-----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, SH1cI+bxwehX2st4VdQPZR7hxjfDe2vNRjMKNZAHuLi1m59pKIoGvcejjvAYVr7c MYoF2In4wBV0KB1fPfeB4w== 0001007594-01-500010.txt : 20010313 0001007594-01-500010.hdr.sgml : 20010313 ACCESSION NUMBER: 0001007594-01-500010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010312 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: 10-K SEC ACT: SEC FILE NUMBER: 000-27744 FILM NUMBER: 1566145 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 10-K 1 form10k.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Commission File Number 0-27744 PCD INC. (Exact Name of Registrant as Specified in its Charter) Massachusetts 04-2604950 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 2 Technology Drive Centennial Park Peabody, Massachusetts 01960-7977 (Address of Principal Executive Offices, Including Zip Code) Registrant's telephone number, including area code: (978) 532-8800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- --------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of February 12, 2001, the aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant was approximately $41,376,599, based upon the closing sales price on the Nasdaq Stock Market for that date. As of February 12, 2001, the number of issued and outstanding shares of the registrant's Common Stock, par value $0.01 per share, was 8,823,822. DOCUMENTS INCORPORATED BY REFERENCE Certain of the information called for by Parts I through IV of this report on Form 10-K is incorporated by reference from certain portions of the Proxy Statement of the registrant to be filed pursuant to Regulation 14A and to be sent to stockholders in connection with the Annual Meeting of Stockholders to be held on April 27, 2001. Such Proxy Statement, except for the parts therein that have been specifically incorporated herein by reference, shall not be deemed "filed" as part of this report on Form 10-K. PCD INC. ANNUAL REPORT ON FORM 10-K For the Fiscal Year Ended December 31, 2000 TABLE OF CONTENTS PART I Page Item 1. Business...................................................... 1 Item 2. Properties.................................................... 17 Item 3. Legal Proceedings............................................. 18 Item 4. Submission of Matters to a Vote of Security Holders........... 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................... 18 Item 6. Selected Financial Data........................................ 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results Of Operations................. 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 26 Item 8. Financial Statements and Supplementary Data.................... 27 Item 9. Changes in and Disagreements with Accountants on Auditing and Financial Disclosure.......................... 50 PART III Item 10. Directors and Executive Officers of the Registrant............. 50 Item 11. Executive Compensation......................................... 51 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 51 Item 13. Certain Relationships and Related Transactions................. 51 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................... 52 Signatures............................................................... 58 PART I ITEM 1. BUSINESS As used herein, the terms "Company" and "PCD," unless otherwise indicated or the context otherwise requires, refer to PCD Inc. and its subsidiaries. However, all financial information for periods ended before December 26, 1997, unless otherwise indicated or the context otherwise requires, is for PCD Inc. and its subsidiaries, excluding Wells Electronics, Inc. ("Wells"). GENERAL PCD Inc. (the "Company") designs, manufactures and markets electronic connectors for use in semi-conductor burn-in, 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 ("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 2000 worldwide market at $30.8 billion with more than 1,200 manufacturers. The Company markets over 6,800 electronic connector products in three product categories, each targeting a specific market. These product categories are semiconductor burn-in sockets, industrial interconnects and avionics junction modules and relay sockets. SEMICONDUCTOR BURN-IN SOCKETS are specially designed electro-mechanical devices that connect ICs to printed circuit boards during the reliability testing stages of IC 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 JUNCTION MODULES AND RELAY SOCKETS perform similar functions as industrial connectors, but are designed and built to operate in the harsher environment and meet the more critical performance requirements of avionics applications. Representative customers of the Company include Bombardier Inc., Micron Technology, Inc., Rockwell International Corp. (through its subsidiary, the Allen-Bradley Company) and Advanced Micro Devices, Inc. The Company believes it will benefit from three trends affecting the electronics industry: (i) the increasing complexity of ICs and corresponding evolution of IC package designs, which favor growth in PCD's semiconductor burn-in 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. 1 The Company's goal is to identify and expand into selected electronic connector markets where it can establish a position of leadership. The Company intends to increase its presence in the markets in which it participates through internal investment in product development, and expansion of its existing product and customer base within each market. To facilitate capital investment, the Company continues to strengthen the balance sheet by reducing the level of bank debt outstanding. The Company was incorporated in Massachusetts on November 9, 1976 under the name Precision Connector Designs, Inc. In February 1996, the Company changed its name to PCD Inc. MARKET OVERVIEW The electrical and electronic systems which utilize connectors have become increasingly widespread and complex, in part as a result of the increased automation of business systems and manufacturing equipment. Consequently, the electronic connector industry has grown in size and electronic connectors have become more sophisticated. Demand for smaller yet more powerful