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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to__________
Commission File Number 0-27744
PCD INC.
(Exact Name of Registrant as Specified in its Charter)
Massachusetts 04-2604950
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification 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 9, 1999, the aggregate market value of the
registrant's Common Stock held by non-affiliates of the
registrant was approximately $81,082,254, based upon the closing
sales price on the Nasdaq Stock Market for that date As of March
9, 1999, the number of issued and outstanding shares of the
registrant's Common Stock, par value $.01 per share, was
8,441,182.
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 May 7, 1999. 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 1998 worldwide market at $23.4 billion with
more than 2,000 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 is benefiting 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.
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. To
enhance the above goal, the Company is undertaking a program 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.
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
has 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 1998 worldwide market at
$23.4 billion. This market is highly fragmented with over 2,000
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 four 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(degree symbol)C
(257(degree symbol)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 up to 10,000 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 has grown in five of the
last eight years and is projected by IC Insights, Inc., a leading
research company in the semiconductor field, to grow at a
compound annual growth rate over the next five years in excess of
15%.
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 Boeing Company estimates that total worldwide demand for
new airplanes over the next decade will be 7,600 aircraft. The
Boeing world fleet is projected to grow from 12,300 airplanes at
the end of 1998 to 17,700 airplanes in 2007. Over the next ten
years, more than 7,600 new commercial jets - 7,425 passenger
airplanes and 175 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 2,200
airplanes that are projected to be removed from service. Many of
these airplanes are expected to be removed form service due to
the International Civil Aviation Organization ("ICAO")
requirement in the United States that all airplanes comply with
the ICAO Stage 3 noise standard as of December 31, 1999. Of the
2,200 airplanes projected to be removed between 1998 and 2007,
three out of four 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 ACQUISITION:
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 three years the Company
has spent on average 5.3% of net sales on new product
tooling. For 1998, 59% 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. The Company
has been active in making acquisitions and intends to remain
so in the future. The Company views acquisitions as either
providing the entree into a new connector market that the
Company has selected or strategically expanding the product
offering of an existing served market.
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 $6.5 million of free cash
flow in 1998. The combination of the cash raised from the
public offering and the free cash flow, along with existing
cash balances, reduced the debt to $55.7 million as of
December 31, 1998 and improved the total debt-to-equity ratio
to 1.08 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 new foundries, as well as the
reconfiguration of existing foundries. According to IC
Insights, Inc., unit demand for major package types is
expected to increase at a compound annual growth rate of 7%
from 1998 to 2003.
SMALL OUTLINE PACKAGE SOCKETS: The SO is a plastic,
rectangular package with leads on two sides, running along
either pair of opposite edges. With lead counts from 8 to 64
leads, the SO houses simple logic, memory and linear dies.
Devices tend to transition to the QFP 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 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 PGA is a square or rectangular
through-hole device that affects 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.
BALL GRID ARRAY SOCKETS: Similar to the PGA, the 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 attach 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.
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 or are designed to operate in a sealed
compartment.
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 737-747-757
767 series of commercial aircraft and the C17 aircraft.
Application-specific relay sockets are marketed to Boeing
subcontractors for the 777 commercial aircraft program and
the C17 aircraft.
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 its customers' anticipated needs. 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 package device designs
such as BGA, TSOP (thin, small outline package) and CSP (chip
scale package) burn-in, test and BGA production packages. The
Company believes, based on industry trends, that BGA will become
the preferred package for high-lead count IC packages (in excess
of 300 leads). The Company also 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.
CUSTOMERS
In 1998, products of the Company were sold to over 1,000
customers in a wide range of industries and applications. The top
five customers of the Company in 1998 accounted for 43.5% of net
sales. Micron Technology, Inc. accounted for 15.8% of net sales
of the Company in 1998 and Advanced Micro Devices, Inc. accounted
for 12.7% of net sales of the Company in 1998. Altera
Corporation accounted for 14.5% and 17.4% of net sales of the
Company in 1997 and 1996, respectively, and TNT Distributors,
Inc. accounted for 12.7% of net sales of the Company in 1997.
Sales to customers located outside the United States, either
directly or through U.S. and foreign distributors, accounted for
approximately 18.8%, 35.8% and 22.1% of the net sales of the
Company in the years ended 1998, 1997 and 1996, respectively.
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.
Cyrex/National Semiconductor, Inc.
International Business Machines Corporation
Micron Technology, Inc.
Motorola, Inc.
Industrial Interconnects............... Giddings & Lewis, Inc.
