<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 1998.
REGISTRATION NO. 333-46137
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PCD INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MASSACHUSETTS 3678 04-2604950
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
TWO TECHNOLOGY DRIVE
CENTENNIAL PARK
PEABODY, MASSACHUSETTS 01960-7977
(978) 532-8800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN L. DWIGHT, JR., CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PCD INC.
TWO TECHNOLOGY DRIVE
CENTENNIAL PARK
PEABODY, MASSACHUSETTS 01960-7977
(978) 532-8800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
THOMAS C. CHASE, ESQ. PETER B. TARR, ESQ.
HILL & BARLOW, A PROFESSIONAL CORPORATION HALE AND DORR LLP
ONE INTERNATIONAL PLACE 60 STATE STREET
BOSTON, MA 02110-2607 BOSTON, MA 02109
(617) 428-3000 (617) 526-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 20, 1998
2,000,000 SHARES
[PCD LOGO]
COMMON STOCK
------------------------
All of the 2,000,000 shares of Common Stock offered hereby are being sold
by the Company. The Company's Common Stock is quoted on the Nasdaq National
Market under the symbol "PCDI." On March 18, 1998, the last reported sale price
of the Common Stock was $22.00 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Per Share........................ $ $ $
- ---------------------------------------------------------------------------------------------------------------
Total (3)........................ $ $ $
===============================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $550,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 300,000 additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to receipt and acceptance by them and to their right to reject any order in
whole or in part. It is expected that delivery of the shares of Common Stock
will be made at the offices of Adams, Harkness & Hill, Inc., Boston,
Massachusetts, on or about , 1998.
ADAMS, HARKNESS & HILL, INC. A.G. EDWARDS & SONS, INC.
The date of this Prospectus is , 1998.
<PAGE> 3
Inside Front Cover: [color work: "PCD Electronic Connectors" in the top
right corner. Globe on left side of page with arrows pointing to and captions
reading "San Jose, CA", "South Bend, IN", Harrisburg, PA", "Peabody, MA",
"Phoenix, AZ", "Northhampton, England", "Regensburg, Germany", "Singapore",
"Yokohama, Japan" and "Seoul, South Korea."] Text on right of page reads "PCD
Inc. designs, manufactures, and markets electronic connectors for use in
integrated circuit package interconnect applications, industrial equipment and
avionics. 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."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING AND SHORT-COVERING TRANSACTIONS IN THESE SECURITIES OR THE
IMPOSITION OF PENALTY BIDS IN CONNECTION WITH THE OFFERING. FOR A DISCUSSION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M.
SEE "UNDERWRITING."
2
<PAGE> 4
Gatefold: 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.
[graphic of process control panel]
INDUSTRIAL INTERCONNECTS
AVIONICS TERMINAL BLOCK AND SOCKETS
[graphics of connectors]
[graphic of airplane]
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.
<PAGE> 5
[graphic top left of test socket]
Test sockets must withstand hundreds of thousands of insertions and
withdrawals and offer high reliability.
[graphic top right of burn-in socket]
Burn-in sockets are utilized to screen for early failures by operating the
IC at elevated voltages and temperatures.
[graphic of integrated circuit]
IC PACKAGE INTERCONNECTS
IC package interconnects are specially designed electro-mechanical devices
that connect ICs to printed circuit boards during the various stages of the ICs'
production and application in electronic systems. These stages are test,
burn-in, development and production.
[graphics of connectors on right and left center of page]
[graphic of computer keyboard]
[graphic of development socket on bottom left of page]
Development sockets are used to program programmable logic devices, and are
often carried through to initial production.
[graphic of production socket on bottom right of page]
Production sockets provide a detachable electromechanical interface between
the printed circuit board and the IC package which provides benefits to both
systems manufacturer and end customer.
<PAGE> 6
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, without limitation, those set forth under "Risk Factors" and
elsewhere in this Prospectus. The following summary is qualified in its entirety
by, and should be read in conjunction with, the more detailed information and
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. Investors should carefully consider the risk factors related to
the purchase of Common Stock of the Company. See "Risk Factors." Except as
otherwise noted, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. See "Capitalization," "Description of
Capital Stock" and "Underwriting."
As used herein, the terms "Company" and "PCD," unless otherwise indicated
or the context otherwise requires, refer to PCD Inc., a Massachusetts
corporation, and its subsidiaries, including Wells Electronics, Inc. and its
subsidiaries ("Wells"). However, all financial information for periods ended
before December 26, 1997, unless otherwise indicated or the context otherwise
requires, is for PCD Inc. and its subsidiaries, excluding Wells.
THE COMPANY
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 1997 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, development 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 Altera Corporation, The Boeing Company, Micron Technology,
Inc., Rockwell International Corp. (through its subsidiary, the Allen-Bradley
Company) and Siemens AG.
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.
3
<PAGE> 7
The Company has maintained a consistent strategy over the past five years
to identify and expand into selected electronic connector markets where it can
establish a position of leadership. There are five key elements of the Company's
strategy: selection of key markets -- market selection has contributed to the
compound annual growth in sales of the Company (excluding Wells) of
approximately 23.8% since 1993, and, after giving effect to the Wells
acquisition, the Company's net sales in 1997, on a pro forma basis, were $71.4
million; total customer solution -- the Wells acquisition and the creation of
the Control Systems Interconnect division are examples of broadening the
Company's product offerings within targeted markets; customer
responsiveness/short delivery cycle -- the Company believes it is among the most
responsive to customer needs including product design and production lead times
in the markets it serves, and its strategy is to maintain and exploit its
leadership position; best cost producer -- the Company (excluding Wells) has
experienced an improvement in gross profit as a percentage of net sales from
33.1% in 1993 to 49.3% in 1997; and penetration of worldwide
markets -- international sales of the Company (excluding Wells) increased from
7.7% of net sales in 1993 to 35.8% in 1997, and, with the addition of operations
of Wells in Europe and Asia, the Company expects that international sales will
account for a significant portion of its revenues for the foreseeable future.
WELLS ACQUISITION
On December 26, 1997, the Company completed the acquisition (the "Wells
acquisition") of Wells Electronics, Inc. ("Wells"). Wells designs, develops,
manufactures and markets a broad line of test and burn-in sockets and plastic
carriers for the global semiconductor industry. In combining the existing
burn-in business of PCD with that of Wells, the Company now supports complete
design, development, manufacturing and marketing of test and burn-in sockets in
two of the world's largest IC package interconnect markets: the United States
and Japan. The Company believes that benefits of the combination of PCD and
Wells include: (i) complementary product lines that together provide an
extensive product offering of burn-in sockets as well as test, development and
production sockets; (ii) complementary major customers with little overlap; and
(iii) improved project design capacity resulting from focusing new product
development resources and eliminating project duplication.
Over the last three years, Wells has employed a similar strategy to that of
the Company. From fiscal 1995 (52 weeks ended June 3, 1995), to fiscal 1997 (53
weeks ended May 3, 1997), the net sales of Wells increased from $18.6 million to
$27.5 million. With the inclusion of the net sales of Wells, consolidated pro
forma net sales and income from operations (before deducting the non-recurring
write-off relating to the Wells acquisition of acquired in-process research and
development) for the Company totaled $71.4 million and $21.9 million,
respectively, in 1997.
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. The Company's executive offices are located at Two Technology
Drive, Centennial Park, Peabody, Massachusetts 01960-7977. Its telephone number
is (978) 532-8800.
4
<PAGE> 8
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company......................... 2,000,000 shares
Common Stock to be outstanding after the offering........... 8,020,182 shares (1)
Use of proceeds............................................. For repayment of indebtedness, working
capital and other general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol............................... PCDI
</TABLE>
- ---------------
(1) Based on the number of shares of Common Stock outstanding as of December 31,
1997. Excludes 996,600 shares of Common Stock reserved for issuance under
the Company's stock option plans, of which 719,850 shares were subject to
outstanding options as of December 31, 1997 at a weighted average exercise
price of $3.46 per share. Also excludes 525,000 shares of Common Stock
subject to a common stock purchase warrant held by Emerson Electric Co. (the
"Emerson Warrant"), which warrant was exercisable as of December 31, 1997 as
to 150,000 shares; the Emerson Warrant has an exercise price of $1.00 per
share. See "Capitalization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," "Management -- Stock Awards" and "Certain Transactions."
5
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
1995 1996 1997 (1) 1997 (2)(3) 1997 (2)(4)
------- ------- -------- -------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales.................... $25,616 $26,857 $ 29,796 $ 71,386 $ 71,386
Gross profit................. 12,139 12,400 14,676 41,024 41,024
Write-off of acquired in-
process research and
development................ -- -- (44,438) -- --
Income (loss) from
operations................. 6,472 6,955 (35,578) 21,877 21,877
Interest income (expense),
net........................ 112 725 940 (12,013) (8,080)
Net income (loss)............ $ 3,863 $ 4,785 $(22,836) $ 5,570 $ 7,969
======= ======= ======== ======== ========
Net income (loss) per
share (5):
Basic...................... $ 0.85 $ 0.87 $ (3.83) $ 0.94 $ 1.00
======= ======= ======== ======== ========
Diluted.................... $ 0.74 $ 0.76 $ (3.83) $ 0.82 $ 0.91
======= ======= ======== ======== ========
Weighted average number of
common and common
equivalent shares
outstanding (5):
Basic...................... 4,570 5,478 5,955 5,955 7,955
Diluted.................... 5,201 6,292 5,955 6,769 8,769
OTHER DATA:
EBITDA (6)(7)................ $ 7,498 $ 8,344 $ 10,390 $ 30,059 $ 30,059
EBITDA margin (6)............ 29.3% 31.1% 34.9% 42.1% 42.1%
Depreciation................. 1,026 1,389 1,530 4,140 4,140
Amortization of intangible
assets..................... -- -- -- 4,042 4,042
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------
ACTUAL AS ADJUSTED (4)
------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)................................. $(12,632) $(12,310)
Total assets.............................................. 126,592 126,592
Total debt................................................ 105,903 67,080
Stockholders' equity...................................... 8,995 48,140
</TABLE>
- ---------------
(1) 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).
(2) Gives effect to the Wells acquisition assuming such transaction had occurred
on January 1, 1997 and the elimination of the related non-recurring acquired
in-process research and development expense and the addition of the annual
amortization of acquired intangible assets so that the pro forma and the pro
forma as adjusted include only recurring costs. See "Unaudited Pro Forma
Condensed Consolidated Statement of Operations" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(3) Before deducting the additional interest expense for the value of the
exercisable portion of the Emerson Warrant, pro forma net income was
approximately $6,849,000, pro forma net income per share -- basic was $1.15
(based on a
6
<PAGE> 10
weighted average number of shares outstanding of 5,954,657) and pro forma
net income per share -- diluted was $1.01 (based on a weighted average
number of common and common equivalent shares outstanding of 6,769,479).
(4) Adjusted to reflect (i) the sale by the Company of 2,000,000 shares of
Common Stock offered hereby (at an assumed public offering price of $22.00
per share), less underwriting discounts and commissions and estimated
offering expenses payable by the Company; (ii) the application of the net
proceeds from the offering; and (iii) the write-off of approximately $2.1
million of interest expense relating to the exercisable portion of the
Emerson Warrant. Before deducting the additional interest expense for the
value of the exercisable portion of the Emerson Warrant, pro forma as
adjusted net income was approximately $9,248,000, pro forma as adjusted net
income per share -- basic was $1.16 (based on a weighted average number of
shares outstanding of 7,954,657) and pro forma as adjusted net income per
share -- diluted was $1.05 (based on a weighted average number of common and
common equivalent shares outstanding of 8,769,479). See "Use of Proceeds,"
"Capitalization" and Note 9 of Notes to the Company's Consolidated Financial
Statements.
(5) See Note 2 of Notes to the Company's Consolidated Financial Statements for
an explanation of the basis used to calculate net income (loss) per share.
(6) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
includes income from operations before deducting the non-recurring write-off
relating to the Wells acquisition for acquired in-process research and
development adjusted to exclude depreciation and amortization of intangible
assets. EBITDA margin is EBITDA reflected as a percentage of net sales. The
Company believes that EBITDA and EBITDA margin provide additional
information to assist investors in determining its ability to meet future
debt service requirements. However, EBITDA is not a defined term under
generally accepted accounting principles ("GAAP"), is not indicative of
operating income or cash flow from operations as determined under GAAP and
may not be comparable to similarly titled measures reported by other
companies.
(7) Net cash provided by operating activities was $5.5 million, $7.8 million and
$8.1 million for 1995, 1996 and 1997, respectively. Net cash used in
investing activities was $2.5 million, $1.9 million and $132.9 million for
1995, 1996 and 1997, respectively. Net cash provided by financing activities
were $0.004 million, $10.7 million and $108.3 million for 1995, 1996 and
1997, respectively.
SUMMARY CONSOLIDATED FINANCIAL DATA FOR WELLS ELECTRONICS, INC.
<TABLE>
<CAPTION>
52 WEEKS 48 WEEKS 53 WEEKS 34 WEEKS
ENDED ENDED ENDED ENDED
JUNE 3, APRIL 27, MAY 3, DECEMBER 26,
1995 1996 1997 1997
-------- --------- -------- ------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................... $18,579 $17,998 $27,492 $29,268
Gross profit................................ 8,847 8,727 14,311 19,007
Income from operations...................... 1,575 2,103 5,553 11,584
Other income (expense), net................. 66 735 783 330
Net income.................................. $ 843 $ 2,252 $ 4,367 $ 6,269
======= ======= ======= =======
Net income per share(1):
Basic..................................... $107.73 $287.80 $558.08 $801.15
======= ======= ======= =======
Diluted................................... $107.73 $287.80 $558.08 $801.15
======= ======= ======= =======
Weighted average number of common and common
equivalent shares outstanding(1):
Basic..................................... 7,825 7,825 7,825 7,825
Diluted................................... 7,825 7,825 7,825 7,825
</TABLE>
- ---------------
(1) See Note 2 of Notes to Wells' Consolidated Financial Statements for an
explanation of the basis used to calculate net income per share.
7
<PAGE> 11
RISK FACTORS
The following discussion contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including, without limitation, those set forth below and
elsewhere in this Prospectus. The risk factors set forth below should be
considered carefully in addition to the other information in this Prospectus
before purchasing the Common Stock offered by this Prospectus.
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, 1997, the Company
(excluding Wells) derived 42.3% 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
recent acquisition of Wells Electronics, Inc. ("Wells"), a supplier of IC
package interconnects, significantly increases 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Background."
Dependence on Principal Customers. Altera Corporation ("Altera"), a
provider of high performance, high density programmable logic devices, has been
the largest customer of the Company (excluding Wells) since 1994. Altera
accounted for 16.6%, 17.4% and 14.5% of the net sales of the Company (excluding
Wells) for the years ended December 31, 1995, 1996 and 1997, respectively. Sales
to TNT Distributors, Inc. ("TNT"), a semiconductor equipment distributor,
accounted for 13.4% and 12.7% of net sales for the years ended December 31, 1995
and 1997, respectively. Sales by Wells to Advanced Micro Devices, Inc. ("AMD"),
Dynavision, Inc. ("Dynavision") and Micron Technology, Inc. ("Micron") accounted
for 12.0%, 11.6% and 29.6%, respectively, of net sales by Wells for the pro
forma calendar year ended December 31, 1997. The Company does not have written
agreements with any of its customers, including Altera, AMD, Dynavision, 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,
Dynavision, Micron or TNT, for any reason, would have a material adverse effect
on the financial condition, results of operations and business of the Company.
See "Business -- Products and Applications," "-- Customers," " -- Sales and
Marketing" and Note 14 of Notes to the Company's Consolidated Financial
Statements.
Acquisitions and Indebtedness. The Company acquired all of the capital
stock of Wells, a manufacturer of IC package interconnect products, on December
26, 1997. Wells currently operates as a wholly-owned subsidiary of the Company.
Subject to compliance with the Company's credit facility ("Senior Credit
Facility") with Fleet National Bank and other lenders, the Company may from time
to time pursue the acquisition of other 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 Wells or 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
8
<PAGE> 12
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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Strategy."
International Sales and Operations. Sales to customers located outside the
United States, either directly or through U.S. and foreign distributors,
accounted for approximately 28.1%, 22.1% and 35.8% of the net sales of the
Company (excluding Wells) in the years ended December 31, 1995, 1996 and 1997,
respectively, and the Company believes that, with the addition of Wells,
international sales will account for a significant portion of its revenues for
the foreseeable future. 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.
As a result of the Wells acquisition, the Company now has an operating
subsidiary in Japan, and sales or technical support operations in England,
Germany, South Korea, Malaysia and Singapore. 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
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
9
<PAGE> 13
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. See "Dividend Policy," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 8 of the Notes to the
Company's Consolidated Financial Statements.
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
1995 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. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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. See
"Business -- Product Development."
Management of Growth. The Company has grown rapidly in recent years, in
particular through the Wells acquisition in December 1997. A continuing period
of rapid 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. See "Business -- Strategy"
and "Management."
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.
10
<PAGE> 14
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. See "Business -- Intellectual
Property" and "-- Legal Proceedings."
Patent Litigation. On August 21, 1995, the Company's wholly-owned
subsidiary, CTi Technologies, Inc. ("CTi"), filed an action in the United States
District Court for the District of Arizona against Wayne K. Pfaff, an individual
residing in Texas ("Pfaff"), and Plastronics Socket Company, Inc., a corporation
affiliated with Pfaff, alleging and seeking a declaratory judgment that two
United States patents issued to Pfaff and relating to certain burn-in sockets
for "leadless" IC packages (the "Pfaff Leadless Patent") and ball grid array
("BGA") IC packages (the "Pfaff BGA Patent") (collectively, the "Pfaff Patents")
are invalid and are not infringed by CTi, the products of which include burn-in
sockets for certain "leaded" packages (including Quad Flat Paks) (the "CTi
Leaded Products") and BGA packages (the "CTi BGA Products") (collectively, the
"CTi Products"). Pfaff has filed a counterclaim alleging that CTi infringes the
"Pfaff Leadless Patent" and has requested an award of damages; the counterclaim
does not allege infringement of the Pfaff BGA Patent. Pfaff has also sought a
permanent injunction against further infringement by CTi of the Pfaff Leadless
Patent. That action has been stayed pending resolution of another action,
described below, involving the Pfaff Leadless Patent.
In litigation between Wells and Pfaff concerning the Pfaff Leadless Patent,
the United States Court of Appeals for the Federal Circuit has found all of the
individual descriptions of the invention (the "Claims" of the patent) of the
Pfaff Leadless Patent which were at issue in that case to be invalid. Certain
other Claims of the patent were not at issue in that case, and their validity
was not decided by the court, because Pfaff did not allege that products of
Wells infringed such Claims. The United States Supreme Court has accepted an
appeal by Pfaff in that case. Unless overturned, the Court of Appeals decision
as to the invalidity of such Claims of the Pfaff Leadless Patent will be binding
in the CTi v. Pfaff action in the District of Arizona, and the reasoning of that
decision could support CTi's position that the remaining Claims of that patent
are invalid. There can be no assurance, however, that the decision will not be
overturned or that the Company will not be required to engage in further costly
litigation regarding the Pfaff Patents.
In addition, there can be no assurance that the Company, CTi or Wells will
prevail in any pending or future litigation. A final court determination that
CTi or Wells has infringed the Pfaff Leadless Patent could have a material
adverse effect on the Company. Such adverse effect could include, without
limitation, the requirement that CTi or Wells pay substantial damages for past
infringement and an injunction against the manufacture or sale in the United
States of such products as are found to be infringing. Approximately 18.5% of
the revenues of the Company (excluding Wells) for 1997 and approximately 7.0% of
the revenues of Wells for calendar year 1997 were derived from the sale of
products potentially at issue in the Pfaff cases. There can be no assurance that
the CTi and Wells litigation will be resolved without material adverse effect on
the financial condition, results of operations and business of the Company. See
"Business -- Legal Proceedings."
Competition. The electronic connector industry is highly competitive and
fragmented, with more than 2,000 manufacturers worldwide. The Company believes
that competition in its targeted segments is primarily based on design,
responsiveness, quality, price, reputation and reliability. The Company has
experienced significant price pressure with respect to certain products,
including its
11
<PAGE> 15
thin, small outline package ("TSOP") product. 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. See "Business -- IC Package Interconnects" and "--
Competition."
Control by Existing Stockholders. Upon the completion of this offering,
the current officers, directors and Emerson Electric Co. ("Emerson"), the
Company's largest stockholder, will beneficially own approximately 41.5% of the
outstanding shares of the Common Stock of the Company based on the number of
shares of Common Stock outstanding as of January 31, 1998. Accordingly, such
persons, if they act together, will have effective control over the Company
through their ability to control the election of directors and all other matters
that require action by the Company's stockholders, irrespective of how other
stockholders may vote. 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.
See "Management -- Executive Officers and Directors," "Principal Stockholders,"
"Description of Capital Stock" and "Underwriting."
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, its 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. See " -- Restrictive Covenants Under Senior Credit Facility,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Management."
Dependence Upon Independent Distributors. Sales through independent
distributors accounted for 35.7%, 28.1% and 38.7% of the net sales of the
Company (excluding Wells) for the years ended December 31, 1995, 1996 and 1997,
respectively. The Company's agreements with its independent distributors are
nonexclusive and may be terminated by either party upon 30 days written notice,
provided that if the Company terminates the agreement with an independent
distributor, the Company will be obligated to purchase certain of such
distributor's pre-designated unsold inventory shipped by the Company within an
agreed-upon period prior to the effective date of such termination. The
Company's distributors are not within the control of the Company, are not
obligated to purchase products from the Company, and may also sell other lines
of products. There can be no assurance that these distributors will continue
their current relationships with the Company or that they will not give higher
priority to the sale of other products, which could include products of
competitors. A reduction in sales efforts or discontinuance of sales of the
Company's products by its distributors could lead to reduced sales and could
materially adversely affect the Company's financial condition, results of
operations and business. The Company grants to certain of its distributors
limited inventory return and stock rotation rights. If the Company's
distributors were to increase their general levels of inventory of the Company's
products, the Company could face an increased risk of product returns from its
distributors. There can be no assurance that the Company's historical return
rate will remain at a low level in the future or that such product returns will
not have a material adverse effect on the Company's financial condition, results
of operations and business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Sales and
Marketing."
12
<PAGE> 16
Year 2000 Compliance Costs. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. To distinguish 21st century dates from 20th century dates, these date
code fields must be able to accept four digit entries. The Company utilizes a
significant number of computer software programs and operating systems across
its entire organization, including applications used in manufacturing, product
development, financial business systems and various administrative functions.
The Company believes that, with the exception of the South Bend, Indiana
location of Wells - CTI ("Wells - CTI South Bend"), its computer systems will be
able to manage and manipulate all material data involving the transition from
1999 to 2000 without functional or data abnormality and without inaccurate
results related to such data. However, there can be no assurances that potential
systems interruptions or the cost necessary to update software would not have a
material adverse effect on the Company's financial condition, results of
operations or business. In addition, the Company has limited information
concerning the compliance status of its suppliers and customers. In the event
that any of the Company's significant suppliers or customers do not successfully
and timely achieve Year 2000 compliance, the Company's financial condition,
results of operations and business could be materially and adversely affected.
The Company believes that, within the next nine months, it will have to
replace the current systems at Wells - CTI South Bend with new systems that are
Year 2000 compliant. Failure to replace such systems could result in the
generation of erroneous data or system failure. Significant uncertainty exists
concerning the potential effects associated with Year 2000 compliance, and Year
2000 issues involving systems of Wells - CTI South Bend could have a material
adverse effect on the Company's financial condition, results of operations or
business. The cost of replacing computer systems of Wells - CTI South Bend is
currently estimated to be up to $900,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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
13
<PAGE> 17
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. See "Description of Capital Stock."
14
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby (at an assumed public offering price
of $22.00 per share), after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, are estimated to be
approximately $40.9 million ($47.1 million if the Underwriters' over-allotment
option is exercised in full).
The Company expects to use the net proceeds to repay (i) 100% of a
Subordinated Debenture ("Debenture") held by Emerson Electric Co. and (ii) a
portion of the outstanding balance on its secured credit loan facility with
Fleet National Bank and other lenders (the "Senior Credit Facility"). The
Company issued the Debenture and arranged the Senior Credit Facility in order to
finance the Wells acquisition. As of December 31, 1997, the principal amount
outstanding under the Debenture was $25 million and under the Senior Credit
Facility was $83 million. Interest on the Debenture is 10% per annum plus the
issuance of a common stock purchase warrant (the "Emerson Warrant") to purchase
up to 525,000 shares of Common Stock of the Company, as follows: (i) the Emerson
Warrant is currently exercisable for 150,000 shares of Common Stock; (ii) if the
principal of and accrued interest and costs and expenses under the Debenture
have not been paid in full at the close of business on December 31, 1998, the
Emerson Warrant shall be exercisable for an additional 225,000 shares of Common
Stock; and (iii) if the principal of and accrued interest and costs and expenses
under the Debenture have not been paid in full at the close of business on
December 31, 1999, the Emerson Warrant shall be exercisable for an additional
150,000 shares of Common Stock. The combined effective interest rate for the
Debenture, the exercisable portion of the Emerson Warrant and the prepayment
penalty is 21.7%, assuming 10% per annum direct interest expense, 8.4% per annum
effective interest expense associated with the value of the Emerson Warrant and
3.25% of effective interest expense due to prepayment penalties. Prepayment of
the principal amount under the Debenture is subject to a penalty, due at the
time of prepayment, as follows: (i) for the period beginning on December 26,
1997 and ending June 30, 1998, an amount equal to 3.25% of the principal sum
prepaid; (ii) for the period beginning July 1, 1998 and ending September 30,
1998, an amount equal to 6.5% of the principal sum prepaid; and (iii) for the
period beginning October 1, 1998 and ending December 31, 1998, an amount equal
to 9.75% of the principal sum prepaid. Interest on loans outstanding under the
Senior Credit Facility is, at the Company's election, payable at either (i) the
higher of the lender's base rate, or a rate equal to 1/2 of 1% per annum above
the weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by federal funds brokers, plus
between 25 and 200 basis points based on the ratio of senior indebtedness to the
Company's earnings before interest, taxes, depreciation and amortization
("EBITDA"), or (ii) a periodic fixed rate equal to Libor plus between 150 and
325 basis points based on the ratio of senior indebtedness to EBITDA. As of
December 31, 1997, the weighted average interest rate on loans outstanding under
the Senior Credit Facility was 8.96%. A portion of the Senior Credit Facility
matures on December 2003 and the remainder matures on December 2004. The
remaining net proceeds, if any, will be used for general corporate purposes,
including working capital, product development and capital expenditures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Notes 8 and 9 of Notes to the
Company's Consolidated Financial Statements.
15
<PAGE> 19
PRICE RANGE OF COMMON STOCK
The following table sets forth the reported high and low sale prices for
the Common Stock on the Nasdaq National Market, under the symbol "PCDI," for the
periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter (from March 27)............................... $12 1/2 $11*
Second Quarter.............................................. 16 11 1/4
Third Quarter............................................... 13 3/4 10 1/8
Fourth Quarter.............................................. 13 7/8 10
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
1998
First Quarter (through March 18)............................ 24 1/4 19 3/4
=== ===
</TABLE>
- ---------------
* Initial public offering price per share.
On March 18, 1998, the last reported sale price for the Common Stock on the
Nasdaq National Market was $22.00 per share. As of January 31, 1998, there were
approximately 800 holders of record of Common Stock.
DIVIDEND POLICY
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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 8 of Notes to the Company's Consolidated Financial
Statements.
16
<PAGE> 20
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of December 31, 1997, and as adjusted to reflect the application
of the estimated net proceeds from the sale of 2,000,000 shares of Common Stock
offered by the Company hereby (at an assumed offering price of $22.00 per
share). This table should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt and current portion of long-term debt....... $17,700 $ 17,700
======= ========
Long-term debt, net of current portion:
Senior Credit Facility Secured Term Loan A................ $25,700 $ 18,877(1)
Senior Credit Facility Secured Term Loan B................ 39,600 30,503(1)
Subordinated Debenture (2)................................ 22,903 --
Stockholders' equity (3):
Preferred Stock, $0.10 par value; 1,000,000 shares
authorized,
none issued and outstanding............................ -- --
Common Stock, actual: $0.01 par value; 25,000,000 shares
authorized; 6,020,182 shares issued and outstanding,
actual; and 8,020,182 shares issued and outstanding, as
adjusted............................................... 60 80
Additional paid-in capital................................ 17,904 58,804
Deferred compensation..................................... (39) (39)
Retained earnings (deficit)............................... (8,930) (10,705)(4)
------- --------
Total stockholders' equity........................ 8,995 48,140
------- --------
Total capitalization.............................. $97,198 $ 97,520
======= ========
</TABLE>
- ---------------
(1) Assumes proceeds are applied pro rata to Term Loan A and Term Loan B.
(2) See Note 9 of Notes to the Company's Consolidated Financial Statements.
(3) Based on the number of shares of Common Stock outstanding as of December 31,
1997. Excludes 996,600 shares of Common Stock reserved for issuance under
the Company's stock option plans, of which 719,850 shares were subject to
outstanding options as of December 31, 1997 at a weighted average exercise
price of $3.46 per share. Also excludes 525,000 shares of Common Stock
subject to the Emerson Warrant, which warrant was exercisable as of December
31, 1997 as to 150,000 shares; the Emerson Warrant has an exercise price of
$1.00 per share. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Management -- Stock Awards."
(4) As adjusted retained earnings (deficit) reflects the after tax impact of the
interest expense for the Emerson Warrant and related prepayment penalty.
17
<PAGE> 21
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
On December 26, 1997, pursuant to the Share Purchase Agreement dated
November 17, 1997, the Company acquired all of the outstanding common stock of
Wells Electronics, Inc. ("Wells") for approximately $130 million in cash. The
Company also incurred approximately $1.2 million in acquisition related costs
resulting in a total purchase price of approximately $131.2 million. The
acquisition was financed by a combination of a new bank credit facility of $90
million of which the Company borrowed approximately $83 million upon
consummation of the acquisition and a $25 million subordinated debenture issued
to Emerson.
The acquisition is being accounted for as a purchase, and the Company has
allocated the purchase price based on the fair value of assets acquired and
liabilities assumed. A significant portion of the purchase price has been
allocated as intangible assets using proven valuation procedures and techniques,
including approximately $44 million of acquired in-process research and
development.
The accompanying Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the 12 months ended December 31, 1997 assumes that the
acquisition of Wells took place on January 1, 1997.
The accompanying pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the financial position or
results of operations which would actually have been reported had the
acquisition been in effect during the periods presented, or which may be
reported in the future.
The accompanying Unaudited Pro Forma Condensed Consolidated Statement of
Operations should be read in conjunction with the historical financial
statements and related notes thereto for PCD and for Wells that appear elsewhere
in this Prospectus.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PCD WELLS PRO FORMA PRO FORMA
DEC. 31, DEC. 31, PRO FORMA PRO FORMA EFFECTS OF THE COMBINED
1997 1997 ADJUSTMENTS COMBINED (1) OFFERING AS ADJUSTED(2)
-------- -------- ----------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net sales................... $ 29,796 $41,590 $ 71,386 $71,386
Cost of sales............... 15,120 15,242 30,362 30,362
-------- ------- -------- -------- ------ -------
Gross profit.............. 14,676 26,348 41,024 41,024
Operating expenses,
excluding amortization.... 5,816 9,289 15,105 15,105
Write-off of acquired in-
process research and
development............... 44,438 $(44,438)(3)
Amortization of acquired
intangible assets......... 484 3,558(4) 4,042 4,042
-------- ------- -------- -------- ------ -------
Income (loss) from
operations.............. (35,578) 16,575 40,880 21,877 21,877
Interest and other income... 1,167 (1,067)(5) 100 100
Interest expense............ (227) (8) (11,878)(6) (12,113) $3,933(8) (8,180)
-------- ------- -------- -------- ------ -------
Income (loss) before
provisions for taxes.... (34,638) 16,567 27,935 9,864 3,933 13,797
Provisions (benefit) for
income taxes.............. (11,802) 7,157 8,939(7) 4,294 1,534(9) 5,828
-------- ------- -------- -------- ------ -------
Net income (loss) before
non-recurring item and
extraordinary loss...... $(22,836) $ 9,410 $ 18,996 $ 5,570 $2,399 $ 7,969
======== ======= ======== ======== ====== =======
Net income (loss) per share:
Basic................... $ (3.83) $ 0.94 $ 1.00
======== ======== =======
Diluted................. $ (3.83) $ 0.82 $ 0.91
======== ======== =======
Weighted average number of
common and common
equivalent shares
outstanding:
Basic................... 5,955 5,955 2,000(10) 7,955
Diluted................. 5,955 6,769 2,000(10) 8,769
</TABLE>
- ---------------
See notes on following page.
18
<PAGE> 22
(1) Before deducting the additional interest expense for the value of the
exercisable portion of the Emerson Warrant, pro forma net income combined
was approximately $6,849,000, pro forma net income combined per
share--basic was $1.15 (based on a weighted average number of shares
outstanding of 5,954,657) and pro forma net income combined per
share--diluted was $1.01 (based on a weighted average number of common and
common equivalent shares outstanding of 6,769,479).
(2) For purposes of this Unaudited Pro Forma Condensed Consolidated Statement
of Operations, the Debenture prepayment penalty of approximately $496,000
(net of taxes) has been excluded from the pro forma combined statement of
operations. Before deducting the additional interest expense for the value
of the exercisable portion of the Emerson Warrant, pro forma net income
combined was approximately $9,248,000, pro forma net income combined per
share--basic was $1.16 (based on a weighted average number of shares
outstanding of 7,954,657) and pro forma net income combined per
share--diluted was $1.05 (based on a weighted average number of common and
common equivalent shares outstanding of 8,769,479).
(3) Reflects the elimination of non-recurring acquired in-process research and
development relating to the Wells acquisition so that the pro forma
combined statement of operations includes only recurring costs.
(4) Includes amortization of intangible assets as a result of the Wells
acquisition consisting of 20 years for goodwill, trademarks and tradenames
and 9 years for patented technologies to reflect a full year's charge.
(5) Represents a reduction of interest income as a result of utilizing cash and
cash equivalents for the Wells acquisition.
(6) Includes interest expense on debt issued to finance the Wells acquisition,
at an assumed weighted average rate of 8.96% for the Senior Credit Facility
and at 10% for the subordinated debenture and additional interest expense
of $2.1 million representing the interest expense of the exercisable
portion of the Emerson Warrant. A 1/8 percent change in the interest rate
of the Senior Credit Facility results in a change of $103,750.
(7) Reflects the related tax effect of adjustments (3) through (6). A portion
of the approximately $44 million of in-process research and development
charge is not deductible in Japanese tax jurisdictions. The remainder of
the adjustments are included at a 39% rate.
(8) Reflects the reduction of interest expense as a result of the pay down of
the Senior Credit Facility and the Subordinated Debenture from the sale of
2,000,000 shares of Common Stock offered hereby (at an assumed public
offering price of $22.00 per share, less underwriting discounts and
commissions and estimated offering expenses payable by the Company).
(9) Reflects the related tax effect of adjustment reducing interest expense.
(10) Issuance of 2,000,000 shares offered hereby for purposes of calculating net
income per share.
