-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NR9iT8ndleAdYCrYc1oilxIXBjJNaDicM0cQRRrzz7xIqNrxA7N7WlwAoSuE2Ad1 LLSm6YIGsb/3u3qe0jGqng== 0000950135-98-000778.txt : 19980217 0000950135-98-000778.hdr.sgml : 19980217 ACCESSION NUMBER: 0000950135-98-000778 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19980212 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PCD INC CENTRAL INDEX KEY: 0001007594 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC CONNECTORS [3678] IRS NUMBER: 042604950 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-46137 FILM NUMBER: 98533158 BUSINESS ADDRESS: STREET 1: TWO TECHNOLOGY DR STREET 2: CENTENNIAL PARK CITY: PEABODY STATE: MA ZIP: 01960 BUSINESS PHONE: 5085328800 MAIL ADDRESS: STREET 1: 2 TECHNOLOGY DRIVE CITY: PEABODY STATE: MA ZIP: 01960 S-1 1 PCD, INC. FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1998. REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PCD INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 3678 04-2604950 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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: 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
------------------------ 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: [ ] CALCULATION OF REGISTRATION FEE
========================================================================================================== AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE - ---------------------------------------------------------------------------------------------------------- Common Stock, $0.01 par value........ 2,300,000 shares $20.25 $46,575,000 $13,740 ==========================================================================================================
(1) Includes 300,000 shares which the Underwriters have the option to purchase from the Company to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, based upon the average high and low prices reported on the Nasdaq National Market on February 5, 1998. 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. ================================================================================ 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 FEBRUARY 12, 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. Up to 622,200 shares of Common Stock have been reserved for sale to Emerson Electric Co. at the public offering price on the same terms as the other shares offered hereby. See "Underwriting." The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "PCDI." On February 11, 1998, the last reported sale price of the Common Stock was $21 1/2 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.
=================================================================================================== PRICE UNDERWRITING PROCEEDS TO DISCOUNTS AND TO PUBLIC COMMISSIONS (1) COMPANY (2) - --------------------------------------------------------------------------------------------------- Per Share........................ $ $ $ - --------------------------------------------------------------------------------------------------- Total (3)........................ $ $ $ ===================================================================================================
(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. 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 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. 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. 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 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 believes that it is the only test and burn-in socket supplier that supports complete design, development, manufacturing and marketing in both of the world's two 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 8 THE OFFERING 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
- --------------- (1) Based on the number of shares of Common Stock outstanding as of December 31, 1997. Excludes 1,314,000 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 9 SUMMARY CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- PRO FORMA PRO FORMA AS ADJUSTED 1995 1996 1997 (1) 1997 (2) 1997 (2)(3) ------- ------- -------- -------------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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) (8,164) Net income (loss)........... $ 3,863 $ 4,785 $(22,836) $ 5,570 $ 7,918 ======= ======= ======== ======== ======== Net income (loss) per share (4): Basic..................... $ 0.83 $ 0.87 $ (3.83) $ 0.94 $ 1.00 ======= ======= ======== ======== ======== Diluted................... $ 0.74 $ 0.76 $ (3.83) $ 0.82 $ 0.90 ======= ======= ======== ======== ======== Weighted average number of common and common equivalent shares outstanding (4): Basic..................... 4,640 5,478 5,955 5,955 7,955 Diluted................... 5,201 6,292 5,955 6,769 8,769 OTHER DATA: EBITDA (5).................. $ 7,498 $ 8,344 $ 10,390 $ 30,059 $ 30,059 EBITDA margin (5)........... 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
DECEMBER 31, 1997 --------------------------------- ACTUAL AS ADJUSTED (3) ------------- ---------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital (deficit)................................... $ (12,632) $(12,310) Total assets................................................ 126,592 126,592 Total debt.................................................. 105,903 68,022 Stockholders' equity........................................ 8,995 47,198
- --------------- (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 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) 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 $21.50 per share), less underwriting discounts and commissions and estimated offering expenses 6 10 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. See "Use of Proceeds," "Capitalization" and Note 9 of Notes to the Company's Consolidated Financial Statements. (4) 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. (5) 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") and is not indicative of operating income or cash flow from operations as determined under GAAP. 7 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 ("Fleet") 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 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 officer of the Company or obtain the consent of the lenders under the Senior Credit Facility to any 9 13 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. 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 10 14 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 claims of the Pfaff Leadless Patent at issue in that case to be invalid. Certain other claims of the patent were not at issue in that case. The United States Supreme Court could accept an appeal by Pfaff in that case. Unless overturned, the Court of Appeals decision as to the invalidity of certain claims 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. 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 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." 11 15 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 48.7% 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 (assuming that Emerson purchases 622,200 shares in this offering). 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, 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." 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 ("Wells South Bend"), its computer systems 12 16 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 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 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. 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 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." 13 17 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 $21.50 per share), after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, are estimated to be approximately $40.0 million ($46.1 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. 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. 14 18 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:
HIGH LOW ---- --- 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 February 9, 1998)................................... 24 1/4 19 3/4
- --------------- * Initial public offering price per share. On February 11, 1998, the last reported sale price for the Common Stock on the Nasdaq National Market was $21.50 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. 15 19 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 $21.50 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.
DECEMBER 31, 1997 ----------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) 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 $ 19,281(1) Senior Credit Facility Secured Term Loan B......................... 39,600 31,041(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 57,862 Deferred compensation.............................................. (39) (39) Retained earnings (deficit)........................................ (8,930) (10,705)(4) ------- ------- Total stockholders' equity................................. 8,995 47,198 ------- ------- Total capitalization....................................... $97,198 $ 97,520 ======= =======
- --------------- (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 1,314,000 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) reflect the after tax impact of the interest expense for the Emerson Warrant and related prepayment penalty. 16 20 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 based on an independent appraisal 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)
PCD WELLS PRO FORMA PRO FORMA DEC. 31, DEC. 31, PRO FORMA PRO FORMA EFFECTS OF THE COMBINED 1997 1997 ADJUSTMENTS COMBINED (1) OFFERING (2) AS ADJUSTED -------- -------- ----------- ------------ -------------- ----------- 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) 3,849(8) (8,264) -------- ------ ------- -------- ------ ------- Income (loss) before provisions for taxes....... (34,638) 16,567 27,935 9,864 3,849 13,713 Provisions (benefit) for income taxes........................ (11,802) 7,157 8,939(7) 4,294 1,501(9) 5,795 -------- ------ ------- -------- ------ ------- Net income (loss)............ $(22,836) $ 9,410 $ 18,996 $ 5,570 $2,348 $ 7,918 ======== ====== ======= ======== ====== ======= Net income (loss) per share: Basic...................... $(3.83) $0.94 $1.00 ======== ======== ======= Diluted.................... $(3.83) $0.82 $0.90 ======== ======== ======= 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
- --------------- See notes on following page. 17 21 (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 prepayment penalty of approximately $496,000 (net of taxes) has been excluded from the pro forma combined statement of operations. (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. (7) Reflects the related tax effect of adjustments (3) through (6) at an assumed tax rate of 32%. (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 $21.50 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. 18 22 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."
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------- PRO FORMA PRO FORMA AS ADJUSTED 1993 1994 1995 1996 1997 (1) 1997 (2) 1997 (2)(3) ------- ------- ------- ------- -------- --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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) (8,164) Net income (loss).................. $ 507 $ 1,301 $ 3,863 $ 4,785 $(22,836) $ 5,570 $ 7,918 ======= ======= ======= ======= ======== ======== ======== Net income (loss) per share (4): Basic............................ $ 0.11 $ 0.29 $ 0.83 $ 0.87 $ (3.83) $ 0.94 $ 1.00 ======= ======= ======= ======= ======== ======== ======== Diluted.......................... $ 0.11 $ 0.28 $ 0.74 $ 0.76 $ (3.83) $ 0.82 $ 0.90 ======= ======= ======= ======= ======== ======== ======== Weighted average number of common and common equivalent shares outstanding (4): Basic............................ 4,561 4,561 4,640 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 (5)......................... $ 1,933 $ 3,142 $ 7,498 $ 8,344 $ 10,390 $ 30,059 $ 30,059 EBITDA margin (5).................. 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
DECEMBER 31, ---------------------------------------------------------------------------- AS ADJUSTED 1993 1994 1995 1996 1997 (1) 1997 (3) ------ ------- ------- ------- -------- ----------- (IN THOUSANDS) 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 68,022 Stockholders' equity.................. 7,473 8,774 12,812 28,706 8,995 47,198
- --------------- See notes on following page. 19 23 (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 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) 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 $21.50 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. See "Use of Proceeds," "Capitalization" and Note 9 of Notes to the Company's Consolidated Financial Statements. (4) 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. (5) 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") and is not indicative of operating income or cash flow from operations as determined under GAAP. 20 24 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 (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. The following table sets forth the relative percentages of the total net sales of the Company (excluding Wells) attributable to each of the Company's product categories for the periods indicated.
YEAR ENDED DECEMBER 31, --------------------------------------- PRO FORMA PRODUCT CATEGORIES 1995 1996 1997 1997 (1) - ------------------------------------------------------ ----- ----- ----- --------- 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% ===== ===== ===== =====
- --------------- (1) Gives effect to the Wells acquisition assuming such transaction had occurred on January 1, 1997. 21 25 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 believes that it is the only test and burn-in socket supplier that supports complete design, development, manufacturing and marketing in both of the world's two largest IC package interconnect markets: the United States and Japan. PCD acquired Wells for $130 million in cash and 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. Approximately $44 million of the premium was written off as acquired in-process research and development with no alternative future use as a non-recurring write-off charged to operations at the acquisition date. The remaining premium of $66 million was allocated to identifiable intangibles and goodwill, and will be amortized over 9 to 20 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. 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%. Wells maintained an 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.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------- PRO FORMA PRO FORMA AS ADJUSTED 1995 1996 1997 (1) 1997 (1)(2) 1997 (1)(2)(3) ----- ----- -------- ----------- -------------- 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) (11.4) Net income (loss)................. 15.1 17.8 (76.6) 7.8 11.1
- --------------- (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." 22 26 (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 $21.50 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 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 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. Interest and Other Income (Expense), Net. Interest and other income increased to $1.2 million in 1997 from $734,000 in 1996. This increase was attributable to the higher balances of cash and cash equivalents during 1997. Interest expense increased to approximately $227,000 in 1997, reflecting the debt incurred in connection with the Wells acquisition. Provision for Income Taxes. The effective tax rate for 1997 was approximately 34.1%, compared to 37.7% in 1996. The decrease in the effective tax rate for 1997 resulted primarily from the write-off of acquired in-process research and development relating to the Wells acquisition. Before taking into consideration the write-off of acquired in-process research and development, the Company's effective tax rate was 36.6%. 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 23 27 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. 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 24 28 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. 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 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 1998. 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 ("Wells 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 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 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. See "Business." 25 29 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. 26 30 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- 27 31 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 28 32 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 its 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. 29 33 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. 30 34 The Company offers a range of products for various packages within each of the four stages: test, burn-in, development and production:
PRODUCT DEFINITION IC TYPE APPLICATION - --------------- ------------------------- ------------------ ------------------------- TEST TSOP Thin, Small Outline Memory Computer Package - ----------------------------------------------------------------------------------------------- BURN-IN TSOP Thin, Small Outline DRAM, Flash Memory Computer Package SOP Small Outline Package Logic Automotive, Computer PGA/IPGA Pin Grid MPU Computer Array/Interstitial Pin 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, Memory, DRAM/SRAM Computer, Consumer, DIP Plastic Leaded Chip Telecommunications Carrier, Dual-In Line Package PQFP, QFP Plastic Quad Flat Pack, Memory, Logic, Computers, Quad Flat Pack MPU, DSP Telecommunications - ----------------------------------------------------------------------------------------------- DEVELOPMENT QFP, Carrier Quad Flat Pack, Carrier Logic, MPU Computer - ----------------------------------------------------------------------------------------------- PRODUCTION BGA Ball Grid Array Logic, MPU, ASIC Computer
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. 31 35 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. 32 36 Examples of end users of the Company's products, by category, are presented below:
PRODUCT CATEGORIES REPRESENTATIVE CUSTOMERS - --------------------------------------------- --------------------------------------------- IC Package Interconnects..................... Advanced Micro Devices, Inc. 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)
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 assembly operations to Japanese vendors. The Company subcontracts a portion of its labor-intensive product assembly to a U.S.-based subcontractor with a manufacturing facility in Mexico. 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 33 37 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 in 1998 both a number of broad based terminal block and interface module product lines and significant new application-specific products that are being developed with Allen-Bradley and Groupe Schneider. 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 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 34 38 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. 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 (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 claims of the Pfaff Leadless Patent at 35 39 issue in that case to be invalid. Certain other claims of the patent were not at issue in that case. The United States Supreme Court could accept an appeal on that case, although the Company considers it unlikely. Unless overturned, the Court of Appeals decision as to the invalidity of certain claims will be binding in the CTi v. Pfaff action in the District of Arizona, and the reasoning of that decision will be significant support for CTi's position that the remaining claims of that patent are invalid. The Company believes, based on the advice of counsel, that the Court of Appeals decision significantly increases the chance that the District of Arizona litigation will be resolved without further expensive proceedings. However, no assurance in that regard can be given at this time. The Company believes, based on the advice of counsel, that CTi and Wells have meritorious defenses against any claims 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. 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 its 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 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. 36 40 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company, and their ages as of December 31, 1997, are as follows:
NAME AGE POSITION - ---------------------------------------- --- ---------------------------------------------- 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 Chief Financial Officer, Vice President, Finance and Administration, 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)
- --------------- (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. 37 41 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." 38 42 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 $16.75 per share under the Directors Stock Plan. The options granted under the Directors Stock Plan vest in full six months after the date of grant. No options may be granted under the Directors Stock Plan after January 29, 2006. 39 43 EXECUTIVE COMPENSATION Compensation Summary The following table sets forth certain information regarding the Company's Chief Executive Officer and each of the other four most highly compensated executive officers during the fiscal year ended December 31, 1997 (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION (2) ---------------- NUMBER OF SHARES ANNUAL COMPENSATION (1) UNDERLYING NAME AND PRINCIPAL ------------------------- OPTIONS ALL OTHER POSITION YEAR SALARY ($) BONUS ($)(3) GRANTED (#) COMPENSATION ($)(4) - ------------------------- ---- ---------- ------------ ---------------- ------------------- 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 Chief Financial 1996 84,584 32,000 5,000 7,850 Officer, Vice 1995 77,494 30,000 -- 8,879 President, Finance and Administration 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
- --------------- (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 fiscal 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. 40 44 Option Grants/SAR Grants No options or stock appreciation rights ("SARs") were granted to the Named Executive Officers during fiscal 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 $23.25 per share. For disclosure regarding the terms of stock options, see "-- Stock Awards." Option Exercises and Year-End Values There were no SARs outstanding during fiscal 1997. The following table sets forth certain information regarding unexercised options held by each of the Named Executive Officers as of December 31, 1997: AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)(2) SHARES ACQUIRED VALUE -------------------------- -------------------------- NAME ON EXERCISE (#) REALIZED ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------------- --------------- --------------- ----------- ------------- ----------- ------------- John L. Dwight, Jr......... 10,000 $ 181,042 52,000 0 $1,162,417 $ 0 Michael S. Cantor.......... 49,000 746,231 70,000 0 1,564,792 0 Jeffrey A. Farnsworth...... 2,000 34,417 130,000 12,000 2,892,543 263,500 Mary L. Mandarino.......... 2,500 32,136 80,500 2,500 1,772,375 28,125 Roddy J. Powers............ 37,400 613,685 86,600 0 1,935,871 0
- --------------- (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 41 45 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, 954,000 shares of Common Stock were reserved for issuance under the 1992 Stock Option Plan. All of these 954,000 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. 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 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 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." 42 46 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. 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. 43 47 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:
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER THE OFFERING (1) OFFERING (1) ------------------- ------------------- NAME AND ADDRESS OF 5% STOCKHOLDERS NUMBER PERCENT NUMBER PERCENT - --------------------------------------------------- --------- ------- --------- ------- Emerson Electric Co. (2)........................... 2,068,080 33.2% 2,690,280 32.7% 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 OTHER DIRECTORS AND EXECUTIVE OFFICERS Bruce E. Elmblad (6)............................... 57,960 1.0 57,960 * Harold F. Faught (7)............................... 37,500 * 37,500 * C. Wayne Griffith (8).............................. 82,300 1.4 82,300 1.0 Theodore C. York (9)............................... 37,500 * 37,500 * Michael S. Cantor (10)............................. 95,000 1.6 95,000 1.2 Jeffrey A. Farnsworth (11)......................... 130,000 2.1 130,000 1.6 Mary L. Mandarino (12)............................. 88,200 1.4 88,200 1.1 Richard J. Mullin (13)............................. 8,435 * 8,435 * Roddy J. Powers (14)............................... 94,000 1.5 94,000 1.2 All directors and executive officers as a group (10 persons)(15)..................................... 1,584,395 24.1% 1,584,395 18.5%
- --------------- * 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. Assumes that Emerson Electric Co. acquires 622,200 shares in the offering. See "Underwriting". In all other cases assumes that no stockholder, officer or director acquires shares of Common Stock in the offering. (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 44 48 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) 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. (7) 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. (8) Includes 37,500 shares issuable upon exercise of stock options. (9) Comprised of 37,500 shares issuable upon exercise of stock options. (10) Includes 45,000 shares issuable upon exercise of stock options. (11) Comprised of 130,000 shares issuable upon exercise of stock options. (12) Includes 75,500 shares issuable upon exercise of stock options. (13) Includes 8,335 shares issuable upon exercise of stock options. (14) Includes 86,600 shares issuable upon exercise of stock options. (15) Includes the shares issuable upon exercise of stock options described in Notes (3) and (6) through (14). 45 49 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. 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 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 46 50 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. 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 47 51 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. 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 (including up to 622,200 shares in this offering) 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 48 52 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. 49 53 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:
NUMBER OF SHARES OF UNDERWRITER COMMON STOCK ---------------------------------------------------------------------- ------------ Adams, Harkness & Hill, Inc. ......................................... A.G. Edwards & Sons, Inc. ............................................ --------- Total....................................................... 2,000,000 =========
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. Up to 622,200 shares of Common Stock have been reserved for sale to Emerson Electric Co. ("Emerson"), currently the Company's largest stockholder. The sale of shares to Emerson will be at the public offering price. The number of shares available for sale to the general public may be reduced to the extent Emerson purchases such reserved shares. Any reserved shares not so purchased will be offered by the Underwriters to the general public on the same terms as the other shares offered hereby. 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 4,238,675 shares of Common Stock following the offering (assuming Emerson Electric Co. acquires 622,200 shares in 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 50 54 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. 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. 51 55 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 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 through sixth sentences 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 through sixth sentences 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 52 56 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. 53 57 Back cover: [color work: "PCD Electronic Connectors" in the top right corner of page. Graphics showing three IC package interconnects connected with a circular line. Text in bottom right corner reads "In December 26, 1997, PCD Inc. completed the acquisition of Wells Electronics, Inc. In combining the existing burn-in business of PCD with that of Wells, the Company believes that it is the only test and burn-in socket supplier that supports complete design, development, manufacturing and marketing in both of the world's two largest IC package interconnect markets: the United States and Japan."] 58 PCD INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----- 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-22 Consolidated Balance Sheets as of April 27, 1996 and May 3, 1997.................. F-23 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-24 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-25 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-26 Notes to Consolidated Financial Statements........................................ F-27 DECEMBER 26, 1997 Independent Auditors' Report...................................................... F-35 Consolidated Balance Sheet as of December 26, 1997................................ F-36 Consolidated Statement of Income for 34 weeks ended December 26, 1997............. F-37 Consolidated Statement of Shareholder's Equity for 34 weeks ended December 26, 1997........................................................................... F-38 Consolidated Statement of Cash Flows for 34 weeks ended December 26, 1997......... F-39 Notes to Consolidated Financial Statements........................................ F-40
F-1 59 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. COOPERS & LYBRAND L.L.P. Boston, Massachusetts February 11, 1998 F-2 60 PCD INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, -------------------- 1996 1997 ------- -------- 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 (Note 11)............................... -- -- Stockholders' equity: Preferred stock -- $0.10 par value; 1,000,000 shares authorized; no shares issued Common stock -- $0.01 par value; authorized 25,000,000 shares, 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 (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 ======= ========
The accompanying notes are an integral part of the consolidated financial statements. F-3 61 PCD INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, -------------------------------- 1995 1996 1997 ------- ------- -------- 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 Write-off of 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................................................. $ 0.83 $ 0.87 $ (3.83) ======= ======= ======= Diluted............................................... $ 0.74 $ 0.76 $ (3.83) ======= ======= ======= Weighted average number of common and common equivalent shares outstanding: Basic................................................. 4,640 5,478 5,955 ======= ======= ======= Diluted............................................... 5,201 6,292 5,955 ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-4 62 PCD INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK ADDITIONAL RETAINED TREASURY STOCK TOTAL ----------------------- PAID-IN EARNINGS DEFERRED -------------------- STOCKHOLDERS' SHARES PAR VALUE CAPITAL (DEFICIT) COMPENSATION SHARES AMOUNT EQUITY --------- --------- ---------- -------- ------------ --------- ------ ------------ 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 ========= === ======= ======= ===== ========
The accompanying notes are an integral part of the consolidated financial statements. F-5 63 PCD INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31 ------------------------------ 1995 1996 1997 ------- -------- --------- 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: Write-off of 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) -- ------- ------- ---------- Net cash provided by financing activities......... 4 10,695 108,263 ------- ------- ---------- Net increase (decrease) in cash............................. 3,030 16,571 (16,539) Cash and cash equivalents at beginning of year.............. 928 3,958 20,529 ------- ------- ---------- Cash and cash equivalents at end of year.................... $ 3,958 $ 20,529 $ 3,990 ======= ======= ========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest............................................... $ 13 $ 9 $ 20 ======= ======= ========== Income taxes........................................... $ 2,553 $ 2,452 $ 3,049 ======= ======= ==========
The accompanying notes are an integral part of the consolidated financial statements. F-6 64 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 market. 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 65 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 value. 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 issued. 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.