Groupe Schneider (Modicon, Inc./Square D
Co./Telemecanique)
Parker Hannifin Corporation
Rockwell International Corp. (Allen-Bradley
Company)
Vickers Inc.
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)
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,
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. See "Risk Factors - Patent
Litigation."
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. 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 $8.4
million at December 31, 1998 and $11.9 million at December 31,
1997. 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, 1998, the Company had 336 employees and 10
contract workers. The Company's 346 employees and contract
workers include 277 in manufacturing and engineering, 35 in sales
and marketing and 34 in administration. Of the Company's U.S.
employees, 62 are represented by the International Brotherhood of
Electrical Workers, Local 1392. The Company believes that its
relations with its employees and its union are good. The current
collective bargaining agreement expires on February 18, 2000.
RECENT DEVELOPMENTS
SUBSIDIARY ACTIVITIES
On July 31, 1998, the Company's wholly-owned subsidiary, CTi
Technologies, Inc. was merged into Wells Electronics, Inc. and
concurrently Wells Electronics, Inc. changed its name to Wells-
CTI, Inc.
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 expects to
complete the closure of these operations in the first half of
1999.
FORWARD LOOKING INFORMATION
Statements in this report concerning the future revenues,
profitability, financial resources, product mix, market demand,
product development and other statements in this report
concerning the future results of operations, financial condition
and business of PCD Inc. are "forward-looking" statements as
defined in the Securities Act of 1933 and Securities Exchange Act
of 1934. Investors are cautioned that the Company's actual
results in the future may differ materially from those projected
in the forward-looking statements due to risks and uncertainties
that exist in the Company's operations and business environment,
including:
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 year ended December 31, 1998, the Company derived 71.7% of
its net sales 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. Reduced demand for semiconductors
and their related packages would 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 1998.
Micron accounted for 15.8% of the net sales of the Company for
the year ended December 31, 1998. Advanced Micro Devices, Inc.
("AMD"), a provider of integrated circuits for the global
personal and networked computer, accounted for 12.7% of the net
sales of the Company for the year ended December 31, 1998. 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% and
17.4% of the net sales of the Company for the years ended
December 31, 1997 and 1996, respectively. Sales to TNT
Distributors, Inc. ("TNT"), a semiconductor equipment
distributor, accounted for 12.7% of net sales for the years ended
December 31, 1997, respectively. The Company does not have
written agreements with any of its customers, including Altera,
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, would have a material adverse
effect on the financial condition, results of operations and
business of the Company.
ACQUISITIONS AND INDEBTEDNESS. The Company may from time to
time pursue the acquisition of companies, assets, products or
technologies. The Company has limited experience in integrating
acquired companies or technologies into its operations.
Therefore, there can be no assurance that the Company will
operate other acquired businesses profitably in the future.
Acquisitions involve a number of operating risks that could
materially adversely affect the Company's operating results,
including the diversion of management's attention to assimilate
the operations, products and personnel of the acquired companies,
the amortization of acquired intangible assets and the potential
loss of key employees of the acquired companies. There can be no
assurance that the Company will be able to manage acquisitions
successfully or that the Company will be able to integrate the
operations, products or personnel gained through any such
acquisitions without a material adverse effect on the financial
condition, results of operations and business of the Company.
Accordingly, operating expenses associated with acquired
businesses may have a material adverse effect on the financial
condition, results of operations and business of the Company.
The Company incurred substantial indebtedness in connection
with the Wells acquisition and, subject to compliance with the
terms of the Senior Credit Facility, may incur additional
indebtedness in connection with future acquisitions. The
incurrence of substantial amounts of debt could increase the risk
of the Company's operations. If the Company's cash flow and
existing working capital are not sufficient to fund its general
working capital requirements or to service its indebtedness, the
Company would have to raise additional funds through the sale of
its equity securities, the refinancing of all or part of its
indebtedness or the sale of assets or subsidiaries. There can be
no assurance that any of these sources of funds would be
available in amounts sufficient for the Company to meet its
obligations, if at all. The cost of debt financing may also
impair the ability of the Company to maintain adequate working
capital or to make future acquisitions. In addition, the issuance
of additional shares of Common Stock in connection with
acquisitions could be dilutive to existing investors.
International Sales and Operations. Sales to customers
located outside the United States, either directly or through
U.S. and foreign distributors, accounted for approximately 21.9%,
35.8% and 22.1% of the net sales of the Company in the years
ended December 31, 1998, 1997 and 1996, 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 or
technical support operations in England, and Germany. 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.