19
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following table contains certain selected consolidated financial data
for PCD and its subsidiaries (excluding Wells and its subsidiaries, except as
noted). The selected consolidated financial data for each of the years ended
December 31, 1993, 1994, 1995, 1996 and 1997 have been derived from the
Company's Consolidated Financial Statements, which have been audited by Coopers
& Lybrand L.L.P., independent public accountants. The pro forma statement of
operations data for the year ended December 31, 1997 give effect to the Wells
acquisition assuming such transaction occurred on January 1, 1997 and have been
derived from the Unaudited Pro Forma Condensed Consolidated Statement of
Operations included elsewhere in this Prospectus. The Pro Forma Consolidated
Statement of Operations Data are not necessarily indicative of the actual
results that would have been achieved had the Wells acquisition occurred at the
beginning 1997, nor do they purport to indicate the results of operations of the
Company for any future period. The selected consolidated financial data should
be read in conjunction with the Consolidated Financial Statements and the Notes
thereto of the Company and of Wells appearing elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
1993 1994 1995 1996 1997 (1) 1997 (2)(3) 1997 (2)(4)
------- ------- ------- ------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales.......................... $12,691 $15,850 $25,616 $26,857 $ 29,796 $ 71,386 $ 71,386
Gross profit....................... 4,197 6,016 12,139 12,400 14,676 41,024 41,024
Write-off of acquired in-process
research and development......... -- -- -- -- (44,438) -- --
Income (loss) from operations...... 867 2,157 6,472 6,955 (35,578) 21,877 21,877
Interest income (expense), net..... 1 23 112 725 940 (12,013) (8,080)
Net income (loss).................. $ 507 $ 1,301 $ 3,863 $ 4,785 $(22,836) $ 5,570 $ 7,969
======= ======= ======= ======= ======== ======== ========
Net income (loss) per share (5):
Basic............................ $ 0.11 $ 0.29 $ 0.85 $ 0.87 $ (3.83) $ 0.94 $ 1.00
======= ======= ======= ======= ======== ======== ========
Diluted.......................... $ 0.11 $ 0.28 $ 0.74 $ 0.76 $ (3.83) $ 0.82 $ 0.91
======= ======= ======= ======= ======== ======== ========
Weighted average number of common
and common equivalent shares
outstanding (5):
Basic............................ 4,561 4,561 4,570 5,478 5,955 5,955 7,955
Diluted.......................... 4,637 4,631 5,201 6,292 5,955 6,769 8,769
OTHER DATA:
EBITDA (6)(7)...................... $ 1,933 $ 3,142 $ 7,498 $ 8,344 $ 10,390 $ 30,059 $ 30,059
EBITDA margin (6).................. 15.2% 19.8% 29.3% 31.1% 34.9% 42.1% 42.1%
Depreciation....................... 1,066 985 1,026 1,389 1,530 4,140 4,140
Amortization of intangible
assets........................... -- -- -- -- -- 4,042 4,042
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
AS ADJUSTED
1993 1994 1995 1996 1997 (1) 1997 (4)
------ ------- ------- ------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)............. $4,249 $ 5,089 $ 7,671 $23,054 $(12,632) $(12,310)
Total assets.......................... 8,945 10,783 15,929 32,456 126,592 126,592
Total debt............................ 37 -- -- -- 105,903 67,080
Stockholders' equity.................. 7,473 8,774 12,812 28,706 8,995 48,140
</TABLE>
- ---------------
See notes on following page.
20
<PAGE> 24
(1) 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).
(2) Gives effect to the Wells acquisition assuming such transaction had occurred
on January 1, 1997 and the elimination of the related non-recurring acquired
in-process research and development expense and the addition of the annual
amortization of acquired intangible assets so that the pro forma and the pro
forma as adjusted includes only recurring costs. See "Unaudited Pro Forma
Condensed Consolidated Statement of Operations" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(3) Before deducting the additional interest for the value of the exercisable
portion of the Emerson Warrant, pro forma net income was approximately
$6,849,000, pro forma net income per share -- basic was $1.15 (based on a
weighted average number of shares outstanding of 5,954,657) and pro forma
net income per share -- diluted was $1.01 (based on a weighted average
number of common and common equivalent shares outstanding of 6,769,479).
(4) Adjusted to reflect (i) the sale by the Company of 2,000,000 shares of
Common Stock offered hereby (at an assumed public offering price of $22.00
per share), less underwriting discounts and commissions and estimated
offering expenses payable by the Company; (ii) the application of the net
proceeds from the offering; and (iii) the write-off of approximately $2.1
million of interest expense relating to the exercisable portion of the
Emerson Warrant. Before deducting the additional interest expense for the
value of the exercisable portion of the Emerson Warrant, pro forma as
adjusted net income was approximately $9,248,000, pro forma as adjusted net
income per share -- basic was $1.16 (based on a weighted average number of
shares outstanding of 7,954,657) and pro forma as adjusted net income per
share -- diluted was $1.05 (based on a weighted average number of common and
common equivalent shares outstanding of 8,769,479). See "Use of Proceeds,"
"Capitalization" and Note 9 of Notes to the Company's Consolidated Financial
Statements.
(5) See Note 2 of Notes to the Company's Consolidated Financial Statements for
an explanation of the basis used to calculate net income (loss) per share.
(6) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
includes income from operations before deducting the non-recurring write-off
relating to the Wells acquisition for acquired in-process research and
development adjusted to exclude depreciation and amortization of intangible
assets. EBITDA margin is EBITDA reflected as a percentage of net sales. The
Company believes that EBITDA and EBITDA margin provide additional
information to assist investors in determining its ability to meet future
debt service requirements. However, EBITDA is not a defined term under
generally accepted accounting principles ("GAAP"), is not indicative of
operating income or cash flow from operations as determined under GAAP and
may not be comparable to similarly titled measures reported by other
companies.
(7) Net cash provided by operating activities was $1.5 million, $1.6 million,
$5.5 million, $7.8 million, and $8.1 million for 1993, 1994, 1995, 1996, and
1997, respectively. Net cash used in investing activities was $1.4 million,
$1.4 million, $2.5 million, $1.9 million and $132.9 million for 1993, 1994,
1995, 1996, and 1997, respectively. Net cash (used in) provided by financing
activities was $(0.4) million, $(0.09) million, $0.004 million, $10.7
million and $108.3 million for 1993, 1994, 1995, 1996, and 1997,
respectively.
21
<PAGE> 25
WELLS ELECTRONICS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table contains certain selected consolidated financial data
for Wells Electronics, Inc. The selected consolidated financial data for each of
the periods 52 weeks ended June 3, 1995, 48 weeks ended April 27, 1996, 53 weeks
ended May 3, 1997, and 34 weeks ended December 26, 1997 have been derived from
the Wells Consolidated Financial Statements, which have been audited by KPMG
Peat Marwick, independent public accountants. The selected consolidated
financial data should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto of Wells appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
UNAUDITED
----------------------- 52 WEEKS 48 WEEKS 53 WEEKS 34 WEEKS
YEAR ENDED YEAR ENDED ENDED ENDED ENDED ENDED
MAY 31, MAY 31, JUNE 3, APRIL 27, MAY 3, DECEMBER 26,
1993 1994 1995 1996 1997 1997
---------- ---------- --------- --------- --------- ------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales.......................... $11,696 $12,287 $18,579 $17,998 $27,492 $29,268
Gross profit....................... 4,370 3,964 8,847 8,727 14,311 19,007
Income (loss) from operations...... (944) (642) 1,575 2,103 5,553 11,584
Non-operating income, net.......... 518 154 66 735 783 330
Net income (loss).................. $ (432) $ (386) $ 843 $ 2,252 $ 4,367 $ 6,269
======= ======= ======= ======= ======= =======
Net income (loss) per share(1):
Basic............................ $(55.21) $(49.33) $107.73 $287.80 $558.08 $801.15
======= ======= ======= ======= ======= =======
Diluted.......................... $(55.21) $(49.33) $107.73 $287.80 $558.08 $801.15
======= ======= ======= ======= ======= =======
Weighted average number of common
and common equivalent shares
outstanding(1):
Basic............................ 7,825 7,825 7,825 7,825 7,825 7,825
Diluted.......................... 7,825 7,825 7,825 7,825 7,825 7,825
</TABLE>
<TABLE>
<CAPTION>
MAY 31, MAY 31, JUNE 3, APRIL 27, MAY 3, DECEMBER 26,
1993 1994 1995 1996 1997 1997
---------- ---------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................... $ 1,337 $ 2,043 $ 1,547 $ 2,679 $ 2,085 $ 757
Total assets....................... 7,230 9,023 11,494 13,913 30,785 27,542
Total debt......................... 194 1,458 1,699 2,611 268 18
Stockholders' equity............... 3,612 3,273 4,354 6,333 18,641 13,841
</TABLE>
- ---------------
(1) See Note 2 of Notes to Wells' Consolidated Financial Statements for an
explanation of the basis used to calculate net income (loss) per share.
22
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including, without limitation, those set forth under "Risk
Factors" and elsewhere in this Prospectus.
As used herein, the terms "Company" and "PCD," unless otherwise indicated
or the context otherwise requires, refer to PCD Inc. and its subsidiaries,
including Wells Electronics, Inc. and its subsidiaries ("Wells"). However, all
financial information for periods ended before December 26, 1997, unless
otherwise indicated or the context otherwise requires, is for PCD Inc. and its
subsidiaries, excluding Wells.
OVERVIEW
PCD 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.
The Company was founded in 1976 and the current chairman, John L. Dwight,
Jr., acquired a controlling interest in 1980. Over the years, the Company has
made a number of strategic acquisitions and investments to both bolster existing
product lines and expand into selected key markets. The most significant of
these acquisitions were: (i) the 1997 acquisition of the common stock of Wells
Electronics, Inc. ("Wells") from UL America, Inc., an indirect wholly-owned
subsidiary of Siebe plc; (ii) the 1988 acquisition of the assets of Component
Technologies, Inc.; and (iii) the 1983 acquisition of the Appleton Electronics
product line from Emerson Electric Co. In 1996, the Company completed an initial
public offering of its Common Stock.
In 1995, net sales of the Company (excluding Wells) were $25.6 million and
grew to $29.8 million in 1997, and after giving effect to the Wells acquisition
the Company's net sales in 1997 were $71.4 million on a pro forma basis. The
Company (excluding Wells) realized approximately 46.7% of its net sales in 1997
from products introduced in the last five years. The Company distributes its
products through a combination of its own dedicated direct sales forces, 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 28.1%, 22.1% and
35.8% of the net sales of the Company in the years ended December 31, 1995, 1996
and 1997, respectively, and the Company believes that, with the addition of
Wells, international sales will account for a significant portion of its
revenues for the foreseeable future.
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
PRO FORMA
PRODUCT CATEGORIES 1995 1996 1997 1997 (1)
------------------ ---- ---- ---- ---------
<S> <C> <C> <C> <C>
IC package interconnects.............................. 52.7% 37.6% 42.3% 75.9%
Industrial interconnects.............................. 16.5 22.5 24.5 10.2
Avionics terminal blocks and sockets.................. 30.8 39.9 33.2 13.9
----- ----- ----- ------
Total....................................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ======
</TABLE>
- ---------------
(1) Gives effect to the Wells acquisition assuming such transaction had occurred
on January 1, 1997.
23
<PAGE> 27
WELLS ACQUISITION
On December 26, 1997, the Company purchased Wells (the "Wells
acquisition"). The acquisition significantly expanded the Company's product
offerings in the IC package interconnect category and added principal facilities
in South Bend, Indiana and Yokohama, Japan, as well as technical support
operations in Regensburg, Germany and Penang, Malaysia, sales offices in San
Jose, California; Northhampton, England; Seoul, South Korea and Singapore, and a
stamping facility in Harrisburg (Swatara), Pennsylvania. In combining the
existing IC package interconnect business of PCD with that of Wells, the Company
now supports complete design, development, manufacturing and marketing of test
and burn-in sockets in two of the world's largest IC package interconnect
markets: the United States and Japan. Wells was acquired for access to its
burn-in technology and customer base. The purchase price for Wells was $130
million in cash and the Company incurred approximately $1.2 million in
acquisition related costs resulting in a total purchase price of approximately
$131.2 million. The acquisition is being accounted for as a purchase in
accordance with APB Opinion No. 16. As a result, a purchase price premium of
$110 million was recorded on the transaction. Patented technology of
approximately $3.1 million was identified. The patented technologies reflect the
products built upon established technology, with an average remaining life of 9
years.
The acquisition was financed by a combination of a new bank credit facility
of $90 million, of which the Company borrowed approximately $83 million at
consummation of the acquisition, a $25 million subordinated debenture issued to
Emerson and the Company's existing cash and short term investments.
Approximately $44 million of the purchase price premium was written off as
acquired in-process research and development ("IPR&D") with no alternative
future use as a non-recurring write-off charged to operations at the acquisition
date. The acquired IPR&D relates to in-process burn-in socket designs and
manufacturing process for next generation high density IC packaging. The
completion costs for these IPR&D programs are expected to be approximately $3.7
million. The Company intends to further develop the IPR&D projects, and expects
successful completion of a number of them. However, the Company recognizes that
development of the IPR&D possesses certain risks such as failure of one or more
of the critical technologies to function according to specifications or customer
rejection, which may directly impact these projects reaching technological
feasibility. The Company expects the useful lives of the IPR&D projects to be 5
to 8 years, if technological feasibility is reached. If the IPR&D projects were
not successfully developed, it would negatively impact the future performance
and the ability of the Company's burn-in socket segment to compete.
Wells product development is highly focused and customer driven, and
generally related to a specific product or next generation platform. Often,
successful projects are able to be commercialized into major product lines, as
demonstrated by recent sales results. Wells is in the process of developing
significant next generation product programs with major customers.
Prior to the acquisition of Wells by the Company, Wells was a wholly-owned
subsidiary of Siebe, having been purchased in May 1996 as part of Siebe's
strategic acquisition of Unitech plc. The stated objective of Siebe's purchase
of Unitech was to combine the two companies' power supply and control
operations. Wells, a small non-strategic and non-core subsidiary of Unitech,
represented less than 5% of the total purchase consideration. Subsequent to the
acquisition by Siebe, Wells grew substantially and expanded its customer base,
product lines and product development processes.
24
<PAGE> 28
RESULTS OF OPERATIONS OF WELLS ELECTRONICS, INC. FOR FISCAL 1997 (53 WEEKS ENDED
MAY 3, 1997) AND FISCAL 1996 (48 WEEKS ENDED APRIL 27, 1996); AND THE PERIODS
ENDED DECEMBER 26, 1997 (34 WEEKS ENDED DECEMBER 26, 1997) AND DECEMBER 31, 1996
(35 WEEKS ENDED DECEMBER 31, 1996)
Net Sales. Net sales increased approximately 53% to $27.5 million for
fiscal 1997, from $18.0 million for fiscal 1996. This change in net sales
reflected increased market penetration of Wells' burn-in products on an overall
business basis. Wells' largest customer accounted for approximately 12% of the
53% increase in net sales. In addition, net sales of Wells' TSOP (thin
small-outline package) product line increased significantly as volume shipments
began to a major new customer. For the 34 week period ended December 26, 1997,
net sales increased approximately 89%, to $29.3 million from $15.5 million for
the 35 week period ended December 31, 1996. Shipments to Wells' three largest
customers during the 34 week period ended December 26, 1997 accounted for $15.6
million, or 53% of the net sales for that period.
Gross Profit. Gross profit increased 64% to $14.3 million for fiscal 1997,
from $8.7 million for fiscal 1996. As a percentage of net sales, gross margin
increased to 52.1% for fiscal 1997 from 48.5% for fiscal 1996. This increase in
gross margin was attributable to a shift in product mix to Wells' TSOP and IPGA
product lines and increased manufacturing and labor efficiencies resulting from
the higher sales volume. For the 34 week period ended December 26, 1997, gross
profit increased approximately 171%, to $19.0 million from $7.0 million for the
35 week period ended December 31, 1996. As a percentage of net sales, gross
margin increased to 64.9% for the 34 week period ended December 26, 1997 from
45.2% for the 35 week period ended December 31, 1996. The improvement in gross
margin was primarily due to the increase in sales volume resulting in a shift in
product mix defined above and improved overhead absorption via improved
manufacturing and labor efficiencies.
Operating Expenses. Operating expenses were $8.8 million, or 31.9% of net
sales for fiscal 1997 compared to $6.6 million, or 36.8% of net sales for fiscal
1996. Accounting for this change were higher salaries and related expenses,
increased commissions due to the higher sales volume and increased product
engineering costs. For the 34 week period ended December 26, 1997, operating
expenses were $7.4 million, or 25.4% of net sales, compared to $5.2 million, or
33.9% of net sales for the 35 week period ended December 31, 1996. Accounting
for this change were higher salaries and related expenses, higher product repair
expenses, increased commission expense due to the higher sales volume and
expansion costs into Europe and Texas.
Provision for Income Taxes. The effective tax rate was 31.1% for fiscal
1997 compared to 20.6% for fiscal 1996. The difference was due primarily to a
rate benefit taken by Wells for fiscal 1996 with respect to a reduction in the
valuation allowance, as well as differing effective state tax rates. The
effective tax rate was 47.4% for the 34 week period ended December 26, 1997
compared to 28.3% for the 35 week period ended December 31, 1996. This change
reflects the utilization of net operating loss carryforwards in 1996 that were
not available in 1997.
The gross profit margin for PCD (excluding Wells) for the year ended
December 31, 1997 was 49.3%. The gross profit margin for Wells for the fiscal
year ended May 5, 1997 was 52.1%. The gross profit margin for Wells for the 12
months ended December 31, 1997 was 63.4%. The difference in gross profit margin
between PCD's and Wells' historical results are related to the different markets
that PCD serves versus Wells and the rapid escalation of net sales volume that
Wells experienced during the above referenced periods. Operating expenses
(excluding a write-off of acquired in-process research and development expense
relating to the Wells acquisition) for PCD (excluding Wells) for the year ended
December 31, 1997 was 19.5%. Operating expenses for Wells for fiscal 1997 was
31.9%. Operating expenses for Wells for the 12 months ended December 31, 1997
was 23.5%. The difference in operating expenses between PCD's and Wells'
historical results are related to the costs associated with the sales and
technical support facilities established by Wells to support the growing
international markets for IC package interconnect sockets. Wells maintained an
25
<PAGE> 29
overall effective tax rate equal to 31.1% for the period ended May 5, 1997
compared to a 34.1% overall effective tax rate provided by PCD for the year
ended December 31, 1997. The difference was due primarily to a rate benefit
taken by Wells with respect to a reduction in the valuation allowance, as well
as differing effective state tax rates.
RESULTS OF OPERATIONS
The following table sets forth certain Consolidated Statements of Income
data and other data as a percentage of net sales for the periods indicated. The
table and the discussion below should be read in conjunction with the
Consolidated Financial Statements and Notes thereto for the Company (excluding
Wells) and for Wells that appear elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
PRO PRO FORMA
FORMA AS ADJUSTED
1995 1996 1997 (1) 1997 (2) 1997 (2)(3)
----- ----- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............................ 47.4 46.2 49.3 57.5 57.5
Write-off of acquired in-process
research and development.............. -- -- (149.1) -- --
Income (loss) from operations........... 25.3 25.9 (119.4) 30.6 30.6
Interest income (expense), net.......... 0.4 2.7 3.2 (16.8) (11.3)
Net income (loss)....................... 15.1 17.8 (76.6) 7.8 11.2
</TABLE>
- ---------------
(1) 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.
(2) Gives effect to the Wells acquisition assuming such transaction had occurred
on January 1, 1997 and the elimination of the related non-recurring acquired
in-process research and development and the addition of the annual
amortization of acquired intangible assets so that the pro forma and the pro
forma as adjusted include only recurring costs. See "Unaudited Pro Forma
Condensed Consolidated Statement of Operations."
(3) Adjusted to reflect (i) the sale by the Company of 2,000,000 shares of
Common Stock offered hereby (at an assumed public offering price of $22.00
per share), less underwriting discounts and commissions and estimated
offering expenses payable by the Company; (ii) the application of the net
proceeds from the offering; and (iii) the write-off of the interest expense
relating to the exercisable portion of the Emerson Warrant. See "Use of
Proceeds" and "Capitalization."
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
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<PAGE> 30
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 $44.0 million of acquired in-process
research and development was recorded in connection with the Wells acquisition.
The amount of in-process research and development was determined by identifying
product development projects at Wells that were based on technologies that were
considered incomplete or in-process. The remaining goodwill and purchased
intangibles will be amortized over 9 to 20 years, which will increase operating
expenses by approximately $4.0 million per year. PCD selected a 20 year life for
goodwill and intangibles based on connector industry norms and the wide array of
technologies, services and capabilities required to successfully compete in the
burn-in market. Wells is an established manufacturer in this market with over 20
years experience.
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. The Company expects
interest expense to increase substantially in 1998. See "-- Liquidity and
Capital Resources."
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 36.6%.
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
Net Sales. Net sales increased 4.8% to $26.9 million for 1996 from $25.6
million for 1995. This increase in net sales reflected overall market growth and
increased market penetration of the Company's product lines. The greatest
portion of this growth was derived from higher volume in the industrial
interconnects and avionics terminal block and socket categories. The IC package
interconnect product category declined due to the volatility within the IC
package market. Sales to customers located outside the United States, either
directly or through U.S. and foreign distributors, were 22.1% of net sales in
1996, compared with 28.1% of net sales in 1995.
Gross Profit. Gross profit increased 2.2% to $12.4 million for 1996 from
$12.1 million for 1995. As a percentage of net sales, gross margin decreased
from 47.4% in 1995 to 46.2% for 1996. This decrease in gross margin was
attributable to a shift in product mix from IC packaging interconnects to
industrial interconnects and avionics terminal blocks and sockets and a one-time
expense for a design change to a nonstandard product in the IC package
interconnect category. This decline was partially offset by increased
manufacturing and labor efficiencies resulting from higher sales volume and the
best cost producer program.
Operating Expenses. Operating expenses decreased by $222,000, to $5.4
million, or 20.3% of net sales, for 1996, compared to $5.7 million, or 22.1% of
net sales, for 1995. This decrease in operating expenses is the result of having
recorded professional fees in 1995 associated with pending patent litigation,
partially offset by increased expenses in 1996 resulting from the Company's
status as a publicly traded company.
Interest and Other Income (Expense), Net. Interest and other income was
$725,000 in 1996, compared to $112,000 for 1995. The increase was attributable
to the interest earned on the proceeds from the Company's initial public stock
offering.
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<PAGE> 31
Provision for Income Taxes. The effective tax rate for 1996 was
approximately 37.7%, compared to 41.3% for 1995. This decrease in the effective
tax rate for 1996 was due to the application of the appropriate effective tax
rates for each of the state tax jurisdictions in which the Company operates. In
addition, the Company established a wholly-owned subsidiary which was engaged in
holding PCD securities. This corporate structure allowed for a favorable
treatment of passive income in the Commonwealth of Massachusetts.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in 1997 was $8.1 million, compared to
$7.8 million in 1996. These funds were sufficient to meet increased working
capital needs and capital expenditures of approximately $2.5 million. The
Company currently anticipates that its capital expenditures for 1998 will be
approximately $7 million, which consists primarily of purchased tooling and
equipment required to support the Company's business. The amount of 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 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. Each of PCD, Wells 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. Interest on
loans outstanding under the Senior Credit Facility is, at the Company's
election, payable at either (i) the higher of the lender's base rate, or a rate
equal to 1/2 of 1% per annum above the weighted average of the rates on
overnight federal funds transactions with members of the Federal Reserve System
arranged by federal funds brokers plus between 25 and 200 basis points based on
the ratio of senior indebtedness to earnings before interest, taxes,
depreciation and amortization ("EBITDA"), or (ii) a periodic fixed rate equal to
Libor plus between 150 and 325 basis points based on the ratio of senior
indebtedness to EBITDA. In addition, the Company obtained $25 million in
subordinated debt financing from Emerson Electric Co. ("Emerson") pursuant to a
Subordinated Debenture (the "Debenture") issued to Emerson. Interest on the
Debenture is 10% per annum plus the issuance of the Emerson Warrant which is
exercisable for 525,000 shares of Common Stock of the Company, as follows: (i)
the Emerson Warrant is currently exercisable for 150,000 shares of common stock;
(ii) if the principal of and accrued interest and costs and expenses under the
Debenture have not been paid in full at the close of business on December 31,
1998, the Emerson Warrant shall be exercisable for an additional 225,000 shares
of Common Stock; and (iii) if the principal of and accrued interest and costs
and expenses under the Debenture have not been paid in full at the close of
business on December 31, 1999, the Emerson Warrant shall be exercisable for an
additional 150,000 shares of Common Stock. The combined effective interest rate
for the Debenture, the exercisable portion of the Emerson Warrant and the
prepayment penalty is 21.7%, assuming 10% per annum direct interest expense,
8.4% per annum effective interest expense associated with the value of the
Emerson Warrant and 3.25% of effective interest expense due to prepayment
penalties. Prepayment of the principal amount under the Debenture is subject to
a penalty, due at the time of prepayment, as follows: (i) for the period
beginning on December 26, 1997 and ending June 30, 1998, an amount equal to
3.25% of the principal sum prepaid; (ii) for the period beginning July 1, 1998
and ending September 30, 1998, an amount equal to 6.5% of the principal sum
prepaid; and (iii) for the period beginning October 1, 1998 and ending December
31, 1998, an amount equal to 9.75% of the principal sum prepaid. The Debenture
is convertible into Common Stock of the Company, at Emerson's election, upon the
occurrence of an Event of Default. The Events of Default under the Debenture are
(i) insolvency; (ii) default under the Senior Credit Facility; (iii) a payment
default on the Debenture which default is not cured within 10 business days;
(iv) a material breach by the Company of any representations
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<PAGE> 32
or warranties or failure to comply with covenants or agreements contained in the
agreements with Emerson which breach is not cured within 30 days; and (v) an
undischarged or unstayed judgment against the Company for an amount in excess of
$1 million. The Senior Credit Facility will terminate over a period of six to
seven years. The Company expects to use the net proceeds from this offering to
repay (i) 100% of the Debenture held by Emerson and (ii) a portion of the
outstanding balance on the Senior Credit Facility.
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, including those purchasing
Common Stock in this offering.
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.
YEAR 2000 COMPLIANCE COSTS
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. To distinguish 21st
century dates from 20th century dates, these date code fields must be able to
accept four digit entries. The Company utilizes a significant number of computer
software programs and operating systems across its entire organization,
including applications used in manufacturing, product development, financial
business systems and various administrative functions. The Company believes
that, with the exception of the South Bend, Indiana location of Wells - CTI
("Wells - CTI South Bend"), its computer systems will be able to manage and
manipulate all material data involving the transition from 1999 to 2000 without
functional or data abnormality and without inaccurate results related to such
data. However, there can be no assurances that potential systems interruptions
or the cost necessary to update software would not have a material adverse
effect on the Company's financial condition, results of operations or business.
In addition, the Company has limited information concerning the compliance
status of its suppliers and customers. In the event that any of the Company's
significant suppliers or customers do not successfully and timely achieve Year
2000 compliance, the Company's financial condition, results of operations and
business could be adversely affected.
The Company believes that, within the next nine months, it will have to
replace the current systems at Wells - CTI South Bend with new systems that are
Year 2000 compliant. Failure to replace such systems could result in the
generation of erroneous data or system failure. Significant uncertainty exists
concerning the potential effects associated with Year 2000 compliance, and Year
2000 issues involving systems of Wells - CTI South Bend could have a material
adverse effect on the Company's financial condition, results of operations or
business. The cost of replacing computer systems of Wells - CTI South Bend is
currently estimated to be up to $900,000. See "Business."
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<PAGE> 33
BUSINESS
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 integrated circuit 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 Company markets electronic connector products in three product
categories, each targeting a specific market. These product categories are:
IC package interconnects are specially designed electro-mechanical
devices that connect ICs to printed circuit boards during the various
stages of the ICs' production and application in electronic systems. These
stages are test, burn-in, development 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 of
discrete factory wiring and cabling with 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.
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.
BACKGROUND
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, create 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 1997 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.
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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, development and
production. It is the Company's objective to provide a total solution for
selected IC packages encompassing all four stages. By providing a total
solution, the Company believes it will be able to forge closer customer
relationships and gain acceptance by new customers.
The Company's market position varies by market. Test -- Through the Wells
acquisition, the Company gained entrance to the IC package test market with a
program, which is in its early stage and is designed to penetrate the test
market. Burn-in -- The Company believes that the combination of the burn-in
product lines of PCD and Wells makes the Company one of the worldwide leaders in
the burn-in market. Development -- The Company has been active in the
development market for a number of years, primarily with a product line that it
sells to Altera Corporation. Production -- The Company has recently entered the
production market with the introduction of its Z-Lok(TM) BGA socket.
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 symbolC (257
degree symbolF), 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.
Development -- The main purpose of the development socket is to provide
flexibility for the designer in performing diagnostics of electronic design
layouts and programming of programmable logic devices ("PLDs") in the
prototype and early production stages of these layouts.
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 six years
and is projected by Integrated Circuit Engineering Corporation, 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-
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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.
PCD is benefiting from the proliferation of factory automation and the
embedded electronics which control manufacturing processes. This trend has
spurred demand not only for increased unit volume of terminal blocks but also
for interface modules with higher density and greater diversity of
configurations.
Within the industrial interconnect market, the Company focuses its sales
and marketing efforts on North America. Bishop & Associates forecasts sales of
industrial interconnect products in North America to grow at a 6.2% compound
annual growth rate, from $891 million in 1997 to $1.2 billion in 2002.
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 world fleet of commercial transport aircraft, which includes all
aircraft with 50 seats or more, is projected by The Boeing Company to grow from
11,500 airplanes at the end of 1996 to almost 17,000 airplanes in 2006. Over the
next ten years, The Boeing Company estimates that more than 7,300 new commercial
jets will enter service worldwide. The majority of these airplanes will meet
industry demand for growth, while the remainder will replace the 1,900 airplanes
that are projected to be removed from service. According to The Boeing Company,
many of these airplanes are expected to be removed from service due to the
International Civil Aviation Organization ("ICAO") requirement that in the
United States all airplanes must comply with the ICAO Stage 3 noise standard as
of December 31, 1999. Of the 1,900 airplanes projected to be removed from
service between 1997 and 2006, three out of four are expected to be removed
during the next five years.
STRATEGY
Before the Wells acquisition, both PCD and Wells shared similar strategies,
and the Company has developed a unified strategy for the future. 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:
- Selection of Key Markets: The Company actively identifies and pursues
areas of the electronic connector market 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. The Company focuses on the IC
package, industrial and avionics interconnect markets. The recent
acquisition of Wells emphasizes the Company's strategy of selection of
key markets by expanding its share of the IC package interconnect market.
Similarly, the Company recently formed its Control Systems Interconnect
division in order to
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<PAGE> 36
enter the interface module market which the Company believes is a rapidly
growing segment of the interconnect market.
- Total Customer Solution: The Company seeks to anticipate evolving market
requirements and capitalize on its design capabilities to rapidly develop
products that meet those needs. PCD has increased its product offerings
and design capabilities to provide a total product solution to its
customers. These customers are increasingly seeking a solution to an
expanding array of product requirements and services, resulting in the
establishment of closer strategic relationships between PCD and its
customers. The Company believes its total solution approach meets these
customer needs by shortening the new product development cycle, helping
them to meet their time-to-market requirements and providing product
specific expertise.
- Customer Responsiveness/Short Delivery Cycle: The Company believes that
responding quickly to customer needs is a critical competitive factor in
the markets in which it participates. Increasing emphasis by customers on
time to market with new designs, inventory reduction and shorter, and
more frequent production runs has created the need for more responsive,
innovative vendors. The Company believes it is among the most responsive
to its customer needs including product design and production lead times
for product development and delivery in the markets it serves, and the
Company's strategy is to maintain and leverage this leadership position.
- Best Cost Producer: In the markets in which the Company competes, high
quality is a prerequisite. The Company's goal is to be the low cost
producer for comparable product designs in each of these markets. The
Company strives for continuous cost reduction and monitors its progress
closely throughout the year. As part of this program, engineering and
manufacturing work closely together from the inception of all new product
programs.
- Penetration of Worldwide Markets: The Company has recently placed great
emphasis on marketing its products on a worldwide basis and currently
sells to its foreign customers both directly and through U.S. and foreign
distributors. According to Bishop & Associates, non-U.S. sales accounted
for over 60% of 1997 sales in the world connector market. International
sales of the Company (excluding Wells) as a percentage of net sales
increased from 7.7% in 1993 to 35.8% in 1997. As a result of the Wells
acquisition, the Company now has an operating subsidiary in Japan ("Wells
Japan"), and sales or technical support operations in England, Germany,
South Korea, Malaysia and Singapore, which the Company believes will
expand its ability to serve the global semiconductor market.
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 either 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.
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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 drives the demand for IC sockets.
Based on industry reports, unit demand for major package types are expected
to increase at a compound annual growth rate of 8.1% from 1996 to 2001. The
Company offers products within all package families, however, the Company
primarily focuses on the Small Outline ("SO") Package Sockets, Quad Flat Pack
("QFP") Sockets, Pin Grid Array ("PGA") Sockets and Ball Grid Array ("BGA")
Sockets. Based on industry reports, the projected compound annual growth rates
for SO, QFP, PGA and BGA package families are 8.5%, 16.7%, 8.3% and 59.3%,
respectively, from 1996 to 2001.
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. Most SO packages are 44 leads and below. 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 solderballs are attached to the underside of the
substrate. The solderballs ultimately attach the package to the printed
circuit board. The die is placed in the package prior to the attachment of
the solderballs 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.
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The Company offers a range of products for various packages within each of
the four stages: test, burn-in, development and production:
<TABLE>
<CAPTION>
PRODUCT DEFINITION IC TYPE APPLICATION
------- ---------- ------- -----------
<S> <C> <C> <C>
TEST
TSOP Thin, Small Outline Package Memory Computer
- ---------------------------------------------------------------------------------------------------
BURN-IN
TSOP Thin, Small Outline Package DRAM, Flash Computer
Memory
SOP Small Outline Package Logic Automotive, Computer
PGA/IPGA Pin Grid Array/Interstitial Pin MPU Computer
Grid Array
BGA Ball Grid Array MPU, Memory Computer
CSP Chip Scale Package Flash Memory, Notebook Computer,
Logic Telecommunications, Consumer
SOJ, PLCC, Small Outline J-Lead, Plastic Memory, DRAM/SRAM Computer, Consumer,
DIP Leaded Chip Carrier, Dual-In Telecommunications
Line Package
PQFP, QFP Plastic Quad Flat Pack, Quad Memory, Logic, Computers, Telecommunications
Flat Pack MPU, DSP
- ---------------------------------------------------------------------------------------------------
DEVELOPMENT
QFP, Carrier Quad Flat Pack, Carrier Logic, MPU Computer
- ---------------------------------------------------------------------------------------------------
PRODUCTION
BGA Ball Grid Array Logic, MPU, ASIC Computer
</TABLE>
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.
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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 silicon 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
with Douglas Aircraft Company for the MD11 and C17 aircraft.
Application-specific relay sockets are marketed to Boeing subcontractors
for the 777 commercial aircraft program and to Douglas for the MD11 and C17
aircraft.
CUSTOMERS
In 1997, products of the Company (excluding Wells) were sold to over 1,300
customers in a wide range of industries and applications. The top five customers
of the Company (excluding Wells) in 1997 accounted for 42.7% of net sales.
Altera Corporation accounted for 16.6%, 17.4% and 14.5 % of net sales of the
Company (excluding Wells) in 1995, 1996 and 1997, respectively, and TNT
Distributors, Inc. accounted for 13.4%, and 12.7% of net sales of the Company
(excluding Wells) in 1995 and 1997, respectively. In 1997, principal end users
of products of Wells included Advanced Micro Devices, Inc., Micron Technology,
Inc. and Siemens AG. Sales to customers located outside the United States,
either directly or through U.S. and foreign distributors, accounted for
approximately 28.1%, 22.1% and 35.8% of the net sales of the Company (excluding
Wells) in the years ended 1995, 1996 and 1997, respectively.
36
<PAGE> 40
Examples of end users of the Company's products, by category, are presented
below:
<TABLE>
<CAPTION>
PRODUCT CATEGORIES REPRESENTATIVE CUSTOMERS
------------------ ------------------------
<S> <C>
IC Package Interconnects..................... Advanced Micro Devices, Inc.
Altera Corporation
Micron Technology, Inc.
Motorola, Inc.
