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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 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 Number)
2 Technology Drive
Centennial Park
Peabody, Massachusetts 01960-7977
(Address of Principal Executive Offices, Including Zip Code)
Registrant's telephone number, including area code: (978)532-8800
Securities registered pursuant to Section 12(b) of the act: None Securities
registered pursuant to Section 12(g) of the act: Common Stock, $0.01 par value
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of March 2, 2000, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $27,367,133,
based upon the closing sales price on the Nasdaq Stock Market for that date.
As of March 2, 2000, the number of issued and outstanding shares of the
registrant's Common Stock, par value $0.01 per share, was 8,587,351.
DOCUMENTS INCORPORATED BY REFERENCE
Certain of the information called for by Parts I through IV of this report on
Form 10-K is incorporated by reference from certain portions of the Proxy
Statement of the registrant to be filed pursuant to Regulation 14A and to be
sent to stockholders in connection with the Annual Meeting of Stockholders to
be held on April 28, 2000. Such Proxy Statement, except for the parts therein
that have been specifically incorporated herein by reference, shall not be
deemed "filed" as part of this report on Form 10-K.
PART I
ITEM 1. BUSINESS
As used herein, the terms "Company" and "PCD," unless otherwise indicated
or the context otherwise requires, refer to PCD Inc. and its subsidiaries.
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 Electronics.
GENERAL
PCD Inc. (the "Company") designs, manufactures and markets electronic
connectors for use in integrated circuit ("IC") package interconnect
applications, industrial equipment and avionics. Electronic connectors, which
enable an electrical current or signal to pass from one element to another
within an electronic system, range from minute individual connections within
an IC to rugged, multiple lead connectors that couple various types of
electrical/electronic equipment. Electronic connectors are used in virtually
all electronic systems, including data communications, telecommunications,
computers and computer peripherals, industrial controls, automotive, avionics
and test and measurement instrumentation. The electronic connector market is
both large and broad. Bishop & Associates, a leading electronic connector
industry market research firm, estimates the total 1999 worldwide market at
$25.1 billion with more than 1,200 manufacturers.
The Company markets over 6,800 electronic connector products in three
product categories, each targeting a specific market. These product categories
are IC package interconnects, industrial interconnects and avionics terminal
blocks and sockets. IC package interconnects are specially designed electro-
mechanical devices that connect ICs to printed circuit boards during the
various stages of the IC's production and application in electronic systems.
These stages are test, burn-in and production. Industrial interconnects are
used in industrial equipment systems both internally, as input/output ("I/O")
connectors to link the rugged electrical environment of operating equipment to
the electronic environment of controllers and sensors, and externally, to
facilitate the interface between discrete factory wiring and cabling for
standard computer interconnects. Avionics terminal blocks and sockets perform
similar functions as industrial connectors, but are designed and built to
operate in the harsher environment and meet the more critical performance
requirements of avionics applications. Representative customers of the Company
include Bombardier Inc., Micron Technology, Inc., Rockwell International Corp.
(through its subsidiary, the Allen-Bradley Company) and Advance Micro Devices,
Inc.
The Company believes it will benefit from three trends affecting the
electronics industry: (i) the increasing complexity of ICs and corresponding
evolution of IC package designs, which favor growth in PCD's IC package
interconnect market; (ii) the global nature of semiconductor manufacturers,
which requires suppliers with global design, manufacturing and marketing
capabilities; and (iii) the use of increasingly complex electronic controllers
and sensors in industrial and avionics applications, which creates
opportunities in PCD's industrial equipment and avionics markets. During
1999, however, the Company faced a continuing sluggish market for its burn-in
sockets and serious price erosion from certain segments of this market. See
"Forward Looking Information/Risk Factors".
The Company's goal is to identify and expand into selected electronic
connector markets where it can establish a position of leadership. The Company
intends to increase its presence in the markets in which it participates
through internal investment in product development, and expansion of its
existing product and customer base within each market. To facilitate capital
investment, the Company continues to strengthen the balance sheet by reducing
the level of bank debt outstanding.
The Company was incorporated in Massachusetts on November 9, 1976 under
the name Precision Connector Designs, Inc. In February 1996, the Company
changed its name to PCD Inc.
2
MARKET OVERVIEW
The electrical and electronic systems which utilize connectors have
become increasingly widespread and complex, in part as a result of the
increased automation of business systems and manufacturing equipment.
Consequently, the electronic connector industry has grown in size and
electronic connectors have become more sophisticated. Demand for smaller yet
more powerful products have resulted in continued improvements in electronic
systems in general and electronic connectors in particular. Product cycles
continue to shorten and, as time to market becomes increasingly important,
equipment manufacturers seek to reduce inventory and contend with pressures to
keep up with new product innovations. The growing demand for electronic
connector complexity, coupled with reduced product development cycles and
delivery lead times, creates a need for closer cooperation between connector
suppliers and equipment manufacturers, often leading to new connector
requirements and market opportunities.
The electronic connector market is both large and broad. Bishop &
Associates estimates the total 1999 worldwide market at $25.1 billion. This
market is highly fragmented with over 1,200 manufacturers. While many of these
companies produce connectors which are relatively standard and often produced
in large quantities, a substantial portion of the industry is comprised of
companies which produce both proprietary and standard products in relatively
low volumes for specialized applications. Fleck Research has identified over
1,100 separate electronic connector product lines presently offered in the
marketplace.
PCD focuses its products and sales efforts in the selected key markets
listed below.
IC PACKAGE INTERCONNECT MARKET. In the fabrication and use of ICs, there
are three stages in which sockets may be used: test, burn-in and production.
It is the Company's objective to provide a total solution for selected IC
packages encompassing these three stages. By providing a total solution, the
Company believes it will be able to forge closer customer relationships and
gain acceptance by new customers.
TEST - Test sockets are used primarily in semiconductor foundries. After
silicon wafers have been cut into individual chips and packaged, certain
electrical tests are performed to detect packaging defects and to
grade/sort the chips based on various performance characteristics. Test
sockets are designed for specific packages and must withstand hundreds of
thousands of rapid insertions and withdrawals while offering high
reliability. Because of their intensive use, test sockets have a
relatively short useful life.
BURN-IN - Most leading-edge microprocessors, logic and memory ICs undergo
an extensive reliability screening and stress testing procedure known as
burn-in. The burn-in process screens for early failures by operating the
IC at elevated voltages and temperatures, usually at 125(degrees)C
(257(degrees)F), for periods typically ranging from 12 to 48 hours.
During burn-in, the IC is secured in a socket, an electro-mechanical
interconnect, which is a permanent fixture on the burn-in printed circuit
board. The socket is designed to permit easy insertion and removal of the
IC before and after burn-in. Further, these sockets must be able to
withstand numerous automated insertions and withdrawals under extreme
thermal cycle conditions.
PRODUCTION - Production sockets provide an electro-mechanical interface
between the printed circuit board and the IC package. Printed circuit
boards form the backbone of all electronic systems. The use of sockets
allows a detachable interconnection between the IC and printed circuit
board and benefits both the systems manufacturer and end consumer.
Sockets provide flexibility in production by allowing manufacturers to
produce the printed circuit board with unpopulated sockets, then populate
the board with ICs at a later date. Sockets also make upgrading easier
and more flexible for the consumer by allowing for the replacement of a
chip on a printed circuit board without disturbing or damaging other
elements of the board.
The worldwide semiconductor market expanded at a compound annual growth
rate of 15% during the period 1978-1998, and is projected by IC Insights,
Inc., a leading research company in the semiconductor field, to grow at 16%
compound annual growth rate during the period 1998-2003
3
INDUSTRIAL INTERCONNECT MARKET. The industrial interconnect market is
comprised of a broad range of control, measurement and manufacturing
equipment. Terminal blocks are most commonly used in this equipment to provide
an electrical link between discrete functions, such as monitoring and
measuring, and controlling devices, such as programmable logic controllers
("PLCs"), stand-alone PCs and single function controllers. The use of terminal
blocks has increased as electronic controllers and sensors in the industrial
environment have evolved to control more complex, multi-function activities.
In addition to increasing in number, these controllers and their connectors
are becoming smaller and are being configured in increasing variations.
Increased sophistication in industrial and process control equipment has
led to a demand for flexible, modular interconnection and interface products.
Control systems are used to facilitate the interface of discrete factory
wiring and cable systems with standard computer interconnects. These interface
systems allow industrial customers to reduce installation time and decrease
cabinet space, thereby improving their overall system costs.
AVIONICS MARKET. The avionics market requires a diverse range of
electronic connectors that are designed and manufactured specifically for
avionics applications. Over the last few years, commercial aircraft
applications have represented an increasingly important part of this market.
The Company participates in selected areas of the avionics market with
terminal blocks and sockets that perform similar functions as its industrial
connectors but are designed to operate in the harsher environment and meet the
more critical performance requirements of avionics applications. The two
major market sectors in which the Company participates are the 100+ seat
capacity large jet transports, and the smaller 30-95 seat capacity regional
aircraft. Business jets are also becoming an important market segment.
The Boeing Company estimates that total worldwide demand for new
airplanes over the next decade will be 8,900 aircraft. The world fleet is
projected to grow from 12,600 airplanes at the end of 1998 to 19,100 airplanes
in 2008. Over the next ten years, more than 8,900 new commercial jets - 8,675
passenger airplanes and 225 new freighters - are forecast to enter service
worldwide. The majority of these airplanes will meet industry demand for
growth, while the remainder will replace the 2,300 airplanes that are
projected to be removed from service. Of the 2,300 airplanes projected to be
removed between 1999 and 2008, two out of three are expected to be removed
during the next five years.