RESTRICTIVE COVENANTS UNDER SENIOR CREDIT FACILITY. The
agreement governing the Senior Credit Facility contains numerous
financial and operating covenants. There can be no assurance that
the Company will be able to maintain compliance with these
covenants, and failure to meet such covenants would result in an
event of default under the Senior Credit Facility. Among these
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.
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 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. In addition, it is not uncommon in the
electronic connector industry for results of operations to
display a seasonal pattern of declining revenues in the third
quarter of the calendar year. Although the Company's results of
operations did not display this pattern in 1998 and 1997, it did
occur in 1996 and is likely to occur in the future. 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 concernng the
Pfaff Leadless Patent, the United States Supreme Court has
affirmed the decision of the United States Court of Appeals for
the Federal Circuit finding that all of the individual
descriptions of the invention covered by 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
is thus concluded. However, issues concerning the Pfaff BGA
Patent will remain to be resolved in the District of Arizona
litigation.
The Company believes, based on the advice of counsel, that CTi
has meritorious positions of noninfringement and invalidity with
respect to the Pfaff BGA Patent issues raised in the District of
Arizona litigation and, as necessary, will vigorously litigate
its position. There can be no assurance, however, that the
Company, CTi or Wells-CTI will prevail in any pending or future
litigation, and a final court determination that CTi or Wells-CTI
has infringed the Pfaff BGA Patent could have a material adverse
effect on the Company. Such adverse effect could include,
without limitation, the requirement that CTi or Wells-CTI pay
substantial damages for past infringement and an injunction
against the manufacture or sale in the United States of such
products as are found to be infringing.
COMPETITION. The electronic connector industry is highly
competitive and fragmented, with more than 1,200 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. 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 39.3% 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, 1998. 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,
Michael S. Cantor, Vice President and General Manager,
Industrial/Avionics Division, Jeffrey A. Farnsworth, its Vice
President 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 noncompetition
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 21.9%, 38.7% and 28.1% of
the net sales of the Company for the years ended December 31,
1998, 1997 and 1996, 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.
YEAR 2000 COMPLIANCE AND COSTS. The "Year 2000 Issue" is the
result of computer programs that were written using two digits
rather than four to define the applicable year. If the Company's
computer programs with date-sensitive functions are not Year 2000
compliant, they may interpret a date using "00" in the year field
as the Year 1900 rather than the Year 2000. This
misinterpretation could result in a system failure or
miscalculations causing disruptions of operations, including,
among other things, an interruption of design or manufacturing
functions or an inability to process transactions, send invoices
or engage in similar normal business activities until the problem
is corrected.
The Company has identified its Year 2000 risk in three
categories: internal information technology ("IT") systems;
internal non-IT systems, including embedded technology such as
microcontrollers; and external noncompliance by customers and
suppliers.
INTERNAL IT SYSTEMS. The Company utilizes a significant
number of information technology systems across its entire
organization, including applications used in manufacturing,
product development, financial business systems and various
administrative functions. During 1997 and 1998, the Company
reviewed the Year 2000 issue that encompassed operating and
administrative areas of the Company. The Company found that,
with the exception of the South Bend, Indiana location of
Wells-CTI ("Wells-CTI South Bend"), its information
technology systems will be able to manage and manipulate all
material data involving the transition from the year 1999 to
the year 2000 without functional or data abnormality and
without inaccurate results related to such data. During the
past year, Wells-CTI South Bend has completed the
modifications and testing of its information technology
systems, and the Company believes that the Wells-CTI South
Bend location is now Year 2000 compliant. The cost of the
modifications and testing at Wells-CTI South Bend was
approximately $90,000. The Company does not have a
contingency plan in place for Year 2000 failures of its
internal IT systems. If the Company has not achieved or does
not timely achieve Year 2000 compliance for its major IT
systems, the Year 2000 Issue could have a material adverse
effect on the financial condition, results of operations and
business of the Company.
Independent of the Year 2000 Issue and in order to improve
access to business information through common, integrated
computing systems across the Company, PCD began a worldwide
information technology systems replacement project with
systems that use programs from Oracle Corporation. The
Company is in the implementation phase for this system and is
expected to be complete by December 31, 1999.
INTERNAL NON-IT SYSTEMS, INCLUDING EMBEDDED TECHNOLOGY. The
Company is in the data-gathering phase with regard to non-IT
systems including embedded technology such as
microcontrollers. PCD is currently gathering data to assess
the impact of the Year 2000 on its non-IT systems such as
design, manufacturing, testing and security, with Year 2000
compliance targeted for April 30, 1999. The Company does not
at this time have sufficient data to estimate the cost of
achieving Year 2000 compliance for its non-IT systems. If the
Company is unable to achieve Year 2000 compliance for its
major non-IT systems, the Year 2000 Issue could have a
material adverse effect on the financial condition, results
of operations and business of the Company. The Company does
not currently have a contingency plan in place for Year 2000
failures of its internal non-IT systems and embedded
technology.