Siemens AG
Industrial Interconnects..................... Checkpoint Systems, Inc.
Groupe Schneider (Modicon, Inc./Square D
Co./Telemecanique)
Honeywell, Inc.
Pacific Scientific Company
Parker Hannifin Corporation
Rockwell International Corp. (Allen-Bradley
Company)
Avionics Terminal Blocks and Sockets......... Bell Helicopter Textron Inc.
The Boeing Company
Bombardier Inc.
(Canadair/deHavilland/Learjet Inc.)
British Aerospace Ltd.
Empresa Brasileira de Aeronautica S/A
(Embraer)
</TABLE>
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 not handled in bulk
and are relatively small, and problems are resolved as they occur, rather than
continuing through an extended production run.
Wells Japan subcontracts all of its product manufacturing and final
assembly operations to approximately six Japanese vendors. In calendar year
1997, Wells derived $15.1 million (or approximately 21.1% of the Company's pro
forma 1997 revenues) from Wells Japan. The Company does not subcontract any
other final product assembly. In addition, the Company subcontracts a portion of
its labor-intensive product subassembly 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.
37
<PAGE> 41
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.
Through the Wells acquisition, the Company anticipates improved project design
capacity resulting from focusing new product development resources and
eliminating project duplication. 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 following product lines were
introduced in 1997: high density terminal blocks, production BGA Z-Lok(TM)
sockets, test sockets and Flexiplug(TM), and a number of application-specific
products for major market leaders in the IC package interconnect, industrial
equipment and avionics markets, including Micron, AMD, Groupe Schneider and
Rockwell International Corp. (through its subsidiary Allen-Bradley).
The Company's current product development projects in the IC package
interconnect market target new package device designs such as BGA, TSOP and CSP
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 SOP and CSP will be the preferred package for high-volume,
high-density small outline IC devices. In the industrial equipment market, the
Company is scheduled to introduce a series of multi-tier fixed terminal blocks
in the first half of 1998. The initial interface modules were introduced in
January 1998, and a number of custom designs are expected to follow during the
year. New application-specific products are also being developed. Among these
products is a product similar to the Company's Flexiplug(TM) product being
developed for Rockwell International Corp. (Allen-Bradley Company), which is
projected to go into production in the second half of 1998. For Groupe
Schneider, the Company has developed a number of standard and application-
specific fixed terminal blocks, which are projected to be introduced in the
second quarter of 1998.
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, South Korea, Malaysia, Singapore and the United States, augmented with
sales representatives in smaller markets. The Company has integrated the Wells
sales force with PCD's sales force for the IC package interconnect 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.
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 product. 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 2,000 manufacturers worldwide. Competition in the IC package
interconnect market, however, is highly concentrated among a small number of
significant competitors. Competition among manufacturers
38
<PAGE> 42
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 $7.3 million (excluding Wells) at December 31, 1996 and
$11.9 million (including Wells) at December 31, 1997, all of which the Company
expects to fill in 1998. The level and timing of orders placed by the Company's
customers vary due to customer attempts to manage inventory, changes in
manufacturing strategy and variations in demand for customer products due to,
among other things, introductions of new products, product life cycles,
competitive conditions or general economic conditions. The Company generally
does not obtain long-term purchase orders or commitments but instead seeks to
work closely with its customers to anticipate the volume of future orders. Based
on anticipated future volumes, the Company makes other significant decisions
regarding the level of business it will accept, the timing of production and the
levels and utilization of personnel and other resources. A variety of
conditions, both specific to the individual customer and generally affecting the
customer's industry, may cause customers to cancel, reduce or delay purchase
orders that were either previously made or anticipated. Generally, customers may
cancel, reduce or delay purchase orders and commitments without penalty. For
these reasons, backlog may not be indicative of future demand or results of
operations.
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 "-- Legal Proceedings."
LEGAL PROCEEDINGS
On August 21, 1995, the Company's wholly-owned subsidiary, CTi
Technologies, Inc. ("CTi"), filed an action in the United States District Court
for the District of Arizona against Wayne K. Pfaff, an individual residing in
Texas ("Pfaff"), and Plastronics Socket Company, Inc., a corporation affiliated
with Pfaff, alleging and seeking a declaratory judgment that two United States
patents issued to Pfaff and relating to certain burn-in sockets for "leadless"
IC packages (the "Pfaff Leadless Patent") and ball grid array ("BGA") IC
packages (the "Pfaff BGA Patent") (collectively, the "Pfaff Patents") are
invalid and are not infringed by CTi, the products of which include burn-in
sockets for certain "leaded" packages (including Quad Flat Paks) (the "CTi
Leaded Products") and BGA packages
39
<PAGE> 43
(the "CTi BGA Products") (collectively, the "CTi Products"). Pfaff has filed a
counterclaim alleging that CTi infringes the Pfaff Leadless Patent and has
requested an award of damages; the counterclaim does not allege infringement of
the Pfaff BGA Patent. Pfaff has also sought a permanent injunction against
further infringement by CTi of the Pfaff Leadless Patent. That action has been
stayed pending resolution of another action, described below, involving the
Pfaff Leadless Patent.
In litigation between Wells and Pfaff concerning the Pfaff Leadless Patent,
the United States Court of Appeals for the Federal Circuit has found all of the
individual descriptions of the invention (the "Claims" of the patent) of the
Pfaff Leadless Patent which were at issue in that case to be invalid. Certain
other Claims of the patent were not at issue in that case, and their validity
was not decided by the court, because Pfaff did not allege that products of
Wells infringed such Claims. The United States Supreme Court has accepted an
appeal on that case. Unless overturned, the Court of Appeals decision as to the
invalidity of such Claims of the Pfaff Leadless Patent will be binding in the
CTi v. Pfaff action in the District of Arizona, and the reasoning of that
decision could support CTi's position that the remaining Claims of that patent
are invalid.
The Company believes, based on the advice of counsel (Brown & Bain, P.A.,
as to CTi and Baker & Daniels as to Wells), that CTi and Wells have meritorious
defenses against any allegations of infringement under the Pfaff Patents, and,
if necessary, CTi and Wells will vigorously litigate their positions. There can
be no assurance, however, that the Company, CTi or Wells will prevail in any
pending or future litigation, and a final court determination that CTi or Wells
has infringed the Pfaff Leadless Patent could have a material adverse effect on
the Company. Such adverse effect could include, without limitation, the
requirement that CTi or Wells pay substantial damages for past infringement and
an injunction against the manufacture or sale in the United States of such
products as are found to be infringing. Approximately 18.5% of the revenues of
the Company (excluding Wells) for 1997 and approximately 7.0% of the revenues of
Wells for calendar year 1997 were derived from the sale of products potentially
at issue in the Pfaff cases.
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, 1997, the Company had 367 employees and 18 contract
workers. The Company's 385 employees and contract workers include 311 in
manufacturing and engineering, 45 in sales and marketing and 29 in
administration. Of the Company's U.S. employees, 53 are represented by the
International Brotherhood of Electrical Workers, Local 1392. The Company
believes that its relations with its employees and their union are good. The
current collective bargaining agreement expires on February 18, 2000.
FACILITIES
PCD, headquartered in Peabody, Massachusetts, operates leased production
facilities in Peabody, Massachusetts (60,000 square feet) and Phoenix, Arizona
(24,000 square feet). In conjunction with the Wells acquisition, production
facilities were added in 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
40
<PAGE> 44
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; Regensburg, Germany; Seoul, South Korea; Singapore and
Penang, Malaysia. The Company believes that its facilities are adequate for its
operations for the foreseeable future.
41
<PAGE> 45
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John L. Dwight, Jr.............................. 53 Chairman of the Board, Chief Executive
Officer, President, and Director
Richard J. Mullin............................... 46 Vice President and President, Wells - CTI
Division
Michael S. Cantor............................... 61 Vice President and General Manager,
Industrial/Avionics Division
Jeffrey A. Farnsworth........................... 51 Vice President and General Manager,
Wells - CTI Phoenix
Mary L. Mandarino............................... 43 Vice President, Finance and Administration,
Chief Financial Officer and Treasurer
Roddy J. Powers................................. 54 Vice President, Operations
Bruce E. Elmblad................................ 69 Director (1)
Harold F. Faught................................ 73 Director (2)
C. Wayne Griffith............................... 62 Director (2)
Theodore C. York................................ 55 Director (1)
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Dwight has served as Chairman of the Board, Chief Executive Officer,
President and a director of the Company since November 1980, when he purchased a
controlling interest in PCD. Mr. Dwight was previously Vice
President - International of Burndy Corporation, an electronic connector
manufacturer. Mr. Dwight has 27 years of management and operating experience in
the connector industry.
Mr. Mullin has served as Vice President and President, Wells - CTI Division
since December 1997. From June 1993 to December 1997, he was President and Chief
Executive Officer of Wells. From May 1983 to June 1993, Mr. Mullin was Executive
Vice President and Chief Financial Officer of Wells. Before joining Wells, Mr.
Mullin was a CPA with Peat Marwick Mitchell & Co. for nine years.
Mr. Cantor has served as Vice President and General Manager,
Industrial/Avionics Division since February 1998. From July 1988 to February
1998, he was Vice President, Sales and Marketing. Mr. Cantor joined the Company
in 1983 and has held various positions in management. From 1980 to 1983, Mr.
Cantor was President - U.S. Operations for Balteau S.A. and from 1972 to 1980,
Director of Regional Operations at Burndy Corporation. Mr. Cantor has 37 years
of experience in the connector industry.
Mr. Farnsworth has served as Vice President and the General Manager,
Wells - CTI Phoenix since December 1997. From October 1993 to December 1997, he
was Vice President and General Manager - CTi. Mr. Farnsworth was a founder of
Component Technologies, Inc. in 1983, and remained with the Company, in various
positions in sales and marketing, following the acquisition of Component
Technologies, Inc. by the Company in 1988. Mr. Farnsworth has 22 years of
experience in the connector industry.
Ms. Mandarino has served as Vice President, Finance and Administration,
Chief Financial Officer and Treasurer since 1989. Ms. Mandarino joined the
Company in 1986 and has held several positions of increasing responsibility in
finance. Prior to joining PCD, Ms. Mandarino held various financial positions
with American Brands, Inc. and Dresser Industries, Inc.
42
<PAGE> 46
Mr. Powers has served as Vice President, Operations since he joined the
Company in 1983. Previously, he was the General Manager of the Incon Division of
Transitron, which was acquired by PCD.
Mr. Elmblad has served as a director of the Company since 1980. Since April
1994, he has been President of Venture Investment Advisors, a venture capital
investment company. From April 1990 to April 1994, Mr. Elmblad was President of
SED Management Company, Inc., a venture capital management company. Before April
1990, he was a private investor and served as a consultant to and a director of
several high technology companies. He is currently a director of Martek
Biosciences Corporation and Antex Biologics Inc.
Mr. Faught has served as a director of the Company since 1983. From 1973 to
1993, when he retired, Mr. Faught served as an officer, most recently Senior
Vice President - Technology, of Emerson Electric Co. Since retiring, he has
served Emerson in a consulting capacity.
Mr. Griffith has served as a director of the Company since 1980. Mr.
Griffith is Senior Executive Vice President of Kessler Financial Services and
has held that position since 1994. Previously, he held the positions of
Chairman, Chief Executive Officer and President of Digitec, Inc. and Chairman,
Chief Executive Officer and President of Xylogics, Inc.
Mr. York has served as a director of the Company since 1994. Mr. York has
been President of the Highland Group, a consulting firm, since February 1997.
From 1995 through February 1997, Mr. York was President of Saber Equipment
Corporation, a petrochemical equipment company. On February 14, 1997, Saber
Equipment Corporation filed a Chapter 11 bankruptcy petition, which, at Saber's
request, was converted into a Chapter 7 bankruptcy proceeding on February 24,
1997. A trustee was appointed by the bankruptcy court, and the sale of Saber's
assets concluded in July 1997. From 1984 to 1994, Mr. York was President of
Burndy Corporation. From 1992 to 1994, he was also Executive Vice President of
Framatome Connectors International, a manufacturer of electrical and electronic
connectors and tools. He is currently a director of Robroy Industries, Inc.
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee reviews the Company's accounting
practices, internal accounting controls and financial results and oversees the
engagement of the Company's independent auditors. The members of the Company's
Audit Committee are Mr. Elmblad and Mr. York. The Compensation Committee reviews
and recommends to the Board of Directors the salaries, bonuses and other forms
of compensation for executive officers of the Company and administers various
compensation and benefit plans, including the 1992 Stock Option Plan and the
1996 Stock Plan. The members of the Company's Compensation Committee are Mr.
Faught and Mr. Griffith. None of the members of the Audit Committee or the
Compensation Committee is a past or current officer or employee of the Company.
The Board of Directors does not maintain a nominating committee or a committee
performing similar functions.
Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any of the directors and executive officers of the
Company.
The Company's Restated Articles of Organization provide that the Board of
Directors is classified into three classes, with the members of the respective
classes serving for staggered three-year terms. The first class consists of Mr.
Faught, the second of Messrs. Elmblad and Griffith and the third of Messrs.
Dwight and York, with the terms of the directors comprising the classes expiring
upon the election and qualification of directors at the annual meetings of
stockholders held following the fiscal years of the Company ending December 31,
1999, 1997 and 1998, respectively. At each annual meeting of stockholders,
directors will be re-elected or elected for full three year terms. See
"Description of Capital Stock -- Massachusetts Law and Certain Provisions of the
Company's Amended and Restated Articles of Organization and By-Laws."
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<PAGE> 47
DIRECTOR COMPENSATION
Directors Fees. The Company pays its directors who are not officers or
employees of the Company fees of $750 for each Board meeting attended plus an
annual retainer fee in the amount of $5,000.
Directors Stock Plan. The Company's 1996 Eligible Directors Stock Plan
(the "Directors Stock Plan") was approved by the Board of Directors on January
30, 1996 and thereafter by the Company's stockholders. Under the Directors Stock
Plan, commencing with the 1997 annual meeting of stockholders, each director who
is not an officer or employee of the Company or any subsidiary of the Company
(an "Outside Director") who has not previously been granted an option to
purchase shares of Common Stock will be granted, on the thirtieth day after such
meeting or any subsequent annual meeting of stockholders, an option to purchase
3,000 shares of Common Stock at an exercise price equal to the fair market value
on the date of grant. In addition, on the thirtieth day after re-election,
commencing with the 1997 annual meeting of stockholders, each Outside Director
will be granted an option at each annual meeting of the stockholders to purchase
1,500 shares of Common Stock at an exercise price equal to the fair market value
on the date of grant. A total of 36,000 shares of Common Stock are available for
awards under the Directors Stock Plan. As of December 31, 1997, 6,000 shares
were subject to outstanding options at a weighted average exercise price of
$16.75 per share under the Directors Stock Plan. The options granted under the
Directors Stock Plan vest in full six months after the date of grant. No options
may be granted under the Directors Stock Plan after January 29, 2006.
44
<PAGE> 48
EXECUTIVE COMPENSATION
Compensation Summary
The following table sets forth certain information regarding the Company's
Chief Executive Officer and each of the other four most highly compensated
executive officers during the year ended December 31, 1997 (the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION (2)
----------------
NUMBER OF
SHARES
ANNUAL COMPENSATION (1) UNDERLYING
------------------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(3) GRANTED (#) COMPENSATION ($)(4)
- --------------------------- ---- ---------- ------------ ---------------- -------------------
<S> <C> <C> <C> <C> <C>
John L. Dwight, Jr........ 1997 $204,068 $ 80,000 -- $ 8,189
Chairman of the Board, 1996 188,313 100,000 -- 7,712
Chief Executive Officer 1995 177,647 80,000 -- 7,737
and President
Michael S. Cantor......... 1997 122,000 48,000 -- 10,125
Vice President and 1996 116,019 35,000 -- 8,787
General Manager, 1995 111,649 30,000 -- 9,649
Industrial/Avionics
Division
Jeffrey A. Farnsworth..... 1997 113,577 12,000 -- 10,026
Vice President and 1996 103,474 60,000 -- 9,663
General Manager, 1995 98,061 40,000 -- 8,429
Wells - CTI Phoenix
Mary L. Mandarino......... 1997 92,426 32,000 -- 10,996
Vice President, Finance 1996 84,584 32,000 5,000 7,850
and Administration, Chief 1995 77,494 30,000 -- 8,879
Financial Officer and
Treasurer
Roddy J. Powers........... 1997 111,833 45,000 -- 7,694
Vice President, 1996 106,163 37,000 -- 7,029
Operations 1995 101,109 30,000 -- 6,884
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted because such perquisites and other personal benefits
constituted less than the lesser of $50,000 or ten percent of the total
annual salary and bonus reported for the executive officer during the years
reported.
(2) The Company did not grant any restricted stock awards or stock appreciation
rights during the years reported. The Company does not have any long term
incentive plan.
(3) The Company's officers are eligible for annual cash bonuses under the terms
of the Company's Management Incentive Plan, adopted each fiscal year.
Payments of bonuses are based upon achievement of specified individual and
Company objectives determined by the Board of Directors at the beginning of
each year.
(4) Includes amounts awarded pursuant to the Company's 401(k) Salary Savings
Plan, life insurance premium remainders and automobile allowances. For 1997,
such amounts were, respectively, Mr. Dwight, $4,750, $470 and $2,969; Mr.
Cantor, $4,750, $416 and $4,959; Mr. Farnsworth, $4,430, $165 and $5,431;
Ms. Mandarino, $3,941, $105 and $6,950; and Mr. Powers, $4,750, $303 and
$2,641.
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<PAGE> 49
Option Grants/SAR Grants
No options or stock appreciation rights ("SARs") were granted to the Named
Executive Officers during 1997. On December 26, 1997, in connection with his
appointment as Vice President and President, Wells - CTI Division, the Company
granted to Mr. Mullin an incentive stock option to purchase 50,000 shares of
Common Stock at an exercise price of $23.25 per share. For disclosure regarding
the terms of stock options, see "-- Stock Awards."
Option Exercises and Year-End Values
There were no SARs outstanding during 1997. The following table sets forth
certain information regarding option exercises during 1997 and unexercised
options held by each of the Named Executive Officers as of December 31, 1997:
AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($)(2)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE (#) REALIZED ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John L. Dwight, Jr......... 10,000 $ 181,042 52,000 0 $1,149,417 $ 0
Michael S. Cantor.......... 49,000 746,229 70,000 0 1,547,292 0
Jeffrey A. Farnsworth...... 2,000 34,417 130,000 12,000 2,860,083 260,500
Mary L. Mandarino.......... 2,500 32,135 80,500 2,500 1,752,250 28,125
Roddy J. Powers............ 37,400 613,683 86,600 0 1,914,221 0
</TABLE>
- ---------------
(1) The values in this column represent the last reported sale price of the
Company's Common Stock on the Nasdaq National Market on the exercise date,
less the respective option exercise price.
(2) Solely for purposes of this table, the values in these columns have been
calculated on the basis of the price of $23.50 per share, the fair market
value of the Common Stock on December 31, 1997, less the option exercise
price.
STOCK AWARDS
1996 Stock Plan. The Company's 1996 Stock Plan was approved by the Board
of Directors on January 30, 1996, and thereafter by the Company's stockholders.
The 1996 Stock Plan provides for the grant or award of stock options, restricted
stock and other performance awards which may or may not be denominated in shares
of Common Stock or other securities (collectively, the "Awards"). Stock options
granted under the 1996 Stock Plan may be either incentive stock options or non-
qualified options. The purpose of the 1996 Stock Plan is to attract and retain
outstanding employees through the incentives of stock ownership. Any regular
full-time employee of the Company, including officers but excluding directors
who are not officers or employees, is eligible to receive Awards.
The 1996 Stock Plan is administered by the Compensation Committee. Subject
to the provisions of the 1996 Stock Plan, the Committee has the authority to
designate participants, determine the types of Awards to be granted, the number
of shares to be covered by each Award, the time at which each Award is
exercisable or may be settled, the method of payment and any other terms and
conditions of the Awards. All Awards shall be evidenced by an Award Agreement
between the Company and the participant.
While the Committee determines the prices at which options and other Awards
may be exercised under the 1996 Stock Plan, the exercise price of an option
shall be at least 100% of the fair market value (as determined under the terms
of the 1996 Stock Plan) of a share of Common Stock on the date of grant. As of
December 31, 1997, 324,000 shares were reserved for issuance, and 77,250 shares
were subject to outstanding options at a weighted average exercise price of
$20.69 per
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<PAGE> 50
share, under the 1996 Stock Plan. No Awards may be made under the 1996 Stock
Plan after January 29, 2006.
1992 Stock Option Plan. The Company's 1992 Stock Option Plan was approved
by the Board of Directors on January 31, 1992, and thereafter by the Company's
stockholders. The 1992 Stock Option Plan provided for the grant or award of
stock options, which may be either incentive stock options or non-qualified
options. As of December 31, 1997, 636,600 shares of Common Stock were reserved
for issuance under the 1992 Stock Option Plan. All of these 636,600 shares are
subject to outstanding options at a weighted average exercise price of $1.24 per
share. The Compensation Committee administers the 1992 Stock Option Plan.
1996 Eligible Directors Stock Plan. See "Management -- Director
Compensation."
Compensation Committee Interlocks and Insider Participation. The members
of the Company's Compensation Committee are Mr. Faught and Mr. Griffith. Except
for Mr. Dwight, the Company's Chairman of the Board, Chief Executive Officer and
President, no officer or employee of the Company has participated in
deliberations of the Board of Directors concerning executive officer
compensation. No executive officer of the Company serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.
CERTAIN TRANSACTIONS
On December 26, 1997, the Company entered into a Subordinated Debenture and
Warrant Purchase Agreement (the "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 (the
"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. The Emerson Warrant is initially exercisable for 150,000 shares
of Common Stock. If the principal and interest on the Debenture have not been
paid in full as of December 31, 1998, the Emerson Warrant becomes exercisable
for an additional 225,000 shares. If the principal and interest on the Debenture
have not been paid in full as of December 31, 1999, the Emerson Warrant becomes
exercisable for the remaining 150,000 shares. The combined effective interest
rate for the Debenture, the exercisable portion of the Emerson Warrant, and the
prepayment penalty is 21.7%, assuming 10% per annum direct interest expense,
8.4% per annum effective interest expense associated with the value of the
Emerson Warrant and 3.25% of effective interest expense due to prepayment
penalties. Prepayment of the principal amount under the Debenture is subject to
a penalty, due at the time of prepayment, as follows: (i) for the period
beginning on December 26, 1997 and ending June 30, 1998, an amount equal to
3.25% of the principal sum prepaid; (ii) for the period beginning July 1, 1998
and ending September 30, 1998, an amount equal to 6.5% of the principal sum
prepaid; and (iii) for the period beginning October 1, 1998 and ending December
31, 1998, an amount equal to 9.75% of the principal sum prepaid. At the option
of the holder, the unpaid principal and accrued interest under the Debenture is
convertible into Common Stock upon the occurrence of certain Events of Default
thereunder, at a conversion price equal to the lesser of $17.00 per share or 70%
of the average daily closing price of Common Stock for the 90 days preceding
such default as reported by The Nasdaq Stock Market, Inc. The Events of Default
under the Debenture are (i) insolvency; (ii) default under the Senior Credit
Facility; (iii) a payment default on the Debenture which default is not cured
within 10 business days; (iv) a material breach by the Company of any
representations or warranties or failure to comply with covenants or agreements
contained in the agreements with Emerson which breach is not cured within 30
days; and (v) an undischarged or unstayed judgment against the Company for an
amount in excess of $1 million. The total purchase price paid by Emerson for the
Debenture and the Warrant was $25 million. The proceeds from the sale of the
Debenture and the Warrant were applied in full to the
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<PAGE> 51
purchase price paid by the Company in connection with the Wells acquisition. The
Company intends to use a portion of the proceeds from the sale of Common Stock
offered hereby to pay in full the outstanding $25 million principal amount and
any accrued unpaid interest, costs and expenses under the Debenture. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
In connection with the Purchase Agreement, the Company granted registration
rights to Emerson pursuant to a Registration Rights Agreement dated as of
December 26, 1997. See "Description of Capital Stock -- Registration Rights."
In connection with the Purchase Agreement, certain directors and executive
officers (Mr. Dwight, Ms. Mandarino, Mr. Cantor, Mr. Powers, Mr. Elmblad and Mr.
Griffith) (collectively, the "Stockholders") entered into a Voting Agreement and
Power of Attorney (the "Voting Agreement"), dated as of December 26, 1997, with
Emerson. The Voting Agreement provides that each of the Stockholders will vote
his or her shares of Common Stock for approval of the terms of the Debenture and
the Warrant, if such approval is required by the rules of the Nasdaq Stock
Market, Inc. If this offering is completed with net proceeds to the Company of
at least $25 million, the Company intends to pay off the Debenture in its
entirety (as described in Use of Proceeds). In that event, the Debenture will be
canceled and the Warrant will be exercisable only for a number of shares that is
less than the threshold that would require shareholder approval under Nasdaq
rules. Accordingly, the Company will not seek shareholder approval of the terms
of the Debenture and the Warrant under such circumstances. If the Company is
unable to complete an offering resulting in at least $25 million in net proceeds
and has not paid off the Debenture in full, the Company intends to seek
shareholder approval at its annual meeting of stockholders to be held on June 5,
1998. The Company has set a record date of April 7, 1998 in connection with such
meeting. All holders of the Company's common stock as of the record date will be
entitled to vote on all proposals at such meeting. The vote required for
approval of the terms of the Debenture and the Warrant would be an affirmative
vote of a majority of the shares present or represented at the meeting and
voting thereon.
The Company has a policy that all material transactions between the Company
and its officers, directors and other affiliates must (i) be approved by a
majority of the members of the Company's Board of Directors and by a majority of
the disinterested members of the Company's Board of Directors and (ii) be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties. In addition, this policy requires that any loans by the Company
to its officers, directors or other affiliates be for bona fide business
purposes only.
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<PAGE> 52
PRINCIPAL STOCKHOLDERS
The following table sets forth as of January 31, 1998, and as adjusted to
reflect the sale by the Company of 2,000,000 shares of Common Stock in this
offering, certain information with respect to the beneficial ownership of the
Common Stock by: (i) each person known by the Company to beneficially own 5% or
more of the Common Stock; (ii) each director of the Company; (iii) each of the
Named Executive Officers; and (iv) all directors and executive officers of the
Company as a group. The Company believes that the beneficial owners of the
Common Stock listed below, based on information furnished by such owners, have
sole voting and investment power with respect to such shares, except as noted
below:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
OFFERING (1) OFFERING (1)
------------------- -------------------
NAME AND ADDRESS OF 5% STOCKHOLDERS NUMBER PERCENT NUMBER PERCENT
----------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Emerson Electric Co. (2)........................... 2,068,080 33.2% 2,068,080 25.1%
8000 West Florissant Avenue
St. Louis, MO 63136
John L. Dwight, Jr. (3)............................ 953,500 15.6 953,500 11.8
c/o PCD Inc.
Two Technology Drive
Centennial Park
Peabody, MA 01960-7977
Thomson Horstmann & Bryant Inc. (4)................ 413,000 6.8 413,000 5.1
Park 80 West Plaza Two
Saddle Brook, NJ 07663
T. Rowe Price Associates, Inc. (5)................. 363,000 6.0 363,000 4.5
100 East Pratt Street
Baltimore, MD 21202
Fleet Financial Group, Inc.(6)..................... 346,530 5.7 346,530 4.3
One Federal Street
Boston, MA 02211
OTHER DIRECTORS AND EXECUTIVE OFFICERS
Bruce E. Elmblad (7)............................... 57,960 1.0 57,960 *
Harold F. Faught (8)............................... 37,500 * 37,500 *
C. Wayne Griffith (9).............................. 82,300 1.4 82,300 1.0
Theodore C. York (10).............................. 37,500 * 37,500 *
Michael S. Cantor (11)............................. 95,000 1.6 95,000 1.2
Jeffrey A. Farnsworth (12)......................... 130,000 2.1 130,000 1.6
Mary L. Mandarino (13)............................. 88,200 1.4 88,200 1.1
Richard J. Mullin (14)............................. 8,435 * 8,435 *
Roddy J. Powers (15)............................... 94,000 1.5 94,000 1.2
All directors and executive officers as a group (10
persons)(16)..................................... 1,584,395 24.1% 1,584,395 18.5%
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC") and includes voting or investment
power with respect to the shares. Shares of Common Stock subject to options
exercisable or exercisable within 60 days following January 31, 1998, are
deemed outstanding for computing the share ownership and percentage of the
person holding such options, but are not deemed outstanding for computing
the percentage of any other person. For 5% stockholders, beneficial
ownership information is based on each stockholder's most recent Schedule
13G, as filed with the SEC pursuant to Regulation 13D-G under the Securities
Exchange Act of 1934, as amended. In all cases assumes that no stockholder,
officer or director acquires shares of Common Stock in the offering.
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<PAGE> 53
(2) Includes 1,138,800 shares owned by Emerson Electric Co. and 743,280 shares
owned by its wholly-owned subsidiary InnoVen III Corporation and over which
Emerson has both sole voting and dispositive power. Also includes 36,000
shares issuable upon exercise of stock options held by Harold F. Faught, a
director of the Corporation and a consultant to Emerson Electric Co. Also
includes 150,000 shares issuable upon exercise of the Emerson Warrant.
(3) John L. Dwight, Jr.'s beneficial ownership of Common Stock of the Company,
consists of 924,500 shares over which he has both sole voting and
dispositive powers and 29,000 shares over which he has shared voting and
dispositive powers. Mr. Dwight disclaims beneficial ownership with respect
to the 29,000 shares held by his children. Also includes 52,000 shares
issuable upon exercise of stock options.
(4) Thomson Horstmann & Bryant, Inc.'s beneficial ownership of Common Stock of
the Company, consists of 290,200 shares over which it has sole voting
power, 2,600 shares over which it has shared voting power. Thomson
Horstmann & Bryant, Inc. has sole dispositive power over all such shares.
Shares of Common Stock beneficially owned by Thomson, Horstmann & Bryant,
Inc. are owned by a variety of investment advisory clients of Thomson,
Horstmann & Bryant, Inc. No such client is known to have an interest in
more than 5% of the Common Stock.
(5) T. Rowe Price Associates, Inc.'s beneficial ownership of Common Stock of
the Company, consists of 46,000 shares over which it has sole voting power,
no shares over which it has shared voting power, 363,000 shares over which
it has sole dispositive power and no shares over which it has shared
dispositive power. T. Rowe Price Associates, Inc. disclaims beneficial
ownership of such securities.
(6) Fleet Financial Group, Inc.'s beneficial ownership of Common Stock of the
Company consists of 346,530 shares over which it has sole voting power, no
shares over which it has shared voting power, 346,530 shares over which it
has sole dispositive power, and no shares over which it has shared
dispositive power.
(7) Includes 1,500 shares issuable upon exercise of stock options. Mr. Elmblad
disclaims beneficial ownership with respect to 20,460 shares held by his
spouse.
(8) Comprised of 37,500 shares issuable upon exercise of stock options. Does
not include 2,068,080 shares which are beneficially held by Emerson
Electric Co., of which Mr. Faught was an officer from 1973 to 1993, when he
retired, and which he has since served in a consulting capacity.
(9) Includes 37,500 shares issuable upon exercise of stock options.
(10) Comprised of 37,500 shares issuable upon exercise of stock options.
(11) Includes 45,000 shares issuable upon exercise of stock options.
(12) Comprised of 130,000 shares issuable upon exercise of stock options.
(13) Includes 75,500 shares issuable upon exercise of stock options.
(14) Includes 8,335 shares issuable upon exercise of stock options.
(15) Includes 86,600 shares issuable upon exercise of stock options.
(16) Includes the shares issuable upon exercise of stock options described in
Notes (3) and (7) through (15).
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<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 26,000,000 shares,
of which 25,000,000 shares have been designated Common Stock, par value $0.01
per share, and 1,000,000 shares have been designated Preferred Stock, par value
$0.10 per share. The following summary description of the capital stock of the
Company is qualified in its entirety by reference to the Company's Articles of
Organization and By-laws, as amended and restated, copies of which are filed as
exhibits to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
As of January 31, 1998, there were 6,050,182 shares of Common Stock
outstanding, held of record by approximately 800 holders. As of January 31,
1998, 689,850 shares were reserved for issuance pursuant to outstanding options;
525,000 shares were reserved for issuance pursuant to outstanding warrants and
1,592,818 shares were reserved for issuance upon conversion of the Debenture,
assuming conversion on January 31, 1998 of the entire principal amount and
interest accrued thereon, in accordance with the terms of the Debenture. See
"Certain Transactions." Holders of Common Stock are entitled to one vote per
share on all matters submitted to a vote of stockholders and to receive ratably
such dividends as may be declared by the Board of Directors out of funds legally
available therefor, subject to preferences that may be applicable to any
outstanding Preferred Stock. In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock are entitled to share ratably
in all assets remaining after payment of liabilities and the liquidation
preference of any outstanding shares of Preferred Stock. Holders of Common Stock
have no preemptive, subscription, redemption or conversion rights. All of the
outstanding shares of Common Stock are, and all shares of Common Stock to be
outstanding upon completion of this Offering will be, fully paid and
nonassessable. The rights, privileges and preferences of Common Stock are
subject to, and could be adversely affected by, the issuance of Preferred Stock.
PREFERRED STOCK
Pursuant to the Company's Articles of Organization, the Board of Directors
has the authority to issue 1,000,000 shares of Preferred Stock. Within the
limitations established by law, the Board of Directors is authorized to fix or
alter the dividend rights, dividend rates, rights and terms of redemption
(including sinking fund provisions), redemption price or prices, liquidation
preference, conversion rights, voting rights and other rights of any unissued
shares of Preferred Stock, and to fix and amend the number of shares
constituting any issued or unissued series and the designation thereof, or any
of the foregoing. The issuance of Preferred Stock in certain circumstances may
have the effect of delaying, deterring or preventing a change in control of the
Company, may discourage bids for the Company's Common Stock at a premium over
the market price of the Common Stock and may adversely affect the market price
of, and the voting and other rights of the holders of, the Common Stock. Upon
the completion of this offering, the Company will have no shares of Preferred
Stock outstanding. At present the Company has no plans to issue any shares of
Preferred Stock.
MASSACHUSETTS LAW AND CERTAIN PROVISIONS OF THE COMPANY'S AMENDED AND RESTATED
ARTICLES OF ORGANIZATION AND BY-LAWS
The Company has elected to be governed by Chapter 110F of the Massachusetts
General Laws, an anti-takeover law. In general, this statute prohibits a
publicly held Massachusetts corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person becomes an interested
stockholder, unless (i) the interested stockholder obtains the approval of the
board of directors prior to becoming an interested stockholder; (ii) the
interested stockholder acquires 90% of the outstanding voting stock of the
corporation (excluding shares held by certain affiliates of the corporation) at
the time it becomes an interested stockholder; or (iii) the business combination
is approved by both the board
51
<PAGE> 55
of directors and the holders of two-thirds of the outstanding voting stock of
the corporation (excluding shares held by the interested stockholder). An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or at any time within the prior three years did own) 5% or
more of the outstanding voting stock of the corporation. A "business
combination" includes a merger, a stock or asset sale, and certain other
transactions resulting in a financial benefit to the interested stockholder. The
Company may at any time elect not to be governed by Chapter 110F, by vote of a
majority of its stockholders, but such an election would not be effective for
twelve months and would not apply to a business combination with any person who
became an interested stockholder prior to such election.