STRATEGY
The Company's goal is to identify and expand into selected electronic
connector markets where it can establish a position of leadership. The Company
intends to increase its presence in the markets in which it participates
through internal investment in product development and potential strategic
acquisitions. The key elements of the Company's strategy are:
BE THE KEY SUPPLIER IN SELECTED NICHE MARKETS: The electronic connector
industry services a variety of different industries with connectors that
are often unique to particular applications within a given industry. The
Company actively identifies and pursues those markets which have the
following characteristics: demand for electronic connectors with
relatively high engineering content, high degree of customer interface,
changing technology, significant growth opportunities and a market size
appropriate to the Company's resources. Presently, the Company focuses
on the IC package, industrial and avionics interconnect markets. In each
of these markets for the products that the Company offers, it holds a
market position of either first or second or has a strategic plan to
attain that position. There can be no assurance that the Company,
however, will attain or maintain these positions.
GROW THROUGH INTERNAL PRODUCT DEVELOPMENT AND EXPANSION OF EXISTING
PRODUCT AND CUSTOMER BASE: The Company is committed to grow the sales
revenue at a rate that is higher than the connector industry projected
growth rate. To accomplish this, the Company invests heavily in new
product development. Over the last five years the Company has spent on
average 5.6% of net sales on new product tooling. For 1999, 42% of sales
were generated from products that were introduced in the last five years.
It is the Company's strategy to continually expand the range of products
that it offers in its existing markets and, through the additional
synergy offered by these products as well as focused sales efforts, work
to both grow sales volume to existing customers and to expand the
customer base.
4
STRENGTHEN THE BALANCE SHEET: The acquisition of Wells Electronics, Inc.
in December of 1997 resulted in the Company taking on approximately $108
million of debt. The public stock offering of 2,300,000 shares of common
stock in April and May of 1998 raised approximately $42 million, and the
Company generated an additional $5.3 million and $6.5 million of free
cash flow in 1999 and 1998, respectively. The Company defines free cash
flow as cash flow from operations less capital expenditures. The
combination of the cash raised from the public offering and the free cash
flow, along with existing cash balances, reduced the debt to $49.6
million as of December 31, 1999 and improved the total debt-to-equity
ratio to 0.98 to 1.00. Strengthening the balance sheet will provide the
Company the flexibility it needs in the area of acquisitions and product
development.
PRODUCTS AND APPLICATIONS
The Company markets over 6,800 electronic connector products in three
product categories, each targeting a specific market. These product categories
are: IC package interconnects, industrial interconnects and avionics terminal
blocks and sockets. The products offered within each product category can be
characterized as proprietary, application-specific or industry standard, as
described below.
PROPRIETARY connectors are unique Company designs that are introduced and
sold to a broad market rather than a single customer.
APPLICATION-SPECIFIC INTERCONNECTS are products which are designed and
developed for a specific application, typically for one customer. These
products can be subsequently developed into proprietary product lines.
INDUSTRY STANDARD connectors are normally produced in accordance with a
relatively detailed industry or military design and performance specification
and sold to the broad market to which that specification relates.
IC PACKAGE INTERCONNECTS
ICs (which before being packaged are frequently referred to as dies) are
generally encased in a plastic or ceramic package to protect the device and
facilitate its connection with other system components. The IC package
industry offers a wide variety of evolving package designs. New package
designs are driven by the need to accommodate the increasing complexity and
higher lead count ICs. Each unique IC package configuration requires a socket
that corresponds to the package's specific characteristics.
ICs are constantly increasing in functionality while generally decreasing
in unit cost. This leads to an increase in IC product application, thereby
driving IC unit growth. This unit growth and the proliferation of sizes and
packages drive the demand for IC sockets. A further driver of unit growth is
the establishment of new foundries, as well as the upgrading of existing
foundries. According to IC Insights, Inc., total semiconductor demand
measured in units is expected to increase at a compound annual growth rate of
over 9% from 1999 to 2003.
SMALL OUTLINE PACKAGE SOCKETS: The small outline ("SO") is a plastic,
rectangular package with leads on two sides, running along either pair of
opposite edges. With lead counts from 8 to 86 leads, the SO houses simple
logic, memory and linear dies. Devices tend to transition to the quad
flat pack above this lead count. The small size, low price and surface
mount design of the SO makes it a highly desirable package. The Company
currently produces 170 distinct sockets to accommodate a variety of SO
packages.
QUAD FLAT PACK SOCKETS: The quad flat pack ("QFP") is a plastic package
with leads on four sides. It is used for high lead count surface mount
applications and is characterized by lead counts typically ranging
between 40 and 208 leads. The QFP is currently a predominant and rapidly
growing technology for packaging of leading edge ICs used in
microprocessor, communication and memory applications. The Company
currently produces over 37 distinct sockets to accommodate a wide variety
of QFP packages.
PIN GRID ARRAY SOCKETS: The pin grid array ("PGA") is a square or
rectangular through-hole device that effects routing through all layers
of the printed circuit board. The pins are generally placed on the
package before insertion of the die. The differentiating feature of the
PGA is that the contacts are placed in an array over the bottom of the
packaged device, rather than protruding from the sides of the device in a
perimeter pattern, as with the QFP. As a result, the PGA offers greater
lead density and smaller overall profile. This makes the PGA ideal for
devices with high lead counts, in excess of 208, the upper range in which
the QFP becomes difficult to handle.
5
BALL GRID ARRAY SOCKETS: Similar to the PGA, the ball grid array ("BGA")
uses an underlying substrate, rather than a lead frame, for die
attachment. The die is then encapsulated and solder balls are attached to
the underside of the substrate. The solder balls ultimately connect the
package to the printed circuit board. The die is placed in the package
prior to the attachment of the solder balls to ensure a flat surface for
the die during processing. In some cases, the packaged BGA is referred to
as the BGA Chip-Scale Package ("BGA/CSP") because the package is only
slightly larger (i.e. less than 20% larger) than the die itself. Whereas
the PGA contacts the printed circuit board at all layers using through
hole connection, the BGA contacts the printed circuit board only at the
surface. This allows the BGA to achieve a lower profile, lighter weight
and smaller area on the printed circuit board due to surface mounting.
LAN GRID ARRAY SOCKETS: Still another grid array package, the lan grid
array ("LGA") achieves maximum density and reduced cost by eliminating
both pins and solder balls, and providing an array of tiny, gold plated
contact leads on the bottom of the package for interconnect purposes.
Because of high density and relatively low cost the LGA is primarily used
in high lead count application specific integrated circuits ("ASICS") and
microprocessors applications.
INDUSTRIAL INTERCONNECTS
The Company's product areas in this market are industrial terminal blocks
and interface modules. Terminal blocks are most commonly used in industrial
equipment to provide an electrical link between discrete functions, such as
monitoring and measuring, and a controlling device. Interface modules
facilitate the interface between discrete factory wiring and cabling for
standard computer interconnects. The Company's industrial interconnects are
targeted at the industrial and process control markets and affiliated markets
and applications such as environmental control systems, food and beverage
preparation, motor controls, machine tools, robotics, instrumentation and test
equipment.
TERMINAL BLOCKS: Terminal blocks are used in applications where I/O
power or signal wires are fed into a PLC or similar (and often simpler)
control system, and a connector is required to interface between the
electrical environment of relatively heavy wires and the electronic
environment of controllers and sensors. The Company's terminal blocks
connect to and capture the wires in screw-clamp terminations, and
interface with printed circuit boards in a variety of manners. The
Company concentrates on four major product lines within this market:
pluggable terminal blocks, fixed mount terminal blocks, edgecard terminal
blocks, and application-specific terminal blocks. Application-specific
terminal blocks are developed for customers who are of strategic
importance to the Company, represent significant potential volume and are
recognized market leaders.
INTERFACE MODULES: Interface modules are interconnect devices that
incorporate terminal blocks, high density connectors and often additional
electronic components and are used to form the interconnection between a
system I/O card and field equipment. Often these interconnections require
several discrete wire and standard computer connector interconnects. The
interface module simplifies the interconnection by incorporating both the
discrete wire and standard computer interconnects into a rail mounted
printed circuit board assembly consisting of terminal blocks, additional
connectors and possibly other electronic devices. Interface modules are
typically application-specific and may contain electronic components for
signal conditioning, fusing and various other electronic requirements.
AVIONICS TERMINAL BLOCKS AND SOCKETS
Avionics terminal blocks perform similar functions as industrial terminal
blocks, linking discrete wires that are individually terminated to a
connector. However, avionics terminal blocks are designed to withstand the
harsher environment and far more critical operating requirements to which they
are subject. The primary differences are that: contacts are gold plated; wires
are terminated by the crimped (metal deformation) technique rather than screw
clamps; and individual wires are installed and removed from the connector
through use of spring-actuated locking devices. The avionics connectors are
normally completely environmentally sealed through use of a silicone elastomer
sealing grommet are designed to operate in a sealed compartment.
6
The Company concentrates on three major product lines in the avionics
market:
RELAY SOCKETS: Relay sockets are used throughout aircraft as a means to
facilitate installation, repair and maintenance of electro-mechanical
relays which are utilized for a wide variety of control purposes ranging
from main control circuits to landing gear.