EXTERNAL NONCOMPLIANCE BY CUSTOMERS AND SUPPLIERS. The
Company is in the process of identifying and contacting its
material suppliers, service providers and contractors to
determine the extent of the Company's vulnerability to those
third parties' failure to remedy their own Year 2000 issues.
PCD expects to complete its assessment of that vulnerability
by April 30, 1999. To the extent that responses to Year 2000
readiness inquiries are unsatisfactory, the Company intends
to change suppliers, service providers or contractors to
those who have demonstrated Year 2000 readiness, but the
Company cannot assure that it will be successful in finding
such alternative suppliers, service providers and
contractors. The Company does not currently have any formal
information concerning the Year 2000 compliance status of its
customers but has received indications that most of its
customers are working on Year 2000 compliance. If any of the
Company's significant customers and suppliers do not
successfully and timely achieve Year 2000 compliance, and the
Company is unable to replace them with new customers or
alternative suppliers, the Company's financial condition,
results of operations and business could be materially
adversely affected.
The Company's ability to achieve Year 2000 compliance, the
level of incremental costs associated with compliance and the
timing of compliance, could be adversely impacted by, among
other things, the availability and cost of programming and
testing resources, vendors' ability to modify proprietary
software, and unanticipated problems identified in the
ongoing compliance review.
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 expenses.
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.
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), Yokohama, Japan (6,600 square feet) and
Harrisburg (Swatara), Pennsylvania (7,000 square feet). The
Peabody facility is responsible for 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 burn-in, development 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
and molding fabrication of components for both Peabody and
Phoenix are handled at the Peabody facility. The Harrisburg
(Swatara) facility handles stamping for production in South Bend.
The Company also maintains distribution and technical sales
support facilities in Northhampton, England; and Regensburg,
Germany. 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 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 has
affirmed the decision of the United States Court of Appeals for
the Federal Circuit finding that all of the individual
descriptions of the invention covered by 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
is thus concluded. However, issues concerning the Pfaff BGA
Patent will remain to be resolved in the District of Arizona
litigation.
The Company believes, based on the advice of counsel, that CTi
has meritorious positions of noninfringement and invalidity with
respect to the Pfaff BGA Patent issues raised in the District of
Arizona litigation and, as necessary, will vigorously litigate
its position. There can be no assurance, however, that the
Company, CTi or Wells-CTI will prevail in any pending or future
litigation, and a final court determination that CTi or Wells-CTI
has infringed the Pfaff BGA Patent could have a material adverse
effect on the Company. Such adverse effect could include,
without limitation, the requirement that CTi or Wells-CTI pay
substantial damages for past infringement and an injunction
against the manufacture or sale in the United States of such
products as are found to be infringing.
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 1998.
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
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
1997
First Quarter.......................... 17 3/4 13
Second Quarter......................... 17 5/8 14
Third Quarter.......................... 25 16
Fourth Quarter......................... 26 1/2 19 1/2
On March 9, 1999, the last reported sale price for the Common
Stock on the Nasdaq National Market was $14.75 per share. As of
January 31, 1999, 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.
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, 1998, 1997, 1996, 1995 and 1994 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,
1998 (1) 1997 (2) 1996 1995 1994
(in thousands, except per share amounts)
Consolidated Statement
of Operations Data:
Net sales....................... $64,391 $ 29,796 $26,857 $25,616 $15,850
Gross profit.................... 37,060 14,676 12,400 12,139 6,016
Write-off of acquired in-process
research and development...... - (44,438) - - -
Income (loss) from operations... 17,679 (35,578) 6,955 6,472 2,157
Interest income (expense), net.. (8,813) 940 725 112 23
Net income (loss) before
extraordinary item............. 5,191 (22,836) 4,785 3,863 1,301
Extraordinary item, net of
income tax benefit of $567..... (888) - - - -
Net income (loss)............... $ 4,303 $(22,836) $ 4,785 $ 3,863 $ 1,301
======= ======== ======= ======= =======
Net income (loss) per share
before extraordinary item:
Basic.......................... $ 0.69 $ (3.83) $ 0.87 $ 0.85 $ 0.29
======= ======== ======= ======= =======
Diluted........................ $ 0.57 $ (3.83) $ 0.76 $ 0.75 $ 0.29
======= ======== ======= ======= =======
Net income (loss) per share:
Basic.......................... $ 0.64 $ (3.83) $ 0.87 $ 0.85 $ 0.29
======= ======== ======= ======= =======
Diluted........................ $ 0.53 $ (3.83) $ 0.76 $ 0.75 $ 0.29
======= ======== ======= ======= =======
December 31,
1998 1997 1996 1995 1994
(in thousands)
Consolidated Balance Sheet Data:
Working capital (deficit)....... $(11,839) $(12,632) $23,054 $ 7,671 $5,089
Total assets.................... 119,104 126,592 32,456 15,929 10,783
Total debt...................... 55,700 105,903 - - -
Stockholders' equity............ 57,277 8,995 28,706 12,812 8,774
- ----------
(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).