Massachusetts General Laws Chapter 156B, Section 50A, generally requires
that publicly-held Massachusetts corporations have a classified board of
directors consisting of three classes as nearly equal in size as possible, with
one class to be elected each year to a three year term. This statute also
provides that directors of publicly-held Massachusetts corporations may only be
removed for "cause." "Cause" includes (i) a felony conviction; (ii) declaration
of an unsound mind by order of court; (iii) gross dereliction of duty; (iv)
commission of an action involving moral turpitude; or (v) intentional misconduct
or a knowing violation of law, if the director derives an improper and
substantial personal benefit from his actions and his actions materially injure
the Company. This statute further provides that (a) vacancies and newly-created
directorships may be filled solely by a majority of directors remaining in
office; (b) directors elected to fill any vacancy hold office for the remainder
of the full term of the class to which they are elected; (c) no decrease in the
number of directors shortens the term of any incumbent director; and (d) the
number of directors is to be fixed only by vote of the board. The Company may at
any time elect not to be governed by Chapter 156B, Section 50A, by a vote of its
board or by a vote of stockholders holding two-thirds of each class of the
Company's voting stock.
The Company's By-Laws include a provision that excludes the Company from
the applicability of Massachusetts General Laws Chapter 110D, entitled
"Regulation of Control Share Acquisitions." In general, this statute provides
that any stockholder of a corporation subject to this statute 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. (For purposes of the statute, a person is not deemed to be a
beneficial owner of shares as to which such person may exercise voting power
solely by virtue of a revocable proxy conferring the right to vote.) The Board
of Directors may amend the Company's By-Laws at any time to subject the Company
to this statute prospectively.
The Company's By-Laws require that nominations for the Board of Directors
made by a stockholder comply with certain notice procedures. A notice by a
stockholder of a planned nomination must be given not less than 60 days prior to
a scheduled meeting, provided that if less than 70 days' notice is given of the
date of the meeting, a stockholder will have ten days from the notice of the
date of the meeting to give notice of such planned nomination. The stockholder's
notice of nomination must include particular information about the stockholder,
the nominee and any beneficial owner on whose behalf the nomination is made. The
Company may require any proposed nominee to provide such additional information
as is reasonably required to determine the eligibility of the proposed nominee.
The By-Laws require that a stockholder seeking to have any business
conducted at a meeting of stockholders give notice to the Company not less than
60 days prior to the scheduled meeting, provided in certain circumstances that a
stockholder will have ten days within which to give such notice. The notice from
the stockholder must describe the proposed business to be brought before the
meeting and include information about the stockholder making the proposal, any
beneficial owner on whose behalf the proposal is made, and any other stockholder
known to be supporting the proposal.
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<PAGE> 56
The By-Laws require the Company to call a special meeting of stockholders
at the request of stockholders holding at least 40% of the voting power of the
Company, the minimum threshold for publicly-held Massachusetts corporations
required by Massachusetts General Laws, Chapter 156B, Section 34. The provisions
in the Company's By-Laws pertaining to stockholders and directors (including the
provisions described above pertaining to nominations and the presentation of
business before a meeting of the stockholders) may not be amended and no
provision inconsistent therewith may be adopted without the approval of either
the Board of Directors or the holders of at least 80% of the voting power of the
Company.
As permitted by the Massachusetts Business Corporation Law, the Company's
Articles of Organization include provisions eliminating the personal liability
of the Company's directors for monetary damages resulting from certain breaches
in their fiduciary duty. These provisions do not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the Company or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) for
certain distributions in violation of the Company's Articles of Organization, or
authorized when the Company is insolvent or is rendered insolvent by the making
of such distribution; (iv) for certain loans to any officer or director of the
Company which are not repaid and which were not approved or ratified by a
majority of disinterested directors; (v) for any transaction from which the
director derived an improper personal benefit; and (vi) for duties and
obligations imposed on the Company's directors by federal securities laws.
Additionally, the Company's Articles of Organization provide that the Company
shall indemnify each person who is or was a director, officer, employee or other
agent of the Company, and each person who is or was serving at the request of
the Company as a director, trustee, officer, employee or other agent of another
organization in which it directly or indirectly owns shares or of which it is
directly or indirectly a creditor, against all liabilities, costs and expenses
reasonably incurred by any such person in connection with the defense or
disposition of or otherwise in connection with or resulting from any action,
suit or other proceeding in which they may be involved by reason of being or
having been such a director, officer, employee, agent or trustee, or by reason
of any action taken or not taken in such capacity, except with respect to any
matter as to which such person shall have been finally adjudicated by a court of
competent jurisdiction not to have acted in good faith in the reasonable belief
that his or her action was in the best interest of the Company.
The Articles of Organization provide that certain transactions, such as the
sale, lease or exchange of all or substantially all of the Company's property
and assets and the merger or consolidation of the Company into or with any other
corporation, may be authorized by the approval of the holders of a majority of
the shares of each class of stock entitled to vote thereon, rather than by
two-thirds as otherwise provided by statute, provided that the transactions have
been authorized by a majority of the members of the Board of Directors and the
requirements of any other applicable provision of the Articles of Organization
have been met.
Certain of the provisions of the Articles of Organization and By-Laws
discussed above would make more difficult or discourage a proxy contest or the
assumption of control by a holder of a substantial block of the Company's stock.
Such provisions could also have the effect of discouraging a third party from
making a tender offer or otherwise attempting to obtain control of the Company,
even though such an attempt might be beneficial to the Company and its
stockholders. In addition, since the Articles of Organization and By-Laws are
designed to discourage accumulations of large blocks of the Company's stock by
purchasers whose objective is to have such stock repurchased by the Company at a
premium, such provisions could tend to reduce the temporary fluctuations in the
market price of the Company's stock which are caused by such accumulations.
Accordingly, stockholders could be deprived of certain opportunities to sell
their stock at a temporarily higher market price.
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<PAGE> 57
REGISTRATION RIGHTS
If the Company proposes to register any of its securities under the
Securities Act of 1933, as amended (the "Securities Act"), for its own account
or otherwise at any time, Emerson and its affiliates, collectively beneficially
owning as of January 31, 1998, 2,068,080 shares of Common Stock, plus any shares
acquired by Emerson after such date (the "Registrable Shares"), or certain of
their permitted transferees (collectively, the "Holders"), are entitled to
notice of such registration and to include shares of such Common Stock therein,
subject to certain conditions and limitations. In addition, the Holders may,
subject to certain conditions and limitations, on up to two occasions, require
the Company, whether or not the Company proposes to register its Common Stock
for sale, to register all or part of their Registrable Shares for sale to the
public under the Securities Act. The Company is obligated to pay all the
expenses (other than underwriting discounts and fees and expenses of
underwriters' counsel) for the first such registration required by the Holders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is State
Street Bank & Trust Company of Boston, Massachusetts.
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<PAGE> 58
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
such Underwriters has severally agreed to purchase from the Company the
respective number of shares of Common Stock set forth opposite each
Underwriter's name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Adams, Harkness & Hill, Inc. ...............................
A.G. Edwards & Sons, Inc. ..................................
---------
Total............................................. 2,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the public offering price set forth on the cover page
of this Prospectus, and in part to certain securities dealers at such price less
a concession of not in excess of $ per share. The Underwriters may
allow, and such dealers may re-allow, a concession not in excess of $
per share to certain brokers and dealers. After the shares of Common Stock are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the Underwriters.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 300,000
additional shares of Common Stock to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 2,000,000 shares of Common
Stock offered hereby. The Underwriters may exercise such option only to cover
over-allotments, if any, in connection with the sale of the 2,000,000 shares of
Common Stock offered hereby.
The Company has agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock for a period of 90 days after the date of
this Prospectus without the prior written consent of Adams, Harkness & Hill,
Inc., except for the shares of Common Stock offered hereby and except that the
Company may issue securities pursuant to the Company's stock plans, upon the
exercise of outstanding options, warrants and in connection with certain
acquisitions. In addition, the Company's officers, directors and certain
stockholders who will hold in aggregate 3,616,475 shares of Common Stock
following the offering, have agreed with the Underwriters not to offer to sell,
contract to sell, or otherwise sell, dispose of, transfer, loan, pledge or grant
any option to purchase any shares of Common Stock owned beneficially by them
(other than (i) if an individual as a bona fide gift or gifts to or in trust for
a person or entity who or which agrees in writing to be bound by the foregoing
restrictions or (ii) if a partnership, as a distribution, without consideration,
to its partners in accordance with the partnership's partnership agreement,
provided that the distributees thereof agree in writing to be bound by the
foregoing restrictions) for a period of 90 days after the date of this
Prospectus, without the prior written consent of Adams, Harkness & Hill, Inc.
55
<PAGE> 59
The Underwriters have informed the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
In general, the rules of the Securities and Exchange Commission (the
"Commission") will prohibit the Underwriters from making a market in the Common
Stock during the "cooling off" period immediately preceding the commencement of
sales in the offering. The Commission has, however, adopted exemptions from
these rules that permit passive market making under certain conditions. These
rules permit an Underwriter to continue to make a market subject to the
conditions, among others, that its bid not exceed the highest bid by a market
maker not connected with the offering and that its net purchases on any one
trading day not exceed prescribed limits. Pursuant to these exemptions, the
Underwriters, selling group members (if any) or their respective affiliates may
engage in passive market making in the Common Stock during the cooling off
period.
In connection with the offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. Stabilizing transactions consist of
certain bids or purchases made for the purpose of preventing or retarding a
decline in the market price of the Common Stock. Syndicate short positions
involve the sale by the Underwriters of a greater number of shares of Common
Stock than they are required to purchase from the Company in the offering. The
Underwriters also may impose a penalty bid, whereby the syndicate may reclaim
selling concessions allowed to syndicate members or other broker-dealers in
respect of the Common Stock sold in the offering for their account if the
syndicate repurchases the shares in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock, which may be higher than the price that might otherwise prevail in
the open market. These transactions may be effected on the Nasdaq National
Market, in the over-the-counter market or otherwise, and may, if commenced, be
discontinued at any time.
Adams, Harkness & Hill, Inc. has served as financial advisor to the Company
since 1995, including with respect to the Wells acquisition. In connection with
the Wells acquisition, the Company paid to Adams, Harkness & Hill, Inc., a fee
in the amount of $500,000.
The Company has agreed to indemnify the several Underwriters against or
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Hill & Barlow, a Professional Corporation, Boston,
Massachusetts. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Hale and Dorr LLP, Boston, Massachusetts.
Certain partners of Hale and Dorr LLP hold in the aggregate 7,060 shares of
Common Stock of the Company.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1996 and
1997, and the consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997,
have been included in this Registration Statement, of which this Prospectus is a
part, in reliance upon the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of said firm as experts in accounting and
auditing. The financial statements of Wells Electronics, Inc. and subsidiaries
as of December 26, 1997, May 3, 1997 and April 27, 1996 and the 34 weeks ended
December 26, 1997, 53 weeks ended May 3, 1997, the 48 weeks ended April 27, 1996
and the 52 weeks ended June 3, 1995, included herein and elsewhere in the
registration statement have been audited and reported upon by KPMG Peat Marwick
LLP, independent certified public accountants. Such financial statements have
been
56
<PAGE> 60
included herein and in the registration statement in reliance upon such report
of KPMG Peat Marwick LLP, appearing elsewhere herein, and upon authority of said
firm as experts in accounting and auditing.
The statements relating to PCD and CTi that have been included herein and
in the Registration Statement, of which this Prospectus is a part, in the first
paragraph, the fourth sentence of the second paragraph and the third paragraph
under the caption "Risk Factors -- Patent Litigation" and the first paragraph,
the fourth sentence of the second paragraph and the third paragraph under the
caption "Business -- Legal Proceedings" relating to litigation and United States
patent litigation matters have been reviewed and approved by Brown & Bain, P.A.,
as special litigation counsel for the Company, as experts on United States
patent matters, and are included herein and in the Registration Statement, of
which this Prospectus is a part, in reliance upon that review and approval. The
statements relating to Wells that have been included herein and in the
Registration Statement, of which this Prospectus is a part, in the second
paragraph, with the exception of the fourth sentence thereof, and the third
paragraph under the caption "Risk Factors -- Patent Litigation" and in the
second paragraph, with the exception of the fourth sentence thereof, and the
third paragraph under the caption "Business -- Legal Proceedings" relating to
litigation and United States patent litigation matters have been reviewed and
approved by Baker & Daniels as special litigation counsel for the Company, as
experts on United States patent matters, and are included herein and in the
Registration Statement, of which this Prospectus is a part, in reliance upon
that review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus, which constitutes part of the Registration Statement,
omits certain of the information contained in the Registration Statement and the
exhibits and schedules thereto on file with the Commission pursuant to the
Securities Act and the rules and regulations of the Commission thereunder.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports, proxy statements, and other information with the
Commission (collectively, "Exchange Act Filings").
The Registration Statement, including exhibits and schedules thereto, as
well as the Exchange Act Filings may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, DC 20549, and at the Commission's regional offices at
Seven World Trade Center, Suite 1300, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may be obtained
at prescribed rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C. The Commission also maintains a Web site on
the Internet that contains reports, proxy and information statements and other
information regarding registrants such as the Company that file electronically
with the Commission. The address of such site is http://www.sec.gov. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Common Stock is listed on the Nasdaq National Market
("Nasdaq"), under the symbol PCDI, and all Exchange Act Filings also may be
inspected at the offices of the Nasdaq Stock Market, 1735 K Street, N.W.,
Washington, DC 20006.
Flexiplug(TM), Z-Lok(TM) and the logo of the Company are trademarks of the
Company. All other trademarks and trade names referred to in this Prospectus are
the property of their respective owners.
57
<PAGE> 61
PCD INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PCD INC. DECEMBER 31, 1996 AND 1997
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997....................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997........... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997....................... F-6
Notes to Consolidated Financial Statements................ F-7
WELLS ELECTRONICS, INC.
APRIL 27, 1996 AND MAY 3, 1997
Independent Auditors' Report.............................. F-23
Consolidated Balance Sheets as of April 27, 1996 and May
3, 1997................................................ F-24
Consolidated Statements of Income for the 52 weeks ended
June 3, 1995, 48 weeks ended April 27, 1996 and 53
weeks ended May 3, 1997................................ F-25
Consolidated Statements of Shareholder's Equity the 52
weeks ended June 3, 1995, 48 weeks ended April 27, 1996
and 53 weeks ended May 3, 1997......................... F-26
Consolidated Statements of Cash Flows for the 52 weeks
ended June 3, 1995, 48 weeks ended April 27, 1996 and
53 weeks ended May 3, 1997............................. F-27
Notes to Consolidated Financial Statements................ F-28
DECEMBER 26, 1997
Independent Auditors' Report.............................. F-36
Consolidated Balance Sheets as of December 31, 1996
(Unaudited) and
December 26, 1997...................................... F-37
Consolidated Statement of Income for the 35 weeks ended
December 31, 1996 (Unaudited) and 34 weeks ended
December 26, 1997...................................... F-38
Consolidated Statement of Shareholder's Equity for 34
weeks ended
December 26, 1997...................................... F-39
Consolidated Statement of Cash Flows for 35 weeks ended
December 31, 1996 (Unaudited) and 34 weeks ended
December 26, 1997...................................... F-40
Notes to Consolidated Financial Statements................ F-41
</TABLE>
F-1
<PAGE> 62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of PCD Inc.:
We have audited the accompanying consolidated balance sheets of PCD Inc. as
of December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of PCD Inc. as of
December 31, 1996 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 11, 1998, except information included under the caption Litigation in
Note 11, Commitments and Contingencies, as to which the date is March 18, 1998
F-2
<PAGE> 63
PCD INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $20,529 $ 3,990
Accounts receivable -- trade (less allowance for
uncollectible accounts of $232 in 1996 and $205 in
1997).................................................. 3,578 6,804
Inventory................................................. 2,608 4,796
Prepaid expenses and other current assets................. 89 1,135
------- --------
Total current assets.............................. 26,804 16,725
Equipment and improvements, net............................. 5,337 15,843
Deferred tax asset.......................................... 82 15,335
Goodwill.................................................... -- 61,718
Intangible assets........................................... -- 13,539
Debt financing fees......................................... -- 1,800
Other assets................................................ 233 1,632
------- --------
Total assets...................................... $32,456 $126,592
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt..... $ 17,700
Accounts payable -- trade................................. $ 627 4,213
Accrued liabilities....................................... 3,123 7,444
------- --------
Total current liabilities......................... 3,750 29,357
Long-term debt, net of current portion...................... -- 65,300
Subordinated debenture -- related party..................... -- 22,903
Minority interest........................................... -- 37
------- --------
Total liabilities................................. 3,750 117,597
Commitments and contingencies (Notes 8, 9 and 11)........... -- --
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; 5,854,733 and 6,020,182 shares issued and
outstanding in 1996 and 1997, respectively................ 59 60
Additional paid-in capital.................................. 14,838 17,904
Retained earnings (accumulated deficit)..................... 13,906 (8,930)
Deferred compensation....................................... (97) (39)
------- --------
Total stockholders' equity........................ 28,706 8,995
------- --------
Total liabilities and stockholders' equity........ $32,456 $126,592
======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 64
PCD INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Net sales.................................................. $25,616 $26,857 $ 29,796
Cost of sales.............................................. 13,477 14,457 15,120
------- ------- --------
Gross profit............................................. 12,139 12,400 14,676
Operating expenses......................................... 5,667 5,445 5,816
Acquired in-process research and development............... -- -- 44,438
------- ------- --------
Income (loss) from operations............................ 6,472 6,955 (35,578)
Interest and other income.................................. 125 734 1,167
Interest expense........................................... (13) (9) (227)
------- ------- --------
Income (loss) before income taxes........................ 6,584 7,680 (34,638)
Provision for (benefit) income taxes....................... 2,721 2,895 (11,802)
------- ------- --------
Net income (loss)........................................ $ 3,863 $ 4,785 $(22,836)
======= ======= ========
Net income (loss) per share:
Basic................................................. $ 0.85 $ 0.87 $ (3.83)
======= ======= ========
Diluted............................................... $ 0.74 $ 0.76 $ (3.83)
======= ======= ========
Weighted average number of common and common equivalent
shares outstanding:
Basic................................................. 4,570 5,478 5,955
======= ======= ========
Diluted............................................... 5,201 6,292 5,955
======= ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 65
PCD INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TREASURY STOCK TOTAL
---------------------- PAID-IN EARNINGS DEFERRED ------------------- STOCKHOLDERS'
SHARES PAR VALUE CAPITAL (DEFICIT) COMPENSATION SHARES AMOUNT EQUITY
--------- --------- ---------- --------- ------------ --------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994............... 4,951,032 $50 $ 3,794 $ 5,258 390,000 $(328) $ 8,774
Exercise of stock
options............ 36,000 41 41
Issuance of stock
options............ 239 $(239)
Tax benefit from
non-qualified stock
options
exercised.......... 50 50
Amortization of
deferred
compensation....... 84 84
Net income........... 3,863 3,863
--------- --- ------- -------- ----- --------- ----- --------
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
========= === ======= ======== ===== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 66
PCD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------
1995 1996 1997
------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 3,863 $ 4,785 $ (22,836)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Acquired in-process research and development........... -- -- 44,438
Depreciation........................................... 1,026 1,389 1,530
Amortization of warrant................................ -- -- 34
Loss (gain) on disposal of equipment and
improvements......................................... 261 107 (4)
Allowance for uncollectible accounts................... 76 40 --
Amortization of deferred compensation.................. 84 58 58
Tax benefit from stock options exercised............... 50 356 673
Provision for deferred taxes........................... (192) (80) (15,253)
Changes in operating assets and liabilities, net of
acquisition of Wells Electronics, Inc.:
(Increase) decrease in accounts receivable........... (623) (54) 888
(Increase) decrease in inventory..................... (256) 259 (539)
(Increase) decrease in prepaid expenses and other
current assets.................................... (48) 310 (68)
Increase in other assets and debt financing fees..... (45) (25) (1,830)
Increase (decrease) in accounts payable.............. 205 (59) 479
Increase in accrued liabilities...................... 1,130 692 516
------- -------- ---------
Total adjustments................................. 1,668 2,993 30,922
------- -------- ---------
Net cash provided by operating activities......... 5,531 7,778 8,086
Cash flows from investing activities:
Equipment and improvements expenditures................... (2,505) (1,902) (2,531)
Acquisition of Wells Electronics, Inc., net of cash
acquired of $827....................................... -- -- (130,357)
------- -------- ---------
Net cash used in investing activities............. (2,505) (1,902) (132,888)
Cash flows from financing activities:
Proceeds from issuance of short-term debt................. -- -- 13,000
Proceeds from issuance of long-term debt.................. ---
-- 70,000
Proceeds from issuance of subordinated debenture and --
warrant................................................ -- 25,000
194
Proceeds from exercise of common stock options............ 41 263
10,501
Proceeds from issuance of common stock, net............... -- --
--
Principal payments under long-term debt obligations....... (37) --
------- -------- ---------
4 10,695 108,263
Net cash provided by financing activities.........
------- -------- ---------
3,030 16,571 (16,539)
Net increase (decrease) in cash.............................
928 3,958 20,529
Cash and cash equivalents at beginning of year..............
------- -------- ---------
$ 3,958 $ 20,529 $ 3,990
Cash and cash equivalents at end of year....................
======= ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
$ 13 $ 9 $ 20
Interest...............................................
======= ======== =========
$ 2,553 $ 2,452 $ 3,049
Income taxes...........................................
======= ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 67
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS:
PCD Inc. ("the Company") is engaged principally in designing, manufacturing
and marketing electronic connectors for use in and integrated circuit ("IC")
package interconnect applications, industrial equipment and avionics. 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. As further discussed in Note 3, on December 26, 1997 the
Company acquired all of the outstanding stock of Wells Electronics, Inc.
("Wells"). Wells designs, develops and markets a broad line of test and burn-in
sockets and related carriers for the global IC package interconnect industry.
The effect of the purchase is recorded in the financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated.
Revenue Recognition
Revenue is recognized upon shipment to customers. The Company grants to
certain of its distributors limited return and stock rotation rights.
Historically, the Company's return rate has been insignificant.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or fewer to be cash equivalents. The Company
invests excess cash in a money market fund and indirect obligations of the
United States government. Approximately $16.1 million was invested in such cash
equivalents at December 31, 1996. The Company classifies its investments as
available for sale; however at December 31, 1996, cost approximates fair value.
The Company had all its cash in interest bearing accounts at December 31, 1997.
Concentrations of Credit Risk and Estimates
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
receivables. The Company invests primarily in high quality securities with short
lives. Accordingly, these investments are subject to minimal credit and market
risk. Collateral is not required for trade receivables, but ongoing credit
evaluations of customer's financial condition are performed. As a result of the
Wells acquisition, a greater portion of the Company's accounts receivable will
be concentrated in the IC package interconnect and semiconductor industries. The
Company has not experienced significant losses related to receivables from
individual customers or groups of customers in the IC package interconnect and
semiconductor industries or by geographic region. Additionally, the Company
maintains reserves for potential credit losses. Due to these factors, no
additional credit risk beyond amounts provided for collection losses is believed
by management to be inherent in the Company's accounts receivables.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant estimates included in these financial
F-7
<PAGE> 68
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements are allowances for uncollectible accounts, allowances for inventory
valuation, goodwill, intangible assets and deferred taxes.
Inventory
Inventories are stated at the lower of cost, determined on a first-in,
first-out method, or market.
Research and Development
Research and development costs are charged to expense as incurred.
Net Income Per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("FAS 128"). FAS
128 requires dual presentation of basic and diluted earnings per share on the
face of the income statement for all entities with complex capital structures.
Basic earnings per share is computed using the weighted average number of shares
of common stock outstanding. Diluted earnings per share is computed using the
weighted average number of shares of common stock outstanding plus the effect of
the additional number of common shares that would have been outstanding if the
dilutive potential common shares had been outstanding. Under FAS 128, the
computation of the basic earnings per share does not assume the conversion,
exercise, or contingent issuance of securities that have an anti-dilutive effect
on earnings per share. The Company has issued a subordinated debenture,
described in Note 9, that has a conversion feature to common stock upon the
occurrence of certain events of default.
In accordance with SFAS No. 128, the following tables reconcile net income
(loss) and weighted average shares outstanding to the amounts used to calculate
basic and diluted earnings (loss) per share for each of the years ended December
31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
NET INCOME PER SHARE
(LOSS) SHARES AMOUNT
------------ --------- ---------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1995
Basic earnings....................................... $ 3,863,000 4,570,032 $ 0.85
Assumed exercise of options (treasury method)........ -- 631,092 --
------------ --------- ------
Diluted earnings..................................... $ 3,863,000 5,201,124 $ 0.74
============ ========= ======
FOR THE YEAR ENDED DECEMBER 31, 1996
Basic earnings....................................... $ 4,785,000 5,478,330 $ 0.87
Assumed exercise of options (treasury method)........ -- 813,523 --
------------ --------- ------
Diluted earnings..................................... $ 4,785,000 6,291,853 $ 0.76
============ ========= ======
FOR THE YEAR ENDED DECEMBER 31, 1997
Basic and diluted loss............................... $(22,836,000) 5,954,657 $(3.83)
============ ========= ======
</TABLE>
In 1997, Common Stock equivalents of 679,468 shares were not included in
the calculation of diluted EPS.
Equipment and Improvements
Equipment and improvements are recorded at cost. Maintenance and repairs
which neither materially add to the value of the property nor appreciably
prolong its life are charged to expense as
F-8
<PAGE> 69
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
incurred. Upon retirement or other disposition, the cost and related accumulated
depreciation are eliminated from the accounts and the resulting gain or loss is
included in the results of operation.
Depreciation of equipment and improvements is computed using the
straight-line method over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIFE IN YEARS
------------------------
<S> <C>
Tools, dies and molds............................... 5
Machinery and equipment............................. 10
Office furniture and fixtures....................... 5
Transportation equipment............................ 4
Computer software................................... 3
Leasehold improvements.............................. Shorter of lease term or
useful life
</TABLE>
Income Taxes
The Company utilizes the asset and liability approach of accounting for
income taxes. Under the asset and liability approach, deferred taxes are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. Deferred tax expense (benefit)
represents the change in the deferred tax asset or deferred tax liability
balance. Tax credits are treated as reductions of income taxes in the year in
which the credits become available for tax purposes.
Goodwill
Goodwill is accounted for in accordance with Accounting Principles Board
("APB") No. 17, Intangible Assets. Goodwill represents costs in excess of net
assets of the business acquired and is amortized on a straight-line basis over
the expected periods to be benefited, which is currently 20 years. The Company's
policy is to assess the goodwill based on an evaluation of such factors as the
occurrence of a significant adverse event or change in the environment in which
the business operates. An impairment loss would be recorded in the period such
determination is made based on the undiscounted cash flows of the related
businesses. No impairment losses have been recognized in any of the periods
presented.
Intangible Assets
Intangible assets are accounted for in accordance with SFAS 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Intangible assets are stated at cost and are amortized using the
straight-line method. Loan acquisition fees are amortized over the life of the
applicable indebtedness. Trademarks and trade names are amortized over 20 years,
consistent with industry norms. Patented technologies are amortized over 9
years.
3. ACQUISITION OF WELLS ELECTRONICS, INC.:
On December 26, 1997, pursuant to the Share Purchase Agreement dated
November 17, 1997, the Company acquired all of the outstanding common stock of
Wells Electronics, Inc. Wells is a manufacturer of IC package interconnect
products. The acquisition was financed by a combination of a new bank credit
facility of $90 million of which the Company borrowed approximately $83
F-9
<PAGE> 70
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million upon consummation of the acquisition and a $25 million subordinated
debenture. The acquisition is being accounted for as a purchase in accordance
with APB Opinion No. 16.
In accordance with APB Opinion No. 16, the Company has allocated the
purchase price based on the fair value of assets acquired and liabilities
assumed. Acquired intangible assets consist of trade names and trademarks and
patented technologies valued at approximately $10.4 million and $3.1 million,
respectively. A portion of the purchase price was allocated to these intangible
assets using a risk adjusted discounted cash flow approach. These intangibles
are being amortized over their estimated useful lives of 9 and 20 years,
respectively. Additionally, a portion of the purchase price was allocated to
purchased research and development projects that were identified as having no
alternative future value and had not yet reached technological feasibility.
Purchased research and development that had not reached technological
feasibility and that had no alternative future use was valued under a risk
adjusted cash flow model, under which future cash flows were discounted taking
into consideration risks relating to existing and future markets. This analysis
resulted in an allocation of approximately $44 million to acquired in-process
research and development expense. This amount was charged to operations at the
acquisition date. A final allocation of the purchase price will be completed in
1998 based on determination of the final purchase price. The purchase price is
subject to adjustment by the amount, if any, by which the net worth, with
certain adjustments, of Wells as of the closing date, as agreed to by the
Company and the seller, is less than or more than the corresponding net worth as
of September 30, 1997. The adjustment is expected to be favorable to the
Company, but is not expected to be material. The final allocation is not
expected to differ materially from amounts previously reported.
The aggregate purchase price of $131,184,000, includes acquisition costs.
Acquisition costs consist of approximately $500,000 of financial advisory fees
and $684,000 of professional fees. The aggregate purchase price was allocated as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Current assets.............................................. $ 7,568
Equipment and improvements.................................. 9,501
Acquired intangibles........................................ 13,539
Acquired in-process research & development.................. 44,438
Goodwill.................................................... 61,718
Other assets................................................ 1,369
Liabilities assumed......................................... (6,949)
--------
$131,184
========
</TABLE>
Unaudited pro forma operating results for the Company, assuming the
acquisition of Wells occurred at the beginning of each period presented are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
----------------------
1996 1997
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net sales.............................................. $49,779 $71,386
Net (loss)............................................. (1,342) 5,570
Net income per share:
Basic................................................ $ (0.24) $ 0.94
Diluted.............................................. $ (0.24) $ 0.82
</TABLE>
F-10
<PAGE> 71
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma operating results for years ended 1996 and 1997 include costs of
$4.0 million of amortization of goodwill and acquired intangible assets and
$10.0 million of interest expense. Approximately $44.4 million of expense
related to the acquired in-process research and development and $2.1 million of
additional interest expense related to the Emerson Warrant (Note 9) are excluded
from both 1996 and 1997.
These unaudited pro forma operating results are included for information
purposes only and may not be indicative of the results of operations for PCD and
Wells had they been a single entity during 1996 and 1997.
4. INVENTORY:
Inventory consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and finished subassemblies................... $1,908 $3,387
Work in process............................................ 226 532
Finished goods............................................. 474 877
------ ------
Total...................................................... $2,608 $4,796
====== ======
</TABLE>
5. EQUIPMENT AND IMPROVEMENTS:
Equipment and improvements consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------ -------
(IN THOUSANDS)
<S> <C> <C>
Tools, dies and molds..................................... $5,192 $11,244
Machinery and equipment................................... 2,586 5,546
Office furniture and fixtures............................. 936 1,978
Computer software......................................... 89 99
Transportation equipment.................................. 168 205
Leasehold improvements.................................... 493 718
------ -------
9,464 19,790
Less accumulated depreciation............................. 4,379 4,852
------ -------
5,085 14,938
Capital expenditures in progress.......................... 252 905
------ -------
Equipment and improvements, net........................... $5,337 $15,843
====== =======
</TABLE>
F-11
<PAGE> 72
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INTANGIBLE ASSETS AND GOODWILL:
Goodwill is accounted for in accordance with APB 17, Intangible Assets. The
Company assesses the realizability of intangible assets in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of when events or changes in circumstances indicate that
the carrying amount may not be recoverable. Goodwill is stated at cost and
amortized on a straight line basis over the estimated future periods to be
benefited, which is currently 20 years. The Company's policy is to assess the
goodwill based on an evaluation of such factors as the occurrence of a
significant adverse event or change in the environment in which the business
operates. An impairment loss would be recorded in the period such determination
is made based on the undiscounted cash flows of the related businesses. No
impairment losses have been recognized in any of the periods presented.
Intangible assets are amortized on a straight-line basis, based on their
estimated lives, as follows:
<TABLE>
<CAPTION>
BALANCE ESTIMATED
DECEMBER 31, 1997 LIFE
----------------- ---------
(IN THOUSANDS)
<S> <C> <C>
Patented technology.............................. $ 3,155 9 years
Trade names/trademarks........................... 10,384 20 years
Goodwill......................................... 61,718 20 years
</TABLE>
7. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Compensation and benefits.................................. $ 760 $2,210
Professional fees.......................................... 1,002 846
Income taxes payable....................................... 730 2,604
Other...................................................... 631 1,784
------ ------
Total...................................................... $3,123 $7,444
====== ======
</TABLE>
8. LINE OF CREDIT AND LONG-TERM DEBT:
Prior to the acquisition of Wells discussed in Note 3, the Company had
unsecured lines of credit with a bank. The agreement provided for up to
$5,250,000 in a revolving credit line with interest payable monthly at the
bank's base lending rate until June 30, 1998. As of December 31, 1996, no
amounts were outstanding under this line of credit.
On December 26, 1997, in connection with the Wells acquisition discussed in
Note 3, the Company entered into a secured $20,000,000 Revolving Credit
Agreement ("Revolver") with several banks replacing the previous $5,250,000
agreement described above, a $30,000,000 Secured Term Loan Agreement A and a
$40,000,000 Secured Term Loan Agreement B (collectively referred to as the
"Senior Credit Facility"). The Revolver provides for direct borrowings or
letters of credit and expires December 31, 2003; Term Loan Agreement A expires
December 31, 2003; and Term Loan Agreement B expires December 31, 2004. The
Senior Credit Facility is collateralized by all of the assets of PCD and Wells.
In conjunction with the Senior Credit Facility, PCD and Wells each entered into
a stock pledge agreement with these banks pledging all or substantially all of
the stock of the subsidiaries of PCD and Wells. Each of PCD, Wells and certain
of their subsidiaries also entered into a security agreement and certain other
collateral or conditional assignments of assets. Borrowings under the Senior
Credit Facility bear interest, at the Company's option, at either: (i) the
higher of the lender's base rate, or a rate equal to 1/2 of 1% per annum above
the weighted average of
F-12
<PAGE> 73
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, plus between 25 and 200 basis
points based on the ratio of senior indebtedness to the Company's earnings
before interest, taxes, depreciation and amortization ("EBITDA"), or (ii) a
periodic fixed rate equal to LIBOR plus between 150 and 325 basis points based
on the ratio of senior indebtedness to EBITDA. The Company is required to pay a
quarterly commitment fee ranging from 0.35% to 0.50% per annum, based on a
certain financial ratio of the Company, of the unused commitment under the
Revolver. There are no prepayment fees on the Senior Credit Facility. At
December 31, 1997, borrowings of $83,000,000 were outstanding under the Senior
Credit Facility at a weighted average interest rate of 8.96%.
The Agreement governing the Senior Credit Facility contains numerous
financial and operating covenants that are effective as of the quarter ending
March 28, 1998. 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 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. However, 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. In addition, the Company estimates that the fair value of the loans
approximates the carrying value in the financial statements.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1997
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Term Loan A......................................... -- $30,000
Term Loan B......................................... -- 40,000
------- -------
70,000
Less -- current portion............................. -- 4,700
------- -------
-- $65,300
======= =======
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ----------------------- --------------
(IN THOUSANDS)
<S> <C>
1998................................................. $ 4,700
1999................................................. 4,900
2000................................................. 5,200
2001................................................. 5,400
2002................................................. 5,800
2003 and thereafter.................................. 44,000
-------
$70,000
=======
</TABLE>
F-13
<PAGE> 74
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SUBORDINATED DEBENTURE:
On December 26, 1997, the Company entered into a Subordinated Debenture
("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 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. The combined
effective interest rate for the Debenture, the exercisable portion of the
Emerson Warrant and the prepayment penalty is 21.7%, assuming 10% per annum
direct interest expense, 8.4% per annum effective interest expense associated
with the Emerson Warrant and 3.25% of effective interest expense due to
prepayment penalties. The Emerson Warrant is initially exercisable for 150,000
shares of Common Stock. If the principal and interest on the Debenture have not
been paid in full as of December 31, 1998, the Emerson Warrant becomes
exercisable for an additional 225,000 shares. If the principal and accrued
interest on the Debenture have not been paid in full as of December 31, 1999,
the Emerson Warrant becomes exercisable for the remaining 150,000 additional
shares. Prepayment of the principal amount under the Debenture is subject to a
penalty, due at the time of prepayment, as follows: (i) for the period beginning
December 26, 1997 and ending June 30, 1998, an amount equal to 3.25% of the
principal sum prepaid; (ii) for the period beginning July 1, 1998 and ending
September 30, 1998, an amount equal to 6.5% of the principal sum prepaid; and
(iii) for the period beginning October 1, 1998 and ending December 31, 1998, an
amount equal to 9.75% of the principal sum prepaid. At the option of the holder,
the unpaid principal and accrued interest under the Debenture is convertible
into Common Stock upon the occurrence of certain Events of Default thereunder,
at a conversion price equal to the lesser of $17.00 per share or 70% of the
average daily closing price of Common Stock for the 90 days preceding such
default as reported by the Nasdaq Stock Market. The Events of Default under the
Debenture are (i) insolvency; (ii) default under the Senior Credit Facility;
(iii) a payment default on the Debenture which default is not cured within 10
business days; (iv) a material breach by the Company of any representations or
warranties or failure to comply with covenants or agreements contained in the
agreements with Emerson which breach is not cured within 30 days; and (v) an
undischarged or unstayed judgment against the Company for an amount in excess of
$1 million. The total purchase price paid by Emerson for the Debenture and
Warrant was $25,000,000. The proceeds from the sale of the Debenture and the
Warrant were applied in full to the purchase price paid by the Company in
connection with the Wells acquisition.