products have resulted in continued improvements in electronic systems in general and electronic connectors in particular. Product cycles continue to shorten and, as time to market becomes increasingly important, equipment manufacturers seek to reduce inventory and contend with pressures to keep up with new product innovations. The growing demand for electronic connector complexity, coupled with reduced product development cycles and delivery lead times, creates a need for closer cooperation between connector suppliers and equipment manufacturers, often leading to new connector requirements and market opportunities. Bishop & Associates estimates the total 2000 worldwide market at $30.8 billion. This market is highly fragmented with over 1,200 manufacturers. While many of these companies produce connectors which are relatively standard and often produced in large quantities, a substantial portion of the industry is comprised of companies which produce both proprietary and standard products in relatively low volumes for specialized applications. Fleck Research has identified over 1,100 separate electronic connector product lines presently offered in the marketplace. PCD focuses its products and sales efforts in the selected key markets listed below. Semiconductor Burn-in Testing Market. 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 temperatures, usually at 125(degree symbol)C (257(degree symbol)F) to 150(degree symbol) C (302(degree symbol) F), for periods typically ranging from 8 to 48 hours. During burn-in, the IC is secured in a socket, an electro-mechanical interconnect, which is generally 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. Typically a burn-in socket must be able to withstand 10,000 mechanical insertion and withdrawal cycles. Further, these sockets must withstand thermal excursions from -10(degree symbol) C (14(degree symbol) F) to 150(degree symbol) C (302(degree symbol) F) during the burn-in process. The 2 nature of the semiconductor industry is such that constant advances in technology and changes in IC packages require the introduction of new styles and families of these sockets on a frequent and ongoing basis. The worldwide semiconductor market expanded at a compound annual growth rate of 17% during the period 1978-2000, and is projected by IC Insights, Inc., a leading research company in the semiconductor field, to grow at a 17% compound annual growth rate during the period 2000-2003. INDUSTRIAL INTERCONNECT MARKET. The industrial interconnect market is comprised of a broad range of control, measurement and manufacturing equipment. Terminal blocks are most commonly used in this equipment to provide an electrical link between discrete functions, such as monitoring and measuring, and controlling devices, such as programmable logic controllers ("PLCs"), stand-alone PCs and single function controllers. The use of terminal blocks has increased as electronic controllers and sensors in the industrial environment have evolved to control more complex, multi-function activities. In addition to increasing in number, these controllers and their connectors are becoming smaller and are being configured in increasing variations. Increased sophistication in industrial and process control equipment has led to a demand for flexible, modular interconnection and interface products. Control systems are used to facilitate the interface of discrete factory wiring and cable systems with standard computer interconnects. The Company has expanded its industrial market product offering with a broad line of interface modules: printed board-mounted interconnect systems which incorporate passive and often active components, and are designed in conjunction with customer engineers. These interface systems allow industrial customers to reduce installation time and decrease cabinet space, thereby improving their overall system costs. AVIONICS MARKET. The avionics market requires a diverse range of electronic connectors that are designed and manufactured specifically for avionics applications. Over the last five years, commercial aircraft applications have represented an increasingly important part of this market. The Company participates in selected areas of the avionics market with junction modules and relay sockets that perform similar functions as its industrial connectors but are designed to operate in the harsher environment and meet the more critical performance requirements of avionics applications. The two major market sectors in which the Company participates are the 100+ seat capacity large jet transports, and the smaller 30-95 seat capacity regional aircraft. Business jets are also becoming an important market segment. The Boeing Company estimates that total worldwide demand for new airplanes over the next twenty years will be 22,315 aircraft. The world fleet is projected to grow from 13,670 airplanes at the end of 1999 to 31,755 airplanes in 2019. Over the next twenty years, more than 22,315 new commercial jets - 21,512 passenger airplanes and 803 new freighters - are forecast to enter service worldwide. The majority of these airplanes will meet industry demand for growth, while the remainder will replace the 4,200 airplanes that are projected to be removed from service. 3 STRATEGY The Company's goal is to identify and expand into selected electronic connector markets where it can establish a position of leadership. The Company intends to increase its presence in the markets in which it participates through internal investment in product development and potential strategic acquisitions. The key elements of the Company's strategy are: BE THE KEY SUPPLIER IN SELECTED NICHE MARKETS: The electronic connector industry services a variety of different industries with connectors that are often unique to particular applications within a given industry. The Company actively identifies and pursues those markets which have the following characteristics: demand for electronic connectors with relatively high engineering content, high degree of customer interface, changing technology, significant growth opportunities and a market size appropriate to the Company's resources. Presently, the Company focuses on