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 1998, net sales of the Company of $64.4 million grew from
$29.8 million in 1997. This growth represents the additional
sales from the Wells Electronics acquisition, as well as strong
sales increase in avionics product lines. The Company realized
approximately 58.6% of its net sales in 1998 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 21.9%, 35.8% and 22.1%
of the net sales of the Company in the years ended December 31,
1998, 1997 and 1996, 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 1998 1997 1996
- ------------------ ------ ------ ------
IC package interconnects........... 71.7% 42.3% 37.6%
Industrial interconnects........... 11.4 24.5 22.5
Avionic terminal blocks and sockets 16.9 33.2 39.9
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
----------------------- ---------------------------
1998 1997 1996 1998 vs. 1997 1997 vs. 1996
------ ------ ------ ------------- -------------
Revenue.................. 100.0% 100.0% 100.0% 116.1% 10.8%
Gross profit............. 57.6 49.3 46.2 152.5 18.4
Income from operations... 27.5 29.7 25.9 99.5 27.4
before non-recurring and
extraordinary charges
Interest/other income
(expense), net.......... (10.1) 3.2 2.7 (789.9) 29.7
Net income............... 10.3 20.9 17.8 6.5 30.0
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 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.
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
NET SALES. Net sales increased 10.8% to $29.8 million for
1997, from $26.9 million for 1996. This change in net sales
reflected increased market penetration of the Company's IC
package interconnects and industrial interconnects. The greatest
portion of this growth was derived from higher sales volume of
the IC package sockets, particularly the ball grid array ("BGA")
burn-in sockets. Sales of this product family, which was
introduced in the fourth quarter of 1996, grew to approximately
$1.6 million in 1997 from $163,000 in 1996. The industrial
interconnect line was also favorably impacted by new product
introductions. Sales of the high-density terminal block line,
which was introduced in late 1995, grew to approximately $765,000
in 1997 from $223,000 in 1996. Sales to customers located outside
the United States, either directly or through U.S. and foreign
distributors, were 35.8% of net sales in 1997, compared with
22.1% of net sales in 1996.
GROSS PROFIT. Gross profit increased 18.4% to $14.7 million
for 1997, from $12.4 million for 1996. As a percentage of net
sales, gross margin increased to 49.3% for 1997 from 46.2% for
1996. The increase in gross margin was attributable to a shift in
product mix back to IC packaging interconnects from industrial
interconnects and avionics terminal blocks and sockets, higher
sales volume and cost improvements resulting from the Company's
continuous cost reduction program.
OPERATING EXPENSES. Operating expenses include selling,
general and administrative expenses and costs of product
development. Operating expenses, excluding a write-off of
acquired in-process research and development from the Wells
acquisition, were $5.8 million, or 19.5% of net sales, for 1997,
compared to $5.4 million, or 20.3% of net sales, for 1996. This
dollar increase in operating expenses reflects the costs
associated with the start-up of the Control Systems Interconnect
division in the third quarter of 1997 as well as the costs
associated with the advertising campaign to promote the
production BGA Z-Lok(TM) product family.
WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT.
The non-recurring write-off of approximately $44.4 million of
acquired in-process research and development was recorded in
connection with the Wells acquisition. The remaining goodwill and
purchased intangibles will be amortized over 6 to 20 years, which
will increase operating expenses by approximately $4.2 million
per year.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other
income increased to $1.2 million in 1997 from $734,000 in 1996.
This increase was attributable to the higher balances of cash and
cash equivalents during 1997. Interest expense increased to
approximately $227,000 in 1997, reflecting the debt incurred in
connection with the Wells acquisition.
PROVISION FOR INCOME TAXES. The effective tax rate for 1997
was approximately 34.1%, compared to 37.7% in 1996. The decrease
in the effective tax rate for 1997 resulted primarily from the
write-off of acquired in-process research and development
relating to the Wells acquisition. Before taking into
consideration the write-off of acquired in-process research and
development, the Company's effective tax rate was 36.5%.