The Company allocated the proceeds of the $25,000,000 between the
Subordinated Debenture and the Warrant. The Company has valued the Warrant
according to the Black-Scholes model, and determined the value to be
approximately $2,131,000. The Company has recorded a credit to additional
paid-in capital of $2,131,000 and a reduction in the face amount of the
Subordinated Debenture for the same amount. This amount will be reflected as
additional interest expense over the period that the Subordinated Debenture is
expected to be outstanding. A change in the expected repayment date will result
in an additional charge to income. The Subordinated Debenture is expected to be
repaid in approximately six months.
F-14
<PAGE> 75
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES:
The provision (benefit) for income taxes for the years ended December 31,
1995, 1996 and 1997 was as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal.................................... $2,466 $2,504 $ 2,937
State...................................... 447 471 514
------ ------ --------
Total current........................... 2,913 2,975 3,451
Deferred
Federal.................................... (174) (62) (12,107)
State...................................... (18) (18) (3,146)
------ ------ --------
Total deferred.......................... (192) (80) (15,253)
------ ------ --------
$2,721 $2,895 $(11,802)
====== ====== ========
</TABLE>
The components of the net deferred tax asset consisted of the following at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
----- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets (liabilities):
Difference in accounting for inventory................. $ 195 $ 148
Accounts receivable allowances......................... 90 81
Vacation and other accruals............................ 297 351
In-process research and development.................... -- 15,362
Difference in depreciation methods..................... (500) (607)
----- -------
Net deferred tax asset.............................. $ 82 $15,335
===== =======
</TABLE>
The deferred tax consequences of temporary differences in reporting items
for financial statement and income tax purposes are recognized, if appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including the Company's ability to generate taxable
income. Future tax benefits are recognized to the extent that realization of
such benefits is more likely than not.
The analysis of the variance of income taxes as reported from income taxes
compiled at the U.S. statutory federal income tax rate for continuing operations
is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes at U.S. statutory rate of 34%... $2,239 $2,611 $(11,777)
State income taxes........................... 284 300 (1,737)
Benefit of Foreign Sales Corporation......... -- -- 88
Non-deductible expenditures.................. -- -- 1,624
Other, net................................... 198 (16) --
------ ------ --------
$2,721 $2,895 $(11,802)
====== ====== ========
</TABLE>
F-15
<PAGE> 76
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES:
Litigation:
On August 21, 1995, the Company's wholly-owned subsidiary, CTi
Technologies, Inc. ("CTi"), filed an action in the United States District Court
for the District of Arizona against Wayne K. Pfaff, an individual residing in
Texas ("Pfaff"), and Plastronics Socket Company, Inc., a corporation affiliated
with Pfaff, alleging and seeking a declaratory judgment that two United States
patents issued to Pfaff and relating to certain burn-in sockets for "leadless"
IC packages (the "Pfaff Leadless Patent") and ball grid array ("BGA") IC
packages (the "Pfaff BGA Patent") (collectively, the "Pfaff Patents") are
invalid and are not infringed by CTi, the products of which include burn-in
sockets for certain "leaded" packages (including Quad Flat Paks) (the "CTi
Leaded Products") and BGA packages (the "CTi BGA Products") (collectively, the
"CTi Products"). Pfaff has filed a counterclaim alleging that CTi infringes the
Pfaff Leadless Patent and has requested an award of damages; the counterclaim
does not allege infringement of the Pfaff BGA Patent. Pfaff has also sought a
permanent injunction against further infringement by CTi of the Pfaff Leadless
Patent. That action has been stayed pending resolution of another action,
described below, involving the Pfaff Leadless Patent.
In litigation between Wells and Pfaff concerning the Pfaff Leadless Patent,
the United States Court of Appeals for the Federal Circuit has found all of the
individual descriptions of the invention (the "Claims" of the patent) of the
Pfaff Leadless Patent which were at issue in that case to be invalid. Certain
other Claims of the patent were not at issue in that case, and their validity
was not decided by the court, because Pfaff did not allege that products of
Wells infringed such Claims. The United States Supreme Court has accepted an
appeal on that case. Unless overturned, the Court of Appeals decision as to the
invalidity of such Claims of the Pfaff Leadless Patent will be binding in the
CTi v. Pfaff action in the District of Arizona, and the reasoning of that
decision could support CTi's position that the remaining Claims of that patent
are invalid.
The Company believes, based on the advice of counsel, that CTi and Wells
have meritorious defenses against any allegations of infringement under the
Pfaff Patents, and, if necessary, CTi and Wells will vigorously litigate their
positions. There can be no assurance, however, that the Company, CTi or Wells
will prevail in any pending or future litigation, and a final court
determination that CTi or Wells has infringed the Pfaff Leadless Patent could
have a material adverse effect on the Company. Such adverse effect could
include, without limitation, the requirement that CTi or Wells pay substantial
damages for past infringement and an injunction against the manufacture or sale
in the United States of such products as are found to be infringing.
Leases:
The Company leases office and production facilities in Peabody,
Massachusetts, Wormleysburg, Pennsylvania, and Phoenix, Arizona. These rentals
are subject to escalation in real estate taxes and operating expenses. Rental
expense for the years ended December 31, 1995, 1996 and 1997 was $500,000,
$498,000, and $480,000 respectively.
In conjunction with the Wells acquisition, leased production facilities in
South Bend, Indiana, Yokohama, Japan and Swatara, Pennsylvania and leased
distribution and technical sales support facilities in Northhampton, England;
Regensburg, Germany; Seoul, South Korea; Singapore and Penang, Malaysia were
added.
F-16
<PAGE> 77
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum future rental commitments under leases with remaining terms in
excess of one year are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ----------------------- --------------
(IN THOUSANDS)
<S> <C>
1998................................................. $1,136
1999................................................. 1,012
2000................................................. 914
2001................................................. 914
2002................................................. 913
2003 and thereafter.................................. 1,972
</TABLE>
12. STOCKHOLDERS EQUITY:
Preferred Stock
The Board of Directors is authorized, subject to any limitations prescribed
by law, from time to time to issue up to an aggregate of 1,000,000 shares of
Preferred Stock, $0.10 par value per share, with such powers, designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof, as shall be determined
by the Board of Directors in a resolution or resolutions providing for the
issuance of such Preferred Stock.
Common Stock
In February 1996, the stockholders approved an increase in the authorized
common stock of the Company to 25,000,000 shares, $0.01 par value per share, and
the stockholders approved a twelve-for-one stock split effected in the form of a
stock dividend. All references to the number of shares and per share amounts
have been restated to reflect the split.
Treasury Stock
On January 30, 1996, the Board of Directors approved a resolution to
restore any and all Common Stock of the Company which had been repurchased by
the Company to the status of authorized but unissued shares.
Stock Options:
Directors Stock Plan
The Company's 1996 Eligible Directors Stock Plan (the "Directors Stock
Plan") was approved by the Board of Directors on January 30, 1996 and thereafter
by the Company's stockholders. Under the Directors Stock Plan, commencing with
the 1997 annual meeting of stockholders, each director who is not an officer or
employee of the Company or any subsidiary of the Company (an "outside director")
who has not previously been granted an option to purchase shares of Common Stock
will be granted, on the thirtieth day after such meeting, an option to purchase
3,000 shares of Common Stock at an exercise price equal to the fair market value
on the date of grant. In addition, on the thirtieth day after such meeting, each
outside director will be granted an option at each annual meeting of
stockholders to purchase 1,500 shares of Common Stock at an exercise price equal
to the fair market value on the date of grant. A total of 36,000 shares of
Common Stock are available for awards under the Directors Stock Plan. Each
option shall vest 6 months after, and expire 10 years from, the date of grant of
such option. No options may be granted under the Directors Stock Plan after
January 29, 2006.
F-17
<PAGE> 78
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 Stock Plan
The Company's 1996 Stock Plan was approved by the Board of Directors on
January 30, 1996, and thereafter by the Company's stockholders. The 1996 Stock
Plan provides for the grant or award of stock options, restricted stock and
other performance awards which may or may not be denominated in shares of Common
Stock or other securities (collectively, the "Awards"). Stock options granted
under the 1996 Stock Plan may be either incentive stock options or non-qualified
options. The 1996 Stock Plan is administered by the Compensation Committee.
Subject to the provisions of the 1996 Stock Plan, the Committee has the
authority to designate participants, determine the types of Awards to be
granted, the number of shares to be covered by each Award, the time at which
each Award is exercisable or may be settled, the method of payment and any other
terms and conditions of the Awards. While the Committee determines the prices at
which options and other Awards may be exercised under the 1996 Stock Plan, the
exercise price of an option shall be at least 100% of the fair market value (as
determined under the terms of the 1996 Stock Plan) of a share of Common Stock on
the date of grant. The aggregate number of shares of Common Stock available for
awards under the Plan is 324,000. No option shall be exercisable with respect to
any shares later than 10 years after the date of grant of such options or 5
years in the case of incentive options granted to the owner of stock possessing
more than 10% of the value of all classes of stock of the Company. Vesting is
determined in the sole discretion of the Compensation Committee of the Board of
Directors. In connection with Committee's grants to date, it has fixed vesting
in four approximately equal annual installments, the first of which vests on the
date of grant. No awards may be made under the 1996 Stock Plan after January 29,
2006.
1992 Stock Option Plan
The Company's 1992 Stock Option Plan as amended on January 30, 1996
provides for the grant or award of stock options, which may be either incentive
stock options or non-qualified stock options to key employees and directors. The
aggregate number of shares of Common Stock reserved for issuance under the 1992
Stock Plan is 636,600 shares. No option shall be exercisable with respect to any
shares later than 10 years after the date of grant of such options or 5 years in
the case of incentive options granted to the owner of stock possessing more than
10% of the value of all classes of stock of the Company. Vesting is determined
in the sole discretion of the Compensation Committee of the Board of Directors.
In connection with Committee's grants to date, it has fixed vesting in four
approximately equal annual installments, the first of which vests on the date of
grant. The Compensation Committee administers the 1992 Stock Option Plan.
F-18
<PAGE> 79
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the transactions from these plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
-------- --------------
<S> <C> <C>
Options outstanding at December 31, 1994.................. 846,000 $ 1.15
Options exercised....................................... (36,000) 1.15
Options granted......................................... 144,000 1.68
--------
Options outstanding at December 31, 1995.................. 954,000 1.23
Options exercised....................................... (157,701) 1.22
Options granted......................................... 15,000 12.00
--------
Options outstanding at December 31, 1996.................. 811,299 1.43
Options exercised....................................... (165,449) 1.59
Options cancelled....................................... (4,000) 12.00
Options granted......................................... 78,000 21.08
--------
Options outstanding at December 31, 1997.................. 719,850 3.46
========
</TABLE>
Summarized information about stock options outstanding at December 31, 1997
is as follows:
<TABLE>
<CAPTION>
EXERCISABLE
WEIGHTED --------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE OPTIONS PRICE
--------------- ----------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 1.15......................... 518,100 4.75 $ 1.15 518,100 $ 1.15
1.54-2.08.................... 118,500 7.45 1.67 91,500 1.65
12.00......................... 6,500 8.58 12.00 2,500 12.00
16.125-18.50.................. 26,750 9.34 17.13 10,250 16.84
23.25......................... 50,000 10.00 23.25 8,335 23.25
</TABLE>
For the years ended December 31, 1995, 1996 and 1997, options to purchase
825,000 shares, 740,049 shares and 630,685 shares, respectively, of Common Stock
were exercisable with the remaining options becoming exercisable at various
dates through December 26, 2002. The weighted average exercise price of
outstanding options for the years ended December 31, 1995 and 1996 were $1.18
and $1.25, respectively. The Company has recorded deferred compensation of
$239,000 for the difference between fair value and exercise price for options
granted in 1995 and such deferred compensation is being amortized over the
option vesting period.
Generally, when shares acquired pursuant to the exercise of incentive stock
options are sold within one year of exercise or within two years from the date
of grant, the Company derives a tax deduction measured by the amount that the
fair market value exceeds the option price at the date the options are
exercised. When nonqualified stock options are exercised, the Company derives a
tax deduction measured by the amount that the fair market value exceeds the
option price at the date the options are exercised.
Supplemental Disclosure for Stock Based Compensation:
The Company has three stock-based compensation plans, which are described
above. In October 1995, the FASB issued SFAS 123, Accounting for Stock-Based
Compensation. SFAS 123 is effective for periods beginning after December 15,
1995. SFAS 123 requires that companies either recognize compensation expense for
grants of stock, stock options, and other equity instruments
F-19
<PAGE> 80
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
based on fair value, or provide pro forma disclosure of net income and earnings
per share in the notes to the financial statements. The Company adopted the
disclosure provisions of SFAS 123 in 1996 and has applied APB Opinion 25 and
related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock option plans. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net income (loss) and earnings (loss)
per share for the years ended December 31, 1995, 1996 and 1997 would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------------ ------------------------------- ------------------
NET NET INCOME NET NET INCOME NET INCOME
INCOME PER SHARE INCOME PER SHARE (LOSS)
---------- ----------------- ----------- ----------------- ------------------
BASIC DILUTED BASIC DILUTED
----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
As reported.......... $3,863 $0.85 $0.74 $4,785 $0.87 $0.76 $(22,836)
Pro forma............ $3,772 $0.83 $0.73 $4,665 $0.85 $0.74 $(23,119)
<CAPTION>
1997
--------------------------
NET INCOME
(LOSS) PER SHARE
--------------------------
BASIC DILUTED
----- -------
<S> <C> <C>
As reported.......... $(3.83) $(3.83)
Pro forma............ $(3.88) $(3.88)
</TABLE>
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
---- ----- -----
<S> <C> <C> <C>
Dividend yield...................................... none none none
Expected volatility................................. 0.0% 45.00% 48.79%
Risk free interest rate............................. 7.13% 7.27% 7.27%
Expected life (years)............................... 10.0 10.0 5.0
</TABLE>
Weighted average fair value of options granted below fair value at date of
grant:
<TABLE>
<S> <C>
1995.............................. $2.53
=====
</TABLE>
Weighted average fair value of options granted at fair value at date of
grant:
<TABLE>
<S> <C>
1996........................... $ 7.83
======
1997........................... $12.73
======
</TABLE>
The effect of applying SFAS 123 in this pro forma disclosure is not
indicative of future amounts. The SFAS does not apply to awards made prior to
1995. Additional awards in future years are anticipated.
13. PROFIT SHARING PLAN:
Effective May 1, 1992, the Company adopted a Plan pursuant to Section 401
of the Internal Revenue Code, (the "Code") whereby employees may contribute a
percentage of compensation, but not in excess of the maximum allowed under the
Code. Employees are eligible for participation at the beginning of the calendar
quarter following their one year anniversary. The Company makes matching
contributions of fifty percent of employee contributions up to 6% of employee
compensation; however, the Company's total contribution may not exceed 15% of
the prior year's pre-tax income unless authorized by the Board of Directors. The
Company's matching contributions were approximately $82,000, $80,000 and $93,000
for the years ended December 31, 1995, 1996, and 1997, respectively.
Wells Electronics, Inc. Deferred Compensation and Savings Plan (Salaried
401(k)) allows for salaried employees to contribute up to a maximum allowable
under the Code. Wells makes matching contributions of 25% of the employee
contribution. Wells Electronics, Inc. Union Employees' 401(k) Plan allows for
all union employees to contribute a minimum contribution
F-20
<PAGE> 81
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($0.19 per hour through February 18, 1998). For those employees who contribute
at least the minimum, Wells matches $0.19 per hour through February 18, 1998. As
part of the liabilities assumed as a result of the Wells acquisition, a
liability was recorded for approximately $46,000.
14. SIGNIFICANT CUSTOMERS AND EXPORT SALES:
One customer accounted for approximately 16.6%, 17.4% and 14.5% of the
Company's net sales in 1995, 1996 and 1997, respectively. A second customer
accounted for approximately 13.4% and 12.7% of the Company's net sales in 1995
and 1997, respectively. The Company had export sales of approximately
$3,022,000, $2,975,000 and $3,876,000 in 1995, 1996 and 1997, respectively. All
export sales are in U.S. dollars. No one country or region accounted for greater
than 10% of net sales.
15. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------------------------
MAR 31, JUN 29, SEP 28, DEC 31,
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Net sales................................ $7,087 $7,223 $6,222 $ 6,325
Gross profit............................. 3,235 3,222 2,725 3,218
Net income............................... 1,130 1,348 1,068 1,239
Net income per share:
Basic................................. $ 0.25 $ 0.24 $ 0.19 $ 0.21
Diluted............................... $ 0.21 $ 0.21 $ 0.16 $ 0.19
</TABLE>
<TABLE>
<CAPTION>
MAR 29, JUN 28, SEP 27, DEC 31,
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1997
Net sales................................ $6,217 $7,233 $8,077 $ 8,269
Gross profit............................. 2,953 3,507 3,927 4,289
Net income (loss)........................ 1,175 1,504 1,693 (27,208)
Net income (loss) per share:
Basic................................. $ 0.20 $ 0.25 $ 0.28 $ (4.52)
Diluted............................... $ 0.18 $ 0.23 $ 0.26 $ (4.52)
</TABLE>
16. SUBSEQUENT EVENT (UNAUDITED):
The Company utilizes a significant number of computer software programs and
operating systems across its entire organization, including applications used in
manufacturing, product development, financial business systems and various
administrative functions. The Company believes that, with the exception of the
South Bend, Indiana location, its computer systems will be able to manage and
manipulate all material data involving the transition from 1999 to 2000 without
functional or data abnormality and without inaccurate results related to such
data. However, there can be no assurances that potential systems interruptions
or the cost necessary to update software would not have a material adverse
effect on the Company's financial condition, results of operations or business.
In addition, the Company has limited information concerning the compliance
status of its suppliers and customers. In the event that any of the Company's
significant suppliers or customers do not successfully and timely achieve Year
2000 compliance, the Company's financial condition, results of operations and
business could be adversely affected.
The Company believes that, within the next nine months, it will have to
replace the current systems at Wells South Bend with new systems that are Year
2000 compliant. Failure to replace such
F-21
<PAGE> 82
PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
systems could result in the generation of erroneous data or system failure.
Significant uncertainty exists concerning the potential effects associated with
Year 2000 compliance, and Year 2000 issues involving systems of Wells South Bend
could have a material adverse effect on the Company's financial condition,
results of operations or business. The cost of replacing computer systems of
Wells South Bend is currently estimated to be up to $900,000.
The Company filed a registration statement in February 1998 on Form S-1 for
a public offering to raise proceeds to both retire the subordinated debenture
and pay down a portion of the Senior Credit Facility.
F-22
<PAGE> 83
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Wells Electronics, Inc.:
We have audited the accompanying consolidated balance sheets of Wells
Electronics, Inc. and subsidiaries as of April 27, 1996 (Predecessor) and May 3,
1997 (Successor), and the related consolidated statements of income,
shareholders' equity, and cash flows for the 52 weeks ended June 3, 1995, the 48
weeks ended April 27, 1996 (Predecessor periods), and the 53 weeks ended May 3,
1997 (Successor period). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the aforementioned Predecessor consolidated financial
statements present fairly, in all material respects, the financial position of
Wells Electronics, Inc. and subsidiaries as of April 27, 1996, and the results
of their operations and their cash flows for the Predecessor periods, in
conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned Successor consolidated financial statements present
fairly, in all material respects, the financial position of Wells Electronics,
Inc. and subsidiaries as of May 3, 1997, and the results of their operations and
their cash flows for the Successor period, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
May 2, 1996, Siebe plc acquired all of the outstanding stock of Unitech plc in a
business combination accounted for as a purchase. As a result of the
acquisition, the consolidated financial information for the periods after the
acquisition is presented on a different cost basis than that for the periods
before the acquisition and, therefore, is not comparable.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
January 15, 1998
F-23
<PAGE> 84
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 27, 1996 AND MAY 3, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------- -----------
APRIL 27, 1996 MAY 3, 1997
-------------- -----------
<S> <C> <C>
ASSETS
Cash & cash equivalents..................................... $ 441 $ 95
Accounts receivable -- trade................................ 3,843 4,516
Allowance for uncollectible accounts........................ (100) (100)
Inventory................................................... 3,446 2,540
Prepaid expenses and other current assets................... 475 416
Deferred tax assets......................................... 547 571
------- -------
Total current assets.............................. 8,652 8,038
Property, plant and equipment, net.......................... 4,319 9,224
Intangible assets, net...................................... 714 10,157
Due from affiliate.......................................... -- 3,231
Other assets................................................ 228 135
------- -------
Total assets...................................... $13,913 $30,785
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term debt............................................. $ 1,153 $ 268
Accounts payable -- trade................................... 2,801 3,016
Accrued expenses and other current liabilities.............. 2,008 2,669
Due to affiliate............................................ 11 --
------- -------
Total current liabilities......................... 5,973 5,953
Long-term debt.............................................. 1,458 --
Deferred tax liabilities.................................... 149 6,185
Minority interest........................................... -- 6
------- -------
Total liabilities................................. 7,580 12,144
------- -------
SHAREHOLDER'S EQUITY
Common stock, $10 par value; 13,500 authorized shares;
issued 7,825 shares....................................... 78 78
Additional paid-in capital.................................. 6,547 14,510
Retained earnings........................................... (292) 4,367
Foreign currency translation adjustments.................... -- (314)
------- -------
Total shareholder's equity........................ 6,333 18,641
------- -------
Commitment and contingencies................................ -- --
Total liabilities and shareholder's equity........ $13,913 $30,785
======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-24
<PAGE> 85
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR 52 WEEKS ENDED JUNE 3, 1995; 48 WEEKS ENDED APRIL 27, 1996
AND 53 WEEKS ENDED MAY 3, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------ -----------
JUNE 3, 1995 APRIL 27, 1996 MAY 3, 1997
------------ -------------- -----------
<S> <C> <C> <C>
Net sales.......................................... $18,579 $17,998 $27,492
Cost of sales...................................... 9,732 9,271 13,181
------- ------- -------
Gross profit.................................. 8,847 8,727 14,311
Operating expenses................................. 7,272 6,624 8,758
------- ------- -------
Income from operations........................ 1,575 2,103 5,553
Non-operating income(expense):
Interest income.................................... 10 6 11
Interest expense................................... (126) (115) (93)
Royalty income..................................... 404 844 630
Minority interest.................................. -- -- (6)
Other expense...................................... (42) (40) (23)
Foreign exchange gain/(loss)....................... (180) 40 264
------- ------- -------
Total non-operating income............... 66 735 783
------- ------- -------
Income before income taxes....................... 1,641 2,838 6,336
Provision for income taxes......................... 798 586 1,969
------- ------- -------
Net Income............................... $ 843 $ 2,252 $ 4,367
======= ======= =======
Earnings per share................................. $107.73 $287.80 $558.08
======= ======= =======
Average number of shares........................... 7,825 7,825 7,825
======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-25
<PAGE> 86
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR 52 WEEKS ENDED JUNE 3, 1995; 48 WEEKS ENDED APRIL 27, 1996
AND 53 WEEKS ENDED MAY 3, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
------------------ PAID-IN RETAINED TRANSLATION TOTAL
SHARES PAR VALUE CAPITAL EARNINGS ADJUSTMENTS EQUITY
------ --------- ---------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 29, 1994........ 7,825 $78 $ 6,547 $(3,387) $ 35 $ 3,273
Net income................... 843 843
Net change foreign currency
translation adjustment..... 238 238
----- --- ------- ------- ----- -------
Balance, June 3, 1995........ 7,825 78 6,547 (2,544) 273 4,354
Net income................... 2,252 2,252
Net change foreign currency
translation adjustment..... (273) (273)
----- --- ------- ------- ----- -------
Balance, April 27, 1996...... 7,825 78 6,547 (292) -- 6,333
Acquisition adjustments...... 7,963 292 8,255
Net income................... 4,367 4,367
Net change foreign currency
translation adjustment..... (314) (314)
----- --- ------- ------- ----- -------
Balance, May 3, 1997......... 7,825 $78 $14,510 $ 4,367 $(314) $18,641
===== === ======= ======= ===== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-26
<PAGE> 87
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR 52 WEEKS ENDED JUNE 3, 1995; 48 WEEKS ENDED APRIL 27, 1996
AND 53 WEEKS ENDED MAY 3, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------ -----------
JUNE 3, 1995 APRIL 27, 1996 MAY 3, 1997
------------ -------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 843 $ 2,252 $ 4,367
------- ------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 1,870 1,426 2,205
Gain on disposition of equipment................. (38) (12) (59)
Provision for (benefit from) deferred taxes...... (49) (30) 50
Changes in operating assets and liabilities:
Increase in net accounts receivable........... (1,550) (732) (673)
Decrease (increase) in inventory.............. (520) (1,038) 906
Decrease (increase) in prepaid expenses and
other current assets........................ 193 (176) 60
Decrease (increase) in other assets........... 9 (23) 93
Decrease in due from affiliate................ (1,433) (454) (3,242)
Increase in accounts payable.................. 1,902 337 215
Increase (decrease) in current liabilities.... 476 (91) 661
Increase (decrease) in other liabilities...... (260) 4 3
------- ------- -------
Total adjustments........................ 600 (789) 219
------- ------- -------
Net cash provided by operating activities.......... 1,443 1,463 4,586
Cash flows from investing activities:
Capital expenditures............................. (2,093) (1,971) (2,975)
Proceeds from sale of fixed assets............... 67 18 386
------- ------- -------
Net cash used in investing activities.............. (2,026) (1,953) (2,589)
Cash flow from financing activities:
Net (payments of) proceeds from short-term
debt.......................................... 414 739 (885)
Principal payments of long-term debt............. -- (241) (1,458)
Proceeds from loan............................... 56 -- --
------- ------- -------
Net cash (used in) provided by financing
activities....................................... 470 498 (2,343)
Net (decrease) increase in cash and cash
equivalents...................................... (113) 8 (346)
Cash and cash equivalents at beginning of
the period....................................... 546 433 441
------- ------- -------
Cash and cash equivalents at end of period......... $ 433 $ 441 $ 95
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest......................................... $ 116 $ 109 $ 82
======= ======= =======
Income taxes..................................... $ 567 $ 1,055 $ 1,301
======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-27
<PAGE> 88
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 27, 1996 AND MAY 3, 1997
(IN THOUSANDS)
1. NATURE OF BUSINESS
As of May 3, 1997 and for the year then ended (fiscal 1997), Wells
Electronics, Inc. ("the Company"), an Indiana Corporation, was a wholly owned
subsidiary of UL America, Inc., whose ultimate parent company, Siebe plc, is a
publicly held corporation based in the United Kingdom. On April 24, 1989, UL
America, Inc. acquired Wells Electronics, Inc., and for the eleven months ended
April 27, 1996 (fiscal 1996) and the year ending May 31, 1995 (fiscal 1995), the
Company was a wholly owned subsidiary of UL America, Inc.
The Company has two subsidiaries: Wells Electronics Asia Pte Ltd. in
Singapore ("Wells Asia") which is a wholly owned subsidiary and Wells Japan Ltd.
("Wells Japan") in Japan which is approximately 98% owned by the Company. The
remaining 2% is owned by a Japanese corporation.
The Company is principally engaged in designing, developing, manufacturing
and marketing a broad line of burn-in/test sockets and plastic carriers for the
global semiconductor industry. These products are employed in the handling and
quality assurance phase of semiconductor manufacturing.
The Company's ultimate parent, Unitech plc, was acquired by Siebe plc, on
May 2, 1996. Following the acquisition, a new basis of accounting was applied.
The fair market revaluation of the Company's assets and liabilities resulted in
an acquisition adjustment of $8,255, net of the related deferred tax liability
of $5,962. As a result of the acquisition, property, plant and equipment was
written up to appraised fair market value of $8,535 (net historical cost was
$4,319). Additionally, trademarks and software were written up to appraised fair
market value of $10,001 (net historical cost was $0) and goodwill of $708 was
retained. There were no other significant accounting adjustments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Wells
Electronics, Inc. and its subsidiaries. Significant intercompany balances and
transactions have been eliminated.
The consolidated financial statements are prepared in accordance with
United States generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. The most significant estimates included in these financial
statements are allowance for uncollectible accounts, inventory reserves, and
warranty reserves.
There are 52, 48, and 53 weeks in fiscal 1995, 1996 and 1997, respectively,
due to the change in the fiscal year end subsequent to the Siebe plc
acquisition.
Revenue Recognition
Sales and related cost of sales are recognized upon shipment of products to
customers.
F-28
<PAGE> 89
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company provides credit to customers in the normal course of business.
Collateral is not required for trade receivables, but ongoing credit evaluations
of customers' financial condition are performed. Additionally, the Company
maintains reserves for potential credit losses. As of April 27, 1996 and May 3,
1997 the Company had no significant receivable write-offs. The Company operates
in a single segment of the semiconductor industry.
Research and Development
Research and development costs are charged to expense as incurred.
Inventories
Inventories are stated at the lower of cost or market. The inventories are
valued at standard cost which approximates the first-in, first-out (FIFO) cost
method. Certain inventories are valued at the moving average cost method.
Property, Plant and Equipment
For fiscal 1995 and 1996, property, plant and equipment are stated on the
basis of cost. For fiscal 1997, property, plant and equipment are stated at fair
value based upon independent appraisal. Equipment under capital leases is stated
at the present value of minimum lease payments at the inception of the lease.
Material, labor and overhead costs associated with the manufacture of molds
are capitalized and classified as tooling. Acquisition cost is used to cost
molds which are purchased from outside vendors.
Depreciation is provided using the straight-line method over the estimated
useful lives of depreciable properties as follows: buildings and improvements,
10 to 33 years; machinery and equipment, 7 to 13 years; and tooling, 2 to 6
years.
Equipment held under capital leases and lease improvements are amortized
using the straight-line method over the shorter of the lease term or estimated
useful life of the asset.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the financial statement
bases and the tax bases of the Company's assets and liabilities using enacted
statutory tax rates applicable to future years.
Intangible Assets
The straight-line method is used to amortize intangible assets. The
goodwill and trademarks are amortized to expense over 20 years and computer
software is amortized over 6 years.
F-29
<PAGE> 90
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currency Translation
The accounts of foreign subsidiaries are measured using local currency as
the functional currency. For those operations, assets and liabilities are
translated into US dollars at the end of period exchange rates and income and
expenses are translated at the average exchange rates. Net exchange gains or
losses resulting from such translation are excluded from net income and
accumulated in a separate component of shareholder's equity.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of, during fiscal 1997. This
statement requires that long-lived assets, including associated goodwill, and
certain identifiable intangibles to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. It also requires that long-lived assets and
certain intangible assets to be disposed be reported at the lower of carrying
amount or fair value less costs to sell. Adoption of this statement did not have
any impact on the Company's financial position, results of operations, or
liquidity.
Net Income Per Common Share
Net income per common share is computed using the weighted average number
of shares of common stock outstanding.
3. FOREIGN OPERATIONS
The Company's net income is affected by foreign currency exchange (gains)
losses resulting from translating foreign currency denominated trade receivables
and payables of Wells Japan and Wells Asia and other realized and unrealized
foreign currency (gains) losses.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Raw material and supplies................................ $1,463 $ 778
Work in process.......................................... 349 223
Finished goods........................................... 1,634 1,539
------ ------
$3,446 $2,540
====== ======
</TABLE>
F-30
<PAGE> 91
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1997
-------- -------
<S> <C> <C>
Land.................................................. $ 165 $ --
Buildings and improvements............................ 1,467 171
Machinery and equipment............................... 5,480 4,186
Tooling............................................... 9,374 5,499
Construction in progress.............................. 480 576
-------- -------
16,966 10,432
Less accumulated depreciation......................... (12,647) (1,208)
-------- -------
$ 4,319 $ 9,224
======== =======
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1996 1997
---- -------
<S> <C> <C>
Goodwill.................................................. $708 $ 708
Computer software......................................... 6 349
Trademarks................................................ -- 9,674
---- -------
714 10,731
Less accumulated amortization............................. -- (574)
---- -------
$714 $10,157
==== =======
</TABLE>
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Compensation and benefits................................ $1,013 $1,038
Income taxes payable..................................... 22 605
Product warranty......................................... 100 300
Other accrued liabilities................................ 873 726
------ ------
$2,008 $2,669
====== ======
</TABLE>
8. DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1997
------ ----
<S> <C> <C>
Line of credit............................................. $1,108 $214
Current maturities of long-term debt....................... 45 54
------ ----
Total short-term debt.................................... $1,153 $268
====== ====
</TABLE>
Wells Japan has a Y125 million (approximately $985 at May 3, 1997) line of
credit with a Japanese bank that was guaranteed by its ultimate parent. The
interest rate at May 1997 was 2.375% per annum.
F-31
<PAGE> 92
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1997
------ ----
<S> <C> <C>
Bank loan................................................... $1,400 $--
Capital lease obligation.................................... 103 54
------ ---
Total long-term debt.............................. 1,503 54
Less current maturities..................................... 45 54
------ ---
$1,458 $--
====== ===
</TABLE>
The outstanding bank loan balance of $1,400 as of 1996 represents
borrowings against the Company's revolving line of credit. The line was repaid
in January 1997 and the interest rate at the time of repayment was 7% per annum.
Subsequent to the repayment the line was cancelled.
9. INCOME TAX EXPENSE
Components of income tax expense (benefit) consist of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
1995:
Federal..................................... $ 535 $(49) $ 486
State and local............................. 155 -- 155
Foreign..................................... 157 -- 157
------ ---- ------
$ 847 $(49) $ 798
====== ==== ======
1996:
Federal..................................... $ 358 $(30) $ 328
State and local............................. 109 -- 109
Foreign..................................... 149 -- 149
------ ---- ------
$ 616 $(30) $ 586
====== ==== ======
1997:
Federal..................................... $1,370 $ 43 $1,413
State and local............................. 353 -- 353
Foreign..................................... 196 7 203
------ ---- ------
$1,919 $ 50 $1,969
====== ==== ======
</TABLE>
Actual income tax expense differs from the amounts computed by applying the
enacted US federal corporate rate to income before income taxes as a result of
the following:
<TABLE>
<CAPTION>
1995 1996 1997
---- ----- ------
<S> <C> <C> <C>
Federal income tax expense at statutory rate............. $558 $ 965 $2,190
Increase (decrease) resulting from:
Foreign tax rate differential.......................... (35) (50) 2
Reduction of valuation allowance....................... -- (299) (499)
Foreign subsidiary losses.............................. 144 -- --
State income taxes, net................................ 102 72 233
Other, net............................................. 29 (102) 43
---- ----- ------
$798 $ 586 $1,969
==== ===== ======
</TABLE>
F-32
<PAGE> 93
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of temporary differences that give rise to deferred tax
(assets) and liabilities follow:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Deferred tax assets:
Inventories -- principally obsolescence................... $ 215 $ 201
Bad debts................................................. 38 36
Other -- principally accruals............................. 294 334
Net operating loss carryforward........................... 499 --
------ ------
Total deferred tax assets......................... 1,046 571
Valuation allowance............................... (499) --
------ ------
Net deferred tax assets........................... 547 571
------ ------
Deferred tax liabilities:
Property, plant & equipment............................... 10 1,828
Capital lease............................................. 131 148
Intangible assets......................................... -- 4,200
Other..................................................... 8 9
------ ------
Total deferred tax liabilities.................... 149 6,185
------ ------
Net deferred tax liability (asset)................ $ (398) $5,614
====== ======
</TABLE>
10. LEASES
The company leases certain of its manufacturing facilities, sales offices
and equipment. Some leases include provisions for renewals and purchases at the
Company's option.