NET INCOME PER SHARE (LOSS) SHARES AMOUNT ------------ --------- --------- FOR THE YEAR ENDED DECEMBER 31, 1995 Basic earnings....................................... $ 3,863,000 4,640,396 $ 0.83 Assumed exercise of options (treasury method)........ -- 560,728 -- ------------ --------- ------ 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 earnings........................... $(22,836,000) 5,954,657 $ (3.83) ============ ========= ======
In accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 83, issuance of common stock and common stock equivalents during the twelve month period preceding the date of the initial filing on February 12, 1996, of the registration statement relating to the Company's initial public offering have been included in the calculation using the treasury stock method at the public offering price ($11 per share), as if they were outstanding for all periods prior to January 1, 1996. F-8 66 PCD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 1997, the Company expensed approximately $44,438,000 of in-process research and development acquired in the Wells acquisition; this loss resulted in common stock equivalents becoming anti-dilutive. Without this expense, the dilutive effect of common stock equivalents would have been an additional 679,468 shares for a total of 6,634,125 diluted shares. 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 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:
ESTIMATED USEFUL LIFE IN YEARS --------------------- 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
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 recognized 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. Intangible Assets Intangible assets are recognized 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 and 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 F-9 67 PCD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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 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:
(IN THOUSANDS) 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 ========
Unaudited pro forma operating results for the Company, assuming the acquisition of Wells occurred on January 1, 1996 are as follows:
YEARS ENDED -------------------- 1996 1997 ------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales............................................. $49,779 $ 71,386 Net (loss)............................................ (1,342) (23,487) Net income per share: Basic............................................... $ (0.24) $ (3.94) Diluted............................................. $ (0.24) $ (3.94)
Pro forma operating results for years ended 1996 and 1997 include costs of approximately $4.0 million of amortization of goodwill and acquired intangible assets and approximately $10.0 million of interest expense. For the year ended 1997, the effect of approximately $44.4 million of expense F-10 68 PCD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) related to the acquired in-process research and development and approximately $2.1 million of additional interest expense related to the Emerson Warrant (Note 9) are included, net of tax. The year ended 1996 does not include these additional expenses. 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:
1996 1997 ------ ------ (IN THOUSANDS) Raw materials and finished subassemblies................... $1,908 $3,387 Work in process............................................ 226 532 Finished goods............................................. 474 877 ------ ------ Total...................................................... $2,608 $4,796 ====== ======
5. EQUIPMENT AND IMPROVEMENTS: Equipment and improvements consisted of the following at December 31:
1996 1997 ------ ------- (IN THOUSANDS) 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 ====== =======
F-11 69 PCD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. INTANGIBLE ASSETS AND GOODWILL: Goodwill is valued 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. Under SFAS No. 121, the Company is required to assess the valuation of its long-lived assets, including intangible assets, based on the estimated cash flows to be generated by such assets. Intangible assets are amortized on a straight-line basis, based on their estimated lives, as follows:
BALANCE ESTIMATED DECEMBER 31, 1997 LIFE ----------------- --------- (IN THOUSANDS) Patented technology.............................. $ 3,155 9 years Trade names/trademarks........................... 10,384 20 years Goodwill......................................... 61,718 20 years
7. ACCRUED LIABILITIES: Accrued liabilities consisted of the following at December 31:
1996 1997 ------ ------ (IN THOUSANDS) 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 ====== ======
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 secured 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 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 F-12 70 PCD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ("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:
1996 1997 ------- -------------- (IN THOUSANDS) Term Loan A......................................... -- $ 30,000 Term Loan B......................................... -- 40,000 ------- ------- 70,000 Less -- current portion............................. -- 4,700 ------- ------- -- $ 65,300 ======= =======
Maturities of long-term debt are as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------------------- AMOUNT -------------- (IN THOUSANDS) 1998................................................. $ 4,700 1999................................................. 4,900 2000................................................. 5,200 2001................................................. 5,400 2002................................................. 5,800 2003 and thereafter.................................. 44,000 ------- $ 70,000 =======
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 Com- F-13 71 PCD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) pany 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 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 lessor 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 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. 10. INCOME TAXES: The provision (benefit) for income taxes for the years ended December 31, 1995, 1996 and 1997 was as follows:
1995 1996 1997 ------ ------ -------- (IN THOUSANDS) 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) ====== ====== ========
F-14 72 PCD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the net deferred tax asset consisted of the following at December 31, 1996 and 1997:
1996 1997 ----- ------- (IN THOUSANDS) 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 ===== =======
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:
1995 1996 1997 ------ ------ -------- (IN THOUSANDS) 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) ====== ====== ========
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 claims of the Pfaff Leadless Patent at F-15 73 PCD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) issue in that case to be invalid. Certain other claims of the patent were not at issue in that case. The United States Supreme Court could accept an appeal on that case, although the Company considers it unlikely. Unless overturned, the Court of Appeals decision as to the invalidity of certain claims will be binding in the CTi v. Pfaff action in the District of Arizona, and the reasoning of that decision will be significant support for CTi's position that the remaining claims of that patent are invalid. The Company believes, based on the advice of counsel, that the Court of Appeals decision significantly increases the chance that the District of Arizona litigation will be resolved without further expensive proceedings. However, no assurance in that regard can be given at this time. The Company believes, based on the advice of counsel, that CTi and Wells have meritorious defenses against any claims 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. Minimum future rental commitments under leases with remaining terms in excess of one year are approximately as follows:
YEAR ENDED DECEMBER 31, AMOUNT ----------------------------------------------------- -------------- (IN THOUSANDS) 1998................................................. $1,136 1999................................................. 1,012 2000................................................. 914 2001................................................. 914 2002................................................. 913 2003 and thereafter.................................. 1,972
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. F-16 74 PCD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 F-17 75 PCD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 954,000 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. The following table summarizes the transactions from these plans:
WEIGHTED AVERAGE OPTIONS EXERCISE PRICE -------- -------------- 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 ========
Summarized information about stock options outstanding at December 31, 1997 is as follows:
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 ------------------------------- ----------- ----------- -------- --------- -------- $ 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
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 F-18 76 PCD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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, 1996 and 1997 would have been reduced to the pro forma amounts indicated below:
1996 1997 ------------------------- ------------------------------- NET INCOME NET INCOME NET INCOME NET INCOME PER SHARE (LOSS) (LOSS) PER SHARE ---------- ---------- ---------- ---------------- As reported.................. $4,785 $ 0.76 $(22,836) $(3.83) Pro forma.................... $4,665 $ 0.75 $(23,119) $(3.88)
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:
1995 1996 1997 ---- ----- ----- 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
Weighted average fair value of options granted below fair value at date of grant: 1995........................ $2.53 =====
Weighted average fair value of options granted at fair value at date of grant: 1996....................... $ 7.83 ====== 1997....................... $12.73 ======
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. F-19 77 PCD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. PROFIT SHARING PLAN: Effective May 1, 1992, the Company adopted a Plan pursuant to Section 401 of the Internal Revenue 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 ($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 sales in 1995, 1996 and 1997, respectively. A second customer accounted for approximately 13.4% and 12.7% of the Company's 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. 15. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED):
FOR THE THREE MONTHS ENDED ----------------------------------------------- MAR 31, JUN 29, SEP 28, DEC 31, -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 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
MAR 29, JUN 28, SEP 27, DEC 31, -------- -------- -------- -------- 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)
F-20 78 PCD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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 intends to file an offering in February 1998 on Form S-1 to raise proceeds to both retire the subordinated debenture and pay down a portion of the Senior Credit Facility. F-21 79 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, 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. Further, in our opinion, 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. KPMG PEAT MARWICK LLP January 15, 1998 F-22 80 WELLS ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF APRIL 27, 1996 AND MAY 3, 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
APRIL 27, 1996 MAY 3, 1997 -------------- ----------- 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 ======= =======
"See accompanying notes to the consolidated financial statements." F-23 81 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)
JUNE 3, 1995 APRIL 27, 1996 MAY 3, 1997 ------------ -------------- ----------- 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 ======= ======= =======
See accompanying notes to the consolidated financial statements. F-24 82 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)
FOREIGN COMMON STOCK ADDITIONAL CURRENCY ------------------- PAID-IN RETAINED TRANSLATION TOTAL SHARES PAR VALUE CAPITAL EARNINGS ADJUSTMENTS EQUITY ------ --------- ---------- -------- ----------- ------- 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 ===== === ======= ======= ===== =======
See accompanying notes to the consolidated financial statements. F-25 83 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)
JUNE 3, 1995 APRIL 27, 1996 MAY 3, 1997 ------------ -------------- ----------- 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 ======= ======= =======
See accompanying notes to the consolidated financial statements. F-26 84 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-27 85 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-28 86 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:
1996 1997 ------ ------ Raw material and supplies................................ $1,463 $ 778 Work in process.......................................... 349 223 Finished goods........................................... 1,634 1,539 ------ ------ $3,446 $2,540 ====== ======
F-29 87 WELLS ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
1996 1997 -------- ------- 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 ======= =======
6. INTANGIBLE ASSETS Intangible assets consist of the following:
1996 1997 ---- ------- Goodwill.................................................. $708 $ 708 Computer software......................................... 6 349 Trademarks................................................ -- 9,674 ------- ------- 714 10,731 Less accumulated amortization............................. -- (574) ------- ------- $714 $10,157 ======= =======
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued liabilities consist of the following:
1996 1997 ------ ------ 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 ======= =======
8. DEBT Short-term debt consists of the following:
1996 1997 ------ ---- Line of credit............................................. $1,108 $214 Current maturities of long-term debt....................... 45 54 ------- ------- Total short-term debt.................................... $1,153 $268 ======= =======
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-30 88 WELLS ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Long-term debt consists of the following:
1996 1997 ------ --- Bank loan................................................... $1,400 $-- Capital lease obligation.................................... 103 54 ------ --- Total long-term debt.............................. 1,503 54 Less current maturities..................................... 45 54 ------ --- $1,458 $-- ====== ===
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:
CURRENT DEFERRED TOTAL ------- -------- ------ 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 ====== ==== ======
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:
1995 1996 1997 ---- ----- ------ 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 ==== ===== ======
F-31 89 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:
1996 1997 ------ ------ 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 ====== ======
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:
FISCAL YEAR ------------------------------------------------------------ 1998........................................................ $ 619 1999........................................................ 615 2000........................................................ 564 2001........................................................ 511 2002........................................................ 499 Thereafter.................................................. 1,738 ------ Total minimum lease payments................................ $4,546 ======
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-32 90 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-33 91 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:
FAR USA EAST ------- ------ 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
16. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) FOR THE:
THREE MONTHS ENDED TWO MONTHS --------------------------- ENDED Fiscal 1996: APR 27, JAN 27, OCT 28, JUL 29, ------- ------- ------- ---------- 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
THREE MONTHS ENDED -------------------------------------- Fiscal 1997: MAY 3, FEB 1, OCT 26, JUL 27, ------ ------ ------- ---------- 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
F-34 92 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. KPMG Peat Marwick LLP February 4, 1998 F-35 93 WELLS ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 (UNAUDITED) AND DECEMBER 26, 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
UNAUDITED DEC. 31, DEC. 26, 1996 1997 -------- -------- 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 ======= =======
See accompanying notes to the consolidated financial statements. F-36 94 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)
UNAUDITED DEC. 31, 96 DEC. 26, 97 ----------- ----------- 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 ======= =======
See accompanying notes to the consolidated financial statements. F-37 95 WELLS ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY FOR 34 WEEKS ENDED DECEMBER 26, 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
FOREIGN COMMON STOCK ADDITIONAL CURRENCY ----------------- PAID-IN RETAINED TRANSLATION TOTAL SHARES PAR VALUE CAPITAL DEFICIT ADJUSTMENTS EQUITY ----- --------- ---------- -------- ----------- -------- 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 ===== === ======= ======== ===== ========
See accompanying notes to the consolidated financial statements. F-38 96 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)
UNAUDITED ------- DEC 27, DEC 26, 1996 1997 ------- ------- 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 ======= =======
See accompanying notes to the consolidated financial statements. F-39 97 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-40 98 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-41 99 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: Raw material and supplies........................................... $1,249 Work in process..................................................... 258 Finished goods...................................................... 372 ------ $1,879 ======
5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: 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 =======
6. INTANGIBLE ASSETS Intangible assets consist of the following: Goodwill.......................................................... $ 708 Computer software................................................. 327 Trademarks........................................................ 9,674 ------- 10,709 Less accumulated amortization..................................... (963) ------- $ 9,746 =======
F-42 100 WELLS ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued liabilities consist of the following: Compensation and benefits........................................... $1,027 Income taxes payable................................................ 2,666 Product warranty.................................................... 502 Other accrued liabilities........................................... 143 ------ $4,338 ======
8. INCOME TAX EXPENSE Components of income tax expense (benefit) consist of:
CURRENT DEFERRED TOTAL ------- -------- ------ Federal....................................... $2,843 $ 80 $2,923 State and local............................... 701 -- 701 Foreign....................................... 2,230 (209) 2,021 ------ ---- ----- $5,774 $ (129) $5,645 ====== ==== =====
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: 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 ======
The tax effect of temporary differences that give rise to deferred tax assets and liabilities follow: 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 ======
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-43 101 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:
YEAR ---- 1998........................................................ $ 563 1999........................................................ 435 2000........................................................ 342 2001........................................................ 335 2002........................................................ 327 Thereafter.................................................. 1,563 ------ Total minimum lease payments................................ $3,565 ======
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 infringements. However, 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. 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. F-44 102 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 the 34 weeks ended December 26, 1997 is as follows:
USA FAR EAST ------- -------- Net sales.............................................. $16,402 $ 12,866 Operating income....................................... 6,701 4,883 Identifiable assets.................................... 19,573 7,319
13. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) FOR THE:
THREE MONTHS ENDED TWO MONTHS ----------------------- ENDED FISCAL 1998: AUGUST 2, NOVEMBER 1, JULY 29, ------------------------------------------ --------- ----------- ---------- Net Sales................................. $13,059 $ 9,675 $6,500 Gross Profit.............................. 8,207 6,414 4,027 Net Income(loss).......................... 3,308 2,629 (725)
F-45 103 ====================================================== 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
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 8 Use of Proceeds....................... 14 Price Range of Common Stock........... 15 Dividend Policy....................... 15 Capitalization........................ 16 Unaudited Pro Forma Condensed Consolidated Statement of Operations.......................... 17 Selected Consolidated Financial Data................................ 19 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 21 Business.............................. 26 Management............................ 37 Certain Transactions.................. 42 Principal Stockholders................ 44 Description of Capital Stock.......... 46 Underwriting.......................... 50 Legal Matters......................... 51 Experts............................... 52 Additional Information................ 52 Index to Consolidated Financial Statements.......................... F-1
------------------------ ====================================================== ====================================================== 2,000,000 SHARES [PCD LOGO] COMMON STOCK ------------------- PROSPECTUS ------------------- ADAMS, HARKNESS & HILL, INC. A.G. EDWARDS & SONS, INC. , 1998 ====================================================== 104 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. 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 Transfer Agent and Registrar fees................................ 0 Miscellaneous expenses........................................... 58,602 ------- Total.................................................. $ 550,000 =======
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-1 105 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES a. Exhibits
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------- ------------------------------------------------------------------------------ 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.
II-2 106
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------- ------------------------------------------------------------------------------ 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.
- --------------- * 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-3 107 ** 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. 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-4 108 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Company has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of Massachusetts on the 12th day of February, 1998. PCD INC. By: /s/ JOHN L. DWIGHT, JR. ------------------------------------ John L. Dwight, Jr. Chairman of the Board, President and Chief Executive Officer POWER OF ATTORNEY AND SIGNATURES EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY AUTHORIZES AND APPOINTS JOHN L. DWIGHT, JR., MICHAEL S. CANTOR, MARY L. MANDARINO, RODDY J. POWERS, THOMAS C. CHASE, AND EACH OF THEM, WITH FULL POWER OF SUBSTITUTION AND FULL POWER TO ACT WITHOUT THE OTHER, AS HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT TO ACT IN HIS NAME, PLACE AND STEAD AND TO EXECUTE IN THE NAME AND ON BEHALF OF EACH PERSON, INDIVIDUALLY AND IN EACH CAPACITY STATED BELOW, AND TO FILE, ANY AND ALL AMENDMENTS TO THIS REGISTRATION STATEMENT, INCLUDING ANY AND ALL POST-EFFECTIVE AMENDMENTS AND ANY SUBSEQUENT REGISTRATION STATEMENT FOR THE SAME OFFERING WHICH MAY BE FILED UNDER RULE 462(b). Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities indicated below on the 12th day of February, 1998.
SIGNATURE TITLE - ------------------------------------------ ------------------------------------------------- /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)
II-5 109 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT PAGE - -------- ------------------------------------------------------------------------ ----- 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.
110
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT PAGE - -------- ------------------------------------------------------------------------ ----- 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).
111
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT PAGE - -------- ------------------------------------------------------------------------ ----- 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.
- --------------- * 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. EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 DRAFT OF 2/11/98 PCD Inc. Common Stock ($.01 par value per share) Underwriting Agreement February __, 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-______) (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 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- 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 -3- 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 -4- 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 -5- 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, -6- 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 -7- 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 -8- 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 -9- 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 -10- 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. -11- 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 -12- 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 -13- 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 -14- 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 -15- 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 -16- 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 -17- 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, -18- 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 -19- 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 -20- 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 -21- 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 -22- 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 -23- 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. -24- 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 -25- 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- 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- 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- 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 30 SCHEDULE II Patents: Patent Applications: 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 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 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 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 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 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 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 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 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 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 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 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 rest 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 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. C-2-1 EX-5.1 3 OPINION OF HILL & BARLOW 1 EXHIBIT 5.1 THOMAS C. CHASE Direct Line: 617-428-3536 TCHASE@HILLBARLOW.COM February 12, 1998 PCD Inc. Two Technology Drive Centennial Park Peabody, Massachusetts 01960-7977 Ladies and Gentlemen: This opinion is furnished to you in connection with a Registration Statement on Form S-1 dated February 12, 1998 (S.E.C. File No. 333- ) (the "Registration Statement"), filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), relating to the public offering (the "Offering") of an aggregate of 2,300,000 shares of common stock, $0.01 par value per share (the "Shares"), of PCD Inc., a Massachusetts corporation (the "Company"), by the Company, including 300,000 shares of common stock subject to an over-allotment option granted by the Company to the Underwriters (as defined below). The Shares are to be sold by the Company pursuant to an underwriting agreement (the "Underwriting Agreement") between the Company, and Adams, Harkness & Hill, Inc. and A.G. Edwards & Sons, Inc. as representatives of the several underwriters named in the Underwriting Agreement (the "Underwriters"). We have acted as counsel for the Company in connection with the sale by the Company of the Shares. We have examined and relied upon (i) signed copies of the Registration Statement and all exhibits thereto, all as filed with the Commission, (ii) the Underwriting Agreement in the form filed as Exhibit 1.1 to the Registration Statement, (iii) copies of the Restated Articles of Organization and By-Laws of the Company, and all amendments thereto, and (iv) originals, or copies certified to our satisfaction, of such records of meetings of the directors and stockholders of the Company, documents and other instruments as in our judgment are necessary or appropriate to enable us to render this opinion expressed below. In our examination of the foregoing documents, we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals, the conformity to 2 PCD Inc. February 12, 1998 Page 2 original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such latter documents. Based upon the foregoing, we are of the opinion that the Shares to be issued and sold by the Company have been duly authorized by all necessary corporate action of the Company, and, when issued and sold by the Company in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as part of the Registration Statement and to the use of our name therein and in the related Prospectus under the caption "Legal Matters." We also hereby consent to the incorporation by reference of this opinion in any subsequent registration statement for the same Offering that may be filed under Rule 462(b) of the Act. It is understood that this opinion is to be used only in connection with the offer and sale of the Shares while the Registration Statement is in effect. Very truly yours, HILL & BARLOW, a Professional Corporation By: /s/ Thomas C. Chase -------------------------- Thomas C. Chase, a member of the firm EX-10.22 4 SECOND AMENDMENT TO LEASE AGREEMENT DATED 7/15/93 1 Exhibit 10.22 SECOND AMENDMENT ---------------- This Second Amendment made this 15th day of July, 1993 by and between Centennial Park Associates Limited Partnership III, a Massachusetts Limited Partnership as Landlord and Precision Connector Designs, Inc., a Massachusetts Corporation, as Tenant. W I T N E S S E T H ------------------- Reference is made to a Lease between the Trustees of Centennial Park Associates Reality Trust II under a Declaration of Trust dated July 7, 1986 recorded with Essex South Deeds in Book 8473, Page 268, as Landlord, and Tenant dated June 29, 1987, as amended by a First Amendment of Lease between said Trustees and Tenant dated August 22, 1989, for space in the building at Two Technology Drive, Peabody, Essex County, Massachusetts (the "Lease"). All capital terms used in this Amendment which are not defined herein and which are not otherwise proper nouns shall be defined as set forth in the Lease. WHEREAS, Landlord is the Successor to said Trustees of Centennial Park Associates Realty Trust II as owner of the Building and Lot referred to in the Lease; WHEREAS, Landlord previously constructed the Expansion Space referred to Article XIII of the Lease; WHEREAS, Tenant had certain expansion options with respect to the Expansion Space under the Lease and the First Amendment thereto, but all of such options have heretofore lapsed without being exercised, so that none of the Expansion Space is currently included in the Demised Premises under the Lease; WHEREAS, Tenant now wishes to add certain portions of the Expansion Space to the Demised Premises for the balance of the Term of the Lease, and Landlord has agreed to lease such additional space to Tenant; WHEREAS, the Landlord and Tenant have agreed to increase the payment of rent under the Lease in payment for such additional space; WHEREAS, Landlord and Tenant will each perform certain work in the additional space as more particularly set forth below. 1 2 WHEREAS, Landlord and Tenant also wish to calculate and confirm the rent adjustment to the Basic Annual Rent for the original Demised Premises (exclusive of the aforesaid additional space) required by Sections 4.1 through 4.4 of the Lease and scheduled to take effect on July 8, 1993. NOW THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the Landlord and Tenant agree as follows: 1. EXPANSION OF DEMISED PREMISES. Effective June 1, 1993 through August 31, 1998, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord Four Thousand Nine Hundred Ninety-Four (4,994) square feet of additional space as shown on Exhibit A attached hereto as, "Additional Space A". During said period from June 1, 1993 through August 31, 1998, the Additional Space A shall be added to and deemed a part of the Demised Premises subject to the benefit of all terms, provisions and conditions of the Lease (except as may be specifically be otherwise provided herein). Effective July 1, 1994 through August 31, 1998 Landlord hereby leases to Tenant and Tenant hereby leases from Landlord Five Thousand Two Hundred Sixty-Nine (5,269) square feet of additional space as shown on Exhibit A attached as "Additional Space B". During the period July 1, 1994 through August 31, 1998 the Additional Space B shall be added to and deemed a part of the Demised Premises subject to the benefit of all terms, provisions and conditions of the Lease (except as may be specifically be otherwise provided herein). 2. BASIC ANNUAL RENT FOR ADDITIONAL SPACE. Tenant shall pay Landlord the following additional Basic Annual Rent for the Additional Space A and Additional Space B, above and beyond the Basic Annual Rent otherwise due under Sections 4.1 and 4.2 of the Lease. Such payment shall be made at the same time and in accordance with the same procedures as specified in Section 4.1:
ANNUAL RATE MONTHLY RENT June 1, 1993 - May 31, 1994 $22,473.00 $1,872.75 June 1, 1994 - June 30, 1994 $32,461.00 $2,705.08 July 1, 1994 - August 31, 1998 $66,709.50 $5,559.13
3. LANDLORD'S WORK. Landlord will install, on a one time basis only, at its sole cost and expense, a full height sheet rock wall separating Additional Space A from Additional Space B. Landlord shall be liable, at it sole cost and expense, to maintain and repair the demising wall unless damaged or destroyed by the act, neglect or default of Tenant, its agents, employees, licensees or contractors, in which event Tenant shall make such repairs. Landlord shall remove the demising wall at its sole cost and expenses by July 1, 1994. 2 3 4. TENANT'S WORK. Tenant shall, on a one time basis only, at its sole cost and expense, reconstruct the seven foot (7') by eight (8') space as shown as "Reconstruction Area" on Exhibit A attached in accordance with all applicable codes, regulations and laws. 5. ADJUSTMENT TO BASIC ANNUAL RENT FOR ORIGINAL DEMISED PREMISES. Under Sections 4.1 through 4.4 of the Lease, the Basic Annual Rent for the original 40,000 square foot Demised Premises (excluding Additional Space A and Additional Space B) is to be adjusted as of the fifth anniversary of the Commencement Date (said fifth anniversary being the "Adjustment Date" under Section 4.2) for the balance of the Lease Term in accordance with a certain formula set forth in Section 4.2. Landlord and Tenant agree that (a) the Commencement Date under the Lease was July 8, 1988, (b) the Adjustment Date is therefore July 8, 1993 and (c) the adjusted Basic Annual Rent effective July 8, 1993 determined in accordance with the applicable formula is $363,400 per year (115% x the previously applicable Basic Annual Rent of $316,000 per year), or $30,283.33 per month. Accordingly, the Basic Annual Rent for the original Demised Premises (excluding Additional Space A and Additional Space B) from July 8, 1993 through the end of the Lease Term shall be $363,400 per year or $30,283.33 per month. 6. TOTAL BASIC ANNUAL RENT (ORIGINAL DEMISED PREMISES PLUS ADDITIONAL SPACE). With the additional Basic Annual Rent due for Additional Space A and B pursuant to Paragraph 2 above, and with the adjustment to the Basic Annual Rent for the original Demised Premises pursuant to Sections 4.1 through 4.4 of the Lease and Paragraph 5 above, the total Basic Annual Rent payable by tenant for the entire Demised Premises (the original Demised Premises, Additional Space A and Additional Space B) from time to time from June 1, 1993 through the expiration of the Lease Term on August 31, 1998 shall be as follows:
PERIOD ANNUAL RATE MONTHLY RENT ------ ----------- ------------ June 1, 1993 - June 30, 1993 $338,473.00 $28,206.08 Month of July, 1993 N/A $31,264.14 (month in which Adjustment Date occurs) August 1, 1993 - May 31, 1994 $385,873.00 $32,156.08 June 1, 1994 - June 30, 1994 $395,861.00 $32,988.42 July 1, 1994 - August 31, 1998 $430,109.50 $35,842.46
7. REAL ESTATE TAXES. Under sections 5.1 and 13.2 of the Lease, Tenant is to pay Landlord Tenant's pro rata share of the real estate taxes on the Building, Expansion Space and Lot. Given the additions of Expansion Space A and Expansion Space B to the Demised Premises, (a) for periods prior to June 1, 1993, when the Demised Premises consist of the original space only, 3 4 Tenant's pro rata share shall be 66.7% (40,000 square feet in original Demised Premises divided by 60,000 square feet in Building and Expansion Space = 66.7%), (b) for the period from June 1, 1993 to June 30, 1994 when the Demised Premises consist of the original space plus Additional Space A, Tenant's pro rata share shall be 74.99% (44,994 square feet in original space plus Additional Space A divided by 60,000 square feet in Building and Expansion Space = 74.99%) and (c) for the period from July 1, 1994 through August 31, 1998, (the expiration date of the Lease Term), when the Demised Premises consist of the original space plus Additional Space A and Additional Space B, Tenant's pro rata share shall be 83.77% (50,263 square feet in original space plus Additional Space A and Additional Space B divided by 60,000 square feet in Building and Expansion Space = 83.77%). 8. CERTAIN REIMBURSABLE EXPENSES. In the event that Tenant should be obligated to reimburse Landlord for any services for work, such as snowplowing, pursuant to Section 5.2(a) of the Lease, then in determining the fraction allocable to Tenant in accordance with said Section (a) the numerator shall be (i) 40,000 square feet for the period prior to June 1, 1993, (ii) 44,944 square feet for the period June 1, 1993 through June 30, 1994 and (iii) 50,263 square feet for the period from July 1, 1994 through August 31, 1998 (the expiration date of the Lease Term) and (b) the denominator shall be the total rentable floor area of all buildings having the benefit of such Services. 9. DELIVERY OF ADDITIONAL SPACE. Landlord shall deliver Additional Space A to Tenant free and clear of all other tenants and occupants, with all of any previous tenant's or occupant's property removed and otherwise in the same condition as such space is in on the date hereof, reasonable wear and tear excepted, by June 1, 1993. If for any reason Landlord shall fail to do so, Tenant shall not be required to pay any rent or other charges allocable to Additional Space A until Landlord so delivers said space, and the rent and charges specified in Paragraphs 2, 6, 7 and 8 above shall be adjusted accordingly. Landlord shall deliver Additional Space B to Tenant free and clear of all other tenants and occupants, with all of any previous tenant's or occupant's property removed, with the demising wall between Additional Space A and Additional Space B removed as required by Paragraph 3 of this Amendment, and otherwise in the same condition as such space is in on the date hereof, reasonable wear and tear excepted, by July 1, 1994. If for any reason Landlord shall fail to do so, then (a) Tenant shall not be required to pay the Basic Annual Rent attributable to Additional Space B until Landlord so delivers said space, so that beginning on July 1, 1994 and continuing until said space is so delivered, the Basic Annual Rent payable by Tenant under 4 5 Paragraphs 2 and 6 of this Amendment shall be reduced by $2,854.04 per month (the rent otherwise due on Additional Space B), (b) Tenant shall not be required to pay any other charges attributable to Additional Space B until Landlord so delivers said space, so effective July 1, 1994 and continuing until said space is so delivered, Tenant's pro rata share of real estate taxes as specified in Paragraph 7 of this Amendment and Tenant's pro rata share of certain other expenses as specified in Paragraph 8 of this Amendment shall be reduced to exclude the floor area in Additional Space B, and (c) the Basic Annual Rent attributable to Additional Space A shall be reduced by $832.33 per month until Landlord so delivers Additional Space B, so that commencing July 1, 1994 and continuing until Additional Space B is so delivered, the Basic Annual Rent payable pursuant to paragraphs 2 and 6 of this Amendment shall be further reduced by said monthly amount (for a total monthly reduction, together with the rent reduction pursuant to clause (a) above, of $3,686.37 per month). Landlord shall use best efforts to remove any prior tenant or occupant from Additional Space B, to complete removal of the aforesaid demising wall and to take all necessary further actions to deliver Additional Space B to Tenant as required hereby by July 1, 1994, and failing that, as soon after said date as possible, and Tenant may enforce said obligation of Landlord by appropriate action or actions against Landlord in equity. However, except for the aforesaid rent abatements, Landlord shall not be liable for damages to Tenant if Landlord is unable to deliver Additional Space B to Tenant because of any unauthorized holding over by any prior third party tenant or occupant. 10. ADDITION TO SECTION 9.2(b) OF LEASE. Tenant shall not in any manner be liable for, required to clean up, obligated to pay or bear any costs or expenses with respect to or otherwise in any manner responsible for any hazardous material or oil (as defined in Section 9.2(b) of the Lease) left, abandoned, deposited, disposed of, generated, stored, used, emitted, discharged or released on, in or from Additional Space A, Additional Space B or any other part of the Building, Expansion Space or Lot by any prior tenant or occupant, Landlord or any other party besides Tenant itself or Tenant's invitees, licensees, contractors or any other party for which the Tenant is legally responsible. 11. INSTALLATIONS, ALTERATIONS OR ADDITIONS. In the event that Tenant desires to make any installations, alterations or additions in Additional Space A or Additional Space B, and Landlord's consent thereto is required under Section 9.2(c) of the Lease, Landlord shall not unreasonably withhold or delay such consent. 5 6 In all other respects the Lease is hereby ratified, confirmed, and approved and shall continue in full force and effect, except as herein expressly modified. IN WITNESS WHEREOF, the parties hereto have executed these presents as a sealed instrument as of the day and year first above written. LANDLORD: CENTENNIAL PARK ASSOCIATES LIMITED PARTNERSHIP III /s/ Stanton L. Black ---------------------------------- Stanton L. Black, General Partner TENANT: PRECISION CONNECTOR DESIGNS, INC. /s/ John L. Dwight ---------------------------------- John L. Dwight, President COMBINED PROPERTIES, INC. APPROVED BY: /S/ Jim P 7/29/93 - ---------------------------- LEGAL - ---------------------------- CORPORATE /s/ P. Morrow 7/23/93 - ---------------------------- ACCOUNTING /s/ Jack L. Farrell 7/26/93 - ---------------------------- MANAGEMENT - ---------------------------- CONSTRUCTION - ---------------------------- 6 7 [PLAN OF LOT 32] EXHIBIT A 8 EXHIBIT A --------- LOT 32 LEGAL DESCRIPTION ------------------------ The land together with the buildings and other improvements now or hereafter located thereon, situated in Peabody, Essex County, Massachusetts, shown as Lot 32 on a plan entitled "Easement and Subdivision Plan of Land in Peabody, Massachusetts, prepared for Centennial Park Associates", "by Linenthal Eisenberg Anderson Group, Inc., dated November 30, 1987" and recorded with the Essex South District Registry of Deeds as Plan 4 in Plan Book 234, and bounded and described as follows: Commencing at the northwesterly corner at said Lot 32, said point being S2-00-00W 420.45 feet from the point of curvature of a curve to the right having a radius of 30.00 feet into Centennial Drive, as shown on the above-referenced plan: Thence running S75-35-59E 608.58 feet to a point; Thence running S26-47-08E 53.15 feet to a point; Thence running S14-24-01W 186.68 feet to a point on the northerly sideline of a retention basin easement, entirely within said Lot 32; Thence running S77-21-40E 58.00 feet to a point; Thence running S12-38-20W 150.00 feet to a point; Thence running N77-21-40W 370.00 feet to a point; Thence running S22-25-17W 206.00 feet to a point; Thence running N75-28-04W 82.31 feet to a point on the easterly sideline of Technology Drive. The prior eight courses running along the perimeter of Lot 31 as shown on the above-noted plan. Thence running northerly and northwesterly along said Technology Drive and along a curve to the left, having a radius of 120.00 feet for a distance of 113.61 feet to a point of reverse curvature in said sideline of Technology Drive. Thence running northwesterly and northerly along a curve to the right, having a radius of 50.00 feet for a length of 55.70 feet to a point; EX-10.25 5 INDUSTRIAL LEASE AGREEMENT 1 Exhibit 10.25 INDUSTRIAL LEASE AGREEMENT The parties to this Agreement, entered into on this 21 day of September, 1995 between BLACKTHORN AREA PARTNERS ("Landlord") and WELLS ELECTRONICS, INC. ("Tenant"), agree as follows: 1. PREMISES; PREPARATION; SUBSTITUTION. A. THE PREMISES. The Landlord leases to the Tenant and the Tenant leases from Landlord that parcel of land and that Building and related parking lots and driveways to be constructed by Landlord on that parcel of land commonly known as ______________ pursuant to those approved plans and specifications as further described herein and that floor plan attached to this Agreement as Exhibit A containing 48,858 square feet of leasable space (the "Premises"). B. PREPARATION OF PREMISES. Subject to the provisions of Section 27, on or before the date the term of this lease of the Premises commences, the Landlord shall cause the Premises to be completed in accordance with the terms and conditions of the "Tenant Improvement Work Letter" including those plans and specifications as approved by Tenant attached to this Agreement as Exhibit B. Except as otherwise provided herein, the Landlord will not be liable to the Tenant for damages nor will the Tenant be relieved from any obligations under this Agreement if the Landlord is prevented from completing the Premises for the Tenant's occupancy on the date the term commences because of strikes, lockouts, labor controversies, accidents, inability to obtain fuel or supplies, or any other cause beyond the reasonable control of the Landlord (each a "Force Majeure" event). In such event, however, the rent under this Agreement shall abate on a per diem basis until the Premises are completed, unless the cause for the delay is the result of the Tenants request for materials, finishes, or installations other than those set forth in Exhibit B, the Tenant's changes in the work to be performed by the Landlord and not approved by the Landlord, the performance by the Tenant or any person employed by the Tenant of any work in the Premises, or any other cause within the reasonable control of the Tenant. Landlord will commence construction of the Premises and will substantially complete the Premises and the building of which the same form a part no more than 270 days after the date of the execution of the Lease (the "Delivery Date"). If Landlord's Work in the Premises and Tenant's building has not been substantially completed in accordance with EXHIBIT "B" attached hereto by the Delivery Date, except as caused by a Force Majeure event, Tenant shall receive two (2) days free Rent for each 24-hour period beyond the Delivery Date until the Premises are substantially complete. This free Rent (the "Free Rent" for late delivery) is to be in addition to any other free Rent for which Tenant is eligible. In the event Landlord does not substantially complete Landlord's Work within sixty days after the Delivery Date for any reason other than a Force Majeure event, Tenant shall be entitled to terminate this Lease and receive a refund of any and all amounts previously paid by Tenant to Landlord, or Tenant may continue to accrue Free Rent at the rate of two (2) days Free Rent for each day after the Delivery Date until Landlord substantially completes Landlord's Work (the "Free Rent Period"). As used in this Lease, the terms "substantial completion" and "substantially complete" shall mean Tenants possession of the Demised Premises, and that (a) Landlord's Work has been completed with the exception 2 of minor items which can be completed without material interference with Tenant and (b) a Certificate of Occupancy has been unconditionally issued for Landlord's work. Landlord agrees (unless otherwise provided in EXHIBIT "B"), at Landlord's expense, to perform "Landlord's Work" in a good and workmanlike manner in the construction of the Premises substantially in accordance with those specifications attached hereto and made a part hereof as EXHIBIT "B". Landlord will utilize first-quality new materials in compliance with all applicable laws, ordinances, rules and statutes. Tenant shall also have the right during this period to come onto the Premises to install its fixtures and prepare the Premises for the operation of Tenant's business. Landlord agrees, at Landlord's expense, to obtain and maintain public liability insurance and workers' compensation insurance adequate to fully protect Tenant as well as Landlord from and against any and all liability for death or injury to person or damage to property by reason of construction of Landlord's Work. Notwithstanding anything contained in this Lease to the contrary, if Landlord fails to complete any of Landlord's Work described on EXHIBIT "B", including the parking lot, and after thirty (30) days notice to Tenant's Primary Mortgagee (as further defined herein), Tenant's Primary Mortgagee has failed to commence the completion of any of Landlord's Work and to have diligently pursued the completion thereof and as a result thereof Tenant is unable to obtain a certificate of occupancy, Tenant shall have the right, but not the obligation, to perform such work and deduct the amounts incurred against the next ensuing Rent payments, and there shall be an abatement of all Rent and other charges payable as Rent or a deferral of the Free Rent Period, if applicable, until such time as such necessary work is completed. Tenant shall have a period of thirty (30) days from the substantial completion of Landlord's Work to provide Landlord with a list of any defects incomplete or unsatisfactory items with respect to Landlord's Work which are or would be apparent by a visual inspection. Landlord shall be obligated within a reasonable amount of time, not to exceed thirty (30) days, to cure any such defects, incomplete or unsatisfactory items. This time provision shall not apply to those defects which are not or would not be apparent by a visual inspection and which are otherwise not caused by the Tenant (hereafter referred to as "Latent Defects") and which solely by way of example and by no means limiting, include defects to any structural, mechanical, electrical or plumbing system or component of the Building which is visible or manifested only underground, within the walls or above the ceiling or below the floor, and Tenant shall, during the Term of this Lease, have the right to report to Landlord any Latent Defects which are in need of repair based upon the obligation of Landlord to do work to the Premises. In connection therewith, the provisions set forth above shall otherwise apply with respect to Landlord's obligation to cure said Latent Defects. Tenant shall promptly notify Landlord of its acceptance or nonacceptance of Landlord's Work setting forth the grounds, if applicable, for the nonacceptance. Landlord warrants that upon completion of Landlord's Work the utilities, including without limitation the HVAC (as hereinafter defined), interior and exterior of the Premises will meet with all present laws, codes, regulations and ordinances at the time the Demised Premises is delivered by Landlord to Tenant. If at any time the Premises or such utilities does not meet with such laws, codes, regulations and ordinances as required by 2 3 regulations of governing authorities, then, except for work that is specifically required as a result of the particular type of operation being conducted by Tenant, the Premises will be brought up to the proper standards at Landlord's expense. In the event Tenant is delayed in opening its business as a result of the repairs performed by Landlord in order to comply with this paragraph, then the Free Rent Period shall be extended for that period of time Tenant is delayed in opening its business as a result of such repairs. If Landlord fails to prosecute such repairs diligently and continuously until completion then Tenant may prosecute such repairs itself and apply the cost of same against the next Rent obligations due hereunder. Landlord shall also be responsible for paying any and all fines or penalties assessed by any governmental authority if the Premises fails to meet codes and regulations of governmental authorities during the Term of this Lease with respects to items Landlord is responsible for as set forth in EXHIBIT "B" under Landlord's Work. Moreover, Landlord warrants and guarantees Landlord's Work to have been accomplished in a first-class manner with good workmanship and materials for the longer period of twelve (12) months from the Delivery Date or the length of any warranty or guarantee provided to Landlord from its general contractor. After expiration of said twelve (12) month or longer warranty period, Landlord shall assign to Tenant any and all warranties and guaranties of third parties held by Landlord, except in the event same are unassignable, Landlord shall enforce same for the benefit of Tenant. 2. TERM. The term of the lease of the Premises (the "Term") shall be one hundred forty-four (144) months commencing on the date which is thirty (30) days after the Delivery Date (the "Commencement Date"), and ending at 5:00 p.m. (local time) on the day immediately preceding the twelfth (12th) anniversary of the Commencement Date, unless extended or sooner terminated as provided in this Agreement. 3. USE. The premises shall be occupied and used by the Tenant for manufacturing distribution, and office space and for all other legal uses and for no other purpose. 4. RENT. The Tenant shall pay to the Landlord as rent, and except as otherwise set forth herein, without any setoff or deduction whatsoever, the sum of $3,408,000.00, in equal monthly installments of $23,666.67 in advance, on the first day of each calendar month during the Term (the "Rent") at the address set forth in Section 18. If the Term commences on any day other than the first day of a calendar month, a pro rata fraction shall be paid for the partial month at the beginning of the Term, if any, as provided below. Unpaid rent and other monies owing to the Landlord under this Agreement shall bear interest at the rate of 12% per annum from the date due until paid. Rent shall begin to accrue on the date (the "Rent Commencement Date") which is the earlier of (i) the date of written acceptance by Tenant of delivery of the completed Premises or (ii) the date Tenant commences its business operations in the Premises, however no sooner than the Commencement Date. However, in no event shall Rent accrue prior to the issuance of Certificate of Occupancy by the local municipal authority. 5. UTILITIES. All utilities shall be maintained in the Tenant's name. Payment for all utilities used upon or in connection with the Premises shall be made by the Tenant, continuously during the Term and any extensions hereto. 3 4 6. TAXES AND ASSESSMENTS. Tenant covenants and agrees to pay all real estate taxes and special assessments of State, City and County government which may be levied and assessed against the Premises or become due during the term of this Lease, on or before the due date thereof, together with all interest and penalty charges assessed for late payment. Landlord shall cause all tax bills delivered to it to be delivered to Tenant in a timely manner, and Tenant shall in turn deliver to Landlord in a timely manner receipts giving evidence that such taxes or assessments are current and paid in full. Tenant shall pay all taxes levied against its personal property located within the Premises. Tenant hereby agrees to pay license fees, sales or such other tax in the form of sales or use tax, not only in respect to the payment of rent, but in connection with any other service or services provided for by Landlord under this Lease and as is now or may be required in the future under the laws of the State of Indiana or any other governing jurisdiction which have been imposed by a governmental authority in substitution or in lieu of real estate taxes. 7. LANDLORD'S TITLE. The Landlord's title is and always shall be paramount to the title of the Tenant, and nothing contained in this Agreement authorizes the Tenant to do any act which may encumber the title of the Landlord. This lease shall be subject and subordinate to any mortgage created by or in favor of Landlord and existing on the Commencement Date, and to all renewals, modifications, consolidations, replacements, and extensions thereof, and to all advances made or hereafter to be made on the security of any such mortgage. Notwithstanding the foregoing, the mortgagee under any such mortgage shall recognize this Agreement and, in the event of a foreclosure sale under such mortgage or conveyance by deed in lieu of foreclosure, this Agreement shall continue in full force and effect. The Tenant covenants and agrees that it will, upon the written request of the mortgagee or purchaser, attorn thereto and execute, acknowledge, and deliver any instrument that has for its purposes and effect subordination of the mortgage to this lease. As a material inducement to the Tenant to enter into this Lease, Landlord represents, warrants, covenants and agrees as follows: Landlord will be the owner of the Premises and the Real Estate in fee simple absolute as of the Delivery Date. The only mortgage encumbrances outstanding against the Premises and the Real Estate as of the Commencement Date will be those mortgages held in the order of priority listed hereafter by (1) ________________, (the "Primary Mortgagee"), (2) __________________. For purpose of Section 1.8 of this Lease, the address of Tenant's Primary Mortgagee for notices is: ______________________________. Upon execution and delivery of this Lease, Landlord shall deliver to Tenant a so called "non-disturbance" agreement in recordable form from any mortgagee whose mortgage (or ground lessor whose lease) shall be prior in lien to the lien of this Lease. Such agreement shall provide that in the event of any foreclosure of the mortgage now held by the mortgagee or transfer in lieu of the foregoing, the mortgagee and its successors in interest agree that 4 5 (i) the Tenant's use, possession and enjoyment of the Premises shall not be disturbed and this Lease shall continue in full force and effect so long as Tenant is not in default beyond the applicable cure periods hereunder, and (ii) that such successor to the Landlord's interest will assume the obligations of Landlord under this Lease accruing subsequent to any such foreclosure or transfer. Landlord's title to the Premises and the Real Estate will be good and marketable as of the Delivery Date, free of liens and encumbrances (excluding that mortgage and ground lease described above), and there are no restrictive covenants, easements, or other agreements, zoning laws or other ordinances or regulations which will prevent the Tenant from occupying the Premises for the purpose herein provided, or prevent the full use of the parking areas or otherwise prevent the Real Estate from being developed in accordance with the general layout shown on Exhibit A or otherwise conflict with any of the provisions of this Lease. Landlord represents and warrants to Tenant that on the date of delivery of possession of the Premises to Tenant, the Premises shall be free of all violations, orders, or notices of violations of all public or quasi-public authorities, and that Tenant shall be permitted by authorities having jurisdiction thereover to occupy the Premises for the uses and purposes herein provided. Landlord further represents and warrants that the Premises shall be free from any and all materials, substances, devices or equipment defined as hazardous or otherwise controlled under any governmental law, rule or regulation, including any asbestos or asbestos-containing material. Notwithstanding anything in this Lease to the contrary, Landlord shall be responsible for configuring the Building such that the Building complies with all current, applicable provisions of the Americans with Disabilities Act (the "ADA") and agrees to indemnify and hold Tenant harmless from and against any and all costs, losses, liabilities, fines, damages and actions sought or incurred respecting any portion of the Building which is not in compliance with Title III of the ADA as of the Commencement Date. Tenant shall be responsible for complying with all current, applicable provisions of Title I of the ADA concerning Tenant's employment and hiring practices as an employer and agrees to indemnify and hold Landlord harmless from and against any and all costs, losses, liabilities, fines, damages and actions sought or incurred respecting Tenant's failure to comply with those provisions of Title I of the ADA concerning Tenant's employment and hiring practices as an employer. 5 6 8. ASSIGNMENT AND SUBLETTING. A. TENANT. Except as further set forth herein, Tenant may not assign or transfer all or any part of its right and interest under this Agreement, and may not sublet or permit the use and occupancy of all or any part of the Premises, to or by a third party without the prior written consent of the Landlord which consent will not be unreasonably withheld. The Landlord's consent under this Section 8 shall be in its reasonable discretion and subject to such conditions as the Landlord may reasonably impose. B. LANDLORD. The Landlord named in this Agreement may transfer and assign, in whole or in part, all of its rights and obligations under this Agreement and in the Real Estate. After such transfer or assignment the Landlord named in this Agreement will have no further liability to the Tenant under this Agreement for the obligations assumed by the assignee or transferee providing the new landlord or successor recognizes Tenant's rights under this Lease and assumes all obligations of the Landlord then accrued and thereafter accruing. 9. UNTENANTABILITY. If the Premises or the Building are made untenantable by fire or other cause, the Landlord may elect (a) to terminate this Agreement as of the date of such casualty by notice to the Tenant within thirty days after that date, or (b) to repair all damage to the Premises or the Building so that the same shall be restored to such condition as existed immediately prior to such damage. If the Landlord elects to terminate this Agreement, the rent shall be abated on a per-diem basis and be paid to the date of the fire or casualty. If the Landlord elects to restore the Premises and Building, such restoration shall be completed with reasonable promptness in substantially the same condition as existed immediately prior to the casualty. If the Premises are unusable during such restoration, or if the Tenant is reasonably required to close its operations while such repairs are made, the rent shall abate during such period of repair while such operations have ceased. If the Tenant continues to operate on the Premises during such repairs, but is unable to use a substantial portion of the Premises, then the rent shall be prorated in the proportion which the area of unusable leased space bears to the total Premises for the period that said space is unusable. The Landlord will not be liable for business losses to the Tenant by reason of damage to the Premises except for that damage caused by the negligent or willful actions of the Landlord. Notwithstanding anything contained in this Section 9 to the contrary, if the Premises are not or cannot be made tenantable within one hundred twenty (120) days after the date of the casualty for any reason whatsoever, the Tenant may terminate this Agreement and the Lease. 10. SIGNS. Tenant shall pay for all signs related to the Tenant's use of the Premises. No sign, advertisement, or notice may be inscribed, painted, or affixed on any part of the outside or inside of the Premises or Building by the Tenant except as first consented to by Landlord, which consent will not be unreasonably withheld, and then at the Tenant's expense and only of such color, size, style and material as is approved by the Landlord in writing. The Landlord reserves the right to remove all other signs at the expense of the Tenant. At the expiration of the Term the Tenant shall remove its signs from the Premises and the Building. 11. ALTERATIONS. No structural alterations or those affecting the mechanical, electric or plumbing systems of the Building or additions may be made and no fixtures may 6 7 be affixed to the Premises or the Building by the Tenant without prior written consent of the Landlord. All such alterations, additions, and fixtures, except the Tenant's trade fixtures, equipment and business machines, shall be and remain the property of the Landlord unless otherwise agreed in writing by the Landlord. 12. USE OF THE PREMISES. The Tenant (a) shall occupy and use the Premises during the Term for the purposes specified in Section 3, above and none other; (b) may not make or permit any use of the Premises which, directly or indirectly, is forbidden by public law, ordinance, or government regulations which may be dangerous to life, limb, or property, or which may invalidate or increase the premium cost of any policy of insurance carried by Landlord on or covering the Building and its operations; (c) may not obstruct or use for storage or for any purpose other than ingress and egress the driveways, parking areas, sidewalks, entrances, courts, corridors, vestibules, halls, elevators, and stairways of the Building; (d) may not create or maintain a nuisance in the Premises, (e) may not place, or permit to be placed, any article of any kind on the exterior walls except for any signs approved by Landlord; (f) may not attach additional locks or similar devices to any window and, upon termination of this Agreement or of the Tenant's possession, shall surrender all keys to the Premises and shall explain to the Landlord all combination locks on safes, cabinets, and vaults; (g) shall be responsible for locking the doors and closing the transoms and windows in and to the Premises; (h) may not install any awnings or other form of outside window covering or window ventilators or similar devices without the prior written consent of the Landlord; (i) except as provided in Exhibit B, may not overload any floor, shall route and locate safes and other heavy articles as the Landlord may direct; (j) may not mark, drill into, or in any way deface any part of the Premises or the Building without repairing any damage caused as a result The Landlord or Tenant may exclude or repel any peddler, solicitor or beggar. In addition to all other liabilities for breach of any covenant of this Section 12, the Tenant shall pay to the Landlord, as additional rent under this Agreement, an amount equal to any increase in insurance premiums paid by Landlord caused by such breach. The violation of any covenant of this Section 12 may be restrained by injunction. 