JUNCTION MODULES: Junction modules are environmentally sealed, airborne
terminal blocks.
APPLICATION-SPECIFIC AVIONICS CONNECTORS: Application-specific junction
modules have been developed in conjunction with Boeing Commercial
Aircraft for use on the 717-737-747-757-767 series of commercial aircraft
and the C17 military transport. Application-specific relay sockets are
marketed to Boeing subcontractors for the 777 commercial aircraft program
and the C17 aircraft. Application specific junction modules which
incorporate electronic components and circuitry into module package are
supplied to (among others) Bombardier and British Aerospace for regional
jet programs.
PRODUCT DEVELOPMENT
Currently, the Company markets over 6,800 products in a wide variety of
product lines. The Company seeks to broaden its product lines and to expand
its technical capabilities in order to meet anticipated needs of its
customers. The Company's product development strategy is to introduce new
products into markets where the Company has already established a leadership
position and to develop next generation products for other markets in which
the Company wishes to participate.
The Company's current product development projects in the IC package
interconnect market target new burn-in sockets for package device designs such
as BGA, TSOP (thin, small outline package), CSP (chip scale package) and LGA
and BGA production packages. The Company believes, based on industry trends,
that TSOP and CSP will be the preferred package for high-volume, high-density
small outline IC devices.
SALES AND MARKETING
The Company distributes its products through a combination of its own
dedicated direct sales forces, a worldwide network of manufacturers
representatives and authorized distributors. The Company maintains separate
sales forces for the IC package interconnect markets and for the industrial
equipment and avionics markets. For the IC package interconnect markets, the
Company employs a global direct sales force with offices in England, Germany,
Japan, and the United States, augmented with sales representatives in smaller
markets. For the industrial equipment and avionics markets, the Company
generally uses its direct sales forces and manufacturer representatives for
large customers, new product introductions and application-specific products
and uses its authorized distributors for smaller and medium-sized customers of
standard and proprietary products. The Company's sales and marketing program
is focused on achieving and maintaining close working relationships with its
customers early in the design phase of the customer's own product development
cycle.
CUSTOMERS
In 1999, the Company sold its products to over 1,000 customers in a wide
range of industries and applications. The top five customers of the Company in
1999 and 1998 accounted for 39.8% and 43.5% of net sales, respectively. Among
customers that exceeded 10% of the Company's net sales, Micron Technology,
Inc. accounted for 17.6% and 15.8% of net sales of the Company in 1999 and
1998, respectively. Advanced Micro Devices, Inc. accounted for 12.7% of net
sales in 1998. In 1997, Altera Corporation and TNT Distributors, Inc.
accounted for 14.5% and 12.7% of net sales of the Company, respectively. Sales
to customers located outside the United States, either directly or through
U.S. and foreign distributors, accounted for approximately 25.4%, 21.9% and
35.8% of the net sales of the Company in the years ended 1999, 1998 and 1997,
respectively.
7
Examples of end users of the Company's products, by category, are
presented below:
PRODUCT CATEGORIES REPRESENTATIVE CUSTOMERS
IC Package Interconnects Advanced Micro Devices, Inc.
International Business Machines Corporation
Micron Technology, Inc.
Motorola, Inc.
Industrial Interconnects Groupe Schneider (Modicon, Inc./Square D
Co./Telemecanique)
Parker Hannifin Corporation
Rockwell International Corp. (Allen-Bradley
Company)
Avionics Terminal
Blocks and Sockets Bell Helicopter Textron Inc.
The Boeing Company
Bombardier Inc.
(Canadair/deHavilland/Learjet Inc.)
British Aerospace Ltd.
Empresa Brasileira de Aeronautica S/A
(Embraer)
Smiths Industries
MANUFACTURING AND ENGINEERING
The Company is vertically integrated from the initial concept stage
through final design and manufacturing with regard to the key production
processes which the Company believes are critical to product performance and
service. These processes include precision stamping, plastic injection molding
and automated assembly. The Company believes that this vertical integration
allows the Company to respond to customers quickly, control quality and reduce
the time to market for new product development.
The Company seeks to reduce costs in its manufacturing fabrication and
assembly operations through formalized cost savings programs. Complementary
programs are dedicated to maximizing the return on capital investments and
reducing overhead expense.
The Company believes it is a leader in delivery responsiveness in its
target markets. The introduction of just-in-time ("JIT") manufacturing,
inventory control techniques and quick-change, in-house production tooling
have substantially reduced delivery lead times. Production cells operate under
a JIT pull system, with customer orders assembled as received. PCD carries
minimal finished goods inventory. An additional advantage of JIT manufacturing
is the almost complete elimination of rework. Shop floor orders are relatively
small and are not handled in bulk, and problems are resolved as they occur,
rather than continuing through an extended production run.
Wells-CTI KK, our Japanese subsidiary, subcontracts all of its product
manufacturing and assembly operations to Japanese vendors. The Company
subcontracts a portion of its labor-intensive product assembly to a U.S.-based
subcontractor with a manufacturing facility in Mexico. The Company is not
contractually obligated to do business with any subcontractor, believes it
could substitute other subcontractors without significant additional cost or
delay, and could perform assembly itself if the need were to arise.
INTELLECTUAL PROPERTY
The Company seeks to use a combination of patents and other means to
establish and protect its intellectual property rights in various products.
The Company intends to vigorously defend its intellectual property rights
against infringement or misappropriation. Due to the nature of its products,
the Company believes that intellectual property protection is less significant
than the Company's ability to further develop, enhance and modify its current
products. The Company believes that its products do not infringe on the
intellectual property rights of others. However, many of the Company's
competitors have obtained or developed, and may be expected to obtain or
develop in the future, patents or other proprietary rights that cover or
affect products that perform functions similar to those performed by products
offered by the Company. There can be no assurance that, in the future, the
Company's products will not be held to infringe patent claims of its
competitors, or that the Company is aware of all patents containing claims
that may pose a risk of infringement by its products.
8
COMPETITION
The markets in which PCD operates are highly competitive, and the Company
faces competition from a number of different manufacturers. The Company has
experienced significant price pressure with respect to certain products,
including its TSOP and QFP products, and fixed mounts and pluggable terminal
Industrial blocks. The principal competitive factors affecting the market for
the Company's products include design, responsiveness, quality, price,
reputation and reliability. The Company believes that it competes favorably on
these factors.
Generally, the electronic connector industry is competitive and
fragmented, with over 1,200 manufacturers worldwide. Competition in the IC
package interconnect market, however, is highly concentrated among a small
number of significant competitors. Competition among manufacturers of
application-specific connectors in the industrial terminal blocks market
depends greatly on the customer, market and specific nature of the
requirement. Competition is fragmented in the avionics market, but there are
fewer competitors due to the demanding nature of the military and customer
specifications which control much of the markets and the cost and time
required to tool and qualify military standard parts. In each of the markets
in which the Company participates, the Company's significant competitors are
much larger and have substantially broader product lines and greater financial
resources than the Company. There can be no assurance that the Company will
compete successfully, and any failure to compete successfully could have a
material adverse effect on the financial condition, results of operations and
business of the Company.
BACKLOG
The Company defines its backlog as orders that are scheduled for delivery
within the next 12 months. The Company estimates that its backlog of unfilled
orders was approximately $10.6 million at December 31, 1999 and $8.4 million
at December 31, 1998. The level and timing of orders placed by the Company's
customers vary due to customer attempts to manage inventory, changes in
manufacturing strategy and variations in demand for customer products due to,
among other things, introductions of new products, product life cycles,
competitive conditions or general economic conditions. The Company generally
does not obtain long-term purchase orders or commitments but instead seeks to
work closely with its customers to anticipate the volume of future orders.
Based on anticipated future volumes, the Company makes other significant
decisions regarding the level of business it will accept, the timing of
production and the levels and utilization of personnel and other resources. A
variety of conditions, both specific to the individual customer and generally
affecting the customer's industry, may cause customers to cancel, reduce or
delay purchase orders that were either previously made or anticipated.
Generally, customers may cancel, reduce or delay purchase orders and
commitments without penalty. For these reasons, backlog may not be indicative
of future demand or results of operations.
ENVIRONMENTAL
The Company is subject to a wide range of environmental laws and
regulations relating to the use, storage, discharge and disposal of hazardous
chemicals used during its manufacturing process. A failure by the Company to
comply with present or future laws and regulations could subject it to future
liabilities or the suspension of production. Such laws and regulations could
also restrict the Company's ability to expand its facilities or could require
the Company to acquire costly equipment or incur other significant expenses.
EMPLOYEES
As of December 31, 1999, the Company had 300 employees and 78 contract
workers. The Company's 378 employees and contract workers include 326 in
manufacturing and engineering, 31 in sales and marketing and 21 in
administration. Of the Company's U.S. employees, 54 are represented by the
International Brotherhood of Electrical Workers, Local 1392. As a result of
the WELLS-CTI restructuring program in 1999, this number was reduced to
approximately 30 by February, 2000. The Company believes that its relations
with its employees and its union are good. The current collective bargaining
agreement with unionized employees expires on February 18, 2003.
9
RECENT DEVELOPMENTS
SUBSIDIARY ACTIVITIES
On January 31, 1999, the Company's wholly-owned subsidiary, PCD Control
Systems Interconnect, Inc. was discontinued and its operations were merged
into the Company's Industrial Avionics Division.