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 $1.0 million in capital costs were expended in 1998.
For the active projects as a whole, net sales of $150,000 were
generated in 1998. 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 1998 was $12.0
million, compared to $8.1 million in 1997. These funds were
sufficient to meet increased working capital as well as capital
expenditures of approximately $5.8 million. The Company currently
anticipates that its capital expenditures for 1999 will be
approximately $6.4 million, which consists primarily of purchased
tooling and equipment required to support the Company's business.
The amount of these anticipated capital expenditures will
frequently change based on future changes in business plans and
conditions of the Company and changes in economic conditions.
In December 1997, the Company obtained a Senior Credit
Facility for $90 million from Fleet National Bank and other
lenders (the "Senior Credit Facility") to finance in part the
Wells acquisition. 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 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,
1998 and 1997, borrowings of $55.7 million and $83.0 million were
outstanding under the Senior Credit Facility at a weighted
average interest rate of 7.60% and 8.96%, respectively.
The agreement governing the Senior Credit Facility contains
numerous financial and operating covenants. Among these 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 fixed charge
coverage ratio, as defined, minimum quick ratio, as defined;
maximum ratio of total senior debt to EBITDA, maximum ratio of
total indebtedness for borrowed money to EBITDA, minimum interest
coverage ratio, maximum capital expenditures, as defined, during
the terms of the Senior Credit Facility.
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 of 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.
The Company believes its existing working capital and
borrowing capacity, coupled with the funds generated from the
Company's operations, will be sufficient to fund its anticipated
working capital, capital expenditure and debt payment
requirements through 1999. Because the Company's capital
requirements cannot be predicted with certainty, there can be no
assurance that any additional financing will be available on
terms satisfactory to the Company or not disadvantageous to the
Company's stockholders.
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 YEAR 2000
The "Year 2000 Issue" is the result of computer programs that
were written using two digits rather than four to define the
applicable year. If the Company's computer programs with date-
sensitive functions are not Year 2000 compliant, they may
interpret a date using "00" in the year field as the Year 1900
rather than the Year 2000. This misinterpretation could result in
a system failure or miscalculations causing disruptions of
operations, including, among other things, an interruption of
design or manufacturing functions or an inability to process
transactions, send invoices or engage in similar normal business
activities until the problem is corrected.
The Company has identified its Year 2000 risk in three
categories: internal information technology ("IT") systems;
internal non-IT systems, including embedded technology such as
microcontrollers; and external noncompliance by customers and
suppliers.
INTERNAL IT SYSTEMS. The Company utilizes a significant number
of information technology systems across its entire organization,
including applications used in manufacturing, product
development, financial business systems and various
administrative functions. During 1997 and 1998, the Company
reviewed the Year 2000 issue that encompassed operating and
administrative areas of the Company. The Company found that, with
the exception of the South Bend, Indiana location of Wells-CTI
("Wells-CTI South Bend"), its information technology systems will
be able to manage and manipulate all material data involving the
transition from the year 1999 to the year 2000 without functional
or data abnormality and without inaccurate results related to
such data. During the past year, Wells-CTI South Bend has
completed the modifications and testing of its information
technology systems, and the Company believes that the Wells-CTI
South Bend location is now Year 2000 compliant. The cost of the
modifications and testing at Wells-CTI South Bend was
approximately $90,000. The Company does not have a contingency
plan in place for Year 2000 failures of its internal IT systems.
If the Company has not achieved or does not timely achieve Year
2000 compliance for its major IT systems, the Year 2000 Issue
could have a material adverse effect on the financial condition,
results of operations and business of the Company.
Independent of the Year 2000 Issue and in order to improve
access to business information through common, integrated
computing systems across the Company, PCD began a worldwide
information technology systems replacement project with systems
that use programs from Oracle Corporation. The Company is in the
implementation phase for this system and is expected to be
complete by December 31, 1999.
INTERNAL NON-IT SYSTEMS, INCLUDING EMBEDDED TECHNOLOGY. The
Company is in the data-gathering phase with regard to non-IT
systems including embedded technology such as microcontrollers.
PCD is currently gathering data to assess the impact of the Year
2000 on its non-IT systems such as design, manufacturing, testing
and security, with Year 2000 compliance targeted for April 30,
1999. The Company does not at this time have sufficient data to
estimate the cost of achieving Year 2000 compliance for its non-
IT systems. The Company does not currently have a contingency
plan in place for Year 2000 failures of its internal non-IT
systems and embedded technology. If the Company is unable to
achieve Year 2000 compliance for its major non-IT systems, the
Year 2000 Issue could have a material adverse effect on the
financial condition, results of operations and business of the
Company.