13. REPAIRS. A. BY TENANT. Tenant shall take good care of the Premises and the fixtures in the Premises and other than as set forth in Subsection B of this Section 13, shall keep the Premises in good order, condition, and repair at the Tenant's expense during the Term, including the replacement of all interior broken glass and exterior glass broken by the Tenant with glass of the same size and quality. If the Tenant does not make necessary repairs within a reasonable time and adequately, the Landlord may, but need not, make such repairs, and the Tenant shall promptly pay the Landlord for the cost thereof as additional rent. On the expiration of the Term or on earlier termination or cancellation of this Agreement, the Tenant shall surrender the Premises and the Landlord's fixtures in as good condition as of the time of delivery to the Tenant, subject to reasonable wear and tear. All injury to the Building or fixtures caused by moving of the Tenant in and out of the Building caused by the Tenant and any damage done by water, steam, electricity, fire or other substances to the Building or fixtures, caused by the Tenant may be repaired by the 7 8 Landlord at the expense of the Tenant, and the cost thereof shall become immediately due and payable by the Tenant as additional rent upon the delivery of an itemized statement of such costs by the Landlord to the Tenant, or mailing the same, postage prepaid, to the Tenant at its last known address. B. BY LANDLORD. Except for defects occurring solely as a result of Tenants actions for which Tenant shall bear sole responsibility and cost, Landlord covenants and agrees, at its expense without reimbursement or contribution by Tenant, to keep, maintain and replace, if necessary, the plumbing system, the electrical system, the utility lines and connections to the Premises, the sprinkler mains, if any, and structural systems including, without limitation, the roof, roof membrane roof covering (including interior ceiling if damaged by leakage) and load-bearing walls and floor slabs and foundations necessary to preserve or maintain the useful life of any such component or system. In the event the Premises become or are out of repair and not in normal operating condition due to either the failure of Landlord to comply with the terms of this Section 14 or which constitute a Latent Defect, then Landlord shall perform or cause to be performed any and all repairs necessary to restore the Premises to a state of normal operating condition and repair. If such repairs are not completed within ten (10) days after Landlord has received written notice from Tenant of such state of disrepair or if such repairs cannot reasonably be completed within such ten (10) day period and Landlord shall fail to commence such repairs within ten (10) days after notice and proceed diligently thereafter, then Tenant may either (i ) terminate this Lease immediately upon delivery of written notice to Landlord if such failure to repair materially and adversely affects Tenant's operation of its business in the Premises or poses a threat to the safety of Tenant's employees or the integrity of the Building, or (ii) prosecute such repairs itself and apply the cost of such repairs against the next maturing monthly installment or installments of Rent due hereunder. Notwithstanding the foregoing in the case of an emergency (such as, without limitation, leaky roof), Tenant shall have the right to prosecute immediately any and all necessary repairs and shall deliver contemporaneous notification to Landlord of the emergency and related repairs and offset the cost of such repairs against the next maturing monthly installment or installments of Rent due hereunder; provided further that if contemporaneous notice is not practicable, as determined by Tenant in its sole judgment, then Tenant shall provide such notice as soon thereafter as reasonably practicable. 14. EMINENT DOMAIN. If the Building or Real Estate, or any portion thereof, which in Tenant's reasonable judgment prevents the operation of the Tenant's business shall be taken or condemned by a competent authority for any public use or purpose, the Term shall end upon, and not before, the date when the possession of the part so taken shall be required for such use or purpose. Otherwise, Rent shall abate proportionately with respect to that portion of the Building or Real Estate so taken. The Tenant may not share in the condemnation award, except for its personal property and relocation awards, if any, out of pocket costs and loss of its leasehold improvements. 15. ENVIRONMENTAL CONDITIONS. A. COMPLIANCE WITH LAWS. As a principal element of the consideration for the lease of the Premises to the Tenant by the Landlord, the Tenant acknowledges and agrees 8 9 that it is familiar and shall strictly comply with all applicable federal, state, and local statutes, laws, rules, regulations, and ordinances (collectively, the "Laws") relating to the use, handling and disposal of hazardous and toxic substances and wastes ("Hazardous Substances"), including all air, water, soil, solid waste and other environmental requirements, as an operator of a business on the Premises under this Agreement, including any community right-to-know rules and regulations. The Tenant agrees to comply with all of the Laws, to obtain all applicable permits, and to file all required notices and reports during the Term and the Tenant's possession of the Premises. B. INTENT TO HANDLE HAZARDOUS SUBSTANCES. The Tenant shall check this box if the Tenant intends or expects to handle or dispose of any Hazardous Substances on the Premises or the Real Estate. The Tenant shall immediately notify the Landlord in writing if the Tenant does not now intend or expect to handle or dispose of any Hazardous Substances on the Premises or the Real Estate, but does handle or dispose of any Hazardous Substances during the Term. C. CONTAINERS: SPILL CATCHMENT. The Tenant may install or use above-ground or underground storage tanks or containers only in strict accordance with the Laws and only with the prior written consent of the Landlord and according to standards and restrictions reasonably imposed by the Landlord. To the extent required by law, the Tenant shall provide secondary container or spill catchment devices to effectively prevent any spill or overflow related to the filling of any above-ground or underground tanks from contaminating the soil or ground water. With respect to each tank and container located in or on the Premises or the Real Estate, the Tenant shall label each container as to the contents in each such container. If the container holds any Hazardous Substances, the label shall specify the Hazardous Substance or Substances contained. D. SITE ASSESSMENT BY TENANT. At such time as the Landlord has reason to believe a Hazardous Substance may be present in or on the Real Estate by reason of a spill or other discharge of a Hazardous Substance, or otherwise, the Tenant, shall within thirty (30) days after written request from the Landlord, provide the Landlord with an environmental site assessment or environmental audit report prepared by an environmental engineering firm acceptable to the Landlord, to assess with a reasonable degree of certainty the presence or absence of any Hazardous Substance and the potential costs in connection with abatement, cleanup or removal of any hazardous substance found on, under, at or within the Real Estate. If the assessment or report shows the presence of any Hazardous Substance, the Tenant shall pay all costs related to the preparation of the report and assessment and to the required remediation. If the assessment fails to show the presence of any Hazardous Substance, Landlord shall pay all costs related to the preparation of the report and assessment and failing to do so within (30) days notice by Tenant, Tenant shall be entitled to pay these costs and deduct same from the next rental payments. E. SITE ASSESSMENT BY LANDLORD. In the event Tenant vacates the Premises or defaults with respect to its obligations under Subsection D above, the Landlord (or its representatives) may visit the Real Estate and perform or cause to be performed environmental site investigations and assessments ("Site Assessments") on the Real Estate for the purpose of determining whether there exists in or on the Real Estate any environmental condition which could result in any liability, cost or expense to any owner or 9 10 occupier of the Real Estate. Such Site Assessment may include both above and below the ground testing as may be necessary to properly conduct the Site Assessments in the opinion of the persons conducting the Site Assessments (the "Site Reviewers"). The Tenant shall supply to the Site Reviewers such historical and operational information regarding the Premises and the Real Estate as may be requested by the Site Reviewers to facilitate the Site Assessments and will make available for meetings with the Site Reviewers appropriate personnel having knowledge of such matters. In the event the Site Assessment reveals the presence of Hazardous Substances introduced by the Tenant, the cost of performing all Site Assessments shall be paid by the Tenant within five (5) days after written demand by the Landlord, and thereafter shall bear interest at the rate of 12% per annum. Otherwise, the Landlord shall bear this cost. F. ENVIRONMENTAL INDEMNIFICATION. The Tenant shall indemnify, release, discharge, defend and hold the Landlord harmless from and against, and shall assume, any and all liability including, without limitation, all liability for reporting, assessment, investigation, removal and remediation, and all costs and expenses, arising out of, as a result of, or in connection with any failure of the Tenant or its employees, agents or assigns, to comply with any of the Laws and any and all contamination or the results thereof in the air, soil, and ground water at the Premises and the Real Estate, or at a disposal site to which waste materials generated by the Tenant at the Premises or the Real Estate, or elsewhere, were disposed, as well as any and all releases of contamination from the Premises or the Real Estate caused by or contributed to by the Tenant during the Term and the Tenant's possession of the Premises however except as to any Hazardous Substances introduced by Landlord. The Tenant's obligations under this paragraph shall arise on the discovery of any violation of or non-compliance with any Law by the Tenant, or the contamination of the Premises or the Real Estate, whether or not any federal, state or local agency has taken or threatened any action. Landlord shall indemnify and hold Tenant harmless from and against any and all claims, demands, losses, costs, liabilities and judgments arising from or relating to (i) the violation of any environmental laws, or (ii) the presence of any contamination in, on, or below the Real Estate, including any ground water, existing as of the Commencement Date. G. SURVIVAL OF SECTION. The provisions in this Section 15 shall be in effect from the date of this Agreement, shall apply whether or not the Tenant subsequently subleases the Premises, or any part of the Premises, to any third party, and shall remain in effect and shall survive the termination or expiration of this Agreement. 16. RIGHTS RESERVED TO LANDLORD. The Landlord reserves all rights incident to its ownership of the Building, including, but not limited to, the right (d) if, during or prior to the termination of this Agreement, the Tenant vacates the Premises, to decorate, remodel, repair, alter, or otherwise prepare the Premises for reoccupancy; (f) to exhibit the Premises during the last 180 days of the Term during normal business hours and upon no less than twenty-four (24) hours notice to Tenant; (g) to take any and all measures, including inspections, repairs, alterations, additions, and improvements to the Premises or to the Building as may be necessary or desirable for the safety, protection, or preservation of the Premises or to the Building or the Landlord's interest therein, or as may be necessary or desirable in the operation of the Building during normal business hours and upon no less 10 11 than twenty-four (24) hours notice to Tenant. The Landlord may enter upon the Premises and may exercise any or all of the foregoing rights hereby reserved without being deemed liable for an eviction or disturbance of the Tenant's use of possession and without being liable in any manner to the Tenant providing same causes no unreasonable interference with Tenant's business operations. 17. HOLDING OVER. If the Tenant retains possession of the Premises, or any part thereof, after the termination of this Agreement by lapse of time or otherwise, the Tenant shall pay to the Landlord rent at two times the rate of the then current rental specified in this Agreement for the time that the Tenant thus remains in possession. The provisions of this Section 17 do not waive the Landlord's right of re-entry or any other right under this Agreement. Notwithstanding anything in this Section to the contrary, in the event that Tenant is conducting negotiations in good faith with Landlord for a renewal of the Lease, Tenant may remain in the Premises at the same annual Rent as during the lease year of the Term (or extended term as the case may be) provided, however, upon reaching agreement with Landlord on new lease terms for the renewal, Tenant will pay, retroactively, the agreed to new annual minimum Rent for the entire holdover period; and further, provided, in the event that Landlord deems that Tenant is not, in Landlord's reasonable judgment bargaining in good faith, or Landlord and Tenant cannot reach a mutually acceptable agreement in Landlord's reasonable judgment then upon thirty (30) days' notice to Tenant, Tenant's rent shall be two times the amount of the Rent then applicable pro rated on per diem basis for each day Tenant shall retain possession of the Premises or any part thereof after expiration of said thirty (30) days' notice. 18. NOTICE AND PAYMENTS. Any notice which the Landlord may desire or be required to give the Tenant shall be deemed sufficiently given or rendered if delivered in writing to the Tenant personally or sent by certified or registered mail, addressed to the Tenant at the Premises, return receipt requested. All payments to the Landlord and any notice which the Tenant may desire or be required to give the Landlord shall be deemed sufficiently given or rendered if delivered in writing to the Landlord personally or sent by certified or registered mail, return receipt requested, addressed to the Landlord, Blackthorn Area Partners, c/o Holladay Property Services, Inc., 220 West Colfax Avenue, P.O. Box 1331, South Bend, IN 46624, or at such other place as the Landlord may from time to time designate in writing. 19. DEFAULT BY TENANT. In the event of a default by the Tenant under this Agreement, the Landlord will have the following remedies: A. TENANT'S INSOLVENCY. If the Tenant makes an assignment for the benefit of creditors or if a receiver is appointed for the Tenant or for the Tenant's assets or interest in this Agreement, or if any voluntary or involuntary petition or similar pleading under any section of any bankruptcy law is filed by or against the Tenant or any voluntary or involuntary proceedings in any court or tribunal is instituted to declare the Tenant insolvent or unable to pay its debts and, in the case of any involuntary petition or proceeding which Tenant is not diligently seeking to have dismissed, if it is not dismissed within thirty days from the date it is filed, then the Landlord, at its election and without further notice or demand and either with or without entry upon the Premises, may immediately terminate and cancel this Agreement and this lease and shall thereafter, for the remainder of the Term, 11 12 be entitled to recover damages in an amount equal to the present value of the rental obligation herein stated, including increases in rent as provided in this Agreement, less rent for the Premises which the Landlord obtains. B. LANDLORD'S REMEDIES. If the Tenant fails to pay any rent or other monies owed to the Landlord on the date it is due, and thereafter fails to cure such default within ten days after receipt of written notice from the Landlord, or is otherwise in default of any of its obligations or duties under this Agreement and is not in the process of diligently curing same, then the Landlord may, without being liable for prosecution or claim for damages, enter into and upon the Premises, or any part thereof, and repossess the same, with or without terminating this lease and without prejudice to any of its remedies for rent, entry, possession, damages, or breach of covenant and may, at its option, terminate this Agreement by giving written notice of its election to do so or may, at its option, lease the Premises, or any part thereof, as the agent of the Tenant, or otherwise. The Tenant shall, without demand or further process of law, pay to the Landlord at the end of each month during the Term the difference between the rent due to the Landlord from the Tenant under this Agreement, including any increases in rent due under this Agreement, and the net receipts, if any, being received by the Landlord from the Premises (such net receipts to be calculated by deducting from the gross receipts the expenses incurred by the Landlord in connection with the re-letting of the Premises and performing the Tenant's obligations under this Agreement). If the rent for re-letting the Premises is higher than the monthly rent under this Agreement, then such excess rent shall belong to the Landlord and the Tenant will have no claim or right thereto. The failure or delay of the Landlord in taking any action or pursuing any remedy in the event of a default by the Tenant may not be considered a waiver or consent by the Landlord. C. TENANT'S AND LANDLORD'S ENFORCEMENT COSTS. The other party shall pay upon demand all the prevailing party's costs, charges, and expenses, including reasonable fees of attorneys, agents, and others retained by the prevailing party incurred in enforcing the other party's obligations under this Agreement or incurred by the prevailing party in any litigation, negotiation, or transaction in which the other party causes the prevailing party to become involved or concerned. 20. DEFAULT BY LANDLORD. If the Premises, or any part thereof, are at any time subject to a mortgage, a deed of trust, or a similar lien instrument and this Agreement or the rentals are assigned to such mortgagee, trustee, or beneficiary, and the Tenant is given written notice thereof, including the post office address of such assignee, then the Tenant may not terminate this Agreement for any default on the part of the Landlord without first giving written notice by certified or registered mail, return receipt requested, to such assignee, to the attention of the mortgage loan department, specifying the default in reasonable detail, and affording such assignee a reasonable opportunity to make performance at its election for and on behalf of the Landlord. In the event Landlord shall neglect or fail to perform or observe any of the provisions, covenants or conditions contained in this Lease on its part to be performed or observed (i) within ten (10) days after written notice in the case of default in the payment of money, and (ii) in all other cases within thirty (30) days after written notice of default, unless more than thirty (30) days shall be required because of the nature of the default, in which case if Landlord shall fail to 12 13 proceed diligently to cure such default after notice, Landlord shall be responsible to Tenant for any and all actual damages sustained by Tenant as a result of Landlord's breach. After the expiration of any such period, Tenant, in addition to any other right or remedy it may have at law or in equity, shall have the right to cure any such default at Landlord's expense, and Landlord shall be obligated to reimburse Tenant on demand (in default of which Tenant may reimburse itself out of succeeding rent payments) for all of Tenant's costs and expenses in connection therewith, including, but not limited to, all costs and reasonable attorneys' fees incurred to cure such default or breach of Lease. 21. LIABILITY INSURANCE AND INDEMNIFICATION. A. REQUIRED COVERAGE. The Tenant shall maintain, and provide to the Landlord acceptable evidence of liability insurance of not less than $1,000,000 per occurrence for bodily injury and not less than $100,000 per occurrence for property damage. The Landlord and its mortgagee shall be designated as a named insured with the right to notice of cancellation or amendment thirty (30) days prior to the effective date thereof. Said insurance shall be maintained during the Term. During the construction of the Building, Landlord shall maintain a policy of builder's risk insurance in an amount no less than the full replacement value of the improvements. B. INDEMNIFICATION. The Tenant shall indemnify, defend, and save the Landlord harmless against and from all losses, liabilities, costs, damages, and expenses, including reasonable engineers', architects' and attorneys' fees, which may be incurred by or asserted against the Landlord by reason of or in respect to any of the following occurring during the Term: (i) Any work or thing done by the Tenant in, or, or about the Premises, or any part thereof; (ii) Any use, nonuse, possession, occupation, condition, operation, maintenance, or management by the Tenant of the Premises, or any part thereof; (iii) Any negligence on the part of the Tenant occurring in the Premises and the Building, and on the Building Site. C. DEFENSE. If any action or proceeding is brought against the Landlord, or the Real Estate by reason of any losses, liabilities, costs, damages, or expenses incurred by or asserted against the Landlord, by reason of or in respect to any of the matters or things set forth in subsection B of this Section 21, the Tenant shall, upon written notice from the Landlord and at the Tenant's expense, resist or defend such action or proceeding. The Tenant agrees to give the Landlord prompt written notice of any claim, action, or proceeding brought or threatened against the Landlord, the Tenant, or the Real Estate. Landlord hereby indemnifies and agrees to save Tenant, its officers, directors, employees and agents harmless from and against any and all claims, suits, proceedings, actions, causes of action, responsibility, liability, demands, judgments and executions (hereinafter referred to as "Claims") which either (i) result from any default, breach, violation or non-performance of this Lease or any provision of this Lease by Landlord; (ii) result from occurrences of injury to or death of any person, or damage to property, arising out of any work, construction, reconstruction, restoration, maintenance or other work to be done hereunder by Landlord, unless such Claims are caused by the act or omission of Tenant, or its employees, agents or contractors. 13 14 22. TENANT ESTOPPEL CERTIFICATE. The Tenant agrees that at any time and from time to time, upon not less than ten (10) days prior written request by the Landlord, then the Tenant shall execute, acknowledge, and deliver to the Landlord a statement in writing certifying, to the extent it is true, that this Agreement is unmodified and in full force and effect (or, if there have been modifications, stating the modifications, and that this Agreement, as so modified, is in full force and effect), the commencement and termination dates of this Agreement, that the Tenant has accepted the Premises, the date to which the rental and other charges have been paid in advance, if any, and that the Tenant has no claims against the Landlord or offsets against rent. It is intended that such statement may be relied upon by prospective purchasers of the Landlord's interest in the Real Estate, or by the mortgagee or assignee of any mortgage on the Landlord's interest in the Real Estate. 23. LIENS. The Tenant may not do any act which in any way encumbers the interest or title of the Landlord in the Premises or the Real Estate, nor may the interest or title of the Landlord in the Premises or the Real Estate be in any way subject to any claim by way of lien or encumbrance, whether by operation of law or by virtue of any express or implied contract by the Tenant. The Tenant may not permit the Premises or the Real Estate to become subject to any mechanics', laborers' or material men's liens on account of labor or material furnished, or claimed to have been furnished, to the Tenant for or on the Premises or the Real Estate. In the event, but only in the event, Tenant fails to remove or bond over such lien or diligently pursue same, the Landlord may (but is not required to) remove or discharge such lien, or claim for lien (with the right, in its discretion, to settle or compromise the same), and any amounts advanced by the Landlord for such purposes shall be additional rent immediately due from the Tenant to the Landlord. 24. MISCELLANEOUS. A. The invalidity of any provision, clause, or phrase will not serve to render the balance of this Agreement ineffective or void. This Agreement shall be governed by the laws of the State of Indiana. B. If the Landlord or the Tenant institutes legal proceedings against the other for breach of any of the covenants or conditions in this Agreement, then the prevailing party shall recover reasonable attorneys' fees and expenses from the other. C. This Agreement shall be binding upon and inure to the benefit of the respective parties hereto, their heirs, executors, administrators, successors, and assigns. Any reference to the Tenant or the Landlord shall, for the purpose of determining liability for property damage, personal injury, and the like, be deemed to include the Tenant, the Landlord, his or its receptive agents, employees, servants, partners, independent contractors, licensees, invitees, guests or visitors. D. This Agreement supersedes and cancels all prior negotiations and agreements between the Landlord and the Tenant. This Agreement may be amended or altered only by written agreement signed by both the Landlord and the Tenant. E. All amounts owed by either the Tenant or Landlord to the other under this Agreement shall be deemed due and payable on the fifth working day after the date the party renders a statement of account therefore to the other and shall bear interest at the rate of 12% per annum from the date due and payable until paid. 14 15 F. So long as the Tenant has paid the rent and all other charges under this Agreement and has performed all obligations under this Agreement, then the Tenant shall have quiet possession of the Premises during the Term. G. No consent or approval required of the Landlord in this Agreement may be unreasonably withheld. H. Canvassing, soliciting and peddling on the Real Estate are prohibited, and the Tenant shall cooperate to prevent the same. 25. RULES AND REGULATIONS. The Landlord reserves the right to make reasonable rules and regulations for the Premises and the Real Estate. The Tenant shall abide by all reasonable rules and regulations adopted by the Landlord pertaining to the operation and management of the Premises and the Real Estate. If any rules and regulations adopted by the Landlord are contrary to the provisions of this Agreement, the terms of this Agreement shall govern. 26. OPTION TO EXTEND. Tenant shall have the right and option (the "Extension Option"), which said option and right shall not be severed from this Lease or separately assigned, mortgaged or transferred, to extend the initial Term for two (2) additional consecutive periods of five (5) years each (hereinafter referred to as the "Extension Periods"), provided that (a) Tenant shall give Landlord notice of Tenant's exercise of such option at least six (6) full calendar months prior to the expiration of the initial Term for the first (5) year extension and at least six (6) full calendar months prior to the expiration of the first Extension Period for second five (5) year extension and (b) Tenant shall not be in default (beyond expiration of applicable notice and cure periods, if any) in the performance or observance of any of the terms and provisions of the Lease on the part of Tenant to be performed or observed at the time of giving the applicable notice and the commencement of the applicable Extension Period. Except for the amount of Rent, all the terms, covenants, conditions, provisions and agreements in the Lease contained shall be applicable to the Extension Period, except that (i) there shall be no further option to extend the Term and (ii) Landlord shall not be obligated to make or pay for any improvements to the Premises. If Tenant shall give notice of its exercise of the option to extend in the manner and within the time period provided aforesaid for either Extension Period, the Term shall be extended upon the giving of such notice without the requirement of any further attention on the part of either Landlord or Tenant. Landlord hereby reserves the right, exercisable by Landlord in its sole discretion, to waive (in writing) any condition precedent set forth in clauses (a) or (b) above. If Tenant shall fail to give timely notice of the exercise of such option as aforesaid, Tenant shall nave no right to extend the Term of this Lease, time being of the essence of the foregoing provisions. Any assignment of this Lease by Tenant, any subletting of all or any part of the Premises and any termination of this Lease shall terminate this Extension Option and all rights granted to Tenant under this Section 26, unless such assignment or subletting is permitted under Section 9 of this Lease. The Rent payable for either Extension Period shall be the Fair Market Rent (as said term is hereinafter defined) for the Premises as of commencement of the subject Extension Period. In determining Fair Market Rent, the following factors, among others, shall be 15 16 taken into account and given effect: size of the Premises, location of the Premises, lease term and rents being quoted in St. Joseph County, Indiana for comparable space. Landlord shall have the right to initially designate the Fair Market Rent by giving written notice (the "Rent Notice") to Tenant. Such notice shall be given to Tenant no later than sixty (60) days prior to the deadline set forth above by which Tenant must give Landlord notice of Tenant's exercise of this option to extend for either Extension Period. If Tenant disagrees with Landlord's designation of the Fair Market Rent, Tenant shall have the right, by written notice (the "Arbitration Notice") given to Landlord within fifteen (15) days after Tenant has notified Landlord of its exercise of its option to extend, to submit such Fair Market Rent to arbitration as follows: Fair Market Rent shall be determined by impartial arbitrators, one to be chosen by Landlord, one to be chosen by Tenant, and a third to be selected, if necessary, as below provided. Landlord and Tenant shall each pay all actual costs and expenses of their respective arbitrators and they shall split the actual costs and expenses of the third arbitrator. The unanimous written decision of the two first chosen, without selection and participation of a third arbitrator, or otherwise, the written decision of a majority of three arbitrators chosen and selected as provided below, shall be conclusive and binding upon Landlord and Tenant. Landlord and Tenant shall each notify the other of its chosen arbitrator within ten (10) business days following the call for arbitration and, if such two arbitrators shall not have reached a unanimous decision within thirty (30) days after their designation and are unable to agree upon the designation of a third arbitrator, they shall so notify the American Arbitration Association sitting in Indianapolis, Indiana and request it to select an impartial third arbitrator, who shall be an office building owner, a real estate counsellor or lawyer or a broker dealing with like types of properties, to determine Fair Market Rent as herein defined. The arbitrators shall advise the parties of their determination at least 30 days prior to the respective Extension Period. If the decision by the arbitrators has not been made before the commencement of Tenant's obligation to pay rent based upon such Fair Market Rent, then Tenant shall pay Rent and other charges under the Lease in respect of the Premises in the amounts which were applicable to the twelve (12) month period immediately prior to the applicable Extension Period until the decision of the arbitrators, at which time Tenant shall pay any underpayment of Rent and other charges to Landlord, or Landlord shall refund to Tenant any overpayment, as the case may be. Failure of Tenant to give an Arbitration Notice within fifteen (15) days after receipt of the Rent Notice (time being of the essence) shall constitute Tenant's agreement to the Rent specified in the Landlord's Rent Notice. 27. CONDITIONS PRECEDENT. This Lease and the Tenant's obligations under this Lease are conditioned upon and expressly subject to: (i) Landlord acquiring good and marketable title to the Real Estate no later than November 1, 1995, (ii) completion and attachment to the Lease of the floor plan to be attached as Exhibit A depicting the layout of the Building, the interior of the Premises and the Building exterior and all parking areas and driveways, all as satisfactory to Tenant and completion and attachment to the Lease of the Landlord Work Letter as Exhibit B to include those specifications which are satisfactory to Tenant no later than thirty (30) days after this Lease is signed by the Tenant; (iii) Landlord making and diligently prosecuting all applications to effect an abatement of the taxes assessed against the Real Estate through all state, county, city and other applicable 16 17 governmental entities and having such abatement in effect as of the Commencement Date. In the event any one of these conditions are not met by their respective deadlines (unless extended in writing by Tenant), Tenant shall have the right to terminate this Lease upon written notice to Landlord upon which event Tenant shall be relieved of all obligations under the Lease whether heretofore accrued or not and shall be entitled to reimbursement of any sums advanced or otherwise paid to Landlord. IN WITNESS WHEREOF, the parties have entered into this Industrial Lease Agreement as of the date first written above. LANDLORD BLACKTHORN AREA PARTNERS By: /s/ John T. Phair ----------------------------------- Its: President Hollady of Indiana, Inc. General Partner TENANT WELLS ELECTRONICS, INC. By: /s/ Richard J. Mullin ----------------------------------- President EX-10.26 6 INDUSTRIAL LEASE AGREEMENT 1 Exhibit 10.26 LANDLORD: Blackthorn Area Partners TENANT: Wells Electronics, Inc. LEASE AMENDMENT --------------- This lease amendment dated May 16, 1997 by and between Blackthorn Area Partners (Landlord) and Wells Electronics, Inc. (Tenant) hereby extends all terms and conditions of an original lease agreement dated September 21, 1995 by and between the Landlord and Tenant for leased space located at 52940 Olive Road, South Bend, Indiana, with the following changes as shown: 1. Landlord shall construct an additional parking lot north of existing building, approximately 65' x 220' containing forty-eight (48) parking spaces. 2. Rent shall be changed effective June 1, 1997 as follows: Increase in monthly rent per Paragraph 4 from $23,666.67 per month to $24,041.67. All other terms and conditions to remain in effect per the original lease agreement. This Agreement hereby accepted this 21st day of MAY, 1997. Landlord: Blackthorn Area Partners By: /s/ John T. Phair -------------------- John T. Phair General Partner Tenant: Wells Electronics, Inc. By: /s/ Richard J. Mullin --------------------- Richard J. Mullin President EX-10.27 7 SUBLEASE DATED 10/10/92 (PALEANA BUILDING) 1 Exhibit 10.27 [TRANSLATION] SUBLEASE AGREEMENT FOR PALEANA BUILDING 2 Terms and Conditions of Sublease Sublessor Daiwa House Industry Co., Ltd. Sublessee Wells Japan Co., Ltd. (1) Building Name: Paleana Building Location: 2-15, Shin-yokohama 2-chome, Kohoku-ku, Yokohama Structure: Reinforced concrete building with a steel framework Scale: One basement, nine floors and one penthouse Total floor space: 2,349.84 tsubo (7,768.08 m2) (2) Room for sublease Floor, Room Number The 6th Floor Room Nos. 601 and 602 Area 185.56 tsubo (613.42 m2) (3) Purpose of sublease Office (4) Term of sublease From April 1, 1996 to March 31, 1998 (5) Rent (per month) (Y)1,391,700 (excluding consumption tax) (6) Common areas fee (Y)463,900 (excluding consumption tax) (per month) (7) Lease deposit (Y)16,700,400 (8) Special agreement The Lessor (hereinafter referred to as "A") and the Lessee (hereinafter referred to as "B") conclude this Sublease Agreement (hereinafter referred to as "this Agreement") on Paleana Building (hereinafter referred to as the "Building") owned by Haya Kaneko (hereinafter referred to as "C") as follows: (Purpose) Article 1. Under the Lease Agreement for the Building as a whole that was separately made between A and C, A agrees to sublease the rooms to B and B agrees to sublease such rooms from A in accordance with the provisions hereinafter set forth. (Rooms for sublease) Article 2. The rooms for sublease shall be the rooms set forth in Column (2) of the Terms and Conditions of Sublease which constitute the Building set forth in Column (1) thereof. 