In August 1998, the Company initiated the process of closing its
Singapore subsidiary, Wells-Pte Ltd., and the Korean branch of its Japanese
subsidiary, Wells-CTI KK. The Company has substantially closed these
operations in 1999 and is awaiting final tax clearance.
FORWARD LOOKING INFORMATION/RISK FACTORS
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:
DEPENDENCE ON IC PACKAGE INTERCONNECT AND SEMICONDUCTOR INDUSTRIES. The
Company's semiconductor or integrated circuit ("IC") package interconnect
sockets are used by producers and testers of ICs and original equipment
manufacturers ("OEMs"). For the years ended December 31, 1999 and December 31,
1998, the Company derived 64.5% and 71.7% of its net sales, respectively, from
these products. The Company's future success will depend in substantial part
on the vitality of the semiconductor and the related IC package interconnect
industries. The Company's acquisition of Wells Electronics, Inc. ("Wells") in
December 1997, a supplier of IC package interconnects, significantly increased
the Company's dependence on the IC package interconnect industry.
Historically, the IC package interconnect industry has been driven by both the
technology requirements and unit demands of the semiconductor industry.
Depressed general economic conditions and cyclical downturns in the
semiconductor industry have had an adverse economic effect on the IC package
interconnect market. In addition, the product cycle of existing IC package
designs and the timing of new IC package development and introduction can
affect the demand for IC package interconnect sockets. During 1999, the
Company faced a continuing sluggish market for its burn-in sockets and serious
price erosion in certain segments of this market. Continued reduced demand
and price erosion for semiconductors and their related packages would continue
to have a material adverse effect on the financial condition, results of
operations and business of the Company.
DEPENDENCE ON PRINCIPAL CUSTOMERS. Micron Technology, Inc. ("Micron"), a
provider of DRAMs, SRAMs and other semiconductor components, was the largest
customer of the Company in 1999. Micron accounted for 17.6% of the net sales
of the Company for the year ended December 31, 1999. Altera Corporation
("Altera"), a provider of high performance, high density programmable logic
devices, had been the largest customer of the Company from 1994 to 1997.
Altera accounted for 14.5% of the net sales of the Company for the year ended
December 31, 1997. Sales to TNT Distributors, Inc. ("TNT"), a semiconductor
equipment distributor, accounted for 12.7% of net sales for the year ended
December 31, 1997. The Company does not have written agreements with any of
its customers, including Altera, Advanced Micro Devices, Inc. ("AMD"), Micron
or TNT, and therefore, no customer has any minimum purchase obligations.
Accordingly, there can be no assurance that any of the Company's customers
will purchase the Company's products beyond those covered by released purchase
orders. The loss of, or significant decrease in, business from Altera, AMD,
Micron or TNT, for any reason, could have a material adverse effect on the
financial condition, results of operations and business of the Company.
RESTRICTIVE COVENANTS UNDER SENIOR CREDIT FACILITY. The agreement
governing the Company's credit facility with Fleet Bank (the "Senior Credit
Facility") contains numerous financial and operating covenants. Failure to
meet such covenants would result in an event of default under the Senior
Credit Facility. Among the operating covenants are restrictions that the
Company (i) must maintain John L. Dwight, Jr. as chief executive officer of
the Company or obtain the consent of the lenders under the Senior Credit
Facility to any replacement of Mr. Dwight; (ii) may not, without the prior
consent of such lenders, acquire the assets of or ownership interests in, or
merge with, other companies; and (iii) may not, without the prior consent of
such lenders, pay cash dividends. The Senior Credit Facility also requires
10
the Company to maintain certain financial covenants, including minimum EBITDA
(earnings before interest, taxes, depreciation and amortization), minimum
fixed charge coverage ratio, minimum quick ratio, maximum ratio of total
senior debt to EBITDA, maximum ratio of total indebtedness for borrowed money
to EBITDA, minimum interest coverage ratio, and maximum capital expenditures,
during the term of the Senior Credit Facility.
The Company has experienced difficulty meeting all of the covenants under
its Senior Credit Facility. Accordingly, in September 1999, certain covenants
were amended by agreement between the Company and its lenders. In March 2000,
the Company obtained from its lenders a waiver of compliance with certain
covenants for the fourth quarter 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 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
arrangements 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 December 31, 1999, the Company was in compliance with or had obtained
waivers for 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.
INTERNATIONAL SALES AND OPERATIONS. Sales to customers located outside
the United States, either directly or through U.S. and foreign distributors,
accounted for approximately 25.4%, 21.9% and 35.8% of the net sales of the
Company in the years ended December 31, 1999, 1998 and 1997, respectively.
International revenues are subject to a number of risks, including: longer
accounts receivable payment cycles; exchange rate fluctuations; difficulty in
enforcing agreements and intellectual property rights and in collecting
accounts receivable; tariffs and other restrictions on foreign trade;
withholding and other tax consequences; economic and political instability;
and the burdens of complying with a wide variety of foreign laws. Sales made
to foreign customers or foreign distributors may be denominated in either U.S.
dollars or in the currencies of the countries where sales are made. The
Company has not to date sought to hedge the risks associated with fluctuations
in foreign exchange rates and does not currently plan to do so. The Company's
foreign sales and operations are also affected by general economic conditions
in its international markets. A prolonged economic downturn in its foreign
markets could have a material adverse effect on the Company's business. The
Company has an operating subsidiary in Japan, and sales and technical support
operations in England. Recent and continuing volatility in the Asian economies
and financial and currencies markets may have a material adverse effect on the
Company's current and planned sales and operations in that region,
particularly with respect to the Company's IC package interconnect business.
In addition, the laws of certain countries do not protect the Company's
products and intellectual property rights to the same extent as do the laws of
the United States. There can be no assurance that the factors described above
will not have an adverse effect on the Company's future international revenues
and, consequently, on the financial condition, results of operations and
business of the Company.
ACQUISITION INTEGRATION. The Company has experienced unanticipated costs
and other difficulties associated with the acquisition and integration of
Wells Electronics, Inc. During 1999, the Company recorded charges of $259,000
in connection with a restructuring program at Wells-CTI (see note 16 to the
Company's consolidated financial statements included in Part II). If the
Company experiences further costs or difficulties in this regard, there could
be a material adverse effect on the financial condition, results of operations
and business of the Company.
FLUCTUATIONS IN OPERATING RESULTS. The variability of the level and
timing of orders from, and shipments to, major customers may result in
significant fluctuations in the Company's quarterly results of operations. The
Company generally does not obtain long-term purchase orders or commitments but
instead seeks to work closely with its customers to anticipate the volume of
future orders. Generally, customers may cancel, reduce or delay purchase
11
orders and commitments without penalty. Cancellations, reductions or delays in
orders by a customer or groups of customers could have a material adverse
effect on the financial condition, results of operations and business of the
Company. In addition to the variability resulting from the short-term nature
of its customers' commitments, other factors have contributed, and may in the
future contribute, to such fluctuations. These factors may include, among
other things, customers' and competitors' announcement and introduction of new
products or new generations of products, evolutions in the life cycles of
customers' products, timing of expenditures in anticipation of future orders,
effectiveness in managing manufacturing processes, changes in cost and
availability of labor and components, shifts in the Company's product mix and
changes or anticipated changes in economic conditions. Because the Company's
operating expenses are based on anticipated revenue levels and a high
percentage of the Company's operating expenses are relatively fixed, any
unanticipated shortfall in revenue in a quarter may have a material adverse
impact on the Company's results of operations for the quarter. Results of
operations for any period should not be considered indicative of the results
to be anticipated for any future period.
TECHNOLOGICAL EVOLUTION. The rapid technological evolution of the
electronics industry requires the Company to anticipate and respond rapidly to
changes in industry standards and customer needs and to develop and introduce
new and enhanced products on a timely and cost-effective basis. In particular,
the Company must target its development of IC package interconnect sockets
based on which next-generation IC package designs the Company expects to be
successful. The Company must manage transitions from products using present
technology to those that utilize next-generation technology in order to
maintain or increase sales and profitability, minimize disruptions in customer
orders and avoid excess inventory of products that are less responsive to
customer demand. Any failure of the Company to respond effectively to changes
in industry standards and customer needs, develop and introduce new products
and manage product transitions would have a material adverse effect on the
financial condition, results of operations and business of the Company.
MANAGEMENT OF GROWTH. The Company has grown rapidly in recent years.
Such growth could place a significant strain on the Company's management,
operations and other resources. The Company's ability to manage its growth
will require it to continue to invest in its operational, financial and
management information systems, and to attract, retain, motivate and
effectively manage its employees. The inability of the Company's management to
manage growth effectively would have a material adverse effect on the
financial condition, results of operations and business of the Company.
PROPRIETARY TECHNOLOGY AND PRODUCT PROTECTION. The Company's success
depends in part on its ability to maintain the proprietary and confidential
aspects of its products as they are released. The Company seeks to use a
combination of patents and other means to establish and protect its
proprietary rights. There can be no assurance, however, that the precautions
taken by the Company will be adequate to protect the Company's technology. In
addition, many of the Company's competitors have obtained or developed, and
may be expected to obtain or develop in the future, patents or other
proprietary rights that cover or affect products that perform functions
similar to those performed by products offered by the Company. There can be no
assurance that, in the future, the Company's products will not be held to
infringe patent claims of its competitors, or that the Company is aware of all
patents containing claims that may pose a risk of infringement by its
products. The inability of the Company for any reason to protect existing
technology or otherwise acquire such technology could prevent distribution of
the Company's products, having a material adverse effect on the financial
condition, results of operations and business of the Company.