EXTERNAL NONCOMPLIANCE BY CUSTOMERS AND SUPPLIERS. The Company
is in the process of identifying and contacting its material
suppliers, service providers and contractors to determine the
extent of the Company's vulnerability to those third parties'
failure to remedy their own Year 2000 issues. PCD expects to
complete its assessment of that vulnerability by April 30, 1999.
To the extent that responses to Year 2000 readiness inquiries are
unsatisfactory, the Company intends to change suppliers, service
providers or contractors to those who have demonstrated Year 2000
readiness, but the Company cannot assure that it will be
successful in finding such alternative suppliers, service
providers and contractors. The Company does not currently have
any formal information concerning the Year 2000 compliance status
of its customers but has received indications that most of its
customers are working on Year 2000 compliance. If any of the
Company's significant customers and suppliers do not successfully
and timely achieve Year 2000 compliance, and the Company is
unable to replace them with new customers or alternative
suppliers, the Company's financial condition, results of
operations and business could be materially adversely affected.
The above discussion of the Company's efforts, and
management's expectations, relating to Year 2000 compliance
contains forward-looking statements within the meaning of the
Securities Exchange Act of 1934. See "Forward Looking
Information." The Company's ability to achieve Year 2000
compliance, the level of incremental costs associated with
compliance and the timing of compliance, could be adversely
impacted by, among other things, the availability and cost of
programming and testing resources, vendors' ability to modify
proprietary software, and unanticipated problems identified in
the ongoing compliance review.
ITEM 7A. MARKET RISK AND SECURITY ANALYSIS
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. See
"Management's Discussion and Analysis of Operations - Liquidity
and Capital Resources." Under the swap agreement, PCD pays a
fixed rate of 5.72% on a notional amount of $35,000,000 and
receives LIBOR. The potential increase in the fair value of its
term loan when adjusting for the interest rate swap paying at a
fixed rate would result from a hypothetical 10% decrease in
interest rates was not material
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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards 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
January 29, 199
PCD INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
--------------
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents................................ $ 852 $ 3,990
Accounts receivable - trade (less allowance for
uncollectible accounts of $319 in 1998 and $205 in 1997) 5,851 6,804
Inventory................................................ 5,042 4,796
Prepaid expenses and other current assets................ 643 1,135
-------- --------
Total current assets 12,388 16,725
Equipment and improvements, net........................... 18,127 15,843
Deferred tax asset........................................ 14,192 15,335
Goodwill.................................................. 58,592 61,718
Intangible assets......................................... 12,456 13,539
Debt financing fees....................................... 1,531 1,800
Other assets.............................................. 1,818 1,632
-------- --------
Total assets.................................... $119,104 $126,592
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......................................... $ 9,700 $ 13,000
Current portion of long-term debt........................ 8,400 4,700
Accounts payable - trade................................. 3,146 4,213
Accrued liabilities...................................... 2,981 7,444
-------- --------
Total current liabilities....................... 24,227 29,357
Long-term debt, net of current portion.................... 37,600 65,300
Subordinated debenture - related party.................... - 22,903
Minority interest......................................... - 37
-------- --------
Total liabilities............................... 61,827 117,597
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, 8,439,682 and 6,020,182 shares issued
and outstanding in 1998 and 1997, respectively.......... 84 60
Additional paid-in capital................................ 61,674 17,904
Accumulated deficit....................................... (4,627) (8,930)
Accumulated other comprehensive income -
cumulative translation adjustment........................ 146 -
Deferred compensation..................................... - (39)
-------- --------
Total stockholders' equity...................... 57,277 8,995
-------- --------
Total liabilities and stockholders' equity...... $119,104 $126,592
======== ========
The accompanying notes are an integral part of the
consolidated financial statements
PCD INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Net sales....................................... $64,391 $ 29,796 $26,857
Cost of sales................................... 27,331 15,120 14,457
------- -------- -------
Gross profit.................................. 37,060 14,676 12,400
Operating expenses.............................. 15,172 5,816 5,445
Amortization.................................... 4,209 - -
Acquired in-process research and development.... - 44,438 -
------- -------- -------
Income (loss) from operations................. 17,679 (35,578) 6,955
Interest and other income....................... 421 1,167 734
Interest expense................................ (9,234) (227) (9)
------- -------- -------
Income (loss) before income taxes............. 8,866 (34,638) 7,680
Provision for (benefit) income taxes............ 3,675 (11,802) 2,895
------- -------- -------
Net income (loss) before extraordinary item..... 5,191 (22,836) 4,785
Extraordinary item, net of
income tax benefit of $567 (Note 4)........... (888) - -
------- -------- -------
Net income (loss)............................. 4,303 (22,836) 4,785
======= ======== =======
Basic earnings (loss) per share:
Income (loss) before extraordinary item....... $ 0.69 $ (3.83) $ 0.87
Extraordinary item............................ (0.12) - -
------- -------- -------
Net income (loss).......................... $ 0.57 $ (3.83) $ 0.87
======= ======== =======
Diluted earnings (loss) per share:
Income (loss) before extraordinary item....... $ 0.64 $ (3.83) $ 0.76
Extraordinary item......................... (0.11) - -
------- -------- -------
Net income (loss).......................... $ 0.53 $ (3.83) $ 0.76
======= ======== =======
Weighted average number of common and common
equivalent shares outstanding:
Basic...................................... 7,487 5,955 5,478
======= ======== =======
Diluted 8,168 5,955 6,292
======= ======== =======
The accompanying notes are an integral part of the
consolidated financial statements.