2. The rooms for sublease prescribed in the preceding paragraph shall be marked with red solid lines on the drawing attached at the end of this Agreement and the area of such rooms shall be calculated from the center line of the walls. (Purpose of use) Article 3. B shall use the rooms only for the purpose set forth in Column (3) of the Terms and Conditions of Sublease and shall not use such rooms for any other purpose. 2. B shall report to and obtain the necessary permission from the government or public agencies and take any other necessary procedures regarding the purpose of use prescribed in the preceding paragraph all on its own responsibility and at its expense. (Term of the sublease) Article 4. The term of this sublease shall be as set forth in Column (4) of the Terms and Conditions of Sublease. (Renewal) 3 Article 5. Unless either A or B otherwise expresses to the other party not later than six months prior to the expiration of the term of the sublease, this Agreement shall be renewed for two years under the same terms and conditions. If A considers it necessary upon expiration hereof, a new sublease agreement shall be executed. This shall apply to any subsequent renewal of this Agreement. (Cancellation) Article 6. If B cancels this Agreement before the commencement of term of sublease for its reasons or due to any reason for which it is liable, it shall pay to A damages in an amount equivalent to the rent for six months. 2. If either A or B intends to cancel this Agreement during the term of sublease, it shall notify the other party of its intention in writing not later than six months prior to the expiration hereof. 3. B may not withdraw the already notified intention to cancel this Agreement nor change the already notified date of cancellation without A's consent. 4. B may cancel this Agreement immediately by paying to A an amount equivalent to the rent and common areas fee for six months instead of giving an advance notice as prescribed in paragraph 2. (Rent) Article 7. The rent shall be in the amount set forth in Column (5) of the Terms and Conditions of Sublease and the rent for B shall be calculated as from September 1, 1996. B shall pay the rent for September 1996 by August 25, 1996, and shall thereafter pay the rent for the next month by the 25th day of each month, to the bank account designated by A (The breakdown is shown in Appendix (2) at the end of this Agreement). 2. The amount of the rent for less than a month shall be calculated by the day according to the actual number of days for the month concerned. 3. A will issue no receipt for the rent and common areas fee. (Common areas fee) Article 8. B shall pay to A an amount set force in Column (6) of the Terms and Conditions of Sublease as common areas fee which is necessary for the maintenance, management, operation, etc. of the common areas and facilities of the Building (The breakdown is shown in Appendix (2) at the end of this Agreement). 2. The common areas fee shall be calculated as from the day when the work for the rooms for sublease is started, provided, however, that the payment method of such fee shall be the same as that of the rent prescribed in the preceding Article. (Revision of rent, etc.) Article 9. The rent and common areas fee shall be revised every two years beginning on the date of conclusion of this Agreement and the amount of such revision shall be determined by the consultation between A and B. 2. If taxes or public imposts or any other charges are raised, the price of land and buildings rises rapidly, the body and facilities of the Building are remodeled or any other economic situations change, or the amount of the rent and common areas fee of the Building become inappropriate compared with those of neighboring buildings, A may revise the rent and common areas fee during the term of sublease. (Expenses other than rent and common areas fee) Article 10. B shall pay the following expenses: (a) Heating, ventilation and air-conditioning (HVAC), garbage collection, electricity for lighting, powered equipment, etc., gas, water, sewerage, etc. in connection with B's use of the rooms; (b) Cleaning of the rooms (including B's fixtures, equipment and furniture) and cleaning and repairing of fluorescent lamps, outlets and inlets of air-conditioning equipment; (c) Exchange of bulbs of lighting appliances for the rooms; (d) Extermination of rats and pest insects from the rooms; (e) Fee of the neighborhood association; and (f) Any other fees and expenses which B should pay. 4 2. If A pays on B's behalf any of the expenses set forth in the items of the preceding paragraph, B shall repay to A, immediately upon A's request, the amount of the expense paid by A by the method designated by A. (Real property acquisition tax and fixed assets tax) Article 11. The real property acquisition tax and fixed assets tax imposed on the fixtures and accessory equipment owned by B shall be incurred by B regardless of no matter whom the payment statement of such tax is addressed to. 2. If the real property acquisition tax and fixed assets tax to be imposed on B's fixtures and accessory equipment as set forth in the preceding paragraph are levied on A together with any taxes on the main structure of the Building, A shall calculate the amount of such taxes by a fair and appropriate method based on, for example, the method of dividing the cost of work and ask B in writing to pay to A such amount. 3. If it is asked by A in writing, B shall pay to A such amount without delay by the method designated by A. (Consumption tax) Article 12. B shall pay to A by the same payment method as that of rent, etc. the amount of consumption tax arising in connection with the payment of rent, etc. in accordance with this Agreement which is calculated by multiplying the amount specified in (a) below by the ratio prescribed by the Consumption Tax Law: (a) The rent prescribed in Article 7, the common areas fee prescribed in Article 8 and other expenses to be paid to A by B which are subject to consumption tax. (Lease Deposit) Article 13. B shall pay to A as a lease deposit an amount equivalent to 20% of the amount set forth in Column (7) of the Terms and Conditions of Sublease which is (Y)3,340,080 at the time of conclusion of this Agreement and an amount equivalent to 80% of such amount which is (Y)13,360,320 not later than March 31, 1996. The breakdown of the deposit is shown in Appendix (2) at the end of this Agreement. 2. The deposit shall bear no interest throughout the deposit term. 3. If the rent is revised, B shall additionally deposit with A without delay an amount equivalent to the difference between the revised rent and the rent applicable immediately prior to the rent revision for six months. 4. During the term of this Agreement, B may not demand to offset the lease deposit against any liabilities which it may owe to A including the rent. 5. If B fails to fulfill any of its obligations under this Agreement or any contract, etc. signed in connection herewith, such as the payment of rent, or is obligated to compensate for damage, A may appropriate all or part of the deposit for the fulfillment of obligations or for the compensation for damage. 6. If A appropriates the deposit for the fulfillment of B's obligations pursuant to the preceding paragraph, B shall make up for the resultant deficiency of the deposit within seven days after receipt of the notice on such appropriation. 7. If this Agreement is terminated due to expiration, cancellation or any other reason, A shall repay to B the deposit three months after B vacates the rooms completely or when a new sublessee moves into the rooms and A receives a deposit amount corresponding to the deposit specified in this Article, whichever is earlier, after deducting therefrom all of B's liabilities to A. (Damages for Delayed Payment) Article 14. If B is in arrears with its rent or any other liabilities hereunder, A may demand that B pay to A damage in a sum equal to 18% per annum of the amount in arrears for the actual number of days elapsed, provided that compensation for such damage shall not exempt B from the exercise of the right to cancel the Agreement by A. (Acts prohibited) Article 15. B shall not commit any one of the following acts: 5 (a) To transfer to any third party or to place as a collateral the right to lease the rooms, right to the deposit or any other right arising in connection with this Agreement; (b) To allow any party other than B to take over any right arising in connection with this Agreement, in whole, by the transfer of the business, merger or any other method; (c) To sublease all or part of the rooms to any third party or offer the same for the use of any third party; (d) To allow any third party to share the rooms, put up a nameplate of any party other than B or install a telephone, telex or the like in the name of any party other than B; (e) To commit any act annoying to other tenants or causing damage to the Building, including the rooms; (f) To suspend all or part of the business or close all or part of the rooms without A's consent; (g) To commit any act against the management rules, etc. separately established. (Obligation to manage the Building, etc.) Article 16. A shall make efforts to manage the Building and accessory equipment and to operate and maintain the same so as not to hinder the conduct of B's business. 2. B shall observe the management rules and other related rules separately established by A and shall use the rooms and the entrance hall, stairs, elevators and other common areas and facilities with good manager's care. If A adds or changes the management rules or other related rules, B shall approve such addition or change and observe these in the same way as the original rules. (Acts requiring A's consent) Article 17. B shall obtain A's prior written consent if it does any one of the following acts: (a) To install, add, remove, alter or remodel partitions, doors or other fixtures or equipment (including outdoor open spaces); (b) To install, add or alter facilities for electricity, water, sewerage, sanitation, HVAC, gas, telephone, cable broadcasting, etc.; (c) To put up a trade name, trademark or the like on the entrance door, wall, window, shutter, etc.; (d) To bring into and install in the rooms a safe or any other heavy article; (e) To change the key to the entrance door; (f) To install a signboard or a billboard; (g) To otherwise change the original state of the rooms or the Building similar to the preceding items. 2. The work done in connection with the preceding paragraph shall be performed by A or the contractor appointed by A in principle and the cost of such work shall be paid by B. (Repairs) Article 18. If the rooms or A's fixtures or equipment requires or is likely to require repair due to damage or trouble, B shall promptly notify A of it. 2. If upon B's notice A considers it necessary, A will carry out such repairs at its cost. However, the change, painting, etc. of the ceiling, wall or floor of the rooms, the repairs that become necessary due to the intentional act or negligence of B, its related any person or the repairs of B's own fixtures, equipment, etc. shall be made at B's cost. 3. Even if B carries out the repairs specified in the preceding paragraph at its cost and on its own responsibility, B shall obtain A's prior written consent. (Obligation to compensate for damage) Article 19. If B or B's representative, employee, subcontractor, visitor or any other person concerned with B causes damage to A, other sublessee or any third party due to an intentional act or negligence, B shall promptly report to A such fact and immediately compensate for all of such damage at its cost by restoring to the original state or otherwise. (Cancellation of the Agreement) Article 20. If B commits any one of the following acts, A may cancel this Agreement without notice: 6 (a) If B is in arrears with the rent or any other liabilities for two months or more or is delayed in any payment several times; (b) If an application for provisional seizure, provisional disposition, disposition by suspension of bank transactions, compulsory execution, dissolution, bankruptcy, composition, reorganization corporate rehabilitation or the like is made against B; (c) If there occurs any event that will greatly damage B's reputation; (d) If B violates any one of the provisions of this Agreement or any contract signed in connection herewith. 2. If this Agreement is canceled pursuant to the preceding paragraph, B shall pay to A an amount equivalent to six month's rent; provided that the payment of such amount by B shall not prevent A from demanding compensation for damage. (Termination of this Agreement) Article 21. If due to a natural disaster or any reason for which A is not responsible all or part of the Building is lost or destroyed and it becomes impossible to use the rooms, this Agreement shall be terminated as a matter of course. A shall not be responsible for the damage caused to B as a result of such termination and B may not claim for A any money or other compensation in any name whatsoever. (Obligation to restore to the original state) Article 22. If this Agreement is terminated (including the case where it is canceled), B shall at its cost restore the rooms to their original state by removing the fixtures and equipment it installed, added or a altered at its cost and its own furniture and the like from the rooms, removing the articles installed or added by A upon B's request and returning the same to A if A so requests; and repairing the breakage or trouble of the rooms, fixtures, equipment, etc. and the wear and tear caused by B's special method of use and shall then vacate and return the rooms to A. 2. If B fails to restore the rooms to their original state upon termination of this Agreement, A may remove the fixtures, equipment, etc. repair the breakage and trouble and the wear and tear caused by B's special method of use and demand from B the expense therefor. 3. If there remains any article left by B in the rooms or in the Building after the termination of the Agreement and vacation of the rooms made by B, A may freely dispose of such article as an article transferred by B to A at no cost and may demand from B the expense of such disposal. 4. If it is considered inappropriate to perform work for restoring to the original state, A shall determine the measure to be taken based on the consultation between A and B. 5. For the purposes of this Article, the term "original state" means the work to be carried out at A's cost as set forth in the Work Share Table attached at the end of this Agreement (Further details shall be as specified in the completion drawings of the Building). (Fee until the completion of vacation) Article 23. If B fails to vacate the rooms upon termination of this Agreement, it shall pay to A a penalty in an amount equivalent to double the rent for the period from the day following termination of this Agreement to the completion of vacation and an amount equivalent to other expenses to be paid by B and shall also compensate for the damage caused to A due to delayed vacation. (Prohibition of claims for vacation money) Article 24. Upon vacation of the rooms B may not demand from A in any name or for any reason whatever, the refund of the necessary and beneficial expenses it paid for the rooms, fixtures, equipment, etc. or the payment of vacation money, key money, etc. nor demand that A buy the fixtures, equipment, etc. installed in the rooms at B's cost. (Management of the Building) Article 25. A may entrust any third party (hereinafter referred to as the "Building Manager") with all or part of the management work of the Building. In this case, B and its employees shall follow the instructions of the Building Manager. (Inspection by A's entry into the rooms) 7 Article 26. If necessary for the maintenance and management of the rooms, A or the Building Manager or any other person appointed by A may, giving a prior notice to B, enter the rooms and inspect the same and take appropriate measures. However, in an urgent case or in an emergency where A is unable to notify B in advance, A shall give a notice promptly after the fact. (Exemption) Article 27. A shall not be responsible for the damage suffered by B as a result of force majeure, fire, theft, breakage or suspension of operation of the Building, electric, gas or water supply facilities, HVAC, elevators, etc. unless such damage is caused by A's failure to take good manager's care or A's intentional act or material negligence. 2. A shall not be responsible for the inconvenience or damage suffered by B as a result of the work A considers necessary, including repairs, remodeling, altering or maintenance work (including the work in the event of suspension of electricity or water supply). 3. A shall not be responsible for the damage suffered by B in connection with any other sublessee regardless of the situation. 4. A shall not be responsible for the damage suffered by B as a result of an accident that occurs due to B's failure to give a notice pursuant to Article 18, Paragraph 1. 5. If during the term of this Agreement the lease agreement between A and C (hereinafter referred to as the "Original Agreement") is terminated, the position of the Sublessor shall be taken over by C in accordance with the provisions of the Original Agreement. In this case, A's obligation to returned the deposit paid by B to A and any other liabilities to B shall be taken over by the new lessor C and A shall be exempted from its liabilities. (Taking over A's position) Article 28. If during the term of this Agreement between A and B the Original Agreement between A and C, during the term of this Agreement is terminated for cancellation or any other reason, the position of the lessor in accordance with this Agreement shall be transferred from A to C and this Agreement between A and B shall be taken over by C and B as it is ,to which B shall give its prior consent. 2. In the case set forth in the preceding paragraph, A shall forthwith notify B of it. (Damage insurance) Article 29. During the term of this Agreement, B shall take out a damage insurance in an amount equivalent to its assets in the rooms. A shall not be responsible for any damage to B's assets not so insured that is caused by fire, water leakage, theft, etc. (Notice of change in registration, status, etc.) Article 30. If there is a material change in B's commercial registration or status, such as a change in its address, trade name, representative, purpose of business or capital, B shall notify A of such change in writing without delay. (Agreed jurisdiction) Article 31. A and B agree in advance that in the event of any dispute arising between them, they will submit to the jurisdiction of the Tokyo District Court. (Good faith principles) Article 32. A and B shall consult with each other according to the good faith principles and in all sincerity to settle any matter not prescribed in this Agreement or any doubt arising as to the construction or application of the provisions of this Agreement. IN WITNESS WHEREOF, two copies of this Agreement shall be made and A and B shall retain one copy respectively. January 25, 1996 A: Yokohama Branch, Daiwa House Industry Co., Ltd. 549-2, Shinanocho, Totsuka-ku, Yokohama 8 By: Katsuyoshi Tateno, Title: Director and manager B: Wells Japan Co., Ltd. Shin-yokohama Hayama No.6 Bldg., 28-9, Shin-yokohama 1-chome, Kohoku-ku, Yokohama 222 By: Charles Dodson Title: Representative Director Witnesses: Norio Onishi, President and Representative Director Nihon Sogo Tatemono Co., Ltd. 9-3, Kitasaiwai 2-chome, Nishi-ku, Yokohama Katsunao Takawa Licensed Land and Building Trader License No. 50234, Kanagawa Prefecture Eiichi Suzuki, Manager Minister of Construction License No. (9) 629 Yokohama Branch, Sanki Shoji Co., Ltd. 39, Tokiwacho 4-chome, Naka-ku, Yokohama, Kanagawa Prefecture Tomoyuki Hayakawa Licensed Land and Building Trader License No. 62499, Kanagawa Prefecture 9 Appendixes 1. Floor and Area of the Rooms for Sublease
- ------------------------------------------------------------------------------- FLOOR AREA SUBLEASED REMARKS - ------------------------------------------------------------------------------- (tsubo) (m2) - ------------------------------------------------------------------------------- 6th floor 185.56 613.42 Room Nos. 601 and 602 =============================================================================== Total 185.56 613.42 - ------------------------------------------------------------------------------- (1tsubo = 3.305785m2) - -------------------------------------------------------------------------------
2. Breakdown of Monthly Rent, Common Area Fee, Lease Deposit, Etc.
- ---------------------------------------------------------------------------------------------------- FLOOR AREA SUBLEASED MONTHLY RENT MONTHLY COMMON DEPOSIT AREA FEE - ---------------------------------------------------------------------------------------------------- (tsubo) (m2) ((Y)7,500 per tsubo) ((Y)2,500 per month) ((Y)90,000 per month) - ---------------------------------------------------------------------------------------------------- 6th floor 185.56 613.42 1,391,700 463,900 16,700,400 ==================================================================================================== Total 185.56 613.42 1,391,700 463,900 16,700,400 - ----------------------------------------------------------------------------------------------------
10 License No. 50234, Kanagawa Prefecture_ _ 11 REPRESENTATION The attached document is a fair and accurate representation of the Sublease Agreement dated January 25, 1996 between Daiwa House Industry Co., Ltd. and Wells Japan Co. Ltd. for premises located at Paleana Building, 2-15, Shin-yokohama 2-chome, Kohuku-ku, Yokohama, Japan. /s/ Mary L. Mandarino --------------------------------------------- Mary L. Mandarino Chief Financial Officer, Vice President, Finance and Administration, and Treasurer (Principal Financial and Accounting Officer) February 12, 1998 EX-10.28 8 LEASE AGREEMENT DATED 09/25/97 1 Exhibit 10.28 LEASE BETWEEN UNITED BUILDING & LEASING CORPORATION AND WELLS ELECTRONICS, INC. THIS LEASE, made this 25th day of September 1997, between UNITED BUILDING & LEASING CORPORATION with a principal office located at 5490 Derry Street, P.O. Box 4022, Harrisburg, PA 17111 (hereinafter called "Lessor"), and WELLS ELECTRONICS, INC., an Indiana business corporation with an address at 52940 Olive Road, South Bend, IN, 46628 (hereinafter called "Lessee"). WITNESSETH: 1. PREMISES. Lessor hereby leases to Lessee: SEVEN THOUSAND (7,000) SQUARE FEET OF OFFICE SPACE AND SHOP AREA WITH LOADING DOCK, LOCATED AT THE SOUTH END OF 421 AMITY ROAD, IN SPACES #7, #8, #9, AND REAR HALF OF SPACE #6 SWATARA TOWNSHIP, DAUPHIN COUNTY, PENNSYLVANIA, AS SET FORTH ON THE DRAWING, DESIGNATING SUCH AREA, AS WELL AS THE COMMON AREAS, ATTACHED HERETO AS EXHIBIT "A." TENNABLE SPACE OCCUPIED BY WELLS CONSTITUTES 39% OF THE TOTAL AREA. 2 RE: Wells Electronics, Inc. Page #2 Lease September 25, 1997 2. TERM. (a) The term of this lease shall commence on. OCTOBER 1, 1997, OR SUCH SUBSEQUENT DATE AS THE PREMISES ARE READY FOR OCCUPANCY AND APPROVED BY THE LESSOR AND SHALL EXPIRE IN FIVE (5) YEARS FROM DATE OF COMMENCEMENT. (b) Lessee shall have the right and option to renew this Lease on the same terms and conditions, except for redetermination of the amount of rental at the time of renewal, for a period of two (2) years. (c) Such right and option shall be exercisable by Lessee giving written notice to Lessor not later than four (4) months prior to the expiration of the present term of the Lease. Thereafter, Lessor and Lessee shall negotiate the consideration for such renewal term, and shall reduce to writing both the term and consideration which shall become a part of the term of this Lease. 3. RENT. Lessee, in consideration and respect of this Lease, shall pay to Lessor, as rental for the premises that is the subject of this Lease: AN ANNUAL RENT EQUAL TO ($46,200.00) DOLLARS, TO BE PAID IN TWELVE EQUAL MONTHLY PAYMENTS OF $3,850.00 ON THE FIRST DAY OF EACH MONTH FOR THAT MONTH. 4. LICENSE FEES AND USE OF PREMISES. The premises shall be used and occupied for Lessee's business and related purposes and shall be used for no other purpose without the written consent of Lessor, which shall not be unreasonably withheld, 3 RE: Wells Electronics, Inc. Page #3 Lease September 25, 1997 and Lessee will not, to the detriment of the premises of Lessor, use (nor suffer or permit be used) the premises or any part thereof for any purpose or in any manner in violation of any valid and applicable law, regulation or ordinance of any Federal, State or Local governmental body without first obtaining an effective waiver or consent with respect thereto. Lessee shall pay all license fees, inspection charges and any other expenses which may be imposed upon Lessor applicable to Lessee's business operations on or use of the premises. Lessor certifies that Lessee's intended use of the premises are supported and permitted under local zoning ordinances. 5. REPAIRS AND ALTERATIONS. With respect to repairs, alterations and the like, it is agreed: (a) Lessor, after receiving written notice from Lessee and having reasonable opportunity thereafter to obtain the necessary materials and workmen, agrees to keep in good order and repair the parking lot, underground sewers and pipes and other outside facilities (except as described in Section 5 (d) below) and also the roof and all outer walls of the building on the premises. Lessor shall not be liable to Lessee for any loss or damage caused by stoppage or failure of all or part of the mechanical plant or equipment upon or about the premises, nor by leakage from the plumbing, heating, air 4 RE: Wells Electronics, Inc. Page #4 Lease September 25, 1997 conditioning or drainage facilities, nor by stoppage or failure in heat, light, air conditioning or electric, gas or compressed air supply. Lessee shall be responsible for its telephone jacks and wiring, computer wiring, alarm systems, shop wiring, machine connections, any work on Lessee's equipment, collector, ducting and wiring, and special HVAC systems, if required by Lessee (exclusive of HVAC systems for shop and office areas, to be installed by Lessor and maintained by Lessee). Lessee agrees to keep in good working condition: interior plumbing, heating and air conditioning. Lessor agrees to keep in good condition: Landscape, snow removal and area lighting. (b) All movable furniture and trade fixtures placed or installed in or about the premises by the Lessee shall be and remain the property of Lessee and may be removed by it at any time, free from any claim of Lessor, except that Lessee shall promptly remedy any damages to the premises caused by such removal. All built-in or otherwise permanently attached interior decorations, shelving and other alterations, additions or improvements made by Lessee upon the premises shall be only with written approval of Lessor and shall become the property of Lessor and shall remain upon and be surrendered with the premises upon the termination of this Lease, without molestation or injury, except as Lessor shall otherwise in writing agree. For purposes of this subparagraph, trade fixtures shall be deemed to include, but not by way of limitation, grinding machines and compressors attached to the premises. 5 RE: Wells Electronics, Inc. Page #5 Lease September 25, 1997 (c) If after notice, Lessee has not repaired or is not diligently pursuing repair, and Lessee fails or refuses to commence promptly any of the repairs or other obligations required by subparagraph (b) above and to complete the same with reasonable dispatch, Lessor may make or cause repairs to be made or other obligations to be performed, and shall not be responsible to Lessee for any loss or damage that may be caused to its supplies or business by reason thereof. (d) Lessor shall permit Lessee to install grinder exhaust and compressor connections through existing wall at Lessee's expense. Lessee shall also be permitted to install an approximately 10 foot by 10 foot fenced or shelled area outside this wall to house such equipment at Lessee's expense. 6. SIGNS. No signs shall be constructed, erected or maintained in violation of any applicable law, regulation or ordinance. Paper or temporary signs may be used for a maximum of 30 days only. 7. UTILITIES. Lessee shall pay all separately metered charges for electric and gas (heat) used in and upon the leased premises during the term of this Lease. Lessor shall pay utilities in general common area as depicted in the site plan drawing attached hereto as Exhibit "A." 6 RE: Wells Electronics, Inc. Page #6 Lease September 25, 1997 8. TAXES AND COMMON AREA MAINTENANCE. Lessee shall pay Lessee's pro- rata share, being 39% at the execution of this Lease, as defined below, of the actual real estate taxes assessed and billed by the local taxing authority to Lessor. Lessee shall not be responsible for payment of any late charges hereunder unless such late charges are occasioned by the bad faith failure of the Lessee to timely pay when timely invoiced. Lessor shall provide copies of the tax invoices and calculation of Lessee's pro-rata share to Lessee when Lessor requests payment. Lessee shall pay Lessee's pro-rata share of common area maintenance charges, being 39% at the execution of this Lease, such figure being the actual costs allocated among the several tenants of said building based upon a fraction the numerator of which is the amount of floor area occupied by Lessee and the denominator is the amount of net leasable area of said building, excluding common areas, multiplied by the total of the actual common area maintenance (CAM) charges as paid by the Lessor. Such amount shall be estimated for the initial year estimated at $2.25 per square foot, inclusive of real estate taxes, insurance and CAM's and, thereafter, based upon the actual previous year's payments. Any excess paid by the Lessee shall be credited against the following year's CAM charges and any deficit shall be assessed separately to Lessee for payment 7 RE: Wells Electronics, Inc. Page #7 Lease September 25, 1997 within forty-five (45) days. Lessor shall provide a yearly report of actual charges to yearly report of actual charges to Lessee within forty-five (45) days of the anniversary date of this Lease. 9. INSURANCE. With respect to insurance it is agreed: (a) Lessee covenants and agrees that it shall protect and save and keep Lessor forever harmless and indemnified against and from any penalty or damage or charges imposed for any violation of any law or ordinance applicable to the premises, whether occasioned by the neglect of Lessee or those holding under Lessee, and that Lessee will at all times protect, indemnify and save and keep harmless Lessor against and from all claims, losses, costs, damages or expenses arising out of or from any accident or other occurrence on or about the Demised Premises causing injury to any person or property whomsoever or whatsoever, provided such is not brought about or occasioned in any way by the negligent or willful act or omission of the Lessor for which Lessor agrees to indemnify and hold Lessee harmless and shall protect, indemnify, save and keep harmless Lessor against and from any and all claims and against and from any and all loss, cost, damage or expense, including reasonable attorneys' fees, arising out of any failure of Lessee in any respect to comply with and perform all the requirements and 8 RE: Wells Electronics, Inc. Page #8 Lease September 25, 1997 provisions of this Lease or to comply with any government law, rule, or regulation, unless such compliance is made impossible by the acts or omission of Lessor. (b) Lessee agrees that, at its own cost and expense, it shall procure and continue in force general liability insurance covering any and all claims for injuries to persons occurring in, upon or about the Demised Premises, including all damage from signs, glass, awnings, fixtures or other appurtenances now or hereafter erected on the Demised Premises during the term of this Lease, such insurance at all times to be in an amount of not less than One Million Dollars ($1,000,000) for injury to any one person, and not less than One Million Dollars ($1,000,000) for injuries to more than one person in one accident, and Two Hundred Fifty Thousand Dollars ($250,000) property damage. Such insurance shall be written with a company or companies authorized to engage in the business of general liability and property insurance in the Commonwealth of Pennsylvania, Lessor shall be named as an additional insured in said policy, such insurance shall provide not less than thirty (30) days prior written notice of cancellation to Lessor unless the insurance company mandates a shorter period, and there shall be delivered to Lessor a copy of insurance contract evidencing such coverage. In the event Lessee fails to procure such policies, or continue the same in full force and 9 RE: Wells Electronics, Inc. Page #9 Lease September 25, 1997 effect, as provided herein, Lessor may obtain such insurance and the premiums on such insurance shall be deemed additional rent to be paid by Lessee unto Lessor upon demand. (c) The cost of all insurance to be procured by Lessor for the Demised Premises, including but not limited to general liability insurance for the common areas and hazard and extended coverage insurance for the building of which the Demised Premises are a part, shall be reimbursed by Lessee. Such costs shall be allocated among the several tenants of said building based upon a fraction the numerator of which is the amount of floor area occupied by Lessee and the denominator is the amount of net leasable area of said building (excluding common areas) multiplied by the total of such insurance costs. At the execution hereof, such fraction represents a pro-rata share of 39%. Such insurance may be purchased by Lessor on a full replacement cost basis, and the premium for the same shall be paid by Lessee as additional rent within twenty (20) days after billing for same. Lessor shall provide to Lessee a copy of the invoice for such insurance when Lessor requests payment along with the calculation showing Lessee's pro-rata share. 