PATENT LITIGATION. On August 21, 1995, a predecessor ("CTi") of the
Company's wholly-owned subsidiary, Wells-CTI, Inc. ("Wells-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") 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") are invalid and are not infringed by CTi, the products of which
include burn-in sockets for certain "leaded" packages (including Quad Flat
Paks) and BGA packages.
In other litigation between Wells-CTI and Pfaff concerning the Pfaff
Leadless Patent, the United States Supreme Court affirmed the decision of the
United States Court of Appeals for the Federal Circuit finding that all of the
claims of the Pfaff Leadless Patent which were at issue in that case are
invalid. Pfaff then agreed not to sue CTi or Wells-CTI for infringement of the
Pfaff Leadless Patent, including infringement based upon claims not
adjudicated in that litigation. The litigation between Wells-CTI and Pfaff
and CTi and Pfaff relating to the Pfaff Leadless Patent was thus concluded.
12
In May of 1999 Pfaff and Wells-CTi reached a settlement agreement whereby
the litigation relating to the Pfaff BGA Patent was dismissed without
prejudice and Pfaff agreed that any future litigation for infringement of the
Pfaff BGA Patent would be brought exclusively in the United States District
Court for the District of Arizona.
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.
COMPETITION. The electronic connector industry is highly competitive and
fragmented, with more than 2,000 manufacturers worldwide. The Company believes
that competition in its targeted segments is primarily based on design,
responsiveness, quality, price, reputation and reliability. The Company has
experienced significant price pressure with respect to certain products,
including its thin, small outline package ("TSOP") and quad-flat pack ("QFP")
products, and fixed mount and pluggable Industrial terminal blocks. The
Company's significant competitors are much larger and have substantially
broader product lines and greater financial resources than the Company. There
can be no assurance that the Company will compete successfully, and any
failure to compete successfully would have a material adverse effect on the
financial condition, results of operations and business of the Company.
CONCENTRATION OF OWNERSHIP. The current officers, directors and Emerson
Electric Co. ("Emerson"), the Company's largest stockholder, beneficially own
approximately 34.5% of the outstanding shares of the Common Stock of the
Company based on the number of shares of Common Stock outstanding as of
December 31, 1999. Accordingly, such persons, if they act together, can exert
substantial control over the Company through their ability to influence the
election of directors and all other matters that require action by the
Company's stockholders. Such persons could prevent or delay a change in
control of the Company which may be favored by a majority of the remaining
stockholders. Such ability to prevent or delay such a change in control of
the Company also may have an adverse effect on the market price of the
Company's Common Stock.
DEPENDENCE ON KEY PERSONNEL. The Company is largely dependent upon the
skills and efforts of John L. Dwight, Jr., its Chairman of the Board,
President and Chief Executive Officer, Richard J. Mullin, its Vice President
and President, Wells - CTI Division, John T. Doyle, Vice President and General
Manager, Industrial/Avionics Division, Jeffrey A. Farnsworth, its Vice
President Sales and Marketing Wells-CTI and General Manager, Wells - CTI
Phoenix, and other officers and key employees. The Company does not have
employment agreements with any of its officers or key employees providing for
their employment for any specific term or non-competition agreements
prohibiting them from competing with the Company after termination of their
employment. The loss of key personnel or the inability to hire or retain
qualified personnel could have a material adverse effect on the financial
condition, results of operations and business of the Company.
DEPENDENCE UPON INDEPENDENT DISTRIBUTORS. Sales through independent
distributors accounted for 19.4%, 21.9% and 38.7% of the net sales of the
Company for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company's agreements with its independent distributors are nonexclusive
and may be terminated by either party upon 30 days written notice, provided
that if the Company terminates the agreement with an independent distributor,
the Company will be obligated to purchase certain of such distributor's pre-
designated unsold inventory shipped by the Company within an agreed-upon
period prior to the effective date of such termination. The Company's
distributors are not within the control of the Company, are not obligated to
purchase products from the Company, and may also sell other lines of products.
There can be no assurance that these distributors will continue their current
relationships with the Company or that they will not give higher priority to
the sale of other products, which could include products of competitors. A
reduction in sales efforts or discontinuance of sales of the Company's
products by its distributors could lead to reduced sales and could materially
adversely affect the Company's financial condition, results of operations and
business. The Company grants to certain of its distributors limited inventory
return and stock rotation rights. If the Company's distributors were to
increase their general levels of inventory of the Company's products, the
Company could face an increased risk of product returns from its distributors.
There can be no assurance that the Company's historical return rate will
remain at a low level in the future or that such product returns will not have
a material adverse effect on the Company's financial condition, results of
operations and business.
13
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 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 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.
PRODUCT LIABILITY. The Company's products provide electrical connections
between various electrical and electronic components. Any failure by the
Company's products could result in claims against the Company. Except with
respect to avionics products, the Company does not maintain insurance to
protect against possible claims associated with the use of its products. A
successful claim brought against the Company could have a material adverse
effect on the financial condition, results of operations and business of the
Company. Even unsuccessful claims could result in the Company's expenditure of
funds in litigation and management time and resources. There can be no
assurance that the Company will not be subject to product liability claims.
ENVIRONMENTAL COMPLIANCE. The Company is subject to a wide range of
environmental laws and regulations relating to the use, storage, discharge and
disposal of hazardous chemicals used during its manufacturing process. A
failure by the Company at any time to comply with environmental laws and
regulations could subject it to liabilities or the suspension of production.
Such laws and regulations could also restrict the Company's ability to expand
its facilities or could require the Company to acquire costly equipment or
incur other significant expense.
POSSIBLE VOLATILITY OF STOCK PRICE. The stock market historically has
experienced volatility which has affected the market price of securities of
many companies and which has sometimes been unrelated to the operating
performance of such companies. The trading price of the Common Stock could
also be subject to significant fluctuations in response to variations in
quarterly results of operations, announcements of new products by the Company
or its competitors, other developments or disputes with respect to proprietary
rights, general trends in the industry, overall market conditions and other
factors. In addition, there can be no assurance that an active trading market
for the Common Stock will be sustained.
14
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company's Board of
Directors has the authority without action by the Company's stockholders to
fix the rights and preferences of and to issue shares of the Company's
Preferred Stock, which may have the effect of delaying, deterring or
preventing a change in control of the Company. At present the Company has no
plans to issue any shares of Preferred Stock. The Company's Board of Directors
also has the authority without action by the Company's stockholders to impose
various procedural and other requirements that could make it more difficult
for stockholders to effect certain corporate actions. In addition, the
classification of the Company's Board of Directors and certain provisions of
Massachusetts law applicable or potentially applicable to the Company, could
have the effect of delaying, deterring or preventing a change in control of
the Company. These statutory provisions include a requirement that directors
of publicly-held Massachusetts corporations may only be removed for "cause,"
as well as a provision not currently applicable to the Company that any
stockholder who acquires beneficial ownership of 20% or more of the
outstanding voting stock of a corporation may not vote such stock unless the
stockholders of the corporation so authorize.
ITEM 2. PROPERTIES
PCD, headquartered in Peabody, Massachusetts, operates leased production
facilities in Peabody, Massachusetts (60,000 square feet), Phoenix, Arizona
(24,000 square feet), South Bend, Indiana (50,000 square feet), and Yokohama,
Japan (3,600 square feet). The Peabody facility is responsible for molding,
assembly, manufacturing automation development and quality assurance functions
relating to industrial terminal blocks and avionics terminal blocks. The
Phoenix facility is responsible for assembly and quality assurance functions
relating to test, burn-in, and production sockets, as well as related product
design and development. The South Bend and Yokohama facilities are responsible
for design, assembly, manufacturing automation development and quality
assurance for burn-in sockets. Stamping operations for Peabody, Phoenix and
South Bend are handled at the Peabody facility. Molding fabrication of
components for South Bend and Phoenix are handled at the South Bend facility.
The Company also maintains distribution and technical sales support facilities
in Northhampton, England. The Company believes that its facilities are
adequate for its operations for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On August 21, 1995, a predecessor ("CTi") of the Company's wholly-owned
subsidiary, Wells-CTI, Inc. ("Wells-CTI"), filed an action in the Unites
States District Court for the District Court of Arizona against Wayne K.
Pfaff, an individual residing in Texas ("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") are invalid and are not infringed by CTi, the products of which
include burn-in sockets for certain "leaded" packages (including Quad Flat
Paks) and BGA packages.
In other litigation between Wells-CTI and Pfaff concerning the Pfaff
Leadless Patent, the United States Supreme Court affirmed the decision of the
United States Court of Appeals for the Federal Circuit finding that all of the
claims of the Pfaff Leadless Patent which were at issue in that case were
invalid. In February 1999, Pfaff agreed not to sue CTi or Wells-CTI for
infringement of the Pfaff Leadless Patent, including infringement based upon
claims not abjudicated in that litigation. The litigation between Wells-CTI
and Pfaff and Cti and Pfaff relating to the Pfaff Leadless Patent was thus
concluded.
In May 1999, Pfaff and Wells-CTI reached a settlement agreement whereby
the litigation relating to the Pfaff BGA Patent was dismissed without
prejudice and Pfaff agreed that any future litigation for infringement of the
Pfaff BGA Patent would be brought exclusively in the United States District
Court for the District of Arizona.