the semiconductor burn-in, industrial and avionics interconnect markets. In each of these markets for the products that the Company offers, it holds a market position of either first or second or has a strategic plan to attain that position. There can be no assurance that the Company, however, will attain or maintain these positions. GROW THROUGH INTERNAL PRODUCT DEVELOPMENT AND EXPANSION OF EXISTING PRODUCT AND CUSTOMER BASE: The Company is committed to grow the sales revenue at a rate that is higher than the connector industry projected growth rate. To accomplish this, the Company invests heavily in new product development. Over the last five years the Company has spent on average 5.0% of net sales on new product tooling. For 2000, 51.3% of sales were generated from products that were introduced in the last five years. It is the Company's strategy to continually expand the range of products that it offers in its existing markets and, through the additional synergy offered by these products as well as focused sales efforts, work to both grow sales volume to existing customers and to expand the customer base. STRENGTHEN THE BALANCE SHEET: The acquisition of Wells Electronics, Inc. in December of 1997 resulted in the Company taking on approximately $108 million of debt. The public stock offering of 2,300,000 shares of common stock in April and May of 1998 raised approximately $42 million, and the Company generated an additional $14.2 million, $5.7 million and $6.5 million of free cash flow in the years 2000, 1999 and 1998, respectively. The Company defines free cash flow as cash flow from operations less capital expenditures. The combination of the cash raised from the public offering and the free cash flow, along with existing cash balances, reduced the debt to $36.1 million as of December 31, 2000 and improved the total debt-to-equity ratio to 0.74 to 1.00. Strengthening the balance sheet will provide the Company the flexibility it needs in the area of acquisitions and product development. PRODUCTS AND APPLICATIONS The Company markets over 6,800 electronic connector products in three product categories, each targeting a specific market. These product categories are: semiconductor burn-in sockets, industrial interconnects and avionics 4 terminal blocks and sockets. The products offered within each product category can be characterized as proprietary, application-specific or industry standard, as described below. PROPRIETARY CONNECTORS are unique Company designs that are introduced and sold to a broad market rather than a single customer. APPLICATION-SPECIFIC INTERCONNECTS are products which are designed and developed for a specific application, typically for one customer. These products can be subsequently developed into proprietary product lines. INDUSTRY STANDARD CONNECTORS are normally produced in accordance with a relatively detailed industry or military design and performance specification and sold to the broad market to which that specification relates. SEMICONDUCTOR BURN-IN SOCKETS 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 temperatures, usually at voltages and temperatures, between 125 degrees Centigrade (257(degree symbol) F) to 150(degree symbol) C (302 (degree symbol) F), for periods typically ranging from 8 to 48 hours. During burn-in, the IC is secured in a socket, an electro-mechanical interconnect, which is generally 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. Typically a burn-in socket must be able to withstand 10,000 mechanical insertion and withdrawal cycles. Further, these sockets must withstand thermal excursions from -10 degrees Centigrade (14(degree symbol) F) to 150(degree symbol) C (302(degree symbol) F) during the burn-in process. 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, density and higher I/O count of the ICs. Each unique IC package configuration requires a socket that corresponds to the package's specific characteristics. The nature of the semiconductor industry is such that constant advances in technology and changes in IC packages require the introduction of new styles and families of these sockets on a frequent and ongoing basis. The IC packages on which PCD focuses its burn-in socket efforts are listed below. These packages have been selected because the Company believes that they represent the most advanced and fastest growing elements of the semiconductor burn-in market. CHIP SCALE PACKAGE: The chip scale ("CSP") is an array package that most often terminates via a solder sphere much like a ball grid array ("BGA"). The definition of a CSP package is that the package is no greater than 120% of the IC die area. Over 50 versions of CSP packages are in existence and because the package outline is tied directly to the dies area, many socket versions are required to address the market. Pitches range from 0.5mm to 5 0.8mm and ball counts range from 6 to 600. According to IC Insights, a semiconductor industry market research firm, CSP packaging will grow from 1.1 billion units to 10.8 billion units in the next four years with strong growth beyond. THIN SMALL OUTLINE PACKAGE SOCKETS: The thin small outline ("TSOP") is a plastic, rectangular package with leads on two sides, running along either pair of opposite edges. With lead counts from 20 to 86 contacts, the TSOP houses memory circuits. The small size, low price and surface mount design of the TSOP makes it a highly desirable package. The Company currently produces seven distinct socket series to accommodate a variety of TSOP packages. QUAD FLAT PACK SOCKETS: The quad flat pack ("QFP") is a plastic package with leads on four sides. It is used for high lead count surface mount applications and is characterized by lead counts typically ranging between 32 and 208 leads. The QFP is currently a predominant and rapidly growing technology for packaging a wide variety of ICs used in microcontroller, logic, communication and SRAM applications. The Company currently produces over 37 distinct sockets to accommodate a wide variety of QFP packages. PIN GRID ARRAY SOCKETS: The pin grid array ("PGA") is a square or rectangular through-hole device. 