10. DAMAGE OR DESTRUCTION OF PREMISES. If the building upon the premises shall be damaged or destroyed in whole or in part by fire or other cause during the term 10 RE: Wells Electronics, Inc. Page #10 Lease September 25, 1997 of this Lease, Lessor will repair and restore the same to a good tenable condition with reasonable dispatch, and the rental herein provided for shall abate entirely in case the entire building is untenable and pro rata for the portion rendered untenable, in case a part only is untenable, until the same shall be restored to a tenable condition; provided however, that: (a) There shall be no abatement of rental if such fire or other cause shall result from the willful act of Lessee, its agents or employees, as determined by a court of competent jurisdiction. (b) In case the premises shall be damaged or destroyed to the extent of more than one-half of the value thereof, Lessor or Lessee may at its option terminate this Lease forthwith by written notice to the other party, in which event any unabsorbed advance rental shall be forthwith repaid to Lessee. (c) If Lessee shall use any part of the building for storage or other business during the period of repair, a reasonable charge shall be made therefor against Lessee unless such damage and repair is the result of the wilful or negligent act or omission of Lessor. (d) In any event, if the damaged premises are not restored to mutually acceptable temporary working order and condition within 60 days and mutually acceptable final working order and condition within 90 days, then Lessee may terminate 11 RE: Wells Electronics, Inc. Page #11 Lease September 25, 1997 this Lease forthwith by written notice to the other party, in which event any unabsorbed advance rentals shall be forthwith repaid to Lessee. 11. MORTGAGES. Lessor reserves the right in good faith to subject and subordinate this Lease to the lien of any mortgage or mortgages now or hereafter placed upon Lessor's interest in the premises or any part thereof, and Lessee shall execute and deliver any instrument which shall be reasonably demanded to that end by Lessor, or by any mortgagee, and in the event Lessee fails to deliver any such instrument after two written requests from Lessor or any mortgagee, then in that event Lessee hereby irrevocably appoints Lessor its attorney-in-fact for Lessee to execute and deliver any such instrument for and in the name of Lessee; provided, however, that: (a) So long as Lessee is not in default under the terms of this Lease, it shall not be disturbed or dispossessed by any mortgagee. (b) Such mortgage shall not cover equipment and other property belonging to Lessee, but Lessee shall have full power to mortgage such equipment, property and/or its leasehold interest under this Lease. (c) Should Lessor default in payment of any installments due on any mortgage encumbering the premises, Lessee at its election may pay the amount 12 RE: Wells Electronics, Inc. Page #12 Lease September 25, 1997 thereof after five (5) days prior notice in writing to Lessor if its intention so to do, and any amount so paid by Lessee shall be credited against the rentals thereafter payable by Lessee to Lessor. 12. PEACEFUL POSSESSION. Lessor warrants and covenants that is has full authority to execute and be a party to this Lease. Lessor further covenants that Lessee, upon paying the aforesaid rental and performing the covenants and agreements under this Lease by it to be performed, shall have at all times during the term hereof peaceful and quiet enjoyment and possession of the premises without any manner of hindrance from Lessor or any persons lawfully claiming through Lessor. 13. ASSIGNMENT, Sublease and Transfer. Lessee shall not assign this Lease in whole or part, nor sublet all or any part of the premises, without first obtaining in each and every instance Lessor's written consent thereto, which consent shall not be unreasonably withheld. No assignment or subletting shall operate to relieve or discharge Lessee from its obligations under this Lease unless Lessor shall otherwise expressly agree in writing. Any buyer or other transferee of the premises from or through Lessor 13 RE: Wells Electronics, Inc. Page #13 Lease September 25, 1997 shall take and hold the same subject to this Lease and shall stand in the place and stead of Lessor. 14. INSPECTION. Except in emergency situations, Lessor or its authorized agents shall have the right upon 48 hours advance notice to enter upon the premises at all reasonable times for the purpose of inspecting the same. If any repairs or other obligations under Paragraph 5 hereof shall be necessary for which Lessee is responsible, Lessor may demand that Lessee make the same, and if Lessee refuses or neglects forthwith to commence such repairs or other obligations and complete the same with reasonable dispatch, Lessor may make or cause to be made such repairs, or other obligations to be performed, and shall not be responsible to Lessee for any loss or damage that may occur to its machines or business by reason thereof. If Lessor makes or causes to be made such repairs, or other obligations to be performed, Lessee agrees that it will forthwith on demand pay to Lessor the cost thereof. 15. TERMINATION. This Lease may be terminated at any time, and the premises thereupon repossessed, upon written notice specifying the date of termination, only in the following events: (a) Lessor may terminate it upon not less than fifteen (15) days' written notice to Lessee for non-payment of any rental which may be at least 14 RE: Wells Electronics, Inc. Page #14 Lease September 25, 1997 thirty (30) days overdue; provided, however, that this Lease shall not for such reason terminate if, prior to the date of termination specified in the aforesaid notice, Lessee shall have paid such overdue rental in full. (b) Either party may terminate it upon not less than sixty (60) days' written notice to the other party (specifying the defaults giving rise to such notice) if the latter shall fail or refuse to perform any of its covenants or agreements under this Lease; provided, however, that this Lease shall not for such reason terminate if, prior to the date of termination specified in the aforesaid notice, the defaulting party shall have cured all its defaults which are so specified. (c) Either party may terminate it upon written notice of any duration if the other party shall be adjudicated a bankrupt or if the other party shall file a petition in bankruptcy, or for a receiver or other custodian of all or any substantial portion of its property, or to effect a composition or other arrangement with creditors; or if such a petition shall be filed against it and not dismissed or discharged within sixty (60) days of its filing; or if such other party shall admit the material allegations of any such petition; or if the other party shall make a general assignment for the benefit of creditors. 16. SURVIVAL OF OBLIGATIONS. Notwithstanding its termination, this Lease 15 RE: Wells Electronics, Inc. Page #15 Lease September 25, 1997 shall continue in full force and effect to the extent necessary to permit the carrying out of any provisions which contemplate or require performance by either party subsequent to such termination; nor shall such termination alter or affect the enforceability by or against either party of any right or obligation which shall have accrued prior to such termination (including, but not limited to, any rental owing and any liability for loss or damage on account of default). In the event of termination of this Lease, all unabsorbed advance rentals shall be forthwith repaid to Lessee. 17. RE-ENTRY. Upon termination of this Lease, or if the premises shall be deserted or vacated, Lessee shall yield up the premises peacefully, and it shall be lawful for Lessor, its agents, attorneys, heirs, personal representatives and assigns to re-enter and repossess the premises and Lessee and each and every occupant thereof to remove and put out. If Lessee shall fail to yield up the premises peacefully, Lessee shall be liable to Lessor for all expenses of obtaining possession, including but not limited to court costs and actual attorney fees. 18. HOLDING OVER. In the event of Lessee holding over after termination of this Lease, a tenancy from year to year shall thereafter exist in the absence of a written agreement to the contrary. 16 RE: Wells Electronics, Inc. Page #16 Lease September 25, 1997 19. REIMBURSEMENT. In the event that either party pays expenses, costs or obligations of the other party under any provision of this Lease the payor shall upon making written demand have a right of immediate reimbursement and/or at its option may treat the amount so paid (owing to Lessor/Lessee, as the case may be) as equivalent to rent. 20. CUMULATIVE REMEDIES. All rights, remedies and benefits under this Lease shall be cumulative and shall not be exclusive of any other rights, remedies and benefits conferred by law or by this Lease; provided, however, that this Lease shall not by virtue of any law be terminated, nor the premises repossessed, earlier than permitted by this Lease. 21. WAIVER. No waiver of any provision of this Lease, or of the breach thereof, shall be construed as a continuing waiver or shall constitute a waiver of such provision or breach or of any provision or breach. 22. MODIFICATION. Any modification or amendment of this Lease must be in writing and signed by the parties. 17 RE: Wells Electronics, Inc. Page #17 Lease September 25, 1997 23. INTERPRETATION. The paragraph headings herein are included solely for convenience and shall in no event affect, or be used in connection with, the interpretation of this Lease. Each separately numbered paragraph of this Lease shall be treated as severable to the end that, if any one or more such paragraphs shall be adjudged or declared illegal, invalid or unenforceable, this Lease shall interpreted, and shall remain in full force and effect, as though such paragraph or paragraphs had never been contained in this Lease. Whenever reasonably necessary in the interpretation of this Lease, pronouns of any gender shall be deemed synonymous, as shall singular and plural pronouns. This Agreement shall be construed under the Law of the Commonwealth of Pennsylvania. 24. SUCCESSORS AND ASSIGNS. This Lease shall be binding upon the heirs, personal representatives, successors and assigns of the parties, respectively 25. NOTICES. Any notice, demand or other writing to be given pursuant to this Lease shall be deemed to have been given and received, and to be effective for all purposes, when sent by registered or certified mail, postage prepaid and return receipt requested, to the following address, respectively (or such other address as the recipient shall previously designate in writing): 18 RE: Wells Electronics, Inc. Page #18 Lease September 25, 1997 LESSOR: Carl J. Natale, President Post Office Box 4022 Harrisburg, Pennsylvania 17111 LESSEE: Wells Electronics, Inc. 52940 Olive Road South Bend, IN 46628 Attention: President 26. JANITORIAL SERVICES. Lessee agrees to keep the demised premises in a clean, neat and orderly manner, and in this respect, will provide janitorial services at its own expense and Lessor shall have no liability for such services. 27. INTEREST. Any rental or other amount owing by either party pursuant to this Lease shall bear interest at a rate of six percent (6%) per annum from the due date to the date of payment. 28. PAYMENTS AND RECEIPTS. Rentals and other amounts owing by either party pursuant to this Lease shall be paid at the same address specified for notices unless a different address shall be designated in writing. Each party shall be entitled to receive from the other party upon request a written receipt for any rentals or other such amounts which may be paid. 19 RE: Wells Electronics, Inc. Page #19 Lease September 25, 1997 29. Lessor agrees to indemnify and hold Lessee harmless from and, if requested by Lessee, defend against all costs, expenses, damages, and liability, including without limitation court costs, costs of appeals, fees of consultants and/or experts, fines, levies, penalties, costs of correction abatement, and clean up, and attorneys' fees, resulting from, relating to, or asserted by virtue of: (a) Any latent or structural defects in the Demised Premises or any improvements located in or about them, or (b) Any waste or hazardous material now located in or about the Demised Premises, or hereafter brought upon or about or permitted to be brought upon or about the Demises Premises by Lessor or any of its officers, agents, employees, or contractors, or (c) Violations of any law, ordinance, regulation, or the like, whether now or hereafter in effect, related to waste or hazardous material at any time located in or about the Demises Premises, by Lessor or any of its officers, agents, employees, or contractors. Lessor covenants with Lessee that Lessor during the term of this Lease will not cause or permit any such waste or hazardous material to be brought upon the Demised Premises. The foregoing indemnities shall survive the expiration or earlier termination of the terms of this Lease. 20 RE: Wells Electronics, Inc. Page #20 Lease September 25, 1997 IN WITNESS WHEREOF, the parties hereto have hereunto affixed their hands and seals, all the day and year first above written. ATTEST: /s/ Mara Shall By: /s/ Carl J. Natale - ----------------------- --------------------------------------- Witness Carl J. Natale, President of UBL/Lessor Lessee WELLS ELECTRONICS, INC. By: /s/ Rick Jones By: /s/ Richard J. Mullin ----------------------- --------------------------------------- Secretary President SEAL CJN/ms EX-10.35 9 COLLECTIVE BARGAINING AGREEMENT DATED 02/19/97 1 Exhibit 10.35 AGREEMENT BETWEEN WELLS ELECTRONICS, INC. AND I.B.E.W. LOCAL 1392 FEBRUARY 19, 1997 -- FEBRUARY 18, 2000 2 TABLE OF CONTENTS AGREEMENT BASIC PRINCIPLES PAGE ARTICLE I - TERM-AMENDMENT-TERMINATION Section 1. Terms .................................................... 1 Section 2. Amendment or Termination ................................. 1 Section 3. Amendment During Term .................................... 1 ARTICLE II - RIGHTS AND RESPONSIBILITIES OF PARTIES Section 1. Union Recognition ........................................ 1 Section 2. Management Function Reserved ............................. 2 Section 3. No Strike - No Lockout ................................... 3 Section 4. Union Stewards ........................................... 3 Section 5. Shop Committee ........................................... 3 Section 6. Employee's Right When Disciplinary Action is Taken ....... 4 Section 7. Compensation Insurance ................................... 4 Section 8. Right of Visitation ...................................... 4 Section 9. Review of Wage and Hours Computation ..................... 4 Section 10. Union Security ........................................... 5 Section 11. Dues Deduction ........................................... 5 Section 12. Non-Discrimination ....................................... 5 ARTICLE III - GRIEVANCE PROCEDURE Section 1. Processing a Grievance ................................... 6 Section 2. Arbitration .............................................. 7 Section 3. Waiver of Grievance ...................................... 8 ARTICLE IV - HOURS-OVERTIME-HOLIDAY Section 1. Work Day - Work Week ..................................... 8 Section 2. Regular Working Hours .................................... 8 Section 3. Overtime Payment ......................................... 9 Section 4. Rest Periods ............................................. 9 3 PAGE ARTICLE IV - HOURS-OVERTIME-HOLIDAY (CONTINUED) Section 5. Distribution of Overtime ................................. 9 Section 6. Holidays and Holiday Pay ................................. 11 Section 7. Clean-up ................................................. 12 Section 8. Job Assignment ........................................... 12 ARTICLE V - WAGE PAYMENT-WORK CLASSIFICATIONS Section 1. Wage Rates and Classification of Work .................... 12 Section 2. New Classifications of Work .............................. 13 Section 3. Shift Premium ............................................ 13 Section 4. Pay Day .................................................. 13 Section 5. Call-Back Payments ....................................... 13 Section 6. Minimum Call-In .......................................... 13 Section 7. Cost of Living Adjustment ................................ 13 ARTICLE VI - HOSPITALIZATION AND INSURANCE ................................ 15 ARTICLE VII - HEALTH AND SAFETY ........................................... 17 ARTICLE VIII - RETIREMENT INCOME PLAN ..................................... 17 ARTICLE IX - SENIORITY Section 1. Determination of Seniority ............................... 18 Section 2. Seniority Rights ......................................... 18 Section 3. Acquisition of Seniority by New Employees ................ 19 Section 4. Seniority Lists and Loss of Seniority .................... 19 Section 5. Seniority Change Notices ................................. 20 Section 6. Transfers/Temporary ...................................... 20 Section 7. Temporary Layoff ......................................... 20 Section 8. General Layoff ........................................... 20 Section 9. Recall ................................................... 21 Section 10. Specially Skilled Employees .............................. 22 Section 11. Bid Provision - Upgrading and Horizontal ................. 22 Section 12. Transfer-Classification Rate ............................. 23 Section 13. Qualification Period When Changing Job Classifications ... 23 Section 14. Disqualification When Changing Classification ............ 24 Section 15. Layoff During Qualification Period ....................... 24 4 PAGE ARTICLE IX - SENIORITY (CONTINUED) Section 16. Shift Preference ......................................... 24 Section 17. Union Officer's Seniority ................................ 24 Section 18. Group Leader ............................................. 24 ARTICLE X - LEAVE OF ABSENCE Section 1. Personal Leave ........................................... 25 Section 2. Sickness and Medical-Related Leave ....................... 25 Section 3. Injuries ................................................. 26 Section 4. Maternity Leave .......................................... 27 Section 5. Copy of Leave ............................................ 27 Section 6. Return From Leave ........................................ 27 Section 7. Employment Outside the Bargaining Unit ................... 28 Section 8. Absence Due to Death in the Immediate Family ............. 28 Section 9. Jury Duty ................................................ 28 Section 10. Absence - Union Business ................................. 29 ARTICLE XI - VACATION Section 1. Vacations ................................................ 29 Section 2. Time of Vacation Payments ................................ 31 Section 3. Vacation Schedules ....................................... 31 Section 4. Holidays Within Vacation Periods ......................... 31 ARTICLE XII - GENERAL PROVISIONS Section 1. Definition of Employees .................................. 32 Section 2. Definition of Part-time Employees ........................ 32 Section 3. Bulletin Boards .......................................... 32 Section 4. Effect of Law ............................................ 32 Section 5. Prior Written Agreements ................................. 32 EXHIBIT A - WAGE RATES .................................................... 33 EXHIBIT B - COMPREHENSIVE MEDICAL PLAN .................................... 36 EXHIBIT C - DEPARTMENT LISTING ............................................ 37 5 AGREEMENT This Agreement entered into this 19th day of February 1997, between WELLS ELECTRONICS, INC., 52940 Olive Road, South Bend, Indiana, or its successors or assigns, hereinafter called the "Company" and LOCAL UNION 1392, INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS, hereinafter called the "Union". The International Brotherhood of Electrical Workers being an affiliate of the AFL-CIO. BASIC PRINCIPLES The Company and the Union have a common and sympathetic interest in the electrical industry. Progress in this industry demands a mutuality of confidence between the Company and the Union. Therefore, a working system and harmonious relations are necessary between the Company, the Union, and the public, so that all will benefit by continuous peace and by adjusting any differences by rational, common-sense methods. To these ends, this Agreement is made and entered into. Now, therefore, in consideration of the mutual promises and agreements herein contained, the parties hereto agree as follows: 6 ARTICLE I TERM-AMENDMENT-TERMINATION SECTION 1. TERMS: This Agreement shall take effect on February 19, 1997, and shall continue in full force and effect until and including February 18, 2000. It shall continue in effect from year to year thereafter, unless notice for amendment or termination is given in the way provided for in Section 2 and 3 below. SECTION 2. AMENDMENT OR TERMINATION: Either party desiring to amend or terminate this Agreement must notify the other in writing at least sixty (60) days prior to the termination date. Whenever notice is given for amendment or termination, negotiations thereon shall commence not later than forty-five (45) days prior to the termination date. SECTION 3. AMENDMENT DURING TERM: This Agreement shall be subject to amendment at any time by mutual consent of the parties hereto, but there shall be no obligation to bargain over any proposed amendment during the existence of this agreement or extension thereof. ARTICLE II RIGHTS AND RESPONSIBILITIES OF PARTIES SECTION 1. UNION RECOGNITION: The Company recognizes the Union as the sole bargaining representative of a unit consisting of all employees of the various classifications listed in Exhibit "A" attached hereto, who are employed at the Company plants located in South Bend, Indiana. It is agreed that apprentices will be included in the bargaining unit if and when such a classification is established. Excluded from such bargaining unit are office clerical employees, supervisory employees, engineering and laboratory technicians, timekeepers, guards and professional employees. The non-bargaining maintenance technician unit will not be expanded beyond the three (3) positions that make up the unit. Any additional maintenance technicians positions will be recognized as part of the bargaining unit. -1- 7 SECTION 2. MANAGEMENT FUNCTION RESERVED: (A) Except as expressly and specifically limited or restricted by a provision of this agreement, and to that extent only, the company reserves and retains any and all management rights, prerogatives and privileges previously vested in or exercised by the Company. Such rights of management include, among other things, but are not limited to, the right to plan, direct, control, increase or decrease the operations; to determine the products to be manufactured; to purchase materials and parts from any source, to shift or transfer location of products manufactured or types or methods of work within the Company; to establish and change the sequence of manufacturing processes; with full employment, to subcontract work; to change machinery, methods and facilities, or introduce new methods, techniques or machinery and products; to automate; to maintain and administer job evaluation programs and performance appraisal programs; to maintain discipline of employees; to warn, suspend, discipline, discharge or demote employees for just cause; to establish, change, add to or reduce the number of shifts, the schedules to be worked and the work force; to determine whom shall be hired, the number of employees to be employed at any time and the qualifications necessary for jobs; to transfer, relieve or lay off employees or to shorten or lengthen the work week to meet the needs of the Company; to establish, maintain and enforce and to rescind, amend or change reasonable rules, regulations, policies and disciplinary procedures; to adopt no smoking policies; to add, modify, combine or eliminate job classifications; to set qualifications for job classifications; to determine policies affecting the selection and training of employees; where reasonable suspicion exists and after discussion with the steward, to require an employee to submit to blood alcohol and/or drug testing and/or a medical examination by a doctor designated by the Company, once a program is implemented; to assign and schedule work duties; to schedule overtime hours and to assign employees to overtime work; to transfer employees, and set quality, quantity and work standards in accordance with its determination of the needs of the job and the operation. (B) In every case under this agreement where a judgment is required to be made, except in cases relating to an employee's physical or mental fitness, such judgment shall be made by the Company whose determination shall not be reversed unless it is found that the Company acted in an arbitrary, capricious, discriminatory, unreasonable or unjust manner. If an employee's mental or physical fitness is in question, the Company may send said employee to a qualified physician of its choice at the Company's expense subject to the grievance procedure. The parties agree to utilize and be bound by the provisions of Article X. -2- 8 (C) It is understood and agreed that all rights exercised are retained by the Company unless they are contracted away through specific provisions in this agreement. (D) The Company further specifically reserves the right to move, relocate, sell, close, liquidate or consolidate the plant in whole or in part. (E) It is agreed that an arbitration award shall not impair the reserved management rights in this agreement. (F) The Company and the Union acknowledge that employee involvement can improve morale, product quality, safety, productivity and the overall environment of the workplace. The parties agree that employees should be encouraged to actively participate in employee involvement. SECTION 3. NO STRIKE - NO LOCKOUT: The Union agrees that it and its members will not engage in any strike, slow-down or stoppage of work or other interference with production during the term of this Agreement. The Company agrees that there will be no lockout of its employees, and all differences which may arise shall be settled in accordance with the provision of the Agreement. SECTION 4. UNION STEWARDS: The Company agrees to recognize shop stewards who shall be employees of the Company and members of the Union. There shall be one (1) steward for each shift SECTION 5. SHOP COMMITTEE: The Company recognizes one shop committee from the plant which shall consist of the steward from each shift. For the purpose of grievance discussions, a committee will be formed which shall consist of: (A). The steward from the shift on which the aggrieved employee works. (B). The Union Business Manager or designated representative. Such sub-committee (Grievance Committee) shall operate as outlined in Article III, Grievance Procedure. -3- 9 SECTION 6. EMPLOYEE'S RIGHT WHEN DISCIPLINARY ACTION IS TAKEN: (A). Rights at Suspension or Discharge: Any employee who has established seniority with the Company and who is disciplined by suspension or discharge, may request the presence of his shop steward to discuss the matter with him for a period of time not to exceed twenty (20) minutes in an office designated by the Company for that purpose, before such employee is required to leave the plant; and such shop steward will be called with reasonable promptness and such opportunity of discussion afforded by the Company. (B). Limitation on Life of Warnings: When determining the need for suspension or discharge, only warnings or violations occurring in the immediate preceding twelve (12) month period will be taken into consideration. SECTION 7. COMPENSATION INSURANCE: For all employees covered by this Agreement, the Company shall carry Worker's Compensation Insurance with a company authorized to do business in the state, make proper social security payments and make proper contributions to the State of Indiana Unemployment Compensation Board, and provide such other protective insurance as may be required by the laws and regulations of the State of Indiana, and shall furnish satisfactory proof of such to the Union. SECTION 8. RIGHT OF VISITATION: The Business Manager of the Union, or any of his designated assistants, when not an employee of the Company, shall be received by the Company at its office, on reasonable notification to the Company, and, where investigation of grievance is desired, shall be permitted to go into the factory (to be accompanied by a factory representative, if not an employee of the Company) subject to the same limitations and restrictions as may be imposed by the Company on regular employees of the Company. SECTION 9. REVIEW OF WAGE AND HOURS COMPUTATION: Should a question arise regarding working hours worked or computation of pay of an employee, the Human Resources Department will review the payroll record with an employee. If a satisfactory agreement is not reached on the day the question is raised, the matter will be handled as outlined in Article III, "Grievance Procedure". -4- 10 SECTION 10. UNION SECURITY: All employees covered by the terms of this Agreement shall be required to become and remain members of the Union as a condition of employment from and after the ninetieth (90th) day following the date of employment or the effective date of this Agreement, whichever is later. SECTION 11. DUES DEDUCTION: The Company agrees to deduct from the wages of each Union member, upon written authorization, an amount equal to the regular dues of the Union, such deduction to be made on the last payday of each calendar month. The total amount deducted is to be transmitted to the Financial Secretary of the Union together with a list of the names of the employees from whose pay deductions were made. The form of authorization to be used in this regard shall be made with the Agreement of both parties hereto. The Union agrees to hold the Company free from all liabilities in the matter of dues collection, except for ordinary diligence and care in the transmittal of such moneys. SECTION 12. NON-DISCRIMINATION: The Union and the Company recognize the legal obligation to make reasonable accommodation for certain employees with disabilities as defined by the Americans With Disabilities Act of 1990, 42 U.S.C. SS12101 through 12203, effective July 26, 1992. The parties agree that each and every instance where a reasonable accommodation may be necessary will be treated on a case by case basis based on the facts of each particular employee's disability. The parties agree that the Union shall participate and be present in any meetings and/or discussions between the Company and disabled employees which involve a possible reasonable accommodation. The parties agree that the Union shall, upon request, have access to all information regarding disabled employees relevant to efforts to achieve a reasonable accommodation for said disabled employees. The parties agree that any action taken by the Company to achieve a reasonable accommodation is subject to the contractual grievance/arbitration procedure. -5- 11 ARTICLE III GRIEVANCE PROCEDURE A grievance is defined as an alleged violation of a specific article or section of this Agreement. SECTION 1. PROCESSING A GRIEVANCE: If any such grievance arises there shall be no stoppage or suspension of work because of such grievance, but such grievance shall be submitted to the following grievance procedure: STEP 1. Within five (5) working days of the time a grievance arises, the employee or employees concerned, with the assistance of his shop steward, or committee-person in the absence of their shop steward, will present the grievance to their supervisor. Within two (2) working days after presentation of grievance, the supervisor shall give an answer orally to the employee and the union steward involved. STEP 2. If the grievance is not resolved at Step 1; within the two (2) working days after receiving the company's oral answer, it shall be reduced to writing, signed by the employee(s) involved, and referred to the Shop Steward or committee-person for presentation to the Company. The written grievance shall state the facts giving rise to the grievance, identify all the provisions of the agreement alleged to be violated, state the contention of the union/employee and indicate the relief requested. Within two (2) working days after presentation of the grievance, the supervisor shall give a written answer to the union steward involved. STEP 3. If the grievance is not resolved at Step 2; within two (2) working days after receiving the Company answer in Step 2; the Union shall advise the Company of their desire to meet to resolve the issue. The participants in this meeting shall be the Grievance Committee, the Business Manager of the Union or his designated representative and the Manager, Human Resources or his designated representative. Within two (2) working days following the meeting, the Company will give a written answer to the union steward originating the grievance. -6- 12 STEP 4. If the grievance is not resolved at Step 3; within two (2) working days after receiving the Company answer in Step 3; the Union shall advise the Company of the desire to meet to resolve the issue. The participants in this meeting shall be the grievance committee, the Business Manager of the Union or his designated representative, an International Representative of the IBEW may be present only to assist the Local Union, and the Manager, Human Resources of his designated representative. Within two working days following the meeting, the Company will give a written answer to the Union steward originating the grievance. Within ten (10) working days after the Step 4 answer is rendered by the Company, the Union may decide to submit the grievance to arbitration. If so it shall be handled as specified in Section 2, Arbitration. Disposition of a grievance under any of the foregoing steps will be final unless the grievance is pursued to the next step in the time and manner provided above. The time limits provided for in the grievance procedure may be extended by mutual agreement. SECTION 2. ARBITRATION: Arbitration will be handled by the American Arbitration Association in accordance with their rules and regulations. Each party will bear its own expenses in the arbitration except that the fee and expenses of the Arbitrator will be equally divided between the parties. Within five (5) working days after the Union decides to submit a grievance to arbitration, the Union shall request the American Arbitration Association to furnish both parties with a list of the names of nine (9) duly accredited members of the Association. Within five (5) working days after receiving said list, unless a later date is mutually agreed upon, the parties shall meet and choose one (1) person from that list by alternately striking a name until one (1) name remains. That person shall be the Arbitrator for the case. The Arbitrator will have no authority to alter, modify, eliminate, add or remove any part or parts of this Agreement. The Arbitrator shall consider only the matter which has been properly carried through the Grievance Procedure and which is subject to the Arbitration provisions hereof and shall deal only with the matter which occasioned his appointment. The Arbitrator shall not have the right to consider any matter not subject to the Grievance Procedure as set forth in this Agreement and his decision shall be based solely upon his interpretation or application of what the Agreement provides. The Company and the Union agree that they will accept as final and binding the decision of the Arbitrator. -7- 13 SECTION 3. WAIVER OF GRIEVANCE: (1). Unless mutually agreed to in writing, any grievance not originated and handled strictly within the time limits and in the manner provided in this Article, shall be considered to have been waived, and thereafter, that grievance may not be presented for further consideration. (2). The