Rental expense for all operating leases approximated $233, $241 and $562 in
fiscal year 1995, 1996 and 1997, respectively.
Future minimum operating lease payments consist of the following at May 3,
1997:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1998........................................................ $ 619
1999........................................................ 615
2000........................................................ 564
2001........................................................ 511
2002........................................................ 499
Thereafter.................................................. 1,738
------
Total minimum lease payments................................ $4,546
======
</TABLE>
11. PROFIT SHARING AND RETIREMENT PLANS
The Company has adopted a Plan ("401(k) Plan") pursuant to Section 401 of
the Internal Revenue Code. Salaried employees may contribute a percentage of
their compensation to the 401(k) Plan, but not in excess of the maximum allowed
under the Code. Salaried employees are eligible for participation at their one
year anniversary. The Company makes matching contributions of 25 percent of
employee contributions but not in excess of the maximum allowed under the Code.
In addition to any Employer 401(k) Contribution discussed above, the Company in
any Plan Year, to
F-33
<PAGE> 94
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the extent it has Net Profits or retained earnings, may make additional matching
Employer 401(k) Contributions to the extent it deems appropriate at its complete
discretion.
Effective February 19, 1997, the Company adopted a Retirement Income Plan
for the hourly employees whereby the Company will make a contribution of $0.19
per hour for all hours worked into a retirement income plan, with the employees
contributing a matching amount. The contribution will increase to $0.20 and
$0.22 per all hours worked effective February 19, 1998 and 1999, respectively.
The employee matching contribution will increase accordingly.
The Company's combined matching contributions for the 401(k) Plan and
Retirement Income Plan were approximately $61, $63 and $67 in 1995, 1996 and
1997, respectively.
12. RELATED PARTY TRANSACTIONS
The Company was charged with corporate management fees of $272 in 1995,
$193 in 1996, and $25 in 1997. Non-interest bearing long-term receivable due
from affiliates was $3,231 at May 3, 1997. This consists of $2,550 from Siebe
Inc. and $681 from UL America, Inc.
13. COMMITMENTS AND CONTINGENCIES
The Company has been party to ongoing litigation with Wayne K. Pfaff and an
affiliated corporation regarding alleged patent infringements. Subsequent to the
balance sheet date, the Federal Circuit Court of Appeals found in favor of the
Company. Management believes that the likelihood of any future liability in this
regard is remote and as such, has established no provision.
14. SUBSEQUENT EVENT
On November 17, 1997, UL America, Inc. agreed to sell all of the Company's
issued and outstanding shares of common stock to PCD Inc. The purchase price of
this transaction is $130 million.
15. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in the integrated circuit connector industry which is
a single industrial segment. One customer accounted for approximately 18%, 15%
and 18% of the Company's sales in 1995, 1996 and 1997, respectively. The Company
had no other single customer with sales greater than 10% of total sales.
F-34
<PAGE> 95
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sales between geographic areas are at cost plus approximately 50% mark-up.
The Company has significant operations in foreign countries. Information
regarding operations by geographic area for fiscal 1995, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
FAR
USA EAST
------- ------
<S> <C> <C>
Fiscal 1995:
Net Sales................................................. $12,900 $5,679
Operating income.......................................... 572 1,003
Identifiable assets....................................... 7,001 3,785
Fiscal 1996:
Net Sales................................................. $10,049 $7,949
Operating income.......................................... 735 1,368
Identifiable assets....................................... 7,302 5,903
Fiscal 1997:
Net Sales................................................. $17,528 $9,964
Operating income.......................................... 3,749 1,804
Identifiable assets....................................... 22,734 7,378
</TABLE>
16. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) FOR THE:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWO MONTHS
--------------------------- ENDED
APR 27, JAN 27, OCT 28, JUL 29,
Fiscal 1996: ------- ------- ------- ----------
<S> <C> <C> <C> <C>
Net Sales...................................... $4,261 $4,635 $5,918 $3,184
Gross profit................................... 2,036 2,049 3,026 1,616
Net income..................................... 647 424 957 224
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
MAY 3, FEB 1, OCT 26, JUL 27,
Fiscal 1997: ------ ------ ------- ----------
<S> <C> <C> <C> <C>
Net Sales...................................... $8,767 $7,471 $5,284 $5,970
Gross profit................................... 3,605 4,609 2,816 3,281
Net income..................................... 2,189 1,178 412 588
</TABLE>
F-35
<PAGE> 96
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Wells Electronics, Inc.:
We have audited the accompanying consolidated balance sheet of Wells
Electronics, Inc. and subsidiaries as of December 26, 1997 and the related
consolidated statement of income, shareholder's equity and cash flows for the 34
weeks ended December 26, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wells
Electronics, Inc. and subsidiaries as of December 26, 1997 and the results of
their operations and their cash flows for the 34 weeks then ended in conformity
with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Chicago, Illinois
February 4, 1998, except for note 11 which is as of March 9, 1998
F-36
<PAGE> 97
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 (UNAUDITED)
AND DECEMBER 26, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNAUDITED
DEC. 31, DEC. 26,
1996 1997
--------- --------
<S> <C> <C>
ASSETS
Cash & cash equivalents..................................... $ 784 $ 827
Accounts receivable -- trade................................ 3,380 4,251
Allowance for uncollectible accounts........................ (95) (100)
Inventory................................................... 2,585 1,879
Prepaid expenses and other current assets................... 553 495
Deferred tax assets......................................... 425 758
------- -------
Total current assets.............................. 7,632 8,110
Property, plant and equipment, net.......................... 8,590 9,501
Intangible assets, net...................................... 10,327 9,746
Other assets................................................ 831 185
------- -------
Total assets...................................... $27,380 $27,542
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current portion of capital lease debt....................... $ 1,376 $ 18
Accounts payable -- trade................................... 2,410 2,997
Accrued expenses and other current liabilities.............. 1,725 4,338
------- -------
Total current liabilities......................... 5,511 7,353
Long-term debt.............................................. 21
Deferred tax liabilities.................................... 5,962 6,311
Minority interest........................................... -- 37
------- -------
Total liabilities................................. $11,494 $13,701
------- -------
SHAREHOLDER'S EQUITY
Common stock, $10 par value; 13,500 authorized shares;
issued 7,825 shares....................................... $ 78 $ 78
Additional paid-in capital.................................. 14,510 14,510
Retained earnings (deficit)................................. 1,514 (371)
Foreign currency translation adjustments.................... (216) (376)
------- -------
Total shareholder's equity........................ 15,886 13,841
------- -------
Commitment and contingencies................................ --
Total liabilities and shareholder's equity........ $27,380 $27,542
======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-37
<PAGE> 98
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE 35 WEEKS ENDED DECEMBER 31, 1996 (UNAUDITED)
AND 34 WEEKS ENDED DECEMBER 26, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNAUDITED
DEC. 31, 96 DEC. 26, 97
----------- -----------
<S> <C> <C>
Net sales................................................... $15,497 $29,268
Cost of sales............................................... 8,497 10,261
------- -------
Gross profit...................................... 7,000 19,007
Operating expenses.......................................... 5,246 7,423
------- -------
Income from operations............................ 1,754 11,584
Non-operating income(expense):
Interest expense............................................ (84) (4)
Royalty income.............................................. 386 485
Minority interest........................................... -- (34)
Other income................................................ 56 73
Foreign exchange loss....................................... -- (190)
------- -------
Total non-operating income........................ 358 330
------- -------
Income before income taxes.................................. 2,112 11,914
Provision for income taxes.................................. 598 5,645
------- -------
Net income........................................ $ 1,514 $ 6,269
======= =======
Earnings per share.......................................... $193.48 $801.15
======= =======
Average number of shares.................................... 7,825 7,825
======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-38
<PAGE> 99
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
FOR 34 WEEKS ENDED DECEMBER 26, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
------------------ PAID-IN RETAINED TRANSLATION TOTAL
SHARES PAR VALUE CAPITAL DEFICIT ADJUSTMENTS EQUITY
------ --------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 3, 1997............ 7,825 $78 $14,510 $ 4,367 $(314) $ 18,641
Net income...................... 6,269 6,269
Dividend........................ (11,007) (11,007)
Net change, foreign currency
translation adjustment........ (62) (62)
----- --- ------- -------- ----- --------
Balance, December 26, 1997...... 7,825 $78 $14,510 $ (371) $(376) $ 13,841
===== === ======= ======== ===== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-39
<PAGE> 100
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR 35 WEEKS ENDED DECEMBER 31, 1996 (UNAUDITED)
AND 34 WEEKS ENDED DECEMBER 26, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
---------
DEC 27, DEC 26,
1996 1997
--------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 1,514 $ 6,269
------- -------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 1,517 1,448
Loss on disposition of equipment.......................... -- 45
Effect of changes in foreign currency..................... (216)
Benefit from deferred taxes............................... (27) (61)
Changes in operating assets and liabilities:
Decrease in net accounts receivable.................... 458 265
Decrease in inventory.................................. 861 661
Increase in prepaid expenses and other current
assets................................................ (78) (80)
Increase in other assets............................... (215) (50)
(Decrease) increase in due from affiliate.............. (11) 3,231
Decrease in accounts payable........................... (391) (19)
Increase (decrease) in current liabilities............. (283) 1,669
Increase in other liabilities.......................... -- 31
------- -------
Total adjustments................................. 1,615 7,140
Net cash provided by operating activities................... 3,129 13,409
Cash flows from investing activities:
Capital expenditures...................................... (1,572) (1,433)
Proceeds from sale of fixed assets........................ -- 13
------- -------
Net cash used in investing activities....................... (1,572) (1,420)
Cash flow from financing activities:
Net payments of short-term debt........................... (1,214) (250)
Dividend.................................................. -- (11,007)
------- -------
Net cash used in financing activities....................... (1,214) (11,257)
Net increase in cash and cash equivalents................... 343 732
Cash and cash equivalents at beginning of the period........ 441 95
------- -------
Cash and cash equivalents at end of period.................. $ 784 $ 827
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $88 $4
======= =======
Income taxes........................................... $419 $4,617
======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-40
<PAGE> 101
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1997
(IN THOUSANDS)
1. NATURE OF BUSINESS
Wells Electronics, Inc. ("the Company"), an Indiana Corporation, was a
wholly owned subsidiary of UL America, Inc., whose ultimate parent company,
Siebe plc, is a publicly held corporation based in the United Kingdom.
The Company has two subsidiaries: Wells Electronics Asia Pte Ltd. in
Singapore ("Wells Asia") which is a wholly owned subsidiary and Wells Japan Ltd.
("Wells Japan") in Japan which is approximately 98% owned by the Company. The
remaining 2% is owned by a Japanese corporation.
The Company is principally engaged in designing, developing, manufacturing
and marketing a broad line of burn-in/test sockets and plastic carriers for the
global semiconductor industry. These products are employed in the handling and
quality assurance phase of semiconductor manufacturing.
UL America, Inc.'s ultimate parent, Unitech plc, was acquired by Siebe plc,
on May 2, 1996. Following the acquisition, a new basis of accounting was
applied. The fair market revaluation of the Company's assets and liabilities
resulted in an acquisition adjustment of $8,255, net of the related deferred tax
liability of $5,962. As a result of the acquisition, property, plant and
equipment was written up to appraised fair market value of $8,535 (net
historical cost was $4,319). Additionally, trademarks and software were written
up to appraised fair market value of $10,001 (net historical cost was $0) and
goodwill of $708 was retained. There were no other significant accounting
adjustments.
On December 26, 1997, UL America, Inc. sold all of the Company's issued and
outstanding shares of common stock to PCD Inc. The purchase price of this
transaction was $130 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Wells
Electronics, Inc. and its subsidiaries. Significant intercompany balances and
transactions have been eliminated. The consolidated financial statements are
prepared in accordance with United States generally accepted accounting
principles. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant estimates included in these financial statements are allowance for
uncollectible accounts, inventory reserves, and warranty reserves.
Revenue Recognition
Sales and related cost of sales are recognized upon shipment of products to
customers.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
F-41
<PAGE> 102
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company provides credit to customers in the normal course of business.
Collateral is not required for trade receivables, but ongoing credit evaluations
of customers' financial condition are performed. Additionally, the Company
maintains reserves for potential credit losses. As of December 26, 1997 the
Company had no significant receivable write-offs. The Company operates in a
single segment of the semiconductor industry.
Research and Development
Research and development costs are charged to expense as incurred.
Inventories
Inventories are stated at the lower of cost or market. The inventories are
valued at standard cost which approximates the first-in, first-out (FIFO) cost
method. Certain inventories are valued at the moving average cost method.
Property, Plant and Equipment
Property, plant and equipment acquired on May 2, 1996 are stated at fair
value based upon independent appraisal. Subsequent additions are recorded at
cost. Equipment under capital leases is stated at the present value of minimum
lease payments at the inception of the lease.
Material, labor and overhead costs associated with the manufacture of molds
are capitalized and classified as tooling. Acquisition cost is used to cost
molds which are purchased from outside vendors.
Depreciation is provided using the straight-line method over the estimated
useful lives of depreciable properties as follows: buildings and improvements,
10 to 33 years; machinery and equipment, 7 to 13 years; and tooling, 2 to 6
years.
Equipment held under capital leases and lease improvements are amortized
using the straight-line method over the shorter of the lease term or estimated
useful life of the asset.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the financial statement
bases and the tax bases of the Company's assets and liabilities using enacted
statutory tax rates applicable to future years.
Intangible Assets
The straight-line method is used to amortize intangible assets. The
goodwill and trademarks are amortized to expense over 20 years and computer
software is amortized over 6 years.
Foreign Currency Translation
The accounts of foreign subsidiaries are measured using local currency as
the functional currency. For those operations, assets and liabilities are
translated into US dollars at the end of period exchange rates and income and
expenses are translated at the average exchange rates. Net exchange gain or
losses resulting from such translation are excluded from net income and
accumulated in a separate component of shareholder's equity.
F-42
<PAGE> 103
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income Per Common Share
Net income per common share is computed using the weighted average number
of shares of common stock outstanding.
3. FOREIGN OPERATIONS
The Company's net income is affected by foreign currency exchange (gains)
losses resulting from translating foreign currency denominated trade receivables
and payables of Wells Japan and Wells Asia and other realized and unrealized
foreign currency (gains) losses.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C>
Raw material and supplies................................... $1,249
Work in process............................................. 258
Finished goods.............................................. 372
------
$1,879
======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<S> <C>
Buildings and improvements.................................. $ 245
Machinery and equipment..................................... 4,759
Tooling..................................................... 6,721
Construction in progress.................................... 249
-------
11,974
Less accumulated depreciation............................... (2,473)
-------
$ 9,501
=======
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<S> <C>
Goodwill.................................................... $ 708
Computer software........................................... 327
Trademarks.................................................. 9,674
-------
10,709
Less accumulated amortization............................... (963)
-------
$ 9,746
=======
</TABLE>
F-43
<PAGE> 104
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<S> <C>
Compensation and benefits................................... $1,027
Income taxes payable........................................ 2,666
Product warranty............................................ 502
Other accrued liabilities................................... 143
------
$4,338
======
</TABLE>
8. INCOME TAX EXPENSE
Components of income tax expense (benefit) consist of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Federal....................................... $2,843 $ 80 $2,923
State and local............................... 701 -- 701
Foreign....................................... 2,230 (209) 2,021
------ ----- ------
$5,774 $(129) $5,645
====== ===== ======
</TABLE>
Actual income tax expense differs from the amounts computed by applying the
enacted US federal corporate rate to income before income taxes as a result of
the following:
<TABLE>
<S> <C>
Federal income tax expense at statutory rate................ $4,051
Increase resulting from:
Foreign tax rate differential............................. 772
State income taxes, net................................... 463
Other, net................................................ 359
------
$5,645
======
</TABLE>
The tax effect of temporary differences that give rise to deferred tax
assets and liabilities follow:
<TABLE>
<S> <C>
Deferred tax assets:
Inventories -- principally obsolescence................... $ 280
Warranty accruals......................................... 300
Compensation and benefit accruals......................... 142
Bad debts................................................. 36
------
Net deferred tax assets........................... 758
------
Deferred tax liabilities:
Property, plant & equipment............................... 2,075
Intangible assets......................................... 4,084
Other..................................................... 152
------
Total deferred tax liabilities.................... 6,311
------
Net deferred tax liability........................ $5,553
======
</TABLE>
9. LEASES
The company leases certain of its manufacturing facilities, sales offices
and equipment. Some leases include provisions for renewals and purchases at the
Company's option.
F-44
<PAGE> 105
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rental expense for all operating leases approximated $453 for the 34 weeks
ended December 26, 1997
Future minimum operating lease payments consist of the following at
December 26, 1997:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998........................................................ $ 563
1999........................................................ 435
2000........................................................ 342
2001........................................................ 335
2002........................................................ 327
Thereafter.................................................. 1,563
------
Total minimum lease payments................................ $3,565
======
</TABLE>
10. PROFIT SHARING AND RETIREMENT PLANS
The Company has adopted a Plan ("401(k) Plan") pursuant to Section 401 of
the Internal Revenue Code. Salaried employees may contribute a percentage of
their compensation to the 401(k) Plan, but not in excess of the maximum allowed
under the Code. Salaried employees are eligible for participation at their one
year anniversary. The Company makes matching contributions of 25 percent of
employee contributions but not in excess of the maximum allowed under the Code.
In addition to any Employer 401(k) Contribution discussed above, the Company in
any Plan Year, to the extent it has Net Profits or retained earnings, may make
additional matching Employer 401(k) Contributions to the extent it deems
appropriate at its complete discretion.
The Company has also adopted a Retirement Income Plan for the hourly
employees whereby the Company will make a contribution of $0.19 per hour for all
hours worked into a retirement income plan, with the employees contributing a
matching amount. The contribution will increase to $0.20 and $0.22 per all hours
worked effective February 19, 1998 and 1999, respectively. The employee matching
contribution will increase accordingly.
The Company's combined matching contributions for the 401(k) Plan and
Retirement Income Plan were approximately $72, for the 34 weeks ended December
26, 1997.
11. COMMITMENTS AND CONTINGENCIES
The Company has been party to ongoing litigation with Wayne K. Pfaff and an
affiliated corporation regarding alleged patent infringement.
In litigation between Wells and Pfaff concerning the Pfaff Leadless Patent,
the United States Court of Appeals for the Federal Circuit has found all of the
individual descriptions of the invention (the "Claims" of the patent) of the
Pfaff Leadless Patent which were at issue in that case to be invalid. Certain
other Claims of the patent were not an issue in that case, and their validity
was not decided by the court, because Pfaff did not allege that products of
Wells infringed such Claims. In March, 1998, the United States Supreme Court
accepted an appeal on that case. Unless overturned, the Court of Appeals
decision as to the invalidity of such Claims of the Pfaff Leadless Patent will
be binding.
The Company believes, based on the advice of counsel, that the Company has
meritorious defenses against any allegations of infringement under the Pfaff
Patents, and, if necessary, the Company will vigorously litigate their
positions. There can be no assurance, however, that the Company will prevail in
any pending or future litigation, and a final court determination that the
F-45
<PAGE> 106
WELLS ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company has infringed the Pfaff Leadless Patent could have a material adverse
effect on the Company. Such adverse effect could include, without limitation,
the requirement that the Company pay substantial damages for past infringement
and an injunction against the manufacture or sale in the United States of such
products as are found to be infringing.
12. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in the integrated circuit connector industry which is
a single industrial segment. There were three customers who accounted for
approximately 30%, 12% and 11% of the Company's sales during the 34 weeks ended
December 26, 1997. The Company had no other single customer with sales greater
than 10% of total sales.
Sales between geographic areas are at cost plus approximately 50% mark-up.
The Company has significant operations in foreign countries. Information
regarding operations by geographic area for the 34 weeks ended December 26, 1997
is as follows:
<TABLE>
<CAPTION>
USA FAR EAST
------- --------
<S> <C> <C>
Net sales.............................................. $16,402 $12,866
Operating income....................................... 6,701 4,883
Identifiable assets.................................... 19,573 7,319
</TABLE>
13. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) FOR THE:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWO MONTHS
----------------------- ENDED
FISCAL 1998: AUGUST 2, NOVEMBER 1, JULY 29,
------------ --------- ----------- ----------
<S> <C> <C> <C>
Net Sales................................. $13,059 $9,675 $6,500
Gross Profit.............................. 8,207 6,414 4,027
Net Income(loss).......................... 3,308 2,629 (725)
</TABLE>
F-46
<PAGE> 107
Inside back cover: [color work: "PCD Electronic Connectors" in the bottom right
corner of page. Graphics showing three IC package interconnects connected with a
circular line. Text in bottom right corner reads "On December 26, 1997, PCD Inc.
completed the acquisition of Wells Electronics, Inc. In combining the existing
burn-in business of PCD and that of Wells, the Company now supports complete
design, development, manufacturing and marketing of test and burn-in sockets in
two of the world's largest IC package interconnect markets -- the United States
and Japan."]
<PAGE> 108
======================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 15
Price Range of Common Stock........... 16
Dividend Policy....................... 16
Capitalization........................ 17
Unaudited Pro Forma Condensed
Consolidated Statement of
Operations.......................... 18
Selected Consolidated Financial
Data................................ 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 30
Management............................ 42
Certain Transactions.................. 47
Principal Stockholders................ 49
Description of Capital Stock.......... 51
Underwriting.......................... 55
Legal Matters......................... 56
Experts............................... 56
Additional Information................ 57
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
======================================================
======================================================
2,000,000 SHARES
[PCD LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
ADAMS, HARKNESS & HILL, INC.
A.G. EDWARDS & SONS, INC.
, 1998
======================================================
<PAGE> 109
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the
Company in connection with the sale of the Common Stock being registered hereby.
All the amounts shown are estimated, except the SEC registration fee, the NASD
filing fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 13,740
NASD filing fee............................................. 5,158
Nasdaq listing fee.......................................... 17,500
Blue Sky fee and expenses................................... 10,000
Printing and engraving expenses............................. 100,000
Legal fees and expenses..................................... 180,000
Auditors' accounting fees and expenses...................... 165,000
Miscellaneous expenses...................................... 58,602
-------------
Total............................................. $ 550,000
=============
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Massachusetts General Laws, Chapter 156B, Section 67, empowers a
Massachusetts corporation to indemnify any person in connection with any action,
suit or proceeding brought or threatened by reason of the fact that such person
is or was a director, officer, employee or agent of the corporation or was
serving as such with respect to another corporation or other entity at the
request of such corporation, unless such person shall have been adjudicated in
any proceeding not to have acted in good faith in the reasonable belief that
such action was in the best interests of the Company. The Company's Articles of
Organization, as amended and restated, contain provisions that require the
Company to indemnify its directors and officers to the fullest extent permitted
by Massachusetts law.
Reference is made to the Underwriting Agreement (filed as Exhibit 1.1
hereto) which provides for indemnification arrangements by and among the
Company, its directors or officers and the Underwriters in the offering of the
Common Stock registered hereby, and each person, if any, who controls the
Company or the Underwriters, for certain liabilities, including liabilities
arising under the Securities Act of 1933, as amended (the "Securities Act").
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1995, the Company has issued the following securities that
were not registered under the Securities Act:
On December 26, 1997, the Company issued to Emerson Electric Co. a
subordinated debenture with a principal amount of $25 million (convertible under
certain circumstances into Common Stock) and Common Stock purchase warrants for
the purchase of up to 525,000 shares of Common Stock at an exercise price of
$1.00 per share.
Between January 1, 1995 and July 1, 1996, the Company issued an aggregate
of 62,800 shares of Common Stock to persons who were employees or directors of
the Company upon exercise of stock options previously granted, at an exercise
price of $1.15 per share.
No underwriters were engaged in connection with the foregoing sales of
securities. Such sales were made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act or Rule 701
promulgated thereunder.
II-1
<PAGE> 110
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement by and among Registrant and
the Underwriters.
2.1++ -- Share Purchase Agreement among UL America, Inc., Wells
Electronics, Inc. and PCD Inc. dated as of November 17,
1997.
2.2++ -- Undertaking to Furnish Copies of Omitted Schedules to Share
Purchase Agreement dated as of November 17, 1997.
3.1* -- Restated Articles of Organization of Registrant effective
March 22, 1996.
3.2* -- By-Laws of Registrant, as amended, effective April 1, 1996.
4.1* -- Articles 3, 4, 5 and 6 of the Restated Articles of
Organization of Registrant (included in Exhibit 3.1).
4.2* -- Specimen Stock Certificate.
5.1(-) -- Opinion of Hill & Barlow, a Professional Corporation, as to
the legality of the shares being registered.
10.1++ -- Loan Agreement between PCD Inc. and Fleet National Bank
dated as of December 26, 1997.
10.2++ -- Unlimited Guaranty from Wells Electronics, Inc. to Fleet
National Bank dated as of December 26, 1997.
10.3++ -- Security Agreement between PCD Inc. and Fleet National Bank
dated as of December 26, 1997.
10.4++ -- Security Agreement between Wells Electronics, Inc. and Fleet
National Bank dated as of December 26, 1997.
10.5++ -- Stock Pledge Agreement between PCD Inc. and Fleet National
Bank dated as of December 26, 1997.
10.6++ -- Stock Pledge Agreement between Wells Electronics, Inc. and
Fleet National Bank dated as of December 26, 1997.
10.7++ -- Conditional Patent Assignment from PCD Inc. to Fleet
National Bank dated as of December 26, 1997.
10.8++ -- Conditional Patent Assignment from Wells Electronics, Inc.
to Fleet National Bank dated as of December 26, 1997.
10.9++ -- Conditional Patent Assignment from Wells Japan Kabushiki
Kaisha to Fleet National Bank dated as of December 26, 1997.
10.10++ -- Conditional Trademark Collateral Assignment from PCD Inc. to
Fleet National Bank dated as of December 26, 1997.
10.11++ -- Conditional Trademark Collateral Assignment from Wells
Electronics, Inc. to Fleet National Bank dated as of
December 26, 1997.
10.12++ -- Collateral Assignment of Contracts, Leases, Licenses and
Permits from PCD Inc. to Fleet National Bank dated as of
December 26, 1997.
10.13++ -- Collateral Assignment of Contracts, Leases, Licenses and
Permits from Wells Electronics, Inc. to Fleet National Bank
dated as of December 26, 1997.
10.14++ -- Undertaking to Furnish Copies of Omitted Exhibits and
Schedules to Loan Agreement and Related Documents dated as
of December 26, 1997.
10.15++ -- Subordinated Debenture and Warrant Purchase Agreement
between PCD Inc. and Emerson Electric Co. dated as of
December 26, 1997.
10.16++ -- Subordinated Debenture issued to Emerson Electric Co. dated
December 26, 1997.
10.17++ -- Common Stock Purchase Warrant issued to Emerson Electric Co.
dated December 26, 1997.
10.18++ -- Registration Rights Agreement between PCD Inc. and Emerson
Electric Co. dated as of December 26, 1997.
10.19++ -- Subordination Agreement among PCD Inc., Emerson Electric Co.
and Fleet National Bank dated as of December 26, 1997.
</TABLE>
II-2
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C> <C>
10.20++ -- Undertaking to Furnish Copies of Omitted Exhibits to
Subordinated Debenture and Warrant Purchase Agreement dated
as of December 26, 1997.
10.21* -- Lease dated June 29, 1987, between Centennial Park
Associates Realty Trust II and the Company, for premises
located at Two Technology Drive, Centennial Park, Peabody,
Massachusetts.
10.22(-) -- Second Amendment to lease agreement dated July 15, 1993,
between Centennial Park Associates Limited Partnership III
and the Company.
10.23** -- Third Amendment to lease agreement dated as of June 25,
1996, between the Company and Centennial Park Associates
Limited Partnership III.
10.24* -- Lease dated May 1995, between CMD Southwest Four and CTi
Technologies, Inc., for premises located at 2102 W. Quail
Avenue, Phoenix, Arizona.
10.25(-) -- Lease dated September 21, 1995, between Blackthorn Area
Partners and Wells Electronics, Inc., for premises located
at 52940 Olive Road, South Bend, Indiana.
10.26(-) -- Amendment dated May 16, 1997 to Lease dated September 21,
1995, between Blackthorn Area Partners and Wells
Electronics, Inc., for premises located at 52940 Olive Road,
South Bend, Indiana.
10.27(-) -- Sublease dated October 10, 1992, between Daiwa House Kogyo
Co., Ltd and Wells Japan, Ltd. for premises located at
Paleana Building 2-2-15, Shin-Yokahama, Kohuku-Ku, Yokohama,
Japan (English translation).
10.28(-) -- Lease dated September 25, 1997, between United Building and
Leasing Corporation and Wells Electronics, Inc. for premises
located at 421 Amity Road, Swatara, Pennsylvania.
10.29* -- Registrant's 1992 Stock Option Plan and related forms of
stock option agreement.
10.30* -- Registrant's 1996 Stock Plan and related forms of stock
option agreement.
10.31* -- Registrant's 1996 Eligible Directors Stock Plan and related
form of stock option agreement.
10.32+ -- Form of option agreements for the 1996 Stock Plan.
10.33+ -- Form of option agreement for the 1996 Eligible Directors
Stock Plan.
10.34* -- April 2, 1985 Stock Purchase Agreement and Amendment to
Stock Purchase Agreement dated March 31, 1983.
10.35(-) -- Collective Bargaining Agreement between Wells Electronics,
Inc. and Local Union 1392, International Brotherhood of
Electrical Workers, dated February 19, 1997.
10.36(-) -- Letter of Agreement dated September 18, 1995, between
International Assemblers, Inc. and CTi Technologies, Inc.
10.37(-) -- Letter Agreement with Richard J. Mullin, effective December
26, 1997.
10.38* -- Management Incentive Plan.
11.1 -- Statement re computation of per share earnings.
21.1(-) -- Subsidiaries of Registrant.
23.1 -- Consent of Coopers & Lybrand L.L.P., independent
accountants.
23.2 -- Consent of KPMG Peat Marwick, L.L.P., independent
accountants.
23.3(-) -- Consent of Hill & Barlow, a Professional Corporation
(included in Exhibit 5.1).
23.4 -- Consent of Brown & Bain, a Professional Association, special
litigation counsel.
23.5 -- Consent of Baker & Daniels, special litigation counsel.
24.1(-) -- Power of Attorney (included on signature page of
Registration Statement dated February 12, 1998).
27.1(-) -- Financial Data Schedule.
</TABLE>
- ---------------
* A copy has been previously filed with the Company's registration statement on
Form S-1 (Registration no. 333-1266), as filed on February 12, 1996 and
amended on March 15 and March 21, 1996, and is incorporated in this document
by reference.
II-3
<PAGE> 112
** A copy has been previously filed with the Company's annual report on Form
10-K (Commission file no. 0-27744), as filed on March 28, 1997, and is
incorporated in this document by reference.
+ A copy has been previously filed with the Company's quarterly report on Form
10-Q, (Commission file no. 0-27744), as filed on September 27, 1997, and is
incorporated in this document by reference.
++ A copy has been previously filed with the Company's current report on Form
8-K, (Commission file no. 0-27744), as filed on January 9, 1998, and is
incorporated in this document by reference.
(-) Previously filed.
b. Financial Statement Schedules.
None.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described in Item 14, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 113
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has duly caused this Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Boston, Commonwealth of Massachusetts on the 20th day of March, 1998.
PCD INC.
By: /s/ JOHN L. DWIGHT, JR.
------------------------------------
John L. Dwight, Jr.
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities indicated below on the 20th day of March,
1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JOHN L. DWIGHT, JR. Chairman of the Board, President, Chief Executive
- --------------------------------------------------- Officer and Director (Principal Executive
(John L. Dwight, Jr.) Officer)
/s/ MARY L. MANDARINO Chief Financial Officer, Vice President, Finance
- --------------------------------------------------- and Administration, and Treasurer (Principal
(Mary L. Mandarino) Financial and Accounting Officer)
/s/ BRUCE E. ELMBLAD Director
- ---------------------------------------------------
(Bruce E. Elmblad)
/s/ HAROLD F. FAUGHT Director
- ---------------------------------------------------
(Harold F. Faught)
/s/ C. WAYNE GRIFFITH Director
- ---------------------------------------------------
(C. Wayne Griffith)
/s/ THEODORE C. YORK Director
- ---------------------------------------------------
(Theodore C. York)
</TABLE>
II-5
<PAGE> 114
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ----------------------- ----
<S> <C> <C> <C>
1.1 -- Form of Underwriting Agreement by and among Registrant and
the Underwriters.
2.1++ -- Share Purchase Agreement among UL America, Inc., Wells
Electronics, Inc. and PCD Inc. dated as of November 17,
1997.
2.2++ -- Undertaking to Furnish Copies of Omitted Schedules to Share
Purchase Agreement dated as of November 17, 1997.
3.1* -- Restated Articles of Organization of Registrant effective
March 22, 1996.
3.2* -- By-Laws of Registrant, as amended, effective April 1, 1996.
4.1* -- Articles 3, 4, 5 and 6 of the Restated Articles of
Organization of Registrant (included in Exhibit 3.1).
4.2* -- Specimen Stock Certificate.
5.1(-) -- Opinion of Hill & Barlow, a Professional Corporation, as to
the legality of the shares being registered.
10.1++ -- Loan Agreement between PCD Inc. and Fleet National Bank
dated as of December 26, 1997.
10.2++ -- Unlimited Guaranty from Wells Electronics, Inc. to Fleet
National Bank dated as of December 26, 1997.
10.3++ -- Security Agreement between PCD Inc. and Fleet National Bank
dated as of December 26, 1997.
10.4++ -- Security Agreement between Wells Electronics, Inc. and Fleet
National Bank dated as of December 26, 1997.
10.5++ -- Stock Pledge Agreement between PCD Inc. and Fleet National
Bank dated as of December 26, 1997.
10.6++ -- Stock Pledge Agreement between Wells Electronics, Inc. and
Fleet National Bank dated as of December 26, 1997.
10.7++ -- Conditional Patent Assignment from PCD Inc. to Fleet
National Bank dated as of December 26, 1997.
10.8++ -- Conditional Patent Assignment from Wells Electronics, Inc.
to Fleet National Bank dated as of December 26, 1997.
10.9++ -- Conditional Patent Assignment from Wells Japan Kabushiki
Kaisha to Fleet National Bank dated as of December 26, 1997.
10.10++ -- Conditional Trademark Collateral Assignment from PCD Inc. to
Fleet National Bank dated as of December 26, 1997.
10.11++ -- Conditional Trademark Collateral Assignment from Wells
Electronics, Inc. to Fleet National Bank dated as of
December 26, 1997.
10.12++ -- Collateral Assignment of Contracts, Leases, Licenses and
Permits from PCD Inc. to Fleet National Bank dated as of
December 26, 1997.
10.13++ -- Collateral Assignment of Contracts, Leases, Licenses and
Permits from Wells Electronics, Inc. to Fleet National Bank
dated as of December 26, 1997.
10.14++ -- Undertaking to Furnish Copies of Omitted Exhibits and
Schedules to Loan Agreement and Related Documents dated as
of December 26, 1997.