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.
15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth
quarter of 1999.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
(a) The Company's Common Stock is traded on the Nasdaq National Market of
the Nasdaq Stock Market, Inc. The following table sets forth the reported high
and low sale prices for the Common Stock, under the symbol "PCDI," for the
periods indicated:
High Low
------- -------
1999
First Quarter................ $20 $ 8
Second Quarter............... 13-3/8 7-1/4
Third Quarter................ 9 7-3/8
Fourth Quarter............... 10-1/2 4-3/4
1998
First Quarter................ $24-1/4 $19-3/4
Second Quarter............... 23 16-3/4
Third Quarter................ 18-3/4 10-1/2
Fourth Quarter............... 14-3/4 11
On March 2, 2000, the last reported sale price for the Common Stock on
the Nasdaq National Market was $4.75 per share. As of January 31, 2000, there
were approximately 1,200 holders of record of Common Stock.
The Company has never declared or paid any cash dividends on the Common
Stock. The Company currently intends to retain future earnings, if any, to
fund the development and growth of its business and does not anticipate paying
any cash dividends on the Common Stock in the foreseeable future. The Board of
Directors of the Company intends to review this policy from time to time,
after taking into account various factors such as the Company's financial
condition, results of operation, current and anticipated cash needs and plans
for expansion. The Senior Credit Facility contains a covenant that prohibits
the Company from paying cash dividends.
On March 6, 2000, the Company issued to Fleet Bank and other various
lenders under the Senior Credit Facility warrants to purchase a total of
203,949 shares of Common Stock at a price of $4.90 per share. No underwriters
were engaged in connection with the foregoing issuance of securities. Such
issuance was made in reliance upon the exemption set forth in Section 4(2) of
the Securities Act.
16
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain selected consolidated financial data
for PCD and its subsidiaries. The selected consolidated financial data for
each of the years ended December 31, 1999, 1998, 1997, 1996 and 1995 have been
derived from the Company's Consolidated Financial Statements, which have been
audited by PricewaterhouseCoopers LLP, independent public accountants. The
selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto of the Company and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Year Ended December 31,
-----------------------
1999 1998 1997(2) 1996 1995
(in thousands, except per share amounts)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales...................... $51,838 $64,391 $ 29,796 $26,857 $25,616
Gross profit................... 23,855 37,060 14,676 12,400 12,139
Write-off of acquired
in-process research
and development............... - - (44,438) - -
Income (loss) from operations.. 5,636 17,679 (35,578) 6,955 6,472
Interest income (expense), net. (4,558) (8,813) 940 725 112
Net income (loss) before
extraordinary item............ 679 5,191 (22,836) 4,785 3,863
Extraordinary item, net of
income tax benefit of $567.... - (888) - - -
Net income (loss).............. $ 679 $ 4,303 $(22,836) $ 4,785 $ 3,863
======== ======= ======== ======= =======
Net income (loss) per share
before extraordinary item:
Basic......................... $ 0.08 $ 0.69 $ (3.83) $ 0.87 $ 0.85
======== ======= ======== ======= =======
Diluted....................... $ 0.08 $ 0.57 $ (3.83) $ 0.76 $ 0.75
======== ======= ======== ======= =======
Net income (loss) per share:
Basic......................... $ 0.08 $ 0.64 $ (3.83) $ 0.87 $ 0.85
======== ======= ======== ======= =======
Diluted....................... $ 0.08 $ 0.53 $ (3.83) $ 0.76 $ 0.75
======== ======= ======== ======= =======
December 31,
1999 1998 1997 1996 1995
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit).. $(12,910) $(11,839) $(12,632) $23,054 $ 7,671
Total assets............... 114,786 119,104 126,592 32,456 15,929
Total debt................. 49,600 55,700 105,903 - -
Stockholders' equity....... 58,024 57,277 8,995 28,706 12,812
________
(1) Net loss for the year ended December 31, 1998 includes a non-recurring
charge relating to the Wells acquisition for the valuation of the
Emerson Warrant and an extraordinary charge relating to the write off of
the valuation of the Emerson Warrant and the prepayment penalty
associated with the Debenture (for the meaning of capitalized terms, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources"). Before deducting for
the non-recurring and extraordinary charges, net income per share -
basic was $0.89 (based on a weighted average number of shares
outstanding of 7,486,915), and net income per share - diluted was $0.81
(based on a weighted average number of common and common equivalent
shares outstanding of 8,167,525).
(2) Net loss for the year ended December 31, 1997 includes a non-recurring
write-off relating to the Wells acquisition for acquired in-process
research and development. Before deducting the write-off, net income per
share - basic was $1.04 (based on a weighted average number of shares
outstanding of 5,954,657), and net income per share - diluted was $0.94
(based on a weighted average number of common and common equivalent
shares outstanding of 6,634,125).
17
FINANCIAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
REPORT OF INDEPENDENT ACCOUNTANTS
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999,
1998 AND 1997
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER
31, 1999, 1998 AND 1997
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999,
1998 AND 1997
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18
ITEM 7. 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.
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 Electronics, Inc.
In 1999, net sales of the Company decreased to $51.8 million from $64.4
million in 1998. This decrease was due to lower shipments of IC package
interconnect products caused by a continuing sluggish market for its burn-in
products and price erosion in certain segments of this market. The Company
realized approximately 42% of its net sales in 1999 from products introduced
in the last five years. The Company distributes its products through a
combination of its own dedicated direct sales force, a worldwide network of
manufacturers representatives and authorized distributors. Sales to customers
located outside the United States, either directly or through U.S. and foreign
distributors, accounted for approximately 25.4%, 21.9% and 35.8% of the net
sales of the Company in the years ended December 31, 1999, 1998 and 1997,
respectively.
The following table sets forth the relative percentages of the total net
sales of the Company attributable to each of the Company's product categories
for the periods indicated.
Product Categories 1999 1998 1997
IC package interconnects........... 64.5% 71.7% 42.3%
Industrial interconnects........... 14.1 11.4 24.5
Avionic terminal blocks and sockets 21.4 16.9 33.2
Total......................... 100.0% 100.0% 100.0%
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
Consolidated Statements of Operations as (1) a percentage of net sales and (2)
the percentage period-to-period change in dollar amounts of such items for the
periods indicated. The information for 1998 excludes the non-recurring and
extraordinary charges related to the Wells acquisition and, in 1997, excludes
the effect of the non-recurring charge for purchased in-process research and
development. The table and the discussion below should be read in conjunction
with the Consolidated Financial Statements and Notes thereto.
Year Ended December 31, Period-to-Period Change
----------------------- ----------------------------
1999 1998 1997 1999 vs. 1998 1998 vs. 1997
Revenue............... 100.0% 100.0% 100.0% (19.5%) 116.1%
Gross profit.......... 46.0 57.6 49.3 (35.6) 152.5
Income from operations
before non-recurring
and extraordinary
charges.............. 11.4 27.5 29.7 (66.7) 99.5
Interest/other
income (expense), net (9.3) (10.1) 3.2 (45.3) (789.9)
Net income............ 1.3 10.3 20.9 (84.2) 6.5
19
YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
NET SALES. Net sales decreased 19.5% to $51.8 million for 1999, from
$64.4 million for 1998. The decrease was due to lower net sales in the IC
package interconnect product lines, which were negatively impacted by several
factors in 1999. First, sales volume changes in this segment typically lag the
semiconductor industry overall. The worldwide slowdown in the semiconductor
industry began to impact the Company's shipments during the second half of
1998. Although the industry began to show signs of a recovery during the
second half of 1999, the Company's sales orders did not return to early 1998
levels. Also, in 1999, certain key customers of the Company exited segments of
the semiconductor business while others lost market share to their
competitors. Finally, the memory burn-in sockets market experienced
significant price pressure due to over capacity and an increasing emphasis on
low cost, standardized products.
GROSS PROFIT. Gross profit decreased by $13.2 million or 35.6% in 1999
from $37.1 million in 1998. As a percentage of net sales, gross profit
declined to 46% in 1999 from 58% in 1998. The decline in dollar and percentage
terms was due to lower sales volume, pricing pressure in certain segments of
the IC package interconnect market and a shift in product mix which resulted
in a higher percentage of Industrial/Avionics net sales in 1999. As presented
in the table above, Industrial/Avionics net sales comprised 35.5% of total net
sales in 1999 as compared with 28.3% in 1998.
OPERATING EXPENSES. Operating expenses include selling, general and
administrative expenses and costs of product development. Operating expenses
decreased by $1.4 million to $13.8 million or 26.6% of net sales in 1999 from
$15.2 million or 23.6% of net sales in 1998. The decrease in 1999 was the
result of actions taken to reduce expenses in response to lower sales volume.
These actions included merging the PCD Control Systems Interconnect division
with the Industrial/Avionics division and closing the Pennsylvania sales
office during the first quarter of 1999. Cost reductions at the Wells-CTI
division instituted during the third and fourth quarters of 1998 together with
downsizing of its Japan operations during the third quarter of 1999 also
contributed to reduced operating expenses.