parties by mutual agreement may waive any step of the foregoing grievance procedure. In cases where the grievance involves wages, such may not be retroactive prior to the work week during which the written grievance was first presented. ARTICLE IV HOURS-OVERTIME-HOLIDAY SECTION 1. WORK DAY - WORK WEEK: Eight (8) hours shall constitute a regular work day. Five (5) consecutive days, starting with Monday, shall constitute a regular work week, when operating a three (3) shift schedule, the first working shift of the week shall be first shift starting at 7:00 a.m. on Monday morning. Nothing herein shall be construed as a guarantee of hours per day or days per week. SECTION 2. REGULAR WORKING HOURS: The regular working hours for the following classifications are: Q.A. Auditors, Operators and Set-Up Assembly 1st shift 7:00 a.m. - 3:00 p.m. 2nd shift 3:00 p.m. - 11:00 p.m. 3rd shift 11:00 p.m. - 7:00 a.m. A twenty-five (25) minute period will be given for lunch break as nearly as possible to 3 hours before the end of the shift. The regular working hours for all other classifications are as follows: 1st shift 7:00 a.m. - 3:30 p.m. 2nd shift 3:00 p.m. - 11:30 p.m. 3rd shift 11:00 p.m. - 7:30 a.m. A thirty (30) minute intermission will be given for lunch period as nearly as possible to 3 hours before the end of the shift. -8- 14 SECTION 3. OVERTIME PAYMENT: (1) Overtime pay at the rate of one and one-half (1-1/2) times base rate will be paid for: (A). All hours worked in excess of eight (8) per day. (B). All work performed on the sixth consecutive work day in a regular work week, regardless of the day of the week on which the shift started or ended. (2) Overtime pay at the rate of two (2) times base rate will be paid for all hours worked on the seventh consecutive day in a regular work week. (3) Overtime pay at the rate of two (2) times base rate will be paid for all hours worked on Holidays designated in Section 6 below, plus the employee will receive eight (8) hours straight time pay as holiday pay. SECTION 4. REST PERIODS: One rest break will be given in addition to the lunch break for those employees in the Operator, QA Auditor and Set-up Assembly classifications. The rest break(s) will be ten (10) minutes and will be given as nearly as possible to two and one-half (2-1/2) hours after the start of the shift. For all other classifications, an additional break in the afternoon will be given as nearly as possible to one and one-half (1-1/2) hours before the end of the shift. Whenever any employee is scheduled to work two (2) or more hours beyond the end of their regular scheduled eight (8) hour shift, an additional ten (10) minute rest break will be given. SECTION 5. DISTRIBUTION OF OVERTIME: Overtime is scheduled in two ways: (1). All employees on one or more shifts in a department are requested to work a scheduled period of overtime. A list of departments can be found in Exhibit C. In this case all employees are required to work 50% of the overtime offered. Failure to maintain this average for a calendar month may subject the employee to disciplinary action. The Company will provide 48 hours advance notice of required overtime for full shift schedules in a department. If the Company fails to provide 48 hours advance notice for full shift schedules in a department, the 50% rule will not apply. The intention of an employee to work or not work a scheduled period of overtime will be indicated by the employee signing the overtime roster no later than -9- 15 noon Friday for all weekend overtime. The overtime roster will be maintained by the supervisor. Any employee who agrees to work such overtime and then either leaves early, arrives late or fails to work at all, will be charged with an absence or tardy in the same way as during the regular working week. This occasion will be charged to their attendance record. Exceptions to this provision may be made when evidence, as determined satisfactory by the Company, is presented showing that an emergency prevented the employee from reporting to work. Absences on a scheduled weekend will not be considered in determining eligibility for a P.A. Day, unless the 50% overtime requirement has not been met. (2). Specific employees are requested to work. In this case, several provisions apply: (A). The overtime will first be offered to the employee(s) performing the work during the regular working week. There will be no penalty for employees refusing this overtime, provided, however, that if more senior employees decline to work voluntary overtime, the least senior employees in the department will be required to work the offered overtime. The Company, in its sole discretion, will determine the number of employees necessary to work voluntary overtime. (B). Overtime will be divided as equally as possible among the employees possessing the necessary skills and experience. (C). Any employee who agrees to work such overtime and then either leaves early, arrives late or fails to work at all, will be charged with an absence or tardy in the same way as during the regular working week. This occasion will be charged to their attendance record. -10- 16 SECTION 6. HOLIDAYS AND HOLIDAY PAY: (1). Holidays: Holidays recognized under the terms of this Agreement shall be: (A) Good Friday (B) Memorial Day (C) Independence Day (D) Labor Day (E) Thanksgiving Day and the Friday following Thanksgiving Day. (F) Christmas Day and either the working day immediately before or after Christmas Day. (G) New Year's Eve (H) New Year's Day (I) One Personal Day per year to be taken at any time, provided the scheduling of such day would fall within the guidelines of the number of employees that could be allowed on Vacation or Personal Day at any given time. Any Personal Day not taken by December 31st will be paid at straight time in a succeeding paycheck. (J) Three (3) P.A. Incentive days will be allowed each year, one for every four months. These days must be earned for each trimester by a perfect attendance record in the preceding trimester. A perfect attendance record is defined as no absences, except for P.A. days, vacations, layoffs or holidays, and not more than two tardies (or leave earlies) during the calendar trimester. Any P.A. Incentive days earned and not taken by December 31st of each year, will be paid in a paycheck during January of the next year. These P.A. Incentive days will be subject to the same restrictions as the regular P.A. day defined in subsection (I) above. (2). Holiday Pay: Employees shall be paid their regular rate of pay including any shift premium for eight (8) hours for such holidays, provided that they have worked a minimum of six (6) hours on both the last scheduled day before the holiday and the first scheduled day after the holiday. Work performed on a holiday shall be paid as defined in Section 3, Overtime Payment. The requirements for work both before and after the holiday will be waived when: (A) The holiday falls within a vacation period. See Article XI, Section 4. -11- 17 (B) The absence is approved, in advance, by the employee's supervisor. Forms will be provided by the Company; copies are to be forwarded, approval by the supervisor, to Payroll Department and to the Union Business Manager. (C) The absence is due to a layoff which began within the week preceding the week within which the holiday falls, or when layoff began on the day following the holiday. SECTION 7. CLEAN-UP: The Company and the Union agree that a five-minute period at the end of each shift should be set aside for the dual purpose of cleaning the work place, equipment, and tools, as well as for personal wash up. The Company may elect to signal the start of such a period with a bell but this signal to stop work and start cleaning may not apply to all employees because of the nature of the work assignment. In such instances, such as continuously running equipment, the Company will issue special instructions to serve the purposes intended. It is further agreed that idleness during this period will not be tolerated. SECTION 8. JOB ASSIGNMENT: In the Manufacturing Department, operators will have their press assignments changed periodically. Operators performing assembly will be rotated on a periodic basis within product groups depending on product mix and scheduling requirements. ARTICLE V WAGE PAYMENT-WORK CLASSIFICATIONS SECTION 1. WAGE RATES AND CLASSIFICATION OF WORK: Attached hereto is a schedule setting forth the classifications of employees and of work covered by this Agreement, together with minimum wage rates applicable to such classifications, all of which is specifically made a part of this Agreement and shall be known as Exhibit "A". Job Descriptions will be posted on bulletin boards during job postings. -12- 18 SECTION 2. NEW CLASSIFICATIONS OF WORK: Should new bargaining unit classifications of work be established, the wage rates applicable thereto shall be established by the Company. Should the Union feel that such rates are improper in relation to other shop rates, then such complaint shall be handled under provisions of Article III, "Grievance Procedure", starting with Step 3. Any changes in wage rate so negotiated, would be retroactive to the date the new classification was established, if the grievance is settled prior to arbitration. SECTION 3. SHIFT PREMIUM: Employees who are required to work shifts, other than day shift, shall be paid $0.20 per hour over their straight time rate of pay for the second shift, and $0.30 per hour over their straight time rate of pay for the third shift. SECTION 4. PAY DAY: Wages shall be paid weekly during the regular working hours on Thursday for the second shift and on Friday for the first and third shift and not more than seven (7) days' wages may be withheld at any time. In the event a recognized holiday falls on a Thursday or a Friday of the regular week as defined in Article IV, Section 2; then the second and third shifts will receive their pay prior to the first shifts' last working day of that week. SECTION 5. CALL-BACK PAYMENTS: Any employee called back to work after having been released from the regular days' work shall be paid a minimum of four (4) hours at the applicable rate of pay. SECTION 6. MINIMUM CALL-IN: Where an employee reports for work on a regularly scheduled work day at the regular starting time and work is not available, the employee shall be given a minimum of four (4) hours work or shall be paid his regular straight time of pay for four (4) hours. When an employee is scheduled to work on Saturday and report for work, and work is not available, they shall receive four (4) hours at one and one-half (1-1/2) times the regular rate of pay. This provision shall not apply where the work is unavailable due to any general disaster, fire, explosion, labor dispute, or other condition beyond the control of the Company. SECTION 7. COST OF LIVING ADJUSTMENT: Effective on February 19th of each contract year, a quarterly cost of living adjustment will be paid to all employees in the bargaining unit who hold seniority at the time the adjustment is made. The amount of COLA will be determined and redetermined on the basis of the official "Consumer Price Index" published by the Bureau of Labor Statistics, U.S. Department of Labor (1967=100). -13- 19 The basis for the first quarterly COLA in each year will be the CPI for January of that year. At the end of each contract quarter (i.e., May 19th, August 19th, November 19th and February 19th) in each year, if the increase in the CPI exceeds 6 points as measured by the Bureau of Labor Statistics, each 0.5 point increase above 6 points will mean $0.01 per hour better cost of living adjustment. The COLA will not exceed $0.25 per hour in any one year period. -14- 20 ARTICLE VI HOSPITALIZATION AND INSURANCE SECTION 1. The Company agrees to maintain in force during the term of this contract, a group health, accident, and life insurance policy for all its employees. Employees will be required to pay 25% of the cost of health insurance in the 3rd year of this Agreement with the Company paying the balance of any premium due. Following is a summary of those costs:
DEDUCTION PER HOUR* PLAN YEAR BEGINNING - ------------------- ------------------- 4/1/97 4/1/98 4/1/99 ------ ------ ------ EMPLOYEE ONLY $0.177 $0.289 $0.402 EMPLOYEE WITH CHILD(REN) $0.522 $0.634 $0.745 EMPLOYEE WITH SPOUSE $0.554 $0.696 $0.839 EMPLOYEE WITH FAMILY $0.637 $0.863 $1.089 * BASED ON FIRST 1,500 HOURS WORKED. ANNUAL INCREASE IN DEDUCTION* PLAN YEAR BEGINNING - ----------------------------- ------------------- 4/1/97 4/1/98 4/1/99 ------ ------ ------ EMPLOYEE ONLY $0.11 $0.11 $0.11 EMPLOYEE WITH CHILD(REN) $0.11 $0.11 $0.11 EMPLOYEE WITH SPOUSE $0.14 $0.14 $0.14 EMPLOYEE WITH FAMILY $0.23 $0.23 $0.23 * BASED ON FIRST 1,500 HOURS WORKED. TOTAL COSTS PLAN YEAR BEGINNING - ----------- ------------------- 4/1/97 4/1/98 4/1/99 ------ ------ ------ EMPLOYEE ONLY $2,067 $2,211 $2,409 EMPLOYEE WITH CHILD(REN) 3,803 4,086 4,471 EMPLOYEE WITH SPOUSE 4,278 4,599 5,036 EMPLOYEE WITH FAMILY 5,539 5,961 6,534
-15- 21
EMPLOYEE SHARE PLAN YEAR BEGINNING - -------------- ------------------- 4/1/97 4/1/98 4/1/99 ------ ------ ------ EMPLOYEE ONLY $ 517 $ 553 $ 602 EMPLOYEE WITH CHILD(REN) 951 1,022 1,118 EMPLOYEE WITH SPOUSE 1,070 1,150 1,259 EMPLOYEE WITH FAMILY 1,385 1,490 1,634
If, based on actual health insurance costs, employees pay in excess of 25% in any year, Wells will refund the excess to each employee at the end of the three year period. If maximum costs set by the Insurance Company for the years beginning 4/1/98 or 4/1/99 are less than the amounts currently estimated, Wells will reduce the deduction accordingly at the start of each new plan year. Wells will form a committee of both salary and hourly employees to review alternative health plans and cost-containment measures. Benefits will include: (A) A comprehensive medical plan with $150.00 annual deductible per person, limit of two (2) deductibles per family with $250.00 stop loss (in-network) and $500.00 stop loss (out-of-network) per individual per calendar year. See Exhibit B. (B) Disability payments of 60% of wage for weekly income with a maximum of $210.00 weekly, based on 1st day accident, 8th day illness, 18 weeks benefit period effective February 19, 1997. (C) Group Life Insurance and AD&D of $15,000. (D) Dental Plan: * 50% coverage of expenses for dental services (excluding Orthodontist) * $1,000 maximum per year per individual $25.00 deductible per calendar year * Limit of three (3) deductibles per family -16- 22 To be qualified for insurance coverage, an employee must work enough hours each month to achieve an annualized minimum of 1,000 hours/year. Employees will become eligible for insurance benefits after completion of a 90-day probationary period. Insurance coverage will be provided for employees on layoff until the 25th day of the month in which the layoff occurs. Recalled employees insurance coverage resumes on the day they return to work, if the duration of layoff was less than 12 months. Employees on layoff longer than 12 months must wait a 90-day period before coverage can be resumed. ARTICLE VII HEALTH AND SAFETY The Company agrees to maintain reasonable provisions for sanitary, safe and healthful working conditions in the plant, including the provision for protective clothing that the Company deems advisable. The Union agrees that its members are to make proper use of all safety appliances and protective equipment as directed and to take proper care of all facilities, recognizing that all employees must share the responsibility of keeping their place of work and all facilities clean, orderly, and safe. The Company will further pay for one (1) pair of prescription safety glasses every twelve (12) months. All employees will be required to have an annual eye examination at the Company's expense. The provider is determined by the Company. ARTICLE VIII RETIREMENT INCOME PLAN Effective February 19, 1997, the Company will begin making a contribution of $0.19 per hour for all hours worked into a retirement income plan, with the employees contributing a matching amount. Effective February 19, 1998, the contribution will increase to $0.20 and effective February 19, 1999, the contribution will increase to $0.22 per hour for all hours worked. The employee matching contribution will increase accordingly. -17- 23 Some of the highlights of the plan are: * Vesting 20% a year for each year of service. 100% vested with 5 years of service. Prior service will count for vesting purposes only. * Employees hired after the plan effective date will have a one year waiting period before participating in the plan. * Withdrawal of the employees' contributions and the Company's contribution that are vested can occur when an employee retires or terminates employment. * To be eligible for a Company contribution, employees have to have worked 500 hours in the year and be on the payroll as of December 31. * The Company's contribution to the plan will be made in July, October, January, and April of each plan year. * Employees may choose from several options how they want to have their money invested. * Employees may borrow a portion of their Individual Account, subject to the approval of the Plan Administrator. Such loans are available only for certain extraordinary or emergency purposes. See Summary Plan Description for details. ARTICLE IX SENIORITY SECTION 1. DETERMINATION OF SENIORITY: Seniority for all Union employees shall date as of the first day of current employment with the Company in a bargaining unit classification. An employee can transfer from one classification or department to another only under the provisions of Sections 6, 8, 9 and 11 of this article. When such transfer is made, the employee will carry full seniority time and rights with them to their new department, job or shift. SECTION 2. SENIORITY RIGHTS: No employee shall, by reason of seniority, be entitled to any job for which he is not qualified, nor shall any employee be entitled to replace another employee in a specific assignment. This provision will apply in case of layoffs as outlined in Section 8. -18- 24 SECTION 3. ACQUISITION OF SENIORITY BY NEW EMPLOYEES: Employees are regarded as probationary for the first ninety (90) calendar days of continuous employment except for Moldmakers and Manufacturing Technicians for whom the probationary period can extend up to but will not exceed 180 calendar days. Until satisfactory completion of the probationary period the employee will not be eligible for the economic or security benefits laid out in this Agreement, except for wages, and may be laid off or discharged without recourse to the grievance procedure. Moldmakers and Manufacturing Technicians will be eligible for the economic and security benefits set forth in this Agreement after their 90th calendar day of continuous employment even if they have not qualified for their position by the 90th calendar day of their employment. After the probationary period is completed the names of the employees will be placed on the Seniority List as of the most recent date of hire. If a probationary employee is laid off and rehired and the layoff period is not longer than the working period previous to the layoff, then the previous work time will be counted towards the probationary time and the seniority date will be established as ninety (90) calendar days prior to the date of completion of the probationary period. New employees hired on the same day will have seniority based on the first letter of their last name. SECTION 4. SENIORITY LISTS AND LOSS OF SENIORITY: The Company will prepare seniority lists which must be approved by the Union. These lists will be posted in agreed places accessible to employees. The lists will show date of current employment, date of employment in current department and classification held. An employee shall cease to have seniority and his name shall be removed from the seniority list in the event: (A) He voluntarily resigns. (B) He is discharged for cause and not reinstated. (C) The employee is laid off or is on medical leave for a period of time in excess of the employee's length of seniority as of the date of the layoff or the commencement of the medical leave; and in any event, if the employee is laid off or on medical leave in excess of 24 months. (D) He fails to return to work following a layoff within two (2) working days after being notified to do so by certified mail, sent to the last address given to the Company, unless reasonable excuse is given to the satisfaction of the Company. -19- 25 (E) He accepts employment outside of the Company while on leave of absence for any reason, unless approved in writing in advance by both the Company and the Union. Seniority lists will be updated every six (6) months and copies will be furnished to the stewards and the Business Manager. SECTION 5. SENIORITY CHANGE NOTICES: The Company will provide the Union Business Manager and Stewards with notification of laid-off or discharged employees within two (2) working days of the lay off or discharge. Notification of all other status changes for bargaining unit employees will be made within five (5) working days. SECTION 6. TRANSFERS/TEMPORARY: When employees holding the proper classifications are being transferred temporarily from one department to another, the transfers will be offered to the senior employees first. If there are not enough volunteers, the least senior employees will be transferred to fill the necessary numbers. Temporary transfers will be limited to thirty (30) days in any one contract year unless additional periods are mutually agreed upon by the Company and the Union. Return to original department at the end of the temporary assignment will be in seniority order with the most senior employee returned first. SECTION 7. TEMPORARY LAYOFF: The parties hereto recognize the necessity of emergency layoff, which shall mean layoffs resulting from a temporary shutdown of the plant or part thereof by reason of breakdown of machinery, fire, flood, shortage of material, breakdown of transportation facilities, embargoes on shipments, or cause beyond the control of the Company that interferes with production. It is, therefore, mutually agreed that such temporary layoff may be made from time to time without regard to the seniority provisions of this contract. It is further agreed, however, that no employee may be laid off on such temporary layoff without regard to seniority for more than three (3) working days during a one-year period, February 19 to February 18. The Company will place the employee in another job or on layoff in line with the seniority provisions of this contract. Any further extension will only be by agreement of both parties. SECTION 8. GENERAL LAYOFF: In case a general reduction in employment becomes necessary, any probationary employees in the affected department and classification will be released first with the exception of those designated as specially skilled under Section 10 below. When further layoffs become necessary, the least senior employees shall be -20- 26 released first. Employees with established seniority who are effected by a reduction in force in their department shall have the right to exercise their seniority as follows: (A) Within the classification for which they have current qualifications in any department or shift. (B) To fill any open job for which they have current qualifications. (Current qualifications are defined in Article IX, Section 19.) When layoffs are being made, a senior employee in the department and shift may take the layoff (with unemployment benefits); the employee will not then be permitted to return to work until recalled or until an opening occurs for which he is already qualified or for which he can qualify under the bid provisions of the Contract. SECTION 9. RECALL: When an increase in work makes it necessary to recall employees, the recall procedure will be administered in the following manner: 1. Employee will be recalled in the reverse order in which they were displaced or laid-off from their HOMEBASE, provided they are qualified in the classification. HOMEBASE is defined as the last shift and classification selected by the employee by job bid. 2. Any jobs open after Step 1 will be offered to employees in order of seniority who are qualified in the classification that are displaced from their HOMEBASE or on layoff. Any employee refusing recall will be considered to be a voluntary quit and dropped from the Company roles if they are the least senior employee qualified in the classification. 3. If jobs are still open after the steps outlined above, they will be open for bid as outlined in Article IX, Section 11. In the application of this procedure there are to be no more than two (2) moves by an employee being recalled. -21- 27 SECTION 10. SPECIALLY SKILLED EMPLOYEES: On layoff or subsequent recall, the Company may designate certain employees possessed of special skills whose services are properly necessary under the circumstances then existing for retention or recall over employees senior in standing. However, such designation shall be made only after a conference between the representatives of the parties. Any difference of opinion shall be subject to the procedure of Article III of this Agreement. When the special circumstances in special employee's cases cease to exist, employment shall be governed by Section 8 of this Article. SECTION 11. BID PROVISION - UPGRADING AND HORIZONTAL: In filling any vacancy within the bargaining unit, the Company will post the information, including the number and description of open position(s), on the bulletin board for a period of three (3) regular working days. During this period, the Company may fill the position with any member of the bargaining unit who is available. This period will not be permitted to count towards qualification of the employee and will not be considered when comparing the capability and qualification of the employee. After the three (3) day notification period, the position(s) will be filled by senior employees applying unless they are disqualified under one of the following provisions: (A). Less than six months (including probationary time) in previous classification. (B). Capability and qualifications required for the classification are not met. (C). Employees that return from layoff through job posting will retain recall rights to their homebase as defined in Section 9, provided they have met the ninety (90) day qualifying period (180 days for Moldmakers and Manufacturing Technicians). If they reject the opportunity to return, their new homebase becomes the classification and shift they are filling. Note: Requirement (A) above will be waived once each year for each employee only in the case of new classifications not previously used by the Company. If no employee applies for the position within the three (3) day period, then the Company is free to fill the position at its discretion. If a Union member is chosen, then it must be with the member's consent. Whenever a job posting is made and the job(s) made available is filled immediately, the posting is considered complete. -22- 28 If an occasion arises when the Company doesn't need the full number of people that it posted for, the position will remain active for ninety (90) days, and if the Company requires additional people within ninety (90) days, the employees signing the original posting will be given the first consideration. It shall be the responsibility of the steward of each shift in each department to notify laid off employees from their shift of any new openings. For this purpose the Company will allow the steward thirty (30) minutes at a time convenient to the shift foreman, specifically and only for the purpose of calling such laid-off employees. A copy of each job posting will be given to all department stewards following the posting period. SECTION 12. TRANSFER-CLASSIFICATION RATE: The Company reserves the right to pay the rate of the classification when an employee is permanently transferred from one classification to another. The Company will pay the rate of the classification when an employee is temporarily transferred from one classification to another. Exceptions to this rule will be when an employee is required to work in a lower paying classification, in this case the employee will receive the higher rate of pay. When the employee works in more than one classification, he will be paid the rate of his highest classification. SECTION 13. QUALIFICATION PERIOD WHEN CHANGING JOB CLASSIFICATIONS: When an employee with seniority changes job classifications, a qualification period of ninety (90) calendar days will be established with the exception of Moldmakers and Manufacturing Technicians for whom the qualification period will not exceed 180 calendar days. For purpose of a reduction in the classification, the employee will be considered probationary for ninety (90) calendar days and for Moldmakers and Manufacturing Technicians up to 190 calendar days. It is also understood that the employee must achieve proficiency to perform the work required by the classification, to the satisfaction of the Company. In the event that an employee has been on lay-off between 18 and 24 months and is recalled to work pursuant to Section 9 of this Article, that employee may be recalled to the last job classification worked by that employee. A qualification period of up to 30 working days will be established within which the employee must demonstrate proficiency to perform the work required by the job classification to the satisfaction of the Company. If the employee fails to qualify within the thirty working day period, he may bid on any other vacant position pursuant to Section 11 of this Article. If the employee fails to qualify, he will be returned to lay-off status. -23- 29 SECTION 14. DISQUALIFICATION WHEN CHANGING CLASSIFICATION: If an employee fails to achieve proficiency for a given job, they would be able to bid and attempt to qualify for the same job after twelve (12) months, provided in the opinion of the Company the individual would not present a safety hazard to themselves or fellow employees or a risk of damage to any equipment. SECTION 15. LAYOFF DURING QUALIFICATION PERIOD: If an employee holding seniority is laid off during the qualification period, they will be entitled to recall to that classification for six (6) months including the probationary period. However, they can only be recalled after all of the employees laid off in that classification are called back. Also the six-month waiting period before signing another posting will be waived. If such employee signs a second posting and is accepted for that classification, he automatically gives up the first job posting from which he was laid off. SECTION 16. SHIFT PREFERENCE: An employee shall work on the shift for which he was hired until a vacancy occurs on a shift that he can qualify for by way of the bid provision. However, the Company reserves the right to train employees on shifts other than those for which the employee was hired. SECTION 17. UNION OFFICER'S SENIORITY: A Company employee elected to the Union office of President, Vice President or Shop Steward shall head the seniority list for the purpose of layoff or recall only, while holding these positions provided their duties in these capacities require them to process grievances and administer the labor contract on a day-to-day basis. When such employees are replaced or removed from office, they shall be returned to their proper place on the seniority list. SECTION 18. GROUP LEADER: It is understood and agreed that vacancies for the position of group leader, although subject to bid, will be filled at the discretion of the Company. The wage for the position of Group Leader shall be increased as per Exhibit "A". SECTION 19. LOSS OF QUALIFICATION: At the Company's discretion, an employee who fails to work within a job classification for 18 consecutive months, may lose their qualification for that classification. In such circumstances, the employee is again subject to the qualifying procedures in Article IX, Section 13. -24- 30 ARTICLE X LEAVE OF ABSENCE SECTION 1. PERSONAL LEAVE: Personal Leave(s), without pay, may be granted when the reason for such leave is acceptable to the Company. SECTION 2. SICKNESS AND MEDICAL-RELATED LEAVE: This section refers to leaves due to personal and/or family illness or non-job related injury. (A) Call-In: An employee who is sick or injured has the responsibility of calling within three (3) hours of the start of his/her shift. In all cases, an employee who fails to call before the end of is/her scheduled shift on the second day of absence will be considered a voluntary quit. Exceptions to this provision may be made when evidence, satisfactory to the Company, is presented showing that an EMERGENCY prevented the employee's reporting in. (B) Leave: An employee shall be granted a leave of absence subject to the Family Medical Leave Act provided documentation by an appropriate Physician supporting the employee's absence is provided to the Company. An employee request for leave must be in accordance with the Family or Medical Leave Policy or the Attendance Control Policy. An employee will be considered on medical leave as long as they were certified by a licensed Physician. Upon return from Leave due to Personal Illness or Non-Job Related Injury, the Company shall have the right to require the employee to submit valid medical certification that the employee is able to return to work without risk of further injury. The Company shall have the right to have such proof verified by a Company appointed doctor and any expenses for such would be paid for by the Company. The Company shall adopt a tardiness, absenteeism, and leave program. The first part of said program shall be the Family or Medical Leave policy. The Company shall present copies of its family leave policy to the Union prior to implementation. The Company shall also adopt a tardiness and absenteeism control policy. The Company shall present a copy of the said policy to the Union before implementation. -25- 31 (C) Seniority While on Leave due to Personal and/or Family Illness or Injury: An employee's seniority will not accrue while they are on leave but will be reinstated once the employee returns from leave. SECTION 3. INJURIES: This section refers to leaves due to Job-related injuries covered under the Indiana Worker's Compensation Act. (A) When the injury does not require time off but does require treatment at an Emergency Room or Physician's Office, the employee shall be paid as follows: 1. In lieu of the actual hours worked on the day the accident happened, that employee shall be paid for the scheduled hours excluding overtime hours, unless the employee had worked more than eight (8) consecutive hours before the accident happened. In that case, the employee shall be paid for the actual time worked. 2. For subsequent visits to the Physician or Emergency Room, payment will be made for regular scheduled hours lost not to exceed four (4) hours per day. Total number of visits under this provision shall be determined by the Physician. The Company may require the employee to present documentary proof of each visit to the Physician or Hospital. In no case will this provision include overtime payment. 3. It is the Company's sole discretion to determine whether an injured employee is capable of performing useful work. If such a decision is made, the employee will be required to return to work while being treated for the injury. 