PCD INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Accumulated
Common Stock Additional Retained Other Treasury Stock Total
---------------- Paid-in Earnings Comprehensive Deferred -------------- Stockholders'
Shares Par Value Capital (Deficit) Income Compensation Shares Amount Equity
------ --------- ---------- --------- ------------- ------------ ------ ------ ------------
Balance, December 31, 1995 4,987,032 $ 50 $ 4,124 $ 9,121 - $ (155) 390,000 $ (328) $12,812
Public stock offering, net 1,100,000 11 10,490 10,501
Exercise of stock options 157,701 2 192 194
Retired treasury shares (390,000) (4) (324) (390,000) 328
Tax benefit from stock
options exercised 356 356
Amortization of deferred
compensation 58 58
Net income 4,785 4,785
--------- ----- ------- -------- ----- -------- -------- ------ -------
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 $ 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
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The accompanying notes are an integral part of the consolidated financial statements.
PCD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
1998 1997 1996
Cash flows from operating activities:
Net income (loss)............................... $ 4,303 $(22,836) $4,785
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Acquired in-process research and development.. - 44,438 -
Depreciation.................................. 3,472 1,530 1,389
Amortization of warrant....................... 2,917 34 -
Amortization of goodwill and intangible assets 4,209 - -
Loss (gain) on disposal of equipment and
improvements................................. 9 (4) 107
Allowance for uncollectible accounts.......... - - 40
Amortization of deferred compensation......... 39 58 58
Tax benefit from stock options exercised...... 357 673 356
Provision for deferred taxes.................. 1,143 (15,253) (80)
Changes in operating assets and liabilities,
net of acquisition of Wells Electronics, Inc.:
Accounts receivable 1,262 888 (54)
Inventory................................... (93) (539) 259
Prepaid expenses and other current assets... 949 (68) 310
Other assets................................ (100) (1,830) (25)
Accounts payable............................ (1,448) 479 (59)
Accrued liabilities......................... (4,972) 516 692
------- -------- -------
Total adjustments.......................... 7,744 30,922 2,993
------- -------- -------
Net cash provided by operating activities.. 12,047 8,086 7,778
Cash flows from investing activities:
Equipment and improvements expenditures (5,827) (2,531) (1,902)
Acquisition of Wells Electronics, Inc.,
net of cash acquired of $827................... - (130,357) -
------- -------- -------
Net cash used in investing activities (5,827) (132,888) (1,902)
Cash flows from financing activities:
Proceeds from issuance of short-term debt - 13,000 -
Payments for short-term debt.................... (3,300) - -
Proceeds from issuance of long-term debt........ - 70,000 -
Payments for long-term debt..................... (24,000) - -
Proceeds from issuance of subordinated debenture
and Warrant.................................... - 25,000 -
Payments for subordinated debenture (25,000) - -
Amortization of debt financing fees............. 269 - -
Proceeds from exercise of common stock options.. 150 263 194
Proceeds from issuance of warrant............... 5 - -
Proceeds from issuance of common stock, net..... 42,462 - 10,501
------- -------- -------
Net cash (used in)
provided by financing activities.......... (9,414) 108,263 10,695
------- -------- -------
Net (decrease) increase in cash (3,194) (16,539) 16,571
Effect of exchange rate on cash.................. 56 - -
Cash and cash equivalents at beginning of year... 3,990 20,529 3,958
------- -------- -------
Cash and cash equivalents at end of year......... $ 852 $ 3,990 $20,529
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Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest....................................... $ 7,580 $ 20 $