10.15++ -- Subordinated Debenture and Warrant Purchase Agreement
between PCD Inc. and Emerson Electric Co. dated as of
December 26, 1997.
10.16++ -- Subordinated Debenture issued to Emerson Electric Co. dated
December 26, 1997.
10.17++ -- Common Stock Purchase Warrant issued to Emerson Electric Co.
dated December 26, 1997.
</TABLE>
<PAGE> 115
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ----------------------- ----
<S> <C> <C> <C>
10.18++ -- Registration Rights Agreement between PCD Inc. and Emerson
Electric Co. dated as of December 26, 1997.
10.19++ -- Subordination Agreement among PCD Inc., Emerson Electric Co.
and Fleet National Bank dated as of December 26, 1997.
10.20++ -- Undertaking to Furnish Copies of Omitted Exhibits to
Subordinated Debenture and Warrant Purchase Agreement dated
as of December 26, 1997.
10.21* -- Lease dated June 29, 1987, between Centennial Park
Associates Realty Trust II and the Company, for premises
located at Two Technology Drive, Centennial Park, Peabody,
Massachusetts.
10.22(-) -- Second Amendment to lease agreement dated July 15, 1993,
between Centennial Park Associates Limited Partnership III
and the Company.
10.23** -- Third Amendment to lease agreement dated as of June 25,
1996, between the Company and Centennial Park Associates
Limited Partnership III.
10.24* -- Lease dated May 1995, between CMD Southwest Four and CTi
Technologies, Inc., for premises located at 2102 W. Quail
Avenue, Phoenix, Arizona.
10.25(-) -- Lease dated September 21, 1995, between Blackthorn Area
Partners and Wells Electronics, Inc., for premises located
at 52940 Olive Road, South Bend, Indiana.
10.26(-) -- Amendment dated May 16, 1997 to Lease dated September 21,
1995, between Blackthorn Area Partners and Wells
Electronics, Inc., for premises located at 52940 Olive Road,
South Bend, Indiana.
10.27(-) -- Sublease dated October 10, 1992, between Daiwa House Kogyo
Co., Ltd and Wells Japan, Ltd. for premises located at
Paleana Building 2-2-15, Shin-Yokahama, Kohuku-Ku, Yokohama,
Japan (English translation).
10.28(-) -- Lease dated September 25, 1997, between United Building and
Leasing Corporation and Wells Electronics, Inc. for premises
located at 421 Amity Road, Swatara, Pennsylvania.
10.29* -- Registrant's 1992 Stock Option Plan and related forms of
stock option agreement.
10.30* -- Registrant's 1996 Stock Plan and related forms of stock
option agreement.
10.31* -- Registrant's 1996 Eligible Directors Stock Plan and related
form of stock option agreement.
10.32+ -- Form of option agreements for the 1996 Stock Plan.
10.33+ -- Form of option agreement for the 1996 Eligible Directors
Stock Plan.
10.34* -- April 2, 1985 Stock Purchase Agreement and Amendment to
Stock Purchase Agreement dated March 31, 1983.
10.35(-) -- Collective Bargaining Agreement between Wells Electronics,
Inc. and Local Union 1392, International Brotherhood of
Electrical Workers, dated February 19, 1997.
10.36(-) -- Letter of Agreement dated September 18, 1995, between
International Assemblers, Inc. and CTi Technologies, Inc.
10.37(-) -- Letter Agreement with Richard J. Mullin, effective December
26, 1997.
10.38* -- Management Incentive Plan.
11.1 -- Statement re computation of per share earnings.
21.1(-) -- Subsidiaries of Registrant.
23.1 -- Consent of Coopers & Lybrand L.L.P., independent
accountants.
23.2 -- Consent of KPMG Peat Marwick, L.L.P., independent
accountants.
23.3(-) -- Consent of Hill & Barlow, a Professional Corporation
(included in Exhibit 5.1).
</TABLE>
<PAGE> 116
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ----------------------- ----
<S> <C> <C> <C>
23.4 -- Consent of Brown & Bain, a Professional Association, special
litigation counsel.
23.5 -- Consent of Baker & Daniels, special litigation counsel.
24.1(-) -- Power of Attorney (included on signature page of
Registration Statement dated February 12, 1998).
27.1(-) -- Financial Data Schedule.
</TABLE>
- ---------------
* A copy has been previously filed with the Company's registration statement on
Form S-1 (registration no. 333-1266), as filed on February 12, 1996 and
amended on March 15 and March 21, 1996, and is incorporated in this document
by reference.
** A copy has been previously filed with the Company's annual report on Form
10-K (Commission file no. 0-27744), as filed on March 28, 1997, and is
incorporated in this document by reference.
+ A copy has been previously filed with the Company's quarterly report on Form
10-Q, (Commission file no. 0-27744), as filed on September 27, 1997, and is
incorporated in this document by reference.
++ A copy has been previously filed with the Company's current report on Form
8-K, (Commission file no. 0-27744), as filed on January 9, 1998, and is
incorporated in this document by reference.
(-) Previously filed.
<PAGE> 1
EXHIBIT 1.1
DRAFT OF 3/19/98
PCD Inc.
Common Stock
($.01 par value per share)
Underwriting Agreement
, 1998
Adams, Harkness & Hill, Inc.
A.G. Edwards & Sons, Inc.
As representatives of the several
Underwriters named in Schedule I hereto,
c/o Adams, Harkness & Hill, Inc.
60 State Street
Boston, Massachusetts 02109
Dear Sirs:
PCD Inc., a Massachusetts corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to you and
the several Underwriters named in Schedule I hereto (collectively, the
"Underwriters") for whom you are acting as representatives (the
"Representatives"), an aggregate of 2,000,000 shares (the "Firm Shares") and, at
the election of the Underwriters, up to 300,000 additional shares (the "Optional
Shares") of Common Stock, $.01 par value per share of the Company ("Common
Stock"). The Firm Shares and the Optional Shares which the Underwriters elect to
purchase pursuant to Section 2 hereof are herein collectively called the
"Shares."
1. Representations and Warranties. The Company represents and warrants
to, and agrees with, each of the Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-46137)
(the "Initial Registration Statement") in respect of the Shares has
been filed with the Securities and Exchange Commission (the
"Commission"); the Initial Registration Statement, including any
pre-effective amendments thereto and any post-effective amendment
thereto, each in the form heretofore delivered to you, and, excluding
exhibits thereto, to you for each of the other Underwriters, have been
declared effective by the Commission in such form; other than a
registration statement, if any, increasing the size of the offering (a
"Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b)
under the Securities Act
<PAGE> 2
of 1933, as amended (the "Act"), which became effective upon filing, no
other document with respect to the Initial Registration Statement has
heretofore been filed with the Commission; and no stop order suspending
the effectiveness of the Initial Registration Statement, any
post-effective amendment thereto or the Rule 462(b) Registration
Statement, if any, has been issued and no proceeding for that purpose
has been initiated or, to the Company's knowledge, threatened by the
Commission (any preliminary prospectus included in the Initial
Registration Statement and incorporated by reference in the Rule 462(b)
Registration Statement, if any, or filed with the Commission pursuant
to Rule 424(a) of the rules and regulations of the Commission under the
Act is hereinafter called a "Preliminary Prospectus"; the various parts
of the Initial Registration Statement and the Rule 462(b) Registration
Statement, if any, including all exhibits thereto and including the
information contained in the form of final prospectus filed with the
Commission pursuant to Rule 424(b) under the Act in accordance with
Section 6(a) hereof and deemed by virtue of Rule 430A under the Act to
be part of the Initial Registration Statement at the time it was
declared effective or the Rule 462(b) Registration Statement, if any,
at the time it became effective, each as amended at the time such part
of such registration statement became effective, are hereinafter
collectively called the "Registration Statement"; and such final
prospectus, in the form first filed pursuant to Rule 424(b) under the
Act, is hereinafter called the "Prospectus");
(b) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, nor has the
Commission instituted proceedings for that purpose. Each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations
of the Commission thereunder, and did not contain any untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that this representation and warranty shall not
apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by or
on behalf of an Underwriter expressly for use therein (as set forth in
Section 8(b));
(c) The Registration Statement conforms, and the Prospectus
and any further amendments or supplements to the Registration Statement
or the Prospectus will conform, in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder and do not and will not, as of the applicable effective date
as to the Registration Statement and any amendment thereto and as of
the applicable filing date as to the Prospectus and any amendment or
supplement thereto and at all times subsequent thereto up to and at the
First Time of Delivery (as hereinafter defined) and at the Second Time
of Delivery (as hereinafter defined), contain
-2-
<PAGE> 3
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in
reliance upon and in conformity with information furnished in writing
to the Company by or on behalf of an Underwriter expressly for use in
the Registration Statement (as set forth in Section 8(b));
(d) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to
the Registration Statement by the Act or by the rules and regulations
thereunder which have not been described or filed as required; the
contracts so described in the Prospectus to which the Company or any of
its subsidiaries (the "Subsidiaries") is a party have been duly
authorized, executed and delivered by the Company or its Subsidiaries,
constitute valid and binding agreements of the Company or its
Subsidiaries and are enforceable against and by the Company or its
Subsidiaries in accordance with their respective terms, and, to the
extent any party has any remaining or future obligation thereunder or
otherwise remains bound thereby, are in full force and effect on the
date hereof; and neither the Company nor any of its Subsidiaries nor,
to the best of the Company's knowledge, any other party is or with the
giving of notice or the lapse of time or both will be in breach of or
default under any of such contracts, except to the extent that such
breach or default would not have a material adverse effect on the
financial position, stockholders' equity or results of operations of
the Company and its Subsidiaries; and neither the Company nor any of
its Subsidiaries is or with the giving of notice or lapse of time or
both will be in violation of or default under its Articles of
Organization (or other similar governing document) or bylaws;
(e) Neither the Company nor any of its Subsidiaries has
sustained since the date of the latest audited financial statements
included in the Prospectus any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or
material increase in the long-term debt of the Company or any of its
Subsidiaries or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
earnings, business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and its
Subsidiaries taken as a whole, whether or not occurring in the ordinary
course of business, and there has not been any material transaction
entered into or any material transaction that is
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<PAGE> 4
probable of being entered into by the Company or any Subsidiary, other
than transactions in the ordinary course of business and other than
transactions set forth or contemplated in the Prospectus;
(f) The Company and its Subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title
to all personal property owned by them, in each case free and clear of
all liens, charges, encumbrances, restrictions or defects except such
as are described in the Prospectus or such as do not materially affect
the value of such property and do not interfere in any material respect
with the use made and proposed to be made of such property by the
Company and its Subsidiaries; and any real property and buildings held
under lease by the Company and its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are
not material and do not interfere in any material respect with the use
made and proposed to be made of such property and buildings by the
Company and its Subsidiaries; the Company and its Subsidiaries own or
lease all such properties as are necessary to their operations as now
conducted or as proposed to be conducted, except where the failure to
so own or lease would not result in a material adverse change in or
affecting the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of
the Company and its Subsidiaries taken as a whole;
(g) Each of the Company and its Subsidiaries have been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its respective jurisdiction of organization, each
with full power and authority (corporate or otherwise) to own its
properties, or conduct its business as described in the Prospectus; and
the Company and each of its Subsidiaries has been duly qualified as a
foreign corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it owns or
leases properties, or conducts any business, so as to require such
qualification, or is subject to no material liability or disability by
reason of the failure to be so qualified in any such jurisdiction;
(h) The Company has an authorized capitalization as set forth
under the caption "Capitalization" in the Prospectus, and all the
issued shares of capital stock of the Company have been duly and
validly authorized and issued, are fully paid and non-assessable and
conform to the description of the Common Stock contained in the
Prospectus; all of the issued shares of capital stock of each
Subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and (except for directors'
qualifying shares) are owned directly or indirectly by the Company,
free and clear of all liens, encumbrances, equities or claims; except
as disclosed in or contemplated by the Prospectus and the financial
statements of the Company and the related notes thereto included in the
Prospectus, neither the
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<PAGE> 5
Company nor any Subsidiary has outstanding any options to purchase, or
any preemptive rights or other rights to subscribe for or to purchase
any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations; and the
description of the Company's stock option and stock purchase plans and
the options or other rights granted and exercised thereunder set forth
in the Prospectus accurately and fairly presents, in all material
respects, the information required to be shown with respect to such
plans, options and rights;
(i) The unissued Shares to be issued and sold by the Company
to the Underwriters hereunder have been duly and validly authorized
and, when issued and delivered against payment therefor as provided
herein, will be duly and validly issued and fully paid and non-
assessable and will conform to the description of the Common Stock
contained in the Prospectus; except for the ________ shares of Common
Stock reserved for sale to Emerson Electric Co. as described in the
Prospectus, no preemptive rights or other rights to subscribe for or
purchase exist with respect to the Shares or the issuance and sale
thereof pursuant to this Agreement; no stockholder of the Company has
any right which has not been duly and validly waived or satisfied to
require the Company to register the sale of any shares of capital stock
owned by such stockholder under the Act in the public offering
contemplated by this Agreement; and no further approval or authority of
the stockholders or the Board of Directors of the Company will be
required for the issuance and sale of the Shares to be sold by the
Company as contemplated herein;
(j) The Company has full legal right, and corporate power and
authority, to enter into this Agreement and perform the transactions
contemplated hereby. The Agreement has been duly authorized, executed
and delivered by the Company and constitutes a valid and binding
obligation of the Company and is enforceable against the Company in
accordance with its terms;
(k) The issue and sale of the Firm Shares by the Company and
the compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions herein contemplated
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its Subsidiaries is a party
or by which the Company or any of its Subsidiaries is bound or to which
any of the property or assets of the Company or any of its Subsidiaries
is subject, nor will such action result in any violation of the
provisions of the Restated Articles of Organization or Bylaws of the
Company or of the charter or by-laws of any Subsidiary or any statute
or any order, rule
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<PAGE> 6
or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its Subsidiaries or any of
their properties; and no consent, approval, authorization, order,
registration or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Act of the Shares and such
consents, approvals, authorizations, registrations or qualifications as
may be required under state securities or Blue Sky laws or the by-laws
and rules of the National Association of Securities Dealers, Inc.
("NASD") in connection with the purchase and distribution of the Shares
by the Underwriters;
(l) Except as disclosed in or specifically contemplated by the
Prospectus, there are no legal or governmental actions, suits or
proceedings pending or, to the best of the Company's knowledge,
threatened to which the Company or any of its Subsidiaries is or may be
a party or of which property owned or leased by the Company or any of
its Subsidiaries is or may be the subject, or related to environmental
or discrimination matters, which actions, suits or proceedings are
required to be described in the Registration Statement by the Act or
the rules and regulations thereunder or which are reasonably likely to
prevent or adversely affect the transactions contemplated by this
Agreement or result in a material adverse change in or affecting the
earnings, business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and its
Subsidiaries taken as a whole; no labor disturbance by the employees of
the Company or any of its Subsidiaries exists or, to the knowledge of
the Company, is imminent which is reasonably likely to materially
adversely affect the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and its Subsidiaries taken as a whole; and
neither the Company nor any of its Subsidiaries is a party or subject
to the provisions of any material injunction, judgment, decree or order
of any court, regulatory body, administrative agency or other
governmental body;
(m) The Company and its Subsidiaries possess all licenses,
certificates, authorizations or permits issued by the appropriate
governmental or regulatory agencies or authorities that are necessary
to enable them to own, lease and operate their respective properties
and to carry on their respective businesses as presently conducted
which, with respect to any of the foregoing, are material to the
Company and its Subsidiaries, and neither the Company nor any of its
Subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such license, certificate, authority
or permit which, singly or in the aggregate, is expected to materially
and adversely affect the business, assets, management, financial
position,
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<PAGE> 7
stockholders' equity or results of operations of the Company and its
Subsidiaries;
(n) Each of Coopers & Lybrand L.L.P. and KPMG Peat Marwick
LLP, who have certified certain of the consolidated financial
statements of the Company filed with the Commission as part of the
Registration Statement have advised the Company that they are
independent public accountants as required by the Act and the rules and
regulations of the Commission thereunder;
(o) The financial statements and schedules of the Company and
its Subsidiaries, and the related notes thereto, included in the
Registration Statement and the Prospectus present fairly the financial
position of the Company and its Subsidiaries as of the respective dates
of such financial statements and schedules; and the results of
operations and cash flows of the Company for the respective periods
covered thereby; such statements, schedules and related notes have been
prepared in accordance with generally accepted accounting principles
applied on a consistent basis as certified by the independent public
accountants named in paragraph (n) above; no other financial statements
or schedules are required to be included in the Registration Statement;
the selected and summary financial data set forth in the Prospectus
under the captions "Prospectus Summary", "Capitalization" and "Selected
Consolidated Financial Data" fairly present the information set forth
therein on the basis stated in the Registration Statement;
(p) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and its Subsidiaries own or possess adequate
rights to use all trademarks, trade names, patents, patent rights, mask
works, copyrights, inventions, trade secrets, know how, licenses,
approvals and governmental authorizations that are necessary to conduct
their business as described in the Registration Statement and
Prospectus; the expiration of any trademarks, trade names, patents,
patent rights, mask works, copyrights, inventions, trade secrets, know
how, licenses, approvals and governmental authorizations would not have
a material adverse effect on the earnings, business, management,
properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and its Subsidiaries taken as a
whole; the Company has no knowledge of any material infringement or
misappropriation by the Company of any trademark, tradename rights,
patents, patent rights, mask works, copyrights, inventions, know how,
licenses, trade secret or other similar rights of others, and there is
no claim being made against the Company regarding trademark, trade
name, patent, mask work, copyright, license, trade secret or other
infringement which is reasonably likely to have a material adverse
effect on the business, assets, management, financial position,
stockholders' equity or results of operations of the Company and its
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<PAGE> 8
Subsidiaries; the only patents and patent applications that are
material to the Company or its Subsidiaries or that are necessary to
the conduct of the Company's business as now or proposed to be
conducted by the Company as described in the Prospectus are listed on
Schedule II attached hereto;
(q) The Company and each of its Subsidiaries have filed all
necessary federal, state, local and foreign income and franchise tax
returns and have paid all taxes shown as due thereon; and the Company
has no knowledge of any tax deficiency which has been or might be
asserted or threatened against the Company or any of its Subsidiaries
which could materially and adversely affect the business, assets,
management, financial position, stockholders' equity or results of
operation of the Company;
(r) Neither the Company nor any of its Subsidiaries is an
"investment company" or an "affiliated person" of, or "promotor" or
"principal underwriter" for an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and the rules and regulations of the
Commission thereunder;
(s) Each of the Company and its Subsidiaries maintains
insurance of the types and in the amounts which is adequate for its
business and consistent with industry practice, including, but not
limited to, insurance covering all real and personal property owned or
leased by the Company and its Subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect;
(t) Neither the Company nor any of its Subsidiaries has at any
time during the last five years (i) made any unlawful contribution to
any candidate for foreign office, or failed to disclose fully any
contribution in violation of law, or (ii) made any payment to any
foreign, federal or state governmental officer or official, or other
person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof;
(u) Neither the Company nor, to the Company's best knowledge,
any of its affiliates, has taken or may take, directly or indirectly,
any action which is designed to cause or result in, or which has
constituted or which might reasonably be expected to cause or result
in, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares;
(v) The Common Stock of the Company has been registered
pursuant to Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the Company is not required to take
any further action
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<PAGE> 9
for the inclusion of the Shares on the Nasdaq National Market of The
Nasdaq Stock Market;
(w) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences;
(x) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event"
(as defined in ERISA) has occurred with respect to any "pension plan"
(as defined in ERISA) for which the Company would have any liability;
the Company has not incurred and does not expect to incur liability
under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the
Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each
"pension plan" for which the Company would have any liability that is
intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether by
action or by failure to act, which would cause the loss of such
qualification;
(y) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, and the Company further agrees that if it commences engaging in
business with the government of Cuba or with any person or affiliate
located in Cuba after the date the Registration Statement becomes or
has become effective with the Commission or with the Florida Department
of Banking and Finance (the "Department"), whichever date is later, or
if the information reported or incorporated by reference in the
Prospectus, if any, concerning the Company's business with Cuba or with
any person or affiliate located in Cuba changes in any material way,
the Company will provide the Department notice of such business or
change, as appropriate, in a form acceptable to the Department;
(z) The Company has not distributed and will not distribute
prior to the later of (i) the First Time of Delivery, or any date on
which Optional
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<PAGE> 10
Shares are to be purchased, as the case may be, and (ii) completion of
the distribution of the Shares, any offering material in connection
with the offering and sale of the Shares other than any Preliminary
Prospectuses, the Prospectus, the Registration Statement and other
materials, if any, permitted by the Act and the rules and regulations
thereunder;
(aa) Each officer and director of the Company and each
beneficial owner of 10% or more of the issued and outstanding shares of
Common Stock (determined prior to the offering contemplated hereby),
has agreed in writing that such person will not, for a period of 90
days from the date that the Registration Statement is declared
effective by the Commission (the "Lock-up Period"), offer to sell,
contract to sell, or otherwise sell, dispose of, loan, pledge or grant
any rights with respect to (collectively, a Disposition") any shares of
Common Stock, any options or warrants to purchase any shares of Common
Stock or any securities convertible into or exchangeable for shares of
Common Stock (collectively, "Securities") now owned or hereafter
acquired directly by such person or with respect to which such person
has or hereafter acquires the power of disposition, otherwise than (i)
if an individual, as a bona fide gift or gifts to or in trust for a
person or entity who or which agrees in writing to be bound by this
restriction, (ii) if a partnership, as a distribution, without
consideration, to partners of such entity in accordance with such
partnership's partnership agreement, provided that the distributees
thereof agree in writing to be bound by the terms of this restriction,
or (iii) with the prior written consent of Adams, Harkness & Hill, Inc.
The foregoing restriction is expressly agreed to preclude the holder of
the Securities from engaging in any hedging or other transaction which
is designed to or reasonably expected to lead to or result in a
Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without
limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation,
any put or call option) with respect to any Securities or with respect
to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person will also agree and consent to the
entry of stop transfer instructions with the Company's transfer agent
against the transfer of the Securities held by such person except in
compliance with this restriction. The Company has provided to counsel
for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities
held by each securityholder. The Company has provided to counsel for
the Underwriters true, accurate and complete copies of all of the
agreements pursuant to which its officers, directors and shareholders
have agreed to such or similar restrictions (the "Lock-up Agreements")
presently in effect or effected hereby. The Company hereby represents
and warrants that it will not, prior to the expiration of the
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<PAGE> 11
Lock-Up Period release any of its officers, directors or other
shareholders from any Lock-up Agreements currently existing or
hereafter effected without the prior written consent of Adams, Harkness
& Hill, Inc.
(bb) Except as set forth in the Registration Statement, (i)
the Company is in compliance with all rules, laws and regulations
relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental
Laws") which are applicable to its business, (ii) the Company has
received no notice from any governmental authority or third party of an
asserted claim under Environmental Laws, which claim is required to be
disclosed in the Registration Statement and the Prospectus, (iii) the
Company will not be required to make future material capital
expenditures to comply with Environmental Laws and (iv) no property
which is owned, leased or occupied by the Company has been designated
as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C.
sec. 9601, et seq), or otherwise designated as a contaminated site
under applicable state or local law; and
(cc) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any
of the officers or directors of the Company or any of the members of
the families of any of them, except as disclosed in the Registration
Statement and the Prospectus.
2. Shares Subject to Sale. On the basis of the representations,
warranties and agreements of the Company contained herein, and subject to the
terms and conditions herein set forth, (a) the Company agrees, to sell to each
of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at a purchase price per share of $______,
the number of Firm Shares as set forth opposite the name of such Underwriter in
Schedule I hereto, and (b) in the event and to the extent that the Underwriters
shall exercise the election to purchase Optional Shares as provided below, the
Company agrees to sell to each of the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company, at the purchase
price per share set forth in clause (a) of this Section 2, that portion of the
number of Optional Shares as to which such election shall have been exercised
(to be adjusted by you so as to eliminate fractional shares) determined by
multiplying such number of Optional Shares by a fraction, the numerator of which
is the maximum number of Optional Shares which such Underwriter is entitled to
purchase as set forth opposite the name of such Underwriter in Schedule I
hereto, and the denominator of which is the maximum number of the Optional
Shares which all of the Underwriters are entitled to purchase hereunder.
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<PAGE> 12
The Company hereby grants to the Underwriters the right to purchase at
their election up to 225,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement and
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than three business days after the date of such exercise.
3. Offering. Upon the authorization by you of the release of the Firm
Shares and after the Registration Statement becomes effective, the several
Underwriters propose to offer the Firm Shares for sale upon the terms and
conditions set forth in the Prospectus.
4. Closing. Certificates in definitive form for the Shares to be
purchased by each Underwriter hereunder, and in such denominations and
registered in such names as the Representatives may request upon at least
forty-eight hours' prior notice to the Company, shall be delivered by or on
behalf of the Company to you for the account of such Underwriter, against
payment by such Underwriter or on its behalf of the purchase price therefor by
wire transfer of same day funds, all at the office of Adams, Harkness & Hill,
Inc., 60 State Street, Boston, Massachusetts 02109. The time and date of such
delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m.,
Boston time, on the third (3rd) full business day following the first day that
Shares are traded or such other time and date as you and the Company may agree
upon in writing, and, with respect to the Optional Shares, 9:30 a.m.., Boston
time, on the date specified by you in the written notice given by you, pursuant
to Section 2, of the Underwriters' election to purchase such Optional Shares, or
at such other time and date as you and the Company may agree upon in writing.
Such time and date for delivery of the Firm Shares is herein called the "First
Time of Delivery," such time and date for delivery of the Optional Shares, if
not the First Time of Delivery, is herein called the "Second Time of Delivery,"
and each such time and date for delivery is herein called a "Time of Delivery."
Such certificates will be made available for checking and packaging at least
twenty four hours prior to each Time of Delivery at such location as you may
specify.
5. Covenants of the Company. The Company agrees with each of the
Underwriters:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at
the time and date that this Agreement is executed and delivered by the
parties hereto, to become
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<PAGE> 13
effective as promptly as possible; the Company will use its best
efforts to cause any abbreviated registration statement pursuant to
Rule 462(b) of the Commission's rules and regulations under the Act as
may be required subsequent to the date the Registration Statement is
declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice
thereof, of the time when the Registration Statement, any subsequent
amendment to the Registration Statement or any abbreviated registration
statement has become effective or any supplement to the Prospectus has
been filed; if the Company omitted information from the Registration
Statement at the time it was originally declared effective in reliance
upon Rule 430A(a) of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed, within the time period prescribed, with
the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of
the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is
declared effective by the Commission; if for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the
Rules and Regulations, it will provide evidence satisfactory to you
that the Prospectus contains such information and has been filed with
the Commission within the time period prescribed; it will notify you
promptly of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for
additional information; promptly upon your request, it will prepare and
file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the opinion of counsel
for the several Underwriters ("Underwriters' Counsel"), may be
necessary or advisable in connection with the distribution of the
Shares by the Underwriters; it will promptly prepare and file with the
Commission, and promptly notify you of the filing of, any amendments or
supplements to the Registration Statement or Prospectus which may be
necessary to correct any statements or omissions, if, at any time when
a prospectus relating to the Shares is required to be delivered under
the Act, any event shall have occurred as a result of which the
Prospectus or any other prospectus relating to the Shares as then in
effect would include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
in case any Underwriter is required to deliver a prospectus nine (9)
months or more after the effective date of the Registration Statement
in connection with the sale of the Shares, it will prepare promptly
upon request, but at the expense of such Underwriter, such amendment or
amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act; and it will file no
amendment or supplement to the Registration Statement or Prospectus
which shall not previously have been submitted to you a reasonable time
prior
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<PAGE> 14
to the proposed filing thereof or to which you shall reasonably object
in writing, subject, however, to compliance with the Act and the
Commission's rules and regulations thereunder and the provisions of
this Agreement; to advise you, promptly after it receives notice
thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
Prospectus, of the suspension of the qualification of the Shares for
offering or sale in any jurisdiction, of the initiation or threatening
of any proceeding for any such purpose, or of any request by the
Commission for the amending or supplementing of the Registration
Statement or Prospectus or for additional information; and, in the
event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or Prospectus or
suspending any such qualification, to use promptly its best efforts to
obtain its withdrawal;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under
the securities laws of such United States jurisdictions as you may
request and to comply with such laws so as to permit the continuance of
sales and dealings therein in such jurisdictions for as long as may be
necessary to complete the distribution of the Shares, provided that in
connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process
in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process;
(c) To furnish the Underwriters with copies of the
Registration Statement (three of which will be signed and which will
contain all exhibits), each Preliminary Prospectus, the Prospectus and
any amendments or supplements to such documents, including any
prospectus prepared to permit compliance with Section 10(a)(3) of the
Act, in such quantities as you may from time to time reasonably
request, and, if the delivery of a prospectus is required at any time
prior to the expiration of nine months after the time of issuance of
the Prospectus in connection with the offering or sale of the Shares
and if at such time any events shall have occurred as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be
necessary during such same period to amend or supplement the Prospectus
in order to comply with the Act, to notify you and upon your request to
prepare and furnish without charge to each Underwriter and to any
dealer in securities as many copies as you may from time to time
reasonably request of an amended Prospectus or a supplement to the
Prospectus which will correct such statement or omission or effect such
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<PAGE> 15
compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at any time
nine months or more after the time of issue of the Prospectus, upon
your request but at the expense of such Underwriter, to prepare and
deliver to such Underwriter as many copies as you may request of an
amended or supplemented Prospectus complying with Section 10(a)(3) of
the Act;
(d) To make generally available to its securityholders as soon
as practicable, but in any event not later than the forty-fifth (45th)
day following the end of the fiscal quarter first occurring after the
first anniversary of the effective date of the Registration Statement
(as defined in Rule 158(c)), an earnings statement of the Company and
its Subsidiaries (which need not be audited) complying with Section
11(a) of the Act and the rules and regulations of the Commission
thereunder (including at the option of the Company Rule 158);
(e) During the Lock-up Period, the Company will not, without
the prior written consent of Adams, Harkness & Hill, Inc., effect the
Disposition of, directly or indirectly, any Securities other than (i)
the sale of the Shares to be sold by the Company hereunder, (ii) the
Company's issuance of options or Common Stock under the Company's
presently authorized 1992 Stock Option Plan, 1996 Stock Plan and 1996
Eligible Directors Stock Plan and (iii) shares of capital stock issued
in connection with the acquisition by the Company of the assets or
capital stock of another person or entity, whether directly, through
merger or consolidation or otherwise, or of technology or a product
from another person or entity, if the terms of such issuance provide
that such shares of capital stock shall not be resold for a period of
90 days following the date of the Prospectus; provided, however, that
the Company shall not release any party from such resale restriction
without the prior written consent of Adams, Harkness & Hill, Inc.
(f) To furnish to its stockholders as soon as practicable
after the end of each fiscal year an annual report (including a balance
sheet and statements of income, stockholders' equity and cash flow of
the Company and its consolidated Subsidiaries audited by independent
public accountants) and, as soon as practicable after the end of each
of the first three quarters of each fiscal year (beginning with the
fiscal quarter ending after the effective date of the Registration
Statement), to furnish or make available to its stockholders (within
the meaning of Rule 158(b) under the Act) consolidated summary
financial information of the Company and its Subsidiaries, if any, for
such quarter in reasonable detail;
(g) During a period of five years from the effective date of
the Registration Statement, to furnish to you copies of all reports or
other
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<PAGE> 16
communications (financial or other) furnished to stockholders
generally, and deliver to you (i) as soon as they are available, copies
of any reports and financial statements furnished to or filed with the
Commission, the Nasdaq National Market or any national securities
exchange on which any class of securities of the Company is listed; and
(ii) such additional information concerning the business and financial
condition of the Company as you may from time to time reasonably
request (such financial statements to be on a combined or consolidated
basis to the extent the accounts of the Company and its Subsidiaries
are combined or consolidated in reports furnished to its stockholders
generally or to the Commission);
(h) To use the net proceeds acquired by it from the sale of
the Shares in the manner specified in the Prospectus under the caption
"Use of Proceeds" and in a manner such that the Company will not become
an "investment company" as that term is defined in the Investment
Company Act;
(i) The Company will use its best efforts (i) to maintain the
inclusion of its Common Stock on the Nasdaq National Market or a
national securities exchange and (ii) to provide the services of an
independent transfer agent and registrar to its stockholders;
(j) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a
registrar (which may be the same entity as the transfer agent) for its
Common Stock;
(k) Not to accelerate the vesting of any option issued under
any stock option plan during the 90 days from the date of the
Prospectus.
6. Expenses. The Company covenants and agrees with the Underwriters
that (a) the Company will pay or cause to be paid (i) the fees, disbursements
and expenses of the Company's counsel and accountants in connection with the
registration of the Shares under the Act and all other expenses in connection
with the preparation, printing and filing of the Registration Statement, any
Preliminary Prospectus and the Prospectus and amendments and supplements thereto
and the mailing and delivering of copies thereof to the Underwriters and
dealers; (ii) the cost of printing or producing any Agreement among
Underwriters, this Agreement, the Blue Sky Memoranda and any other documents in
connection with the offering, purchase, sale and delivery of the Shares; (iii)
all expenses in connection with the qualification of the Shares for offering and
sale under state securities laws as provided in Section 5(b) hereof, including
the reasonable fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey;
(iv) the filing fees incident to securing any required review by the NASD of the
terms of the sale of the Shares; (v) the cost of preparing stock certificates;
(vi) the cost and charges of any transfer agent or registrar; and (vii) all
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<PAGE> 17
other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section. It
is understood, however, that, except as provided in this Section, Section 8 and
Section 11 hereof, the Underwriters will pay all of their own costs and
expenses, including the fees of their counsel, stock transfer taxes on resale of
any of the Shares by them, and any advertising expenses connected with any
offers they may make.