RESTRUCTURING COSTS. In 1999, the Company recorded a charge of $259,000
in connection with its Wells-CTI cost reduction program. During the year, the
Pennsylvania stamping facility was closed and operations transferred to
Peabody, MA. The Japan subsidiary was downsized and restructure of
manufacturing operations was begun as certain assembly operations were
transferred from South Bend, IN to Phoenix, AZ. The expenses incurred were
for severance payments of $177,000, write-off of fixed assets of $42,000,
remodeling of Japanese office of $32,000 and other miscellaneous expenses of
$8,000. At December 31, 1999, the only accrued expenses for these
restructuring costs were for severance payments in the amount of $48,000. The
annualized cost savings from the restructuring program are expected to
approximate $1.0 million.
INTEREST AND OTHER INCOME (EXPENSE). Net interest expense was $4.6
million in 1999 as compared with $10.3 million in 1998. Net interest expense
in 1999 includes interest on the Senior Credit Facility of which the balance
was reduced by $6.1 million during the year. As more fully discussed below,
net interest expense in 1998 includes interest on the Senior Credit Facility
in addition to interest costs associated with the Emerson financing. See
"Liquidity and Capital Resources."
PROVISION FOR INCOME TAXES. The effective income tax rates for 1999 and
1998 were 37.0% and 41.9%, respectively. The decrease in the effective rate
in 1999 was due to losses incurred by our Wells-CTI Japan operation, which
carries a higher effective rate than the combined U.S. federal/state effective
rate. In 1998, the Japan operation was profitable.
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
NET SALES. Net sales increased 116.1% to $64.4 million for 1998, from
$29.8 million for 1997. Net sales in the Industrial/Avionic product lines
increased 5.9%, to $18.2 million. The avionics portion of the
Industrial/Avionic business segment showed the largest increase, with an
overall 10% growth from 1997. The IC package interconnect product lines grew
more than 250% to $46.2 million from $12.6 million, which is the direct result
of the acquisition of Wells Electronics. Wells-CTI, represents the merger of
Wells Electronics and CTi Technologies, Inc. and encompasses the entire IC
package interconnect business segment. Sales to customers located outside the
20
United States, either directly or through U.S. and foreign distributors, were
21.9% of net sales for 1998, compared to 35.8% of net sales in 1997.
GROSS PROFIT. Gross profit increased 152.5% to $37.1 million for 1998,
from $14.7 million for 1997. As a percentage of net sales, gross margin
increased to 57.6% for 1998 from 49.3% for 1997. The increase in gross margin
was attributable to the shift in product mix to the higher margin IC package
interconnects, primarily due to the Wells acquisition. The results are also
favorably impacted by the Company's continuous cost improvements program,
which concentrates on cost reduction programs associated with the direct cost
of the product.
OPERATING EXPENSES. Operating expenses include selling, general and
administrative expenses and costs of product development. Operating expenses
increased 233.2% to $19.4 million, or 30.1% of net sales, for 1998, from $5.8
million, or 19.5% of net sales, excluding a write-off of acquired in-process
research and development from the Wells acquisition, for 1997. The dollar
increase in operating expenses reflects both the additional amortization of
goodwill of $4.2 million and expenses of the newly acquired subsidiary.
INTEREST AND OTHER INCOME (EXPENSE), Net. Net interest expense was $10.3
million compared to net interest income in 1997 of $940,000. The net interest
expense represents a combination of three elements: the valuation of the
Emerson Warrant for 150,000 shares of PCD Common Stock of $2.9 million; the
prepayment penalty on the Debenture of $812,500; and the interest expense on
the Senior Credit Facility of $6.6 million. See "Liquidity and Capital
Resources."
PROVISION FOR INCOME TAXES. The effective income tax rates for 1998 and
1997 were 41.9% and 34.1%, respectively. The increase in the effective income
tax rate was due to the application of the effective tax rates for each of the
state and foreign tax jurisdictions in which the Company operates.
Specifically, Wells-CTI KK, the Japanese subsidiary of Wells-CTI, had an
effective tax rate of 50.6% for 1998.
INCOMPLETE TECHNOLOGY UPDATE
The acquired in-process research and development ("IPR&D") which was
expensed in 1997 in connection with the Wells acquisition related to in-
process burn-in socket designs and manufacturing process for various next
generation high density IC package types. More specifically, there were six
projects for dual-sided surface mount ("SO") packages, six for chip scale
packages ("CSP"), three for lan grid array ("LGA"), two for ball grid array
("BGA"), two for test sockets and one for a miscellaneous package. Of the six
SO projects, four remain active and two were abandoned in 1998. Of the six CSP
projects, three remain active, two were postponed and one was abandoned in
1998. Of the three LGA projects, one remains active and two were abandoned in
1998. Of the two BGA projects, both were abandoned in 1998. Of the two test
socket projects and the one miscellaneous package project, one remains active
and two were abandoned in 1998. Regarding the active projects as a whole, an
additional $180,000 and $1,000,000 in capital costs were expended in 1999 and
1998, respectively. For the active projects as a whole, net sales of $1.7
million and $150,000 were generated in 1999 and 1998, respectively. No
additional projects other than the ones abandoned in 1998 were abandoned in
1999. Failure to successfully develop the IPR&D projects would negatively
impact the Company's future performance and its ability to compete in the
burn-in socket market.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in 1999 was $9.4 million, compared
to $12.3 million in 1998. These funds were sufficient to meet working capital
requirements and to fund capital expenditures of approximately $3.7 million.
The Company currently anticipates that its capital expenditures for 2000 will
be approximately $4.4 million, which consist primarily of purchased tooling
and equipment required to support the Company's business. The amount of these
anticipated capital expenditures will frequently change based on future
changes in business plans and conditions of the Company and changes in
economic conditions.
In December 1997, the Company obtained a Senior Credit Facility for
$90 million from Fleet National Bank and other lenders (the "Senior Credit
Facility") to finance in part the Wells acquisition. The Senior Credit
Facility is secured by all of the assets of the Company. In conjunction with
the Senior Credit Facility, PCD and Wells-CTI (formerly Wells Electronics,
Inc.) each entered into a stock pledge agreement with Fleet and the other
21
lenders pledging all or substantially all of the stock of the subsidiaries of
PCD and Wells-CTI. Each of PCD, Wells-CTI and certain of their subsidiaries
also entered into a security agreement and certain other collateral or
conditional assignments of assets with Fleet and other lenders. In August
1998, the Company renegotiated the Senior Credit Facility. As a result, the
interest rate premium of 50 basis points charged on approximately $40 million
of the Senior Credit Facility was eliminated. According to its terms, the re-
negotiated Senior Credit Facility will terminate on or before December 31,
2003. At December 31, 1999 and 1998, borrowings of $49.6 million and $55.7
million were outstanding under the Senior Credit Facility at weighted average
interest rates of 7.78 % and 7.60%, respectively.
The agreement governing the Senior Credit Facility contains numerous
financial and operating covenants. Among the operating covenants are
restrictions that the Company (i) must maintain John L. Dwight, Jr. as chief
executive officer of the Company or obtain the consent of the lenders under
the Senior Credit Facility to any replacement of Mr. Dwight; (ii) may not,
without the prior consent of such lender, acquire the assets of or ownership
interest in, or merge with other companies; and (iii) may not, without the
prior consent of such lenders, pay cash dividends. The Senior Credit Facility
also requires the Company to maintain certain financial covenants, including
minimum EBITDA, minimum fixed charge coverage ratio, minimum quick ratio,
maximum ratio of total senior debt to EBITDA, maximum ratio of total
indebtedness for borrowed money to EBITDA, minimum interest coverage ratio,
and maximum capital expenditures, during the term of the Senior Credit
Facility.
The Company has experienced difficulty meeting all of the covenants under
its Senior Credit Facility. Accordingly, in September 1999, certain covenants
were amended by agreement between the Company and its lenders. In March 2000,
the Company obtained from its lenders a waiver of compliance with certain
covenants for the fourth quarter 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 December 31, 1999, the Company was in compliance with or had obtained
waivers for 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 satisfactory to the
Company or not disadvantageous to the Company's stockholders.
In December 1997, the Company entered into a Subordinated Debenture and
Warrant Purchase Agreement ("Purchase Agreement") with Emerson Electric Co.
("Emerson"), the Company's largest stockholder. Pursuant to the Purchase
Agreement, the Company issued to Emerson a Subordinated Debenture
("Debenture") with a principal amount of $25 million at an annual rate of
interest of 10% and a Common Stock Purchase Warrant (the "Emerson Warrant")
for the purchase of up to 525,000 shares of PCD Common Stock at a purchase
price of $1.00 per share. In April 1998, the Company paid the principal,
interest and prepayment penalty of 3.25%, or $812,500, in full, resulting in
an extraordinary charge to income of $888,000, net of taxes, in the second
quarter of 1998. Accordingly, 375,000 shares of the Emerson Warrant
terminated by the terms thereof, leaving the Emerson Warrant only exercisable
for 150,000 shares of PCD Common Stock. The Emerson Warrant expires on
December 31, 2000.
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.
22
INFLATION AND COSTS
The cost of the Company's products is influenced by the cost of a wide
variety of raw materials, including precious metals such as gold used in
plating, copper and brass used for contacts, and plastic material used in
molding connector components. In the past, increases in the cost of raw
materials, labor and services have been offset by price increases,
productivity improvements and cost saving programs. There can be no assurance,
however, that the Company will be able to similarly offset such cost increases
in the future.
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
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 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.