4. Injury Leave: The Company will send a copy of all reportable accident reports to the Union Business Manager. (B) When the injury requires time off from work, the following will apply: 1. Seniority will continue for the period of the temporary total disability, not to exceed the employee's length of seniority, to a maximum of 24 months. -26- 32 2. The period of temporary total disability, for the purposes of the supplementary Company payments, will be decided by certificate of the Company Doctor or other evidence satisfactory to the Company. The Company may, at its discretion, elect to accept the certificate of any reputable physician. 3. The Company will supplement the Temporary Total Disability payments made under the Indiana Worker's Compensation Act, so that the total of the benefits received by the employee will equal 60% of his regular weekly wage as of the date of the accident, excluding overtime. In the event that time lost from work exceeds twenty-one (21) days and Temporary Total Disability benefits paid under the Indiana Worker's Compensation Act are paid for the initial seven day waiting period, supplements will apply. When applicable, the Company paid supplements will begin when Temporary Total Disability benefits start and will end after a period of time equal to the employee's seniority at the time of the accident or when Temporary Total Disability ends, whichever occurs first. SECTION 4. MATERNITY LEAVE: A maternity leave will be granted upon the same basis as is in effect for employees requesting a medical leave of absence (i.e., an illness or an accident). SECTION 5. COPY OF LEAVE: The Company will furnish the employee, Union Steward and Union President with a copy of the documentation of approved leaves of absences for any reason, except where such employee objects. SECTION 6. RETURN FROM LEAVE: When an employee returns from a leave of absence, he/she will be restored to the same job he/she had before going on leave with any increases in pay or benefit changes that were not dependent upon seniority also effective upon their return, or to an equivalent position with equivalent benefits. If the employee's leave was not subject to the Family and Medical Leave Act and his/her job has been abolished, he/she shall be given a job as nearly equivalent as possible to his/her former job with the same pay and benefits in accord with his/her seniority standing. Displaced employees then can exercise seniority in classifications held in the department, then in the plant on any shift. -27- 33 SECTION 7. EMPLOYMENT OUTSIDE THE BARGAINING UNIT: An employee with established seniority in the Bargaining Unit who accepts employment with the Company outside the Bargaining Unit shall not accumulate seniority during said time. The employee will lose one year of seniority for every year he or she is outside the Bargaining Unit. The employee shall have no right to transfer back to the Bargaining Unit, but in the event the employee is transferred back into the Bargaining Unit by the Company, said employee shall start again accumulating seniority in the Bargaining Unit, which seniority shall be added to whatever amount of seniority is left, if any, at the time of the transfer. An employee returning to their former classification with any seniority will not be able to use this provision again within the next twelve (12) months. SECTION 8. ABSENCE DUE TO DEATH IN THE IMMEDIATE FAMILY: An employee shall be granted reasonable absence when a death occurs in his immediate family. Provided the employee has been employed for 90 days or more at the time the absence begins he will be paid at straight time for time lost from assigned company duties for three (3) consecutive regular working days; provided, however, that the employee produces proof of attendance at the funeral service An employee's immediate family shall be considered as: Husband, wife, children and step-children, mother, father, mother-in-law, father-inlaw, sister, brother, step-mother, step-father, grandparents and grandchildren. In the event of the death of a brother or sister-in-law, an employee will be entitled to one (1) NON-PAID day off. This day will not count as a day of absence. SECTION 9. JURY DUTY: In the event an employee is required to render service as a juror, he will be paid the difference between the fee he receives for such service and the amount of straight time earnings lost by him by reason of such service up to eight (8) hours per day and forty (40) hours per week, provided the employee's term of employment is six (6) months or more at the time such service is required. In order to be eligible for such payments, the employee must furnish a written statement from the appropriate public officials showing the date served and the amount of pay received. -28- 34 Employees working on the First and Second shift who serve as jurors will not be required to work on the shift falling within the day such jury duty is performed if the jury duty extends for more than four (4) hours during said day. Employees working on the Third shift will not be required to work the shift preceding the required jury duty. SECTION 10. ABSENCE - UNION BUSINESS: Any leaves of absence granted for Union business will not be considered an occasion of absence in determining eligibility for a P.A. day. ARTICLE XI VACATION SECTION 1. VACATIONS: Full-time employees will be given vacations with pay during each calendar year as hereinafter provided: (1) Employees with less than three (3) full years of employment by May 31st of the year under consideration will receive vacation pay as follows: Hours Worked in the Full Year Prior to May 31st Vacation Pay Earned ----------------------- ------------------- 800 to 1500 20 hours More than 1500 40 hours (2) Employees with three (3) full years of employment occurring after May 31st of the year under consideration but before December 31st of the same year will receive vacation pay as follows: Hours Worked in the Full Year Prior to May 31st Vacation Pay Earned ----------------------- ------------------- 800 to 1500 30 hours More than 1500 60 hours -29- 35 (3) Employees with three (3) full years of employment but less than eight (8) by May 31st of the year under consideration will receive vacation pay as follows: Hours Worked in the Full Year Prior to May 31st Vacation Pay Earned ----------------------- ------------------- 800 to 1500 40 hours More than 1500 80 hours (4) Employees with eight (8) full years of employment occurring after May 31st of the year under consideration but before December 31st of the same year will receive vacation pay as follows: Hours Worked in the Full Year Prior to May 31st Vacation Pay Earned ----------------------- ------------------- 800 to 1500 50 hours More than 1500 100 hours (5) Employees with eight (8) full years of employment by May 31st of the under consideration will receive vacation pay as follows: Hours Worked in the Full Year Prior to May 31st Vacation Pay Earned ----------------------- ------------------- 800 to 1500 60 hours More than 1500 120 hours (6) Employees with fifteen (15) full years of employment occurring before May 31st of the year under consideration will receive vacation pay as follows: Hours Worked in the Full Year Prior to May 31st Vacation Pay Earned ----------------------- ------------------- 800 to 1500 80 hours More than 1500 160 hours In calculating vacation eligibility; "paid vacation time taken" will be counted as time worked. -30- 36 SECTION 2. TIME OF VACATION PAYMENTS: (1) Vacation pay shall be figured at the regular hourly rate (including shift premium) of wages of the employee as of May 31st of the year in which the vacation pay is made. (2) Vacation payments will be made during the first full week of June. SECTION 3. VACATION SCHEDULES: It is the policy of the Company to grant vacations at any time during the calendar year. Vacations other than plant shutdowns will be granted as near as possible to the time requested by the employee. However, the right to schedule vacations is reserved by the Company in order to insure orderly and efficient operations. In the event the Company or any department or section therein schedules a plant shutdown and if alternative work outside an employee's job classification is not offered by the Company, vacations shall run concurrently with such shutdown period. If the affected employee(s) have used up their vacation, the absences shall be recorded as non-production days and shall not count toward the Attendance Control Policy. Employees may request one (1) additional week of vacation without pay. This additional, unpaid vacation will be scheduled in the same manner as paid vacation. An employee may schedule three (3) days of vacation a year by calling their supervisor by no later than two hours after the start of the shift on the day requested. Approval is at the discretion of the supervisor. SECTION 4. HOLIDAYS WITHIN VACATION PERIODS: When a designated holiday falls within an employee's vacation period, the employee may request permission to include the last work day of the week preceding, or the first work day of the week following as a further part of such vacation period. Such permission may be granted at the option of the Company depending upon anticipated production requirements. Such request and approval must be completed prior to the vacation with at least two weeks notice to the Company. Forms will be provided by the Company, copies are to be forwarded, after approval, to the Payroll Department and to the Union Business Manager. -31- 37 ARTICLE XII GENERAL PROVISIONS SECTION 1. DEFINITION OF EMPLOYEES: All references to employees in this agreement designate both sexes, and whenever the male gender is used, shall be construed to include male and female employees. SECTION 2. DEFINITION OF PART-TIME EMPLOYEES: The Company may hire employees on a part-time basis and such employees will be excluded from provisions of this Agreement. However, any part-time employee who has worked over eighty (80) hours in any given month after having been on the Company payroll for ninety (90) calendar days shall be considered a full-time employee and subject to all provisions of the Agreement and pay to the Union an amount equal to the Union's regular monthly dues. In no case will part-time employees be paid less than the prevailing contract rates for equivalent work. SECTION 3. BULLETIN BOARDS: The Union shall be privileged to post bulletins having to do with the Union's official business on the bulletin boards provided by the Company in the plant. Notices, other than notices of meetings and notices of social affairs of the Union shall be subject to the approval of the Company. SECTION 4. EFFECT OF LAW: Should any provision of the Agreement be declared illegal by any court of competent jurisdiction such provision shall immediately become null and void, leaving the remainder of the Agreement in full force and effect and the parties shall thereupon seek to negotiate substitute provisions which are in conformity with the applicable laws. SECTION 5. PRIOR WRITTEN AGREEMENTS: This Agreement shall constitute the only written Agreement between the parties and all written agreements entered into prior hereto are hereby declared null and void. -32- 38 EXHIBIT A WAGE RATES
YEAR ONE - February 19, 1997 - February 18, 1998 General Increase $0.20 After After After After After After Classification Start Prob. 6 Mos. 9 Mos. 12 Mos. 18 Mos. 24 Mos. - ------------------------------------------------------------------- Operator 6.20 6.45 6.70 6.95 7.20 8.36 9.52
After After After Classification Start Prob. 8 Mos. 14 Mos. - ------------------------------------------------------------- General Laborer 6.83 7.69 8.55 9.42 S/R Stockroom Clk. Helper 6.83 7.69 8.55 9.42 S/R Stockroom Clerk 6.93 7.79 8.65 9.52 Q. A. Auditor 7.39 8.25 9.11 9.98 Set-Up Assembly 7.58 8.72 9.86 11.00 Set-Up Tool Room 7.58 8.72 9.86 11.00 Manufacturing Tech. B 7.78 8.92 10.06 11.20 Manufacturing Tech. A 10.18 10.97 11.76 12.55 Mold Repair 11.18 11.91 12.64 13.37 Moldmaker 13.68 14.55 15.42 16.29
Apprentice Moldmaker 1st 6 Mos. 50% of Moldmaker rate 8.15 2nd 6 Mos. 55% of Moldmaker rate 8.96 3rd 6 Mos. 60% of Moldmaker rate 9.77 4th 6 Mos. 65% of Moldmaker rate 10.59 5th 6 Mos. 70% of Moldmaker rate 11.40 6th 6 Mos. 75% of Moldmaker rate 12.22 7th 6 Mos. 85% of Moldmaker rate 13.85 8th 6 Mos. 95% of Moldmaker rate 15.48
2nd Shift Premium add $0.20 to regular rate 3rd Shift Premium add $0.30 to regular rate Group Leaders - add $0.20 to regular rate -33- 39 EXHIBIT A (CONTINUED) WAGE RATES
YEAR TWO - February 19, 1998 - February 18, 1999 General Increase $0.25 After After After After After After Classification Start Prob. 6 Mos. 9 Mos. 12 Mos. 18 Mos. 24 Mos. - ------------------------------------------------------------------- Operator 6.45 6.70 6.95 7.20 7.45 8.61 9.77
After After After Classification Start Prob. 8 Mos. 14 Mos. - ------------------------------------------------------------- General Laborer 7.08 7.94 8.80 9.67 S/R Stockroom Clk. Helper 7.08 7.94 8.80 9.67 S/R Stockroom Clerk 7.18 8.04 8.90 9.77 Q. A. Auditor 7.64 8.50 9.37 10.23 Set-Up Assembly 7.83 8.97 10.11 11.25 Set-Up Tool Room 7.83 8.97 10.11 11.25 Manufacturing Tech. B 8.03 9.17 10.31 11.45 Manufacturing Tech. A 10.43 11.22 12.01 12.80 Mold Repair 11.43 12.16 12.89 13.62 Moldmaker 13.93 14.80 15.67 16.54
Apprentice Moldmaker 1st 6 Mos. 50% of Moldmaker rate 8.27 2nd 6 Mos. 55% of Moldmaker rate 9.10 3rd 6 Mos. 60% of Moldmaker rate 9.92 4th 6 Mos. 65% of Moldmaker rate 10.75 5th 6 Mos. 70% of Moldmaker rate 11.55 6th 6 Mos. 75% of Moldmaker rate 12.41 7th 6 Mos. 85% of Moldmaker rate 14.06 8th 6 Mos. 95% of Moldmaker rate 15.71
2nd Shift Premium add $0.20 to regular rate 3rd Shift Premium add $0.30 to regular rate Group Leaders - add $0.20 to regular rate -34- 40 EXHIBIT A (CONTINUED) WAGE RATES
YEAR THREE - February 19, 1999 - February 18, 2000 General Increase $0.30 After After After After After After Classification Start Prob. 6 Mos. 9 Mos. 12 Mos. 18 Mos. 24 Mos. - ------------------------------------------------------------------- Operator 6.75 7.00 7.25 7.50 7.75 8.91 10.07
After After After Classification Start Prob. 8 Mos. 14 Mos. - ------------------------------------------------------------- General Laborer 7.38 8.24 9.10 9.97 S/R Stockroom Clk. Helper 7.38 8.24 9.10 9.97 S/R Stockroom Clerk 7.48 8.34 9.20 10.07 Q. A. Auditor 7.94 8.80 9.67 10.53 Set-Up Assembly 8.13 9.27 10.41 11.55 Set-Up Tool Room 8.13 9.27 10.41 11.55 Manufacturing Tech. B 8.33 9.37 10.61 11.75 Manufacturing Tech. A 10.73 11.52 12.31 13.10 Mold Repair 11.73 12.46 13.19 13.92 Moldmaker 14.23 15.10 15.97 16.84
Apprentice Moldmaker 1st 6 Mos. 50% of Moldmaker rate 8.42 2nd 6 Mos. 55% of Moldmaker rate 9.26 3rd 6 Mos. 60% of Moldmaker rate 10.10 4th 6 Mos. 65% of Moldmaker rate 10.95 5th 6 Mos. 70% of Moldmaker rate 11.79 6th 6 Mos. 75% of Moldmaker rate 12.63 7th 6 Mos. 85% of Moldmaker rate 14.31 8th 6 Mos. 95% of Moldmaker rate 16.00
2nd Shift Premium add $0.20 to regular rate 3rd Shift Premium add $0.30 to regular rate Group Leaders - add $0.20 to regular rate -35- 41 EXHIBIT B COMPREHENSIVE MEDICAL PLAN The comprehensive medical plan (CMP) has a $150.00 annual deductible per person; limit of two (2) deductibles per family and $250.00 stop loss (in-network) and $500.00 (out- of-network) stop loss per individual annually. IN-NETWORK - CMP pays 90% of covered charges in excess of the deductible amount for all services, except out-patient nervous and mental conditions which is at 50% of covered charges, until the 10% of covered charges you pay has reached $400.00. Routine Pap Smear & Mammogram, once per year, is covered 90% also. Physicians office visits require only a $10.00 "Encounter Fee". This fee is all you pay for your office visit, but is not applied to your annual deductible. OUT-OF-NETWORK - CMP pays 80% of covered charges in excess of the deductible amount for all services, except out-patient nervous and mental conditions which is at 50% of covered charges, until the 20% of covered charges you pay has reached $650.00. Routine Pap Smear & Mammogram, once per year, is covered 80% also. Physicians office visits are subject to the deductible & co-insurance. CMP pays 100% of covered charges in excess of the deductible amount and the co-insurance amount until a lifetime maximum benefit of $1,000,000 is reached, except nervous and mental conditions for which the calendar year maximum benefit is $500.00 and the lifetime maximum benefit is $25,000. Human Organ Transplant surgery is covered up to $1,000,000. Some services are paid 100% and do not require your co-insurance payment and are not subject to the annual deductible: * Pre-admission testing * REQUIRED 2nd surgical opinion * Non-emergency weekend admissions include a 50% penalty. You must PRE-CERTIFY your IN-PATIENT hospital confinement. If you don't, you will have to pay 50% of your hospital charges. For emergency admissions, you must call the insurance company within 48 hours. For maternity admissions, you must call the insurance company within 24 hours. A more detailed explanation can be found in the insurance booklet. If you do not have one, please see someone in the Human Resources Department. -36- 42 EXHIBIT C DEPARTMENT LISTINGS Manufacturing Tooling Warehouse - S/R -37- 43 In witness whereof, the parties have caused this Agreement to be executed by their duly authorized officers and agents as of the day and year stated in Article I, Section 1. FOR THE UNION FOR THE COMPANY - ------------- --------------- /S/ David Schimmel /S/ Gerald Lutkus - ------------------------ -------------------------- David Schimmel Gerald Lutkus /S/ Margaret Dawning /S/ Juliann Sparazynski - ------------------------ -------------------------- Margaret Dawning Juliann Sparazynski /S/ Judy Jones /S/ James Putt - ------------------------ -------------------------- Judy Jones James Putt /S/ Donna Olszewski - ------------------------ Donna Olszewski /S/ Sharon Schosker - ------------------------ Sharon Schosker /S/ Tina Wilk - ------------------------ Tina Wilk 44 INDEX PAGE Absence Due to Death in the Immediate Family ............................. 28 Absence - Union Business ................................................. 29 Acquisition of Seniority by New Employees ................................ 19 Amendment During Term .................................................... 1 Amendment or Termination ................................................. 1 Arbitration .............................................................. 7 Bid Provision - Upgrading and Horizontal ................................. 22 Bulletin Boards .......................................................... 32 Call-Back Payments ....................................................... 13 Clean-Up ................................................................. 12 Compensation Insurance ................................................... 4 Comprehensive Medical Plan ............................................... 36 Copy of Leave ............................................................ 27 Cost of Living Adjustment ................................................ 13 Definition of Employees .................................................. 32 Definition of Part-Time Employees ........................................ 32 Department Listing ....................................................... 37 Determination of Seniority ............................................... 18 Disqualification When Changing Classification ............................ 24 Distribution of Overtime ................................................. 9 Dues Deduction ........................................................... 5 Effect of Law ............................................................ 32 Employee's Right When Disciplinary Action is Taken ....................... 4 Employment Outside the Bargaining Unit ................................... 28 General Layoff ........................................................... 20 Grievance Procedure ...................................................... 6 Group Leader ............................................................. 24 Health and Safety ........................................................ 17 Holidays and Holiday Pay ................................................. 11 Holidays Within Vacation Periods ......................................... 31 Hospitalization and Insurance ............................................ 15 Injuries ................................................................. 26 Job Assignment ........................................................... 12 Jury Duty ................................................................ 28 Layoff During Qualification Period ....................................... 24 Leave of Absence ......................................................... 25 45 PAGE Management Function Reserved ............................................. 2 Maternity Leave .......................................................... 27 Minimum Call-In .......................................................... 13 New Classifications of Work .............................................. 13 No Strike - No Lockout ................................................... 3 Overtime Payment ......................................................... 9 Pay Day .................................................................. 13 Personal Leave ........................................................... 25 Prior Written Agreements ................................................. 32 Processing a Grievance ................................................... 6 Qualification Period When Changing Classification ........................ 23 Recall ................................................................... 21 Regular Working Hours .................................................... 8 Rest Periods ............................................................. 9 Retirement Income Plan ................................................... 17 Return From Leave ........................................................ 27 Review of Wage and Hours Computation ..................................... 4 Right of Visitation ...................................................... 4 Seniority Change Notices ................................................. 20 Seniority Lists and Loss of Seniority .................................... 19 Seniority Rights ......................................................... 18 Shift Preference ......................................................... 24 Shift Premium ............................................................ 13 Shop Committee ........................................................... 3 Sickness and Medical-Related Leave ....................................... 25 Specially Skilled Employees .............................................. 22 Temporary Layoff ......................................................... 20 Terms .................................................................... 1 Time of Vacation Payments ................................................ 31 Transfer - Classification Rate ........................................... 23 Transfers/Temporary ...................................................... 19 Union Officer's Seniority ................................................ 23 Union Recognition ........................................................ 1 Union Security ........................................................... 5 Union Stewards ........................................................... 3 Vacation Schedules ....................................................... 31 Vacations ................................................................ 29 Wage Rates ............................................................... 33 Wage Rates and Classification of Work .................................... 12 Waiver of Grievance ...................................................... 8 Work Day - Work Week ..................................................... 8 46 [CALENDAR FOR 1997] [CALENDAR FOR 1998] 47 [CALENDAR FOR 1999] [CALENDAR FOR 2000] EX-10.37 10 LETTER AGREEMENT WITH RICHARD J. MULLIN 12/26/97 1 Exhibit 10.37 PCD December 3, 1997 Mr. Richard J. Mullin 15791 Cedar Ridge Court Granger, Indiana 46530 Dear Rich: It is a pleasure to offer you the position of President, Wells CTi and Vice President, PCD Inc., reporting to me in our new organization. I am looking forward to your contribution. You will be an officer of PCD Inc. and will have direct P&L responsibility for the combined operations of Wells and CTi which will operate as a separate entity, Wells CTi. This responsibility includes managing the day-to-day activity as well as the development and implementation of business strategies for the Wells CTi entity. At PCD Inc., we do not use employment agreements or contracts with any employee or prospective employee. It is my preference to identify "terms and conditions" in an offer letter such as this. The purpose, of course, is to be sure that there is complete understanding between the two of us as to those conditions, and to establish that your employment is on an "at will" basis. This means that your employment is for no definite period and can be terminated by either of us at any time. As with all key PCD Inc. employees, you will be required to sign a non-compete and confidentiality agreement. It must be understood that this offer of employment abrogates any and all existing or prior agreements you have, or may have had, with any source concerning employment terms and conditions. This is a summary of the offered conditions: COMPENSATION - ------------ * BASE: Your base salary will be at the rate of $185,000 per year, payable in semi-monthly installments of $7,708.34. You will be reviewed once per year and any adjustment to your base will be based on your performance. * BONUS: You will participate in the Management Incentive Plan and your bonus will range from 0% to 60% of your base salary. The conditions are explained in the attached description of the Management Incentive Plan. * STOCK OPTIONS: As of your employment starting date, you will be granted fifty-thousand (50,000) shares of non-qualified stock options under the terms of the PCD Inc. 1996 Stock Option Plan. 2 These options will have an exercise price equal to the fair market value of Company common stock on the grant date and will vest pro rata over a three year period from date of grant. BENEFITS - -------- It is our policy at PCD Inc. to maintain an internal balance and consistency in providing benefits to officers of the corporation. This means that some of the things for which you have been eligible in the past will not be a part of your employment package, such as company-paid country club membership and any additional medical insurance benefits. You will, however, be eligible for the following: (a) A company-paid leased automobile (but the favorable tax effect will be discounted); (b) Supplementary Long Term Disability Insurance policy; and (c) $1,500 per year for independent tax and financial consultation and advice. Your vacation eligibility will follow the existing Wells schedule as will holidays and other policy benefits. You will participate in either your present 401K Plan or that of PCD Inc. if the Wells Plan is converted to ours. BUSINESS EXPENSE - ---------------- You will be reimbursed for all approved, reasonable expenses incurred for business travel and entertainment. TERMINATION PROVISION - --------------------- Should your employment be terminated for reasons of performance or company decision to eliminate the position for any reason, you will receive a severance package of one (1) year's base pay and benefits, payable in semi-monthly installments. There will be no severance pay if you resign from employment or if your termination is initiated by the company due to gross misconduct. I believe this covers the things we discussed. If you have any questions at all, please call me as soon as possible. I look forward to your acceptance of this offer and to our moving ahead in our new relationship. Please indicate your acceptance by signing in the space below. Sincerely, /s/ John L. Dwight, Jr. John L. Dwight, Jr. Chairman/Chief Executive Officer PCD Inc. Accepted: /s/ Richard J. Mullin Date: 12-26-97 (effective date) ---------------------------- -------------------------- Richard J. Mullin EX-10.38 11 PCD, INC. MANAGEMENT INCENTIVE PLAN 1 Exhibit 10.38 Number: 515 Page: 1 of 2 Date: 2/2/98 Approvals: /s/ J.L. Dwight pcd Policies and Procedures - --------------------------- Subject: MANAGEMENT INCENTIVE PLAN ---------------------------------------------------------------------- POLICY: I. OBJECTIVE The objective of the Management Incentive Plan (the "Plan") is to motivate and reward Key Employees for their efforts in achieving goals and objectives set by the management and approved by the Board of Directors of PCD Inc. by the payment of Incentive Bonuses based on the Company's annual earnings. II. THE AWARDING OF INCENTIVE BONUSES BY THE BOARD OF DIRECTORS Incentive bonuses shall be paid in accordance with the standards described herein under. Notwithstanding the availability of monies for the Incentive Fund in any year, the payment of Incentive Bonuses shall remain within the sole discretion of the Board of Directors of the Company. III. ELIGIBILITY UNDER THE INCENTIVE PLAN Eligibility for bonuses under the Plan is restricted to the officers and employees recommended by the President and approved by the Board of Directors. Only employees holding positions considered to substantially contribute to the Company's growth and success, by way of responsibility and/or authority, may be eligible for bonuses under the Plan. Participants must be in the employ of the company at the time Incentive Bonuses are paid in order to validate their eligibility. Employees who are eligible under the Plan are herein referred to as Key Employees. IV. INCENTIVE BONUS RANGES FOR KEY EMPLOYEES The "range of bonus as a percent of salary" is scaled to reward Key Employees according to their influence on the growth and profitability of the Company. While individual performance is primary in determining the level of Incentive Bonuses, the range of bonus payout is governed by the following criteria: 1. In the Key Employee's profit center, profit for the year must equal at least 80% of the budgeted results for the operating year for the plan to be actuated. 2. Participants in the plan are eligible for maximum bonus payments when their profit center reached 120% of both budgeted operating profit and EVA. 2 pcd Policies & Procedures Number: 515 - ------------------------- Page: 2 of 2 Date: 2/2/98 Approvals: /s/ J.L. Dwight Subject: V. AWARDING OF INCENTIVE BONUSES At the beginning of each fiscal year the Company President shall determine which employees qualify as Key Employees and shall notify them that they are eligible under the Plan. Based on preliminary or estimated financial statements of the Company for the fiscal year just completed, the President shall report to the Compensation Committee of the Board of Directors the percentage of Incentive Bonus he recommends for each Key Employee. The President's recommendations shall be based on the following factors: 1. The overall profitability of the Company and the profitability of the specific profit center that the Key Employee works in. 2. Performance evaluation based on EVA calculations for both the company and the Key Employee's profit center. 3. Evaluation of individual Key Employee performance in their day-to-day activities, corporate goals and core competencies. The evaluation of corporate goals and core competencies will take into account the number which the individual participated in, their degree of difficulty and the rate of successful completion. The Compensation Committee shall evaluate the President's recommendations and offer its proposals for approval by the Board of Directors of the Company. Notwithstanding Board approval, the amount of the Incentive Bonuses shall be subject to revision in the event the final audited financial statements reveal lower profits than estimated for purposes of setting Incentive Bonuses. VI. PAYMENT OF INCENTIVE BONUSES Incentive Bonuses shall be paid in full by corporate check as soon as practicable after the receipt of the company's audited financial statements and verification of the Company's profitability. VII. EFFECTIVE DATE OF THE PLAN The Plan has been ratified by the Board of Directors and shall be effective as of January 1, 1998. VIII. AMENDMENTS TO THE PLAN The Plan may be amended, suspended or reinstated, in whole or in part, at any time, by the Board of Directors of the Company. EX-11.1 12 COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11.1 PCD Inc. STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
Basic Diluted Shares Shares ------ ------ 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 (1) 70,364 70,364 Dilutive effect of common stock equivalents -- 560,728 ------------ ------------ Weighted average number of common and common equivalent shares outstanding 4,640,396 5,201,124 ============ ============ Net income $ 3,863,000 $ 3,863,000 ============ ============ Net income per share $ 0.83 $ 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 (3) -- -- ------------ ------------ 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) In accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 83, issuance of common stock and common stock equivalents during the twelve month period preceding the date of the initial filing on February 12, 1996, of the registration statement relating to the Company's initial public offering have been included in the calculation using the treasury stock method at the public offering price ($11 per share), as if they were outstanding for all periods prior to January 1, 1996. EX-21.1 13 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 SUBSIDIARIES OF PCD INC. CTi Technologies, Inc., a Massachusetts corporation PCD Control Systems, Inc., a Massachusetts corporation PCD USVI, Inc., a United States Virgin Islands corporation Wells Electronics, Inc., an Indiana corporation SUBSIDIARIES OF WELLS ELECTRONICS, INC. Wells Japan Kabushiki Kaisha (Wells Japan Co., Ltd.), a Japanese corporation Wells International Corporation, Inc., an Indiana corporation SUBSIDIARIES OF WELLS INTERNATIONAL CORPORATION, INC. Wells Electronics Asia Pte. Ltd., a Singapore limited liability company EX-23.1 14 CONSENT OF COOPERS & LYBRAND L.L.P. 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form S-1 of our report dated February 11, 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". COOPERS & LYBRAND L.L.P. Boston, Massachusetts February 11, 1998 EX-23.2 15 CONSENT OF KPMG PEAT MARWICK L.L.P. 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 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. Chicago, Illinois February 11, 1998 EX-23.4 16 CONSENT OF BROWN & BAIN 1 EXHIBIT 23.4 CONSENT OF SPECIAL LITIGATION COUNSEL We consent to the reference to our Firm under the caption "Experts" in the registration statement on Form S-1 for PCD Inc. /s/ C. Randall Bain ------------------------- BROWN & BAIN, P.A. Phoenix, Arizona February 9, 1998 EX-23.5 17 CONSENT OF BAKER & DANIELS 1 EXHIBIT 23.5 CONSENT OF SPECIAL LITIGATION COUNSEL We consent to the reference to our Firm under the caption "Experts" in the registration statement on Form S-1 for PCD Inc. BAKER & DANIELS ------------------------- /s/ James D. Hall Partner South Bend, Indiana February 9, 1998 EX-27 18 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 DEC-31-1997 3,990 0 7,009 205 4,796 16,725 20,695 4,852 126,592 29,357 0 0 0 60 8,935 126,592 29,796 29,796 15,120 15,120 50,254 0 227 (34,638) (11,802) (22,836) 0 0 0 (22,836) (3.83) (3.83)
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