7. Conditions of Underwriters, Obligations. The obligations of the
Underwriters hereunder, as to the Shares to be delivered at each Time of
Delivery, shall be subject, in their discretion, to the condition that all
representations and warranties and other statements of the Company herein are,
at and as of such Time of Delivery, true and correct, the condition that the
Company shall have performed all of its obligations hereunder theretofore to be
performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed
for such filing by the rules and regulations under the Act and in
accordance with Section 5(a) hereof; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall
have been issued and no proceeding for that purpose shall have been
initiated or, to the knowledge of the Company or any Underwriter,
threatened by the Commission; and all requests for additional
information on the part of the Commission shall have been complied with
to your reasonable satisfaction;
(b) Hale and Dorr LLP, counsel for the Underwriters, shall
have furnished to you such opinion or opinions, dated such Time of
Delivery, with respect to this Agreement, the Registration Statement,
the Prospectus, and other related matters as you may reasonably
request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon
such matters;
(c) Hill & Barlow, a Professional Corporation, counsel for the
Company, shall have furnished to you their written opinion, dated such
Time of Delivery, in form and substance satisfactory to you, with
respect to the matters set forth in Annex A hereto;
(d) The Company shall have furnished or caused to be furnished
to you at such Time of Delivery certificates of officers of the Company
satisfactory to you, as to the accuracy of the representations and
warranties of the Company herein at and as of such Time of Delivery, as
to the performance by the Company of all of its obligations hereunder
to be performed at or prior to such Time of Delivery, and as to such
other matters as you may reasonably request and the Company shall have
furnished or caused to be furnished
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<PAGE> 18
certificates as to the matters set forth in subsections (a) and (f) of
this Section, and as to such other matters as you may reasonably
request.;
(e) Brown & Bain, special litigation counsel for the Company,
shall have furnished to you their written opinion, dated such Time of
Delivery, in form and substance satisfactory to you, to the effect that
they serve as patent counsel to the Company and further to the effect
set forth in Annex B-1 hereto;
(f) Perkins, Smith & Cohen, patent counsel and special
litigation counsel for the Company, shall have furnished to you their
written opinion, dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that they serve as patent counsel to
the Company and further to the effect set forth in Annex B-2 hereto;
(g) Baker & Daniels, patent counsel and special litigation
counsel for the Company, shall have furnished to you their written
opinion, dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that they serve as patent counsel to
the Company and further to the effect set forth in Annex B-3 hereto;
(h) At 10:00 a.m., Boston time, on the effective date of the
Registration Statement and the effective date of the most recently
filed post-effective amendment to the Registration Statement and also
at each Time of Delivery, Coopers & Lybrand L.L.P. and KPMG Peat
Marwick LLP shall have furnished to you a letter or letters, dated the
respective dates of delivery thereof, in form and substance
satisfactory to you, to the effect set forth in Annex C-1 and Annex C-2
hereto, respectively; none of the foregoing letters shall have
disclosed any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and
its Subsidiaries considered as one enterprise from that set forth in
the Registration Statement or Prospectus, which, in your sole judgment,
is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the
Shares as contemplated by the Prospectus; and you shall have received
from Coopers & Lybrand L.L.P. a letter addressed to the Company and
made available to you for the use of the Underwriters stating that
their review of the Company's system of internal accounting controls,
to the extent they deemed necessary in establishing the scope of their
examination of the Company's consolidated financial statements as of
December 31, 1997, did not disclose any weaknesses in internal controls
that they considered to be material weaknesses;
(i) (i) Neither the Company nor any of its Subsidiaries have
sustained since the date of the latest audited financial statements
included in the Prospectus any material loss or interference with its
business from fire,
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<PAGE> 19
explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated in the
Prospectus, and (ii) since the respective dates as of which information
is given in the Prospectus there shall not have been any change in the
capital stock or material increase in the long-term debt of the Company
or any material change, or any development reasonably likely to result
in a material change, in or affecting the earnings, business,
management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and its
Subsidiaries, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause
(i) or (ii), is in your judgment so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus;
(j) On or after the date hereof there shall not have occurred
any of the following: (i) additional material governmental
restrictions, not in force and effect on the date hereof, shall have
been imposed upon trading in securities generally or minimum or maximum
prices shall have been generally established on the New York Stock
Exchange or on the American Stock Exchange or in the over the counter
market by the NASD, or trading in securities generally shall have been
suspended on either such Exchange or in the over the counter market by
the NASD, or a general banking moratorium shall have been established
by federal or New York authorities, (ii) an outbreak of major
hostilities or other national or international calamity or any
substantial change in political, financial or economic conditions shall
have occurred or shall have accelerated or escalated to such an extent,
as, in the judgment of the Representatives, to affect adversely the
marketability of the Shares, (iii) there shall be any action, suit or
proceeding pending or threatened, or there shall have been any
development or prospective development involving particularly the
business or properties or securities of the Company or any of its
Subsidiaries or transactions contemplated by this Agreement, which, in
the judgment of the Representatives, may materially and adversely
affect the Company's business or earnings and make it impracticable or
inadvisable to offer or sell the Shares or (iv) there shall be any
change in the management of the Company which, in the judgment of the
Representatives, may materially and adversely affect the Company's
business or earnings and make it impracticable or inadvisable to offer
or sell the Shares;
(k) The Company shall have obtained and delivered to you an
agreement in writing from each officer and director of the Company, and
each beneficial owner of 10% or more of the issued and outstanding
shares of Stock (determined prior to the offering contemplated hereby)
that such person will
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<PAGE> 20
not, during the Lock-up Period, effect the Disposition of any
Securities now owned or hereafter acquired directly by such person or
with respect to which such person has or hereafter acquires the power
of disposition, otherwise than (i) as a bona fide gift or gifts to or
in trust for a person or entity who or which agrees in writing to be
bound by this restriction, (ii) if a partnership, as a distribution,
without consideration, to partners of such entity in accordance with
such partnership's partnership agreement, provided that the
distributees thereof agree in writing to be bound by the terms of this
restriction, or (iii) with the prior written consent of Adams, Harkness
& Hill, Inc. The foregoing restriction is expressly agreed to preclude
the holder of the Securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even
if such Securities would be disposed of by someone other than the such
holder. Such prohibited hedging or other transactions would including,
without limitation, any short sale (whether or not against the box) or
any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or
index) that includes, relates to or derives any significant part of its
value from Securities. Furthermore, such person will have also agreed
and consented to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of the Securities held by
such person except In compliance with this restriction;
(l) You shall have received on each Time of Delivery a
certificate of the Company, dated such Time of Delivery, signed by the
Chief Executive Officer and Chief Financial Officer of the Company, to
the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company
in this Agreement are true and correct, as if made on and as of such
Time of Delivery, and the Company has complied with all the agreements
and satisfied all the conditions on its part to be performed or
satisfied at or prior to such Time of Delivery;
(ii) No stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the
Act;
(iii) When the Registration Statement became
effective and at all times subsequent thereto up to the delivery of
such certificate, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, contained all material
information required to be included therein by the Act and the rules
and regulations thereunder and in all
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<PAGE> 21
material respects conformed to the requirements of the Act and the
rules and regulations thereunder, the Registration Statement, and any
amendment or supplement thereto, did not and does not include any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, the Prospectus, and any amendment or supplement
thereto, did not and does not include any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, and, since the effective date of the
Registration Statement, there has occurred no event required to be set
forth in an amended supplemented Prospectus which has not been so set
forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus,
there has not been (a) any material adverse change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one
enterprise, (b) any transaction that is material to the Company and its
subsidiaries considered as one enterprise, except transactions entered
into in the ordinary course of business, (c) any obligation, direct or
contingent, that is material to the Company and its subsidiaries
considered as one enterprise, incurred by the Company or its
subsidiaries, except obligations incurred in the ordinary course of
business, (d) any change in the capital stock or outstanding
indebtedness of the Company or any of its subsidiaries that is material
to the Company and its subsidiaries considered as one enterprise, (e)
any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its subsidiaries, or (f) any
loss or damage (whether or not insured) to the property of the Company
or any of its subsidiaries which has been sustained or will have been
sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one
enterprise.
8. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter and each person, if any, who controls such
Underwriter, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter or controlling person may become subject,
under the Act or otherwise (including, without limitation, in its capacity as an
Underwriter or as a "qualified independent underwriter" within the meaning of
Schedule E of the Bylaws of the NASD), insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of
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<PAGE> 22
the circumstances in which they were made, not misleading, and will reimburse
each Underwriter and each person, if any, who controls such Underwriter for any
legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such action
or claim as such expenses are incurred; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter expressly for use
therein.
(b) Each Underwriter will indemnify and hold harmless the Company and
each person, if any, who controls the Company against any losses, claims,
damages or liabilities to which the Company or such controlling person may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by or on behalf of such Underwriter expressly for use
therein; and will reimburse the Company and each person, if any, who controls
the Company for any legal or other expenses reasonably incurred by the Company
or such controlling person in connection with investigating or defending any
such action or claim as such expenses are incurred.
The Company acknowledges that the information set forth in the last
paragraph on the front cover page (insofar as such information relates to the
Underwriters), under the graphics on page 2, concerning stabilization and
over-allotment by the Underwriters, and under the first, second, third, fifth,
seventh, eighth, ninth and tenth paragraphs under the caption "Underwriting" in
any Preliminary Prospectus and in the final form of Prospectus filed pursuant to
Rule 424(b) constitutes the only information furnished in writing by the
Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement, and you, on behalf of the respective
Underwriters, represent and warrant to the Company that the statements made
therein do not include any untrue statement of a material fact or omit to state
a material fact required to be
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<PAGE> 23
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; no indemnification shall be available hereunder to any
party who shall fail to give notice as provided in the preceding clause if the
party to whom such notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the notice would have related and
was prejudiced by the failure to give such notice, but the omission so to notify
such indemnifying party shall not relieve it from any liability which it may
have to any indemnified party on account of such indemnity agreement. In case
any such action shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the written consent of the indemnified party,
effect the settlement or compromise of, or consent to the entry of any judgment
with respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such action
or claim and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (c) above, then
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<PAGE> 24
each indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contributions pursuant to this
subsection (d) were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this subsection (d). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meaning of the Act.
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<PAGE> 25
9. Termination. (a) If any Underwriter shall default in its obligation
to purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or other
parties to purchase such Shares on the terms contained herein. If within
thirty-six hours after such default by any Underwriter you do not arrange for
the purchase of such Shares, then the Company shall be entitled to a further
period of thirty-six hours within which to procure another party or other
parties satisfactory to you to purchase such Shares on such terms. In the event
that, within the respective prescribed periods, you notify the Company that you
have so arranged for the purchase of such Shares, or the Company notify you that
they have so arranged for the purchase of such Shares, you or the Company shall
have the right to postpone such Time of Delivery for a period of not more than
seven days, in order to effect whatever changes may thereby be made necessary in
the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall include
any person substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
Shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be borne
by the Company and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in
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<PAGE> 26
Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
10. Survival. The respective indemnities, agreements, representations,
warranties and other statements of the Company and the several Underwriters, as
set forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless of
any investigation (or any statement as to the results thereof) made by or on
behalf of any Underwriter or any controlling person of any Underwriter, the
Company or any officer or director or controlling person of the Company and
shall survive delivery of and payment for the Shares.
11. Expenses of Termination. If this Agreement shall be terminated
pursuant to Section 9 hereof, the Company shall not then be under any liability
to any Underwriter except as provided in Section 6 and Section 8 hereof; but, if
for any other reason this Agreement is terminated, the Company will reimburse
the Underwriters through you for all out-of-pocket expenses approved in writing
by you, including fees and disbursements of counsel, reasonably incurred by the
Underwriters in making preparations for the purchase, sale and delivery of the
Shares not so delivered, but the Company shall then be under no further
liability to any Underwriter in respect of the Shares not so delivered except as
provided in Section 6 and Section 8 hereof.
12. Notice. In all dealings hereunder, you shall act on behalf of each
of the Underwriters, and the parties hereto shall be entitled to act and rely
upon any statement, request, notice or agreement on behalf of any Underwriter
made or given by you jointly or by Adams, Harkness & Hill, Inc. on behalf of you
as the Representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the Representatives in care of Adams, Harkness
& Hill, Inc., 60 State Street, Boston, MA 02109, Attention: Joseph W. Hammer; if
to the Company shall be delivered or sent by mail, telex or facsimile
transmission to the address of the Company set forth in the Registration
Statement, Attention: President; however, that any notice to an Underwriter
pursuant to Section 8(d) hereof shall be delivered or sent by mail, telex or
facsimile transmission to such Underwriter at its address set forth in its
Underwriter's Questionnaire or telex constituting such Questionnaire, which
address will be supplied to the Company by you on request. Any such statements,
requests, notices or agreements shall take effect upon receipt thereof.
13. Miscellaneous. (a) This Agreement shall be binding upon, and inure
solely to the benefit of, the Underwriters, the Company and, to the extent
provided in Sections 8 and 10 hereof, the officers and directors of the Company
and each person
-26-
<PAGE> 27
who controls the Company, or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Shares from any Underwriter shall be deemed a successor or assign by
reason merely of such purchase.
(b) Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
(c) This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Massachusetts.
(d) This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us six counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters and the
Company. It is understood that your acceptance of this letter on behalf of each
of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company for examination, upon request, but without warranty on your part as to
the authority of the signers thereof.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-27-
<PAGE> 28
Very truly yours,
PCD INC.
By:_________________________________
John L. Dwight, Jr.
Chairman of the Board, President
and Chief Executive Officer
or
Mary L. Mandarino
Chief Financial Officer, Vice
President, Finance and Administration and
Treasurer
Accepted as of the date
hereof at Boston, Massachusetts
ADAMS, HARKNESS & HILL, INC.
A.G. EDWARDS & SONS, INC.
By:_________________________________
(Adams, Harkness & Hill, Inc.
On behalf of each of the Underwriters)
-28-
<PAGE> 29
SCHEDULE I
Number of
Optional Shares
Total Number of to be Purchased
Firm Shares if Maximum
Underwriter to be Purchased Option Exercised
----------- --------------- -----------------
A.G. Edwards & Sons, Inc.
Adams, Harkness & Hill, Inc.
TOTAL: 2,000,000 300,000
<PAGE> 30
SCHEDULE II
Patents:
Patent Applications:
<PAGE> 31
ANNEX A
1. The Company and each Subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of incorporation as identified in the Registration Statement. The
Company and each Subsidiary is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction, if any, in which the
ownership or leasing of its properties requires such qualification, except where
the failure to be so qualified or be in good standing would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations
or business of the Company and the Subsidiaries taken together. To our
knowledge, the Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the Subsidiaries identified
in Exhibit 21.1 to the Registration Statement.
2. The Company and each Subsidiary has the corporate power and
corporate authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus.
3. The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" as of the
dates stated therein. All the issued and outstanding shares of the Common Stock
are duly authorized, validly issued, fully paid and nonassessable, and to our
knowledge, were not issued in violation of or subject to any preemptive right,
co-sale right, right of first refusal or other similar right. To our knowledge,
except for the _________ shares of Common Stock reserved for sale to Emerson
Electric Co. as described in the Prospectus, no holder of any currently
outstanding shares of the Common Stock has any preemptive right, co-sale right,
right of first refusal or other similar right to subscribe for or purchase any
shares of the Common Stock. To our knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities of
the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights known to such
counsel to registration of such shares of Common Stock or other securities,
because of the filing of the Registration Statement by the Company have, with
respect to the offering contemplated thereby, waived such rights or such rights
have expired by reason of lapse of time following notification of the Company's
intent to file the Registration Statement. All issued and outstanding shares of
capital stock of each Subsidiary of the Company have been duly authorized and
validly issued and are fully paid and non-assessable, and, to our knowledge,
have not been issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar right and are
owned by the Company free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest.
A-1
<PAGE> 32
4. The Company has the corporate power and authority to enter into the
Underwriting Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it thereunder. The Underwriting Agreement has
been duly authorized, executed and delivered by the Company. The Shares to be
issued by the Company pursuant to the terms of the Underwriting Agreement have
been duly authorized and, upon issuance and delivery against payment therefor in
accordance with the terms thereof, will be duly and validly issued and fully
paid and nonassessable, and will not have been issued in violation of or subject
to any preemptive right, co-sale right, registration right, right of first
refusal or other similar right of shareholders pursuant to the Company's
Articles of Organization or by-laws and, to our knowledge, any agreement to
which the Company is a party.
5. The Registration Statement has become effective under the Act and,
to our knowledge, no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act. The Prospectus has been
filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations
under the Act within the time period required thereby. The Registration
Statement, as of its effective date, the Prospectus, as of its date, and each
amendment or supplement thereto complied as to form in all material respects to
the requirements of the Act and the rules and regulations thereunder, except
that in each case we express no opinion as to the financial statements,
including the notes and schedules thereto and other financial, accounting and
statistical data included or incorporated by reference therein or excluded
therefrom.
6. No authorization, approval, consent or order of any court or
governmental authority, body or agency having jurisdiction over the Company or
any of its Subsidiaries or over any of their properties or operations is
necessary in connection with the transactions contemplated by the Company under
the Underwriting Agreement (except such as have been obtained under the Act and
the rules and regulations thereunder or such as may be required under state or
foreign securities laws or by the rules and regulations of the National
Association of Securities Dealers, Inc. (the "NASD")); and the issuance and sale
of the Shares being delivered at the Time of Delivery by the Company, the
execution and delivery of the Underwriting Agreement, the compliance by the
Company with all of the provisions of the Underwriting Agreement and the
consummation by the Company of the transactions contemplated therein will not
(with or without the giving of notice or passing of time or both) conflict with
or result in any violation or breach of, or constitute a default under, (A) any
agreement or instrument filed as an exhibit to the Registration Statement or the
Company's periodic reports filed pursuant to the Securities Exchange Act of
1934, (B) the Restated Articles of Organization or By-laws of the Company, (C)
the Massachusetts General Laws or the laws of the United States of America or
(D) any order, writ or decree of any court or governmental authority or agency
having jurisdiction over the Company or any of its Subsidiaries or over
A-2
<PAGE> 33
any of their properties or operations, which conflict, violation, breach or
default is material to the business or financial condition of the Company and
its Subsidiaries taken as a whole.
7. Based solely upon work performed by our firm in connection with the
Company over the last two years and upon inquiries of responsible officers of
the Company and review of specified documents furnished to us by the Company in
connection with this offering, we do not know of any contracts or documents
required to be described in or filed as exhibits to the Registration Statement
which are not described or filed as required, to our knowledge, the contracts so
described in the Prospectus are in full force and effect on the date hereof and
the consummation of the transactions contemplated by the Underwriting Agreement
will not cause a breach of or default under any such contract.
8. To our knowledge (based solely upon work performed by our firm in
connection with the Company over the last two years and upon inquiries of
responsible officers of the Company and our review of specified documents
supplied to us by the Company in connection with this Offering), other than as
described or contemplated in the Prospectus, there are no legal or governmental
actions, suits or proceedings pending or threatened against the Company or any
of its Subsidiaries or to which the Company or any of its Subsidiaries or any of
the properties owned or leased by the Company or any of its Subsidiaries is
subject, or related to environmental or discrimination matters, which actions,
suits or proceedings, might, individually or in the aggregate, prevent or
adversely affect the transactions contemplated by the Underwriting Agreement;
and neither the Company nor any of its Subsidiaries is a party or subject to the
provisions of any material injunction, judgment, decree or order of any court,
regulatory body, administrative agency or governmental body.
9. The Shares conform in all material respects to the description of
the Common Stock contained in the Prospectus under the caption "Description of
Capital Stock."
10. The statements contained in the Prospectus under the captions
"Description of Common Stock", to the extent that such statements purport to
summarize provisions of the statutes and regulations referred to therein, fairly
summarize such provisions in all material respects; and the statements contained
in the Prospectus under the captions "Management Stock Awards" and "Management
- -- Director Compensation" to the extent that such statements purport to
summarize provisions of the Company's 1992 Stock Option Plan, as amended, 1996
Stock Plan and 1996 Eligible Directors Stock Plan referred to therein, fairly
summarize such provisions in all material respects. The forms of certificates
evidencing the Common Stock and filed as exhibits to the Registration Statement
comply with the applicable law of the Commonwealth of Massachusetts.
A-3
<PAGE> 34
11. The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company" as defined in the Investment Company Act.
12. The Shares have been duly authorized for inclusion on the Nasdaq
National Market System, subject to notice of issuance.
In addition, we have participated in conferences with officers and
representatives of the Company, representatives of the independent accountants
for the Company, representatives of the Underwriters and representatives of the
Underwriters' counsel at which the contents of the Registration Statement and
the Prospectus and related matters were discussed and, although such counsel is
not passing upon, and does not assume any responsibility for, the accuracy,
completeness or fairness of, the statements contained in the Registration
Statement or the Prospectus and have made no independent check or verification
thereof, solely on the basis of the foregoing, no facts have come to our
attention that have caused us to believe that the Registration Statement, at the
time it became effective, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus, as of its
date and as of the date hereof, contained an untrue statement of a material fact
or omitted to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that we do not express any belief with respect to the
financial statements, including the notes and schedules thereto and other
financial, accounting and statistical data included or incorporated by reference
therein or excluded therefrom.
A-4
<PAGE> 35
[Opinion of Brown & Bain, P.A.]
ANNEX B-1
(i) The statements in the Registration Statement and
Prospectus (x) in the first paragraph, the fourth sentence of the
second paragraph and the third paragraph under the caption "Risk
Factors -- Patent Litigation;" and (y) in the first paragraph, the
fourth through sixth sentences of the second paragraph and the third
paragraph under the caption "Business -- Legal Proceedings" insofar as
such statements constitute summaries of matters of law, are accurate
and complete statements or summaries of the matters set forth therein.
In addition, such counsel shall state that although they have not
verified the accuracy or completeness of the statements contained in the
Prospectus, nothing has come to the attention of such counsel that caused them
to believe that, at the time the Registration Statement became effective, or at
any Time of Delivery, as the case may be, the Prospectus (i) under the caption
"Risk Factors -- Patent Litigation;" and (ii) under the caption "Business --
Legal Proceedings" contained any untrue statement of a material fact or omitted
to state a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
B-1-1
<PAGE> 36
[Opinion of Perkins, Smith & Cohen]
ANNEX B-2
(i) The statements in the Registration Statement and
Prospectus (x) under the caption "Risk Factors -- Proprietary
Technology and Product Protection;" and (y) under the caption "Business
-- Intellectual Property" insofar as such statements constitute
summaries of matters of law, are accurate and complete statements or
summaries of the matters set forth therein with respect to the Company
(excluding Wells).
(ii) To such counsel's knowledge, except as set forth in the
Prospectus there are no legal or governmental proceedings pending
(other than patent applications pending) relating to patents, patent
applications, patent rights, inventions, trade secrets, know-how,
trademarks, trademark applications, service marks, service mark
applications, trade names, copyrights or other information
(collectively, "Intellectual Property") owned or used by the Company,
and to such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or others, except as set forth
in the Prospectus.
(iii) Such counsel has no knowledge of any facts which would
preclude the Company from having valid license rights or clear title to
the patents and patent applications set forth on a schedule attached to
its opinion (the "Patent Schedule"). Based on representations by the
Company that no interests have been conveyed to third parties which
have not been recorded in the United States Patent and Trademark
Office, the Company has clear record title to the Company's United
States patents and patent applications identified in the Patent
Schedule. To the best of such counsel's knowledge, the Company has
complied with the PTO duty of candor and disclosure for each of the
United States patent applications set forth on the Patent Schedule.
Such counsel has no knowledge of any facts that the Company lacks or
will be unable to obtain any rights or licenses to use all Intellectual
Property necessary to the conduct of its business as now or proposed to
be conducted by the Company as described in the Prospectus, except as
described in the Prospectus. Such counsel has no knowledge of any facts
which form a basis for a finding of unenforceability or invalidity of
any of the patent rights owned or licensed by the Company. Such counsel
is unaware of any facts which would preclude the grant of a patent from
each of the patent applications set forth on the Patent Schedule. To
the best of such counsel's knowledge, the Company has not received any
notice of infringement or of conflict with rights or claims of others
with respect to any Intellectual Property owned or used by it which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, could result in any material adverse effect upon the
B-2-1
<PAGE> 37
Company, except as described in the Prospectus. Such counsel has no
knowledge of any patent rights of others which are or would be
infringed by specific products or processes referred to in the
Prospectus in such a manner as to materially and adversely affect the
Company, except as described in the Prospectus.
(iv) Such counsel provided a written opinion to the Company
that in such counsel's opinion, based on a review of material including
U.S. Patent No. 4,491,377 to Wayne K. Pfaff and of the Company's quad
flat pack sockets as they were then and are as of this date made, no
valid claim of U.S. Patent No. 4,491,377 is infringed by such quad flat
pack sockets. Such counsel has no knowledge of any facts which would
preclude such counsel now from giving the same opinion, except as set
forth in the Prospectus.
(v) The Company is listed in the records of the appropriate
patent office(s) as the owner of record of the patents and patent
applications set forth in the Patent Schedule.
(vi) To such counsel's knowledge, no contracts or other
documents relating to Intellectual Property of a character required to
be filed as an exhibit to the Registration Statement or required to be
described in the Registration Statement or Prospectus that are not
filed or described as required.
In addition, such counsel shall state that although they have not
verified the accuracy or completeness of the statements contained in the
Prospectus, nothing has come to the attention of such counsel that caused them
to believe that, at the time the Registration Statement became effective, or at
any Time of Delivery, as the case may be, the Prospectus (i) under the caption
"Risk Factors -- Proprietary Technology and Product Protection;" and (ii) under
the captions "Business -- Intellectual Property" and "-- Legal Proceedings"
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
B-2-2
<PAGE> 38
[Opinion of Baker & Daniels]
ANNEX B-3
(i) The statements in the Registration Statement and
Prospectus (x) in the second paragraph, with the exception of the
fourth sentence thereof, and the third paragraph under the caption
"Risk Factors -- Proprietary Technology and Product Protection;" and
(y) in the second paragraph, with the exception of the fourth through
sixth sentences thereof, and the third paragraph under the caption
"Business -- Intellectual Property" insofar as such statements
constitute summaries of matters of law, are accurate and complete
statements or summaries of the matters set forth therein with respect
to Wells.
(ii) To such counsel's knowledge, except as set forth in the
Prospectus there are no legal or governmental proceedings pending
(other than patent applications pending) relating to patents, patent
applications, patent rights, inventions, trade secrets, know-how,
trademarks, trademark applications, service marks, service mark
applications, trade names, copyrights or other information
(collectively, "Intellectual Property") owned or used by the Company,
and to such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or others, except as set forth
in the Prospectus.
(iii) Such counsel has no knowledge of any facts which would
preclude the Company from having valid license rights or clear title to
the patents and patent applications set forth on a schedule attached to
its opinion (the "Patent Schedule"). Based on representations by the
Company that no interests have been conveyed to third parties which
have not been recorded in the United States Patent and Trademark
Office, the Company has clear record title to the Company's United
States patents and patent applications identified in the Patent
Schedule. To the best of such counsel's knowledge, the Company has
complied with the PTO duty of candor and disclosure for each of the
United States patent applications set forth on the Patent Schedule.
Such counsel has no knowledge of any facts that the Company lacks or
will be unable to obtain any rights or licenses to use all Intellectual
Property necessary to the conduct of its business as now or proposed to
be conducted by the Company as described in the Prospectus, except as
described in the Prospectus. Such counsel has no knowledge of any facts
which form a basis for a finding of unenforceability or invalidity of
any of the patent rights owned or licensed by the Company. Such counsel
is unaware of any facts which would preclude the grant of a patent from
each of the patent applications set forth on the Patent Schedule. To
the best of such counsel's knowledge, the Company has not received any
notice of infringement or of conflict with rights or claims of others
with respect to any Intellectual Property owned or used by
B-3-1
<PAGE> 39
it which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, could result in any material adverse
effect upon the Company, except as described in the Prospectus. Such
counsel has no knowledge of any patent rights of others which are or
would be infringed by specific products or processes referred to in the
Prospectus in such a manner as to materially and adversely affect the
Company, except as described in the Prospectus.
(iv) Such counsel provided a written opinion to the Company
that in such counsel's opinion, based on a review of material including
U.S. Patent No. 4,491,377 to Wayne K. Pfaff and of the Company's
burn-in sockets as they were then and are as of this date made, no
valid claim of U.S. Patent No. 4,491,377 is infringed by such burn-in
sockets. Such counsel has no knowledge of any facts which would
preclude such counsel now from giving the same opinion, except as set
forth in the Prospectus.
(v) The Company is listed in the records of the appropriate
patent office(s) as the owner of record of the patents and patent
applications set forth in the Patent Schedule.
(vi) To such counsel's knowledge, no contracts or other
documents relating to Intellectual Property of a character required to
be filed as an exhibit to the Registration Statement or required to be
described in the Registration Statement or Prospectus that are not
filed or described as required.
In addition, such counsel shall state that although they have not
verified the accuracy or completeness of the statements contained in the
Prospectus, nothing has come to the attention of such counsel that caused them
to believe that, at the time the Registration Statement became effective, or at
any Time of Delivery, as the case may be, the Prospectus (i) under the caption
"Risk Factors -- Proprietary Technology and Product Protection;" and (ii) under
the captions "Business -- Intellectual Property" and "-- Legal Proceedings"
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
B-3-2
<PAGE> 40
ANNEX C-1
Pursuant to Section 7(h) of the Underwriter Agreement, Coopers &
Lybrand L.L.P. shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its Subsidiaries within the meaning of the
Act and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
pro forma financial statements) examined by them and included in the
Prospectus or the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations thereunder and they
have made a review in accordance with standards specified by the
American Institute of Certified Public Accountants of the consolidated
financial statements, selected financial data, pro forma financial
information and/or condensed financial statements derived from audited
financial statements of the Company for the periods specified in such
letter, as indicated in their reports thereon, copies of which have
been furnished to the representatives of the Underwriters (the
Representatives");
(iii) They have compared the information in the Prospectus
under selected captions with the disclosure requirements of Regulation
S-K and on the basis of limited procedures specified in such letter
nothing came to their attention as a result of the foregoing procedures
that caused them to believe that this information does not conform in
all material respects with the disclosure requirements of Items 301,
302, 402 and 503(d), respectively, of Regulation S-K;
(iv) The unaudited selected financial information with respect
to the consolidated results of operations and financial position of the
Company for the five most recent fiscal years included in the
Prospectus agrees with the corresponding amounts (after restatements
where applicable) in the audited consolidated financial statements for
such five fiscal years;
(v) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available
interim financial statements of the Company and its subsidiaries,
inspection of the minute books of the Company and its subsidiaries
since the date of the latest audited financial statements included in
the Prospectus, inquiries of officials of the Company and its
subsidiaries responsible for financial and accounting matters
C-1-1
<PAGE> 41
and such other inquiries and procedures as may be specified in such
letter, nothing came to their attention that caused them to believed
that:
(A) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of
cash flows included in the Prospectus do not comply as to form
in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations thereunder, or are not in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with the basis for the audited
consolidated statements of income, consolidated balance sheets
and consolidated statements of cash flows included in the
Prospectus;
(B) any other unaudited income statement data and
balance sheet items included in the Prospectus do not agree
with the corresponding items in the unaudited consolidated
financial statements from which such data and items were
derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the basis
for the corresponding amounts in the audited consolidated
financial statements included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in Clause
(A) and any unaudited income statement data and balance sheet
items included in the Prospectus and referred to in Clause (B)
were not determined on a basis substantially consistent with
the basis for the audited consolidated financial statements
included in the Prospectus;
(D) any unaudited pro forma consolidated condensed
financial statements included in the Prospectus do not comply
as to form in all material respects with the applicable
accounting requirements of the Act and the published rules and
regulations thereunder or the pro forma adjustments have not
been properly applied to the historical amounts in the
compilation of those statements;
(E) as of a specified date not more than five days
prior to the date of such letter, there have been any changes
in the consolidated capital stock (other than issuances of
capital stock upon exercise of options and upon conversions of
convertible securities, in each case which were outstanding on
the date of the latest financial statements included in the
Prospectus) or any increase in the consolidated long-term debt
of the Company and its subsidiaries, or any decreases in
consolidated net current assets or net assets or other items
specified by
C-1-2
<PAGE> 42
the representatives, or any increases in any items specified
by the representatives, in each case as compared with amounts
shown in the latest balance sheet included in the Prospectus,
except in each case for changes, increases or decreases which
the Prospectus discloses have occurred or may occur or which
are described in such letter; and
(F) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in Clause (E) there were any
decreases in consolidated net revenues or operating profit or
the total or per share amounts of consolidated net income or
other items specified by the representatives, or any increases
in any items specified by the representatives, in each case as
compared with the comparable period of the preceding year and
with any other period of corresponding length specified by the
representatives, except in each case for decreases or
increases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(vi) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraphs (iii) and (iv) above, they have carried out certain
specified procedures, not constituting an examination in accordance
with generally accepted auditing standards, with respect to certain
amounts, percentages and financial information specified by the
representatives, which are derived from the general accounting records
of the Company and its subsidiaries, which appear in the Prospectus, or
in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the representatives, and have compared certain
of such amounts, percentages and financial information with the
accounting records of the Company and its subsidiaries and have found
them to be in agreement.
C-1-3
<PAGE> 43
ANNEX C-2
Pursuant to Section 7(h) of the Underwriter Agreement, KPMG Peat
Marwick LLP shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its Subsidiaries within the meaning of the
Act and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
pro forma financial statements) examined by them and included in the
Prospectus or the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations thereunder.
(iii) The audited selected financial information with respect
to Wells Electronics, Inc. for the 52 weeks ended June 3, 1995, 48
weeks ended April 27, 1996, 53 weeks ended May 3, 1997 and 34 weeks
ended December 26, 1997 included in the Prospectus agrees with the
corresponding amounts in the audited financial statements of Wells
Electronics, Inc. for such periods;
(iv) They have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted
auditing standards, with respect to certain amounts, percentages and
financial information specified by the representatives, which are
derived from the general accounting records of Wells Electronics, Inc.
and its subsidiaries, which appear in the Prospectus, or in Part II of,
or in exhibits and schedules to, the Registration Statement specified
by the representatives, and have compared certain of such amounts,
percentages and financial information with the accounting records of
Wells Electronics, Inc. and its subsidiaries and have found them to be
in agreement.
C-2-1
<PAGE> 1
EXHIBIT 11.1
PCD Inc.
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Basic Diluted
Shares Shares
------------ ------------
<S> <C> <C>
For the year ended December 31, 1995
Common stock outstanding, beginning of the period 4,561,032 4,561,032
Weighted average common stock issued during the period 9,000 9,000
Cheap stock outstanding during the period -- 70,364
Dilutive effect of common stock equivalents -- 560,728
------------ ------------
Weighted average number of common
and common equivalent shares outstanding 4,570,032 5,201,124
============ ============
Net income $3,863,000 $3,863,000
============ ============
Net income per share $0.85 $0.74
============ ============
For the year ended December 31, 1996
Common stock outstanding, beginning of the period 4,597,032 4,597,032
Weighted average common stock issued during the period 881,298 881,298
Dilutive effect of common stock equivalents -- 813,523
------------ ------------
Weighted average number of common
and common equivalent shares outstanding 5,478,330 6,291,853
============ ============
Net income $4,785,000 $4,785,000
============ ============
Net income per share $0.87 $0.76
============ ============
For the year ended December 31, 1997
Common stock outstanding, beginning of the period 5,854,733 5,854,733
Weighted average common stock issued during the period 99,924 99,924
Dilutive effect of common stock equivalents -- --
------------ ------------
Weighted average number of common
and common equivalent shares outstanding 5,954,657 5,954,657
============ ============
Net income (loss) ($22,836,000) ($22,836,000)
============ ============
Net income (loss) per share ($3.83) ($3.83)(1)
============ ============
</TABLE>
- --------
(1) In 1997, Common Stock equivalents of 679,468 shares were not included in the
calculation of diluted EPS.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1, as
filed on March 20, 1998, of our report dated February 11, 1998 except
information included under the caption Litigation in Note 11, Commitments and
Contingencies as to which the date is March 18, 1998 on our audits of the
consolidated financial statements of PCD Inc. as of December 31, 1996 and 1997
and for each of the three years in the period ended December 31, 1997. We also
consent to the reference to our firm under the caption "Experts" and "Selected
Financial Data".
/S/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 20, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF KPMG PEAT MARWICK LLP
We consent to the inclusion of our report dated January 15, 1998, relating to
the consolidated balance sheets of Wells Electronics, Inc. and its subsidiaries
as of May 3, 1997 and April 27, 1996 and the related consolidated statements of
income, shareholder's equity, and cash flows for the 53 weeks ended May 3, 1997,
the 48 weeks ended April 27, 1996 and the 52 weeks ended June 3, 1995, which
report appears in the registration statement on Form S-1 of PCD Inc. We also
consent to the inclusion of our report dated February 4, 1998 except for note 11
which is as of March 9, 1998, relating to the consolidated balance sheet of
Wells Electronics, Inc. and its subsidiaries as of December 26, 1997 and the
related consolidated statements of income, shareholder's equity, and cash flows
for the 34 weeks then ended which report also appears in the registration
statement on Form S-1 of PCD Inc. We also consent to the reference to our firm
under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
----------------------
KPMG Peat Marwick LLP
Chicago, Illinois
March 19, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF SPECIAL LITIGATION COUNSEL
We consent to the reference to our Firm under the captions "Legal
Proceedings" and "Experts" in the registration statement on Form S-1 for PCD
Inc.
BROWN & BAIN, P.A.
/s/ C. Randall Bain
Phoenix, Arizona
March 18, 1998
<PAGE> 1
EXHIBIT 23.5
CONSENT OF SPECIAL LITIGATION COUNSEL
We consent to the reference to our Firm under the captions "Legal
Proceedings" and "Experts" in the registration statement on Form S-1 for PCD
Inc.
BAKER & DANIELS
/s/ James D. Hall
South Bend, Indiana
March 18, 1998