ITEM 7A. MARKET RISK
INTEREST RATE RISK
PCD is exposed to fluctuations in interest rates in connection with its
variable rate term loan. In order to minimize the effect of changes in
interest rates on earnings, PCD entered into an interest rate swap that fixed
the interest rate on a notional amount of its variable rate term loan. Under
the swap agreement, PCD pays a variable rate under LIBOR and receives a fixed
rate of 5.72% on a notional amount of $35,000,000. The potential increase in
the fair value of its term loan when adjusting for the interest rate swap
paying at a fixed rate resulting from a hypothetical 10% decrease in interest
rates was not material.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of PCD Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and stockholders' equity
present fairly, in all material respects, the financial position of PCD Inc.
and its subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 3, 2000, except as to the information included in the
fourth paragraph of footnote 9 for which the date is March 6, 2000.
24
PCD INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
1999 1998
ASSETS
Current assets:
Cash and cash equivalents........................... $ 652 $ 852
Accounts receivable - trade (less
allowance for uncollectible accounts
of $367 in 1999 and $319 in 1998).................. 6,831 5,851
Inventory........................................... 5,479 5,042
Income tax refund receivable........................ 1,416 -
Prepaid expenses and other current assets........... 674 643
-------- --------
Total current assets 15,052 12,388
Equipment and improvements, net....................... 17,542 18,127
Deferred tax asset.................................... 12,258 14,192
Goodwill, net......................................... 55,506 58,592
Intangible assets, net................................ 11,418 12,456
Debt financing fees................................... 1,276 1,531
Other assets.......................................... 1,734 1,818
-------- --------
Total assets................................ $114,786 $119,104
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt..................................... $ 12,000 $ 9,700
Current portion of long-term debt................... 8,800 8,400
Accounts payable - trade............................ 3,972 3,146
Accrued liabilities................................. 3,190 2,981
-------- --------
Total current liabilities................... 27,962 24,227
Long-term debt, net of current portion................ 28,800 37,600
-------- --------
Total liabilities........................... 56,762 61,827
Commitments and contingencies (Notes 9, 10 and 12).... - -
Stockholders' equity:
Preferred stock - $0.10 par value; 1,000,000 shares
authorized; no shares issued........................
Common stock - $0.01 par value; 25,000,000 shares
authorized, 8,561,735 and 8,439,682 shares issued
and outstanding in 1999 and 1998, respectively...... 86 84
Additional paid-in capital............................ 61,913 61,674
Accumulated deficit................................... (3,948) (4,627)
Accumulated other comprehensive income (loss)......... (27) 146
-------- --------
Total stockholders' equity.................. 58,024 57,277
-------- --------
Total liabilities and stockholders' equity.. $114,786 $119,104
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
25
PCD INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended December 31,
1999 1998 1997
Net sales................................... $51,838 $64,391 $ 29,796
Cost of sales............................... 27,983 27,331 15,120
------- ------- --------
Gross profit.............................. 23,855 37,060 14,676
Operating expenses.......................... 13,770 15,172 5,816
Restructuring costs......................... 259 - -
Amortization................................ 4,190 4,209 -
Acquired in-process research and development - - 44,438
------- ------- --------
Income (loss) from operations............. 5,636 17,679 (35,578)
Interest and other income................... 33 421 1,167
Interest expense............................ (4,591) (9,234) (227)
------- ------- --------
Income (loss) before income taxes......... 1,078 8,866 (34,638)
Provision (benefit) for income taxes........ 399 3,675 (11,802)
------- ------- --------
Net income (loss) before extraordinary item. 679 5,191 (22,836)
Extraordinary item,
net of income tax benefit of $567 (Note 4) - (888) -
------- ------- --------
Net income (loss)........................... $ 679 $ 4,303 $(22,836)
======= ======= ========
Basic earnings (loss) per share:
Income (loss) before extraordinary item $ 0.08 $ 0.69 $ (3.83)
Extraordinary item..................... - (0.12) -
------- ------- --------
Net income (loss)...................... $ 0.08 $ 0.57 $ (3.83)
======= ======= ========
Diluted earnings (loss) per share:
Income (loss) before extraordinary item $ 0.08 $ 0.64 $ (3.83)
Extraordinary item..................... - (0.11) -
------- ------- --------
Net income (loss)...................... $ 0.08 $ 0.53 $ (3.83)
======= ======= ========
Weighted average number of common and
common equivalent shares outstanding:
Basic.................................. 8,521 7,487 5,955
======= ======= ========
Diluted................................ 9,049 8,168 5,955
======= ======= ========
The accompanying notes are an integral part
of the consolidated financial statements.
26
PCD INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Accumulated Accumulated
Additional Retained Other Total
Common Stock Paid-in Earnings Comprehensive Deferred Stockholders'
Shares Par Value Capital (Deficit) Income Compensation Equity
Balance,
December 31, 1996. 5,854,733 $59 $14,838 $13,906 - $(97) $28,706
Exercise of
stock options..... 165,449 1 262 263
Tax benefit
from stock
options exercised 673 673
Amortization of
deferred
compensation...... 58 58
Issuance of
stock warrant..... 2,131 2,131
Net (loss)......... (22,836) (22,836)
--------- --- ------- ------- ----- ---- -------
Balance,
December 31, 1997. 6,020,182 60 17,904 (8,930) - (39) 8,995
Public stock
offering, net..... 2,300,000 23 42,439 42,462
Exercise of
stock options..... 119,500 1 149 150
Other comprehensive
income-cumulative
translation
adjustment........ 146 146
Tax benefit
from stock
options exercised. 357 357
Valuation of
stock warrant..... 820 820
Purchase of
stock warrant..... 5 5
Amortization
of deferred
compensation...... 39 39
Net income......... 4,303 4,303
--------- --- ------- ------- ----- ---- -------
Balance,
December 31, 1998. 8,439,682 84 61,674 (4,627) 146 - 57,277
Employee stock
purchase plan..... 7,053 - 65 65
Exercise of
stock options..... 115,000 2 135 137
Other comprehensive
income (loss)
-cumulative
translation
adjustment........ (173) (173)
Tax benefit
from stock
options exercised. 39 39
Net income......... 679 679
--------- --- ------- ------- ----- ---- -------
Balance,
December 31, 1999. 8,561,735 $86 $61,913 $(3,948) $ (27) $ - $58,024)
========= === ======= ======= ===== ==== =======
The accompanying notes are an integral part
of the consolidated financial statements.
27
PCD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
1999 1998 1997
Cash flows from operating activities:
Net income (loss)............................... $ 679 $ 4,303 $(22,836)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Acquired in-process research and development... - - 44,438
Depreciation................................... 4,315 3,472 1,530
Amortization of warrant........................ - 2,917 34
Amortization of goodwill
and intangible assets......................... 4,190 4,209 -
Loss (gain) on disposal of equipment and
Improvements.................................. 19 9 (4)
Amortization of deferred compensation.......... - 39 58
Amortization of debt financing fees............ 348 269 -
Tax benefit from stock options exercised....... 39 357 673
Provision for deferred taxes................... 1,934 1,143 (15,253)
Changes in operating assets and
liabilities, net of acquisition of
Wells Electronics, Inc.:
Accounts receivable.......................... (1,078) 1,262 888
Inventory.................................... (363) (93) (539)
Prepaid expenses
and other current assets.................... (1,418) 949 (68)
Other assets................................. (61) (100) (1,830)
Accounts payable............................. 649 (1,448) 479
Accrued liabilities.......................... 116 (4,972) 516
------ ------- --------
Total adjustments.......................... 8,690 8,013 30,922
------ ------- --------
Net cash provided by operating activities.. 9,369 12,316 8,086
------ ------- --------
Cash flows from investing activities:
Equipment and improvements expenditures......... (3,703) (5,827) (2,531)
Acquisition of Wells Electronics, Inc.,
net of cash acquired of $827................... - - (130,357)
------ ------- --------
Net cash used in investing activities...... (3,703) (5,827) (132,888)
------ ------- --------
Cash flows from financing activities:
Proceeds from issuance of short-term debt....... - - 13,000
Borrowings of short-term debt................... 2,300 - -
Payments for short-term debt.................... - (3,300) -
Proceeds from issuance of long-term debt........ - - 70,000
Payments for long-term debt..................... (8,400) (24,000) -
Proceeds from issuance of
subordinated debenture and warrant............. - - 25,000
Payments for subordinated debenture............. - (25,000) -
Proceeds from employee stock purchase plan...... 65 - -
Proceeds from exercise of common stock options.. 137 150 263
Proceeds from issuance of warrant............... - 5 -
Proceeds from issuance of common stock, net..... - 42,462 -
------ ------- --------
Net cash (used in)
provided by financing activities........... (5,898) (9,683) 108,263
------ ------- --------
Net decrease in cash............................. (232) (3,194) (16,539)
Effect of exchange rate on cash.................. 32 56 -
Cash and cash equivalents at beginning of year... 852 3,990 20,529
------ ------- --------
Cash and cash equivalents at end of year......... $ 652 $ 852 $ 3,990
====== ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.................................... $4,140 $ 7,580 $ 20
====== ======= ========
Income taxes................................ $ 395 $ 4,793 $ 3,049
====== ======= ========
The accompanying notes are an integral part
of the consolidated financial statements.
28
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS:
PCD Inc. ("the Company") is engaged principally in designing, manufacturing
and marketing electronic connectors for use in integrated circuit ("IC")
package interconnect applications, industrial equipment and avionics.
Electronic connectors are used in virtually all electronic s