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. The interstitial pin grid array ("IPGA") is a newer and higher density version of the PGA, and a prime focus of the Company's new product development work. Ball Grid Array Sockets: An area array package, the ball grid array uses an underlying substrate, rather than a lead frame, for die attachment. The die is then encapsulated and solder balls are attached to the underside of the substrate. The solder balls ultimately connect the package to the printed circuit board. The die is placed on the substrate prior to the attachment of the solder balls to ensure a flat surface for the die during processing. At a compound annual growth rate of 49% from 1996 to 2005, according to IC Insights, the BGA package is the most popular new package technology, utilized in every IC segment. Wells-CTI has made a significant investment in BGA socket technology and will continue to grow product lines to address the packaging scheme. LAND GRID ARRAY SOCKETS: Another grid array package, the land grid array ("LGA") achieves maximum density by eliminating both pins and solder balls, and providing an array of tiny, gold plated contact pads on the bottom of the package for interconnect purposes. Because of high density and high performance, the LGA is primarily used in high lead count application specific integrated circuits ("ASICS") and microprocessors applications. Lower cost organic substrate versions are now being introduced to make this package style more attractive in the future. 6 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 spring-clamp or screw-clamp terminations, and interface with printed circuit boards in a variety of manners. The Company concentrates on four major product lines within this market: pluggable terminal blocks, fixed mount terminal blocks, edgecard terminal blocks, and application-specific terminal blocks. Application-specific terminal blocks are developed for customers who are of strategic importance to the Company, represent significant potential volume and are recognized market leaders. INTERFACE MODULES: Interface modules are interconnect devices that incorporate terminal blocks, high density connectors and often additional electronic components and are used to form the interconnection between a system I/O card and field equipment. Often these interconnections require several discrete wire and standard computer connector interconnects. The interface module simplifies the interconnection by incorporating both the discrete wire and standard computer interconnects into a rail mounted printed circuit board assembly consisting of terminal blocks, additional connectors and possibly other electronic devices. Interface modules are typically application-specific and may contain electronic components for signal conditioning, fusing and various other electronic requirements. AVIONICS JUNCTION MODULES AND RELAY SOCKETS Avionics junction modules perform similar functions as industrial terminal blocks, linking discrete wires that are individually terminated to a connector. However, avionics terminal blocks are designed to withstand the harsher environment and far more critical operating requirements to which they are subject. The primary differences are that: contacts are gold plated; wires are terminated by the crimped (metal deformation) technique rather than screw clamps; and individual wires are installed and removed from the connector through use of spring-actuated locking devices. The avionics connectors are normally completely environmentally sealed through use of a silicone elastomer sealing grommet, or are designed to operate in a sealed compartment. The Company concentrates on three major product lines in the avionics market: 7 JUNCTION MODULES: Junction modules are environmentally sealed, airborne terminal blocks. 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. APPLICATION-SPECIFIC AVIONICS CONNECTORS: Application-specific junction modules have been developed in conjunction with Boeing Commercial Aircraft for use on the 717-737-747-757-767 series of commercial aircraft and the C17 military transport. Application-specific relay sockets are marketed to Boeing subcontractors for the 777 commercial aircraft program and the C17 aircraft. Application specific junction modules which incorporate electronic components and circuitry into module package are supplied to (among others) Bombardier and British Aerospace for regional jet programs. PRODUCT DEVELOPMENT Currently, the Company markets over 6,800 products in a wide variety of product lines. The Company seeks to broaden its product lines and to expand its technical capabilities in order to meet anticipated needs of its customers. The Company's product development strategy is to introduce new products into markets where the Company has already established a leadership position and to develop next generation products for other markets in which the Company wishes to participate. The Company's current product development projects in the semiconductor burn-in market target new burn-in sockets for package device designs such as IPGA, TSOP, CSP, LGA and BGA production packages. The Company believes, based on industry trends, that TSOP and CSP will be the preferred package for high- volume, high-density small outline IC devices. SALES AND MARKETING The Company distributes its products through a combination of its own dedicated direct sales forces, a worldwide network of manufacturers representatives and authorized distributors. The Company maintains separate sales forces for the semiconductor burn-in markets and for the industrial equipment and avionics markets. For the semiconductor burn-in markets, the Company employs a global direct sales force with offices in England, Germany, Japan, and the United States, augmented with sales representatives in smaller markets. For the industrial equipment and avionics markets, the Company generally uses its direct sales forces and manufacturer representatives for large customers, new product introductions and application-specific products and uses its authorized distributors for smaller and medium-sized customers of standard and proprietary products. The Company's sales and marketing program is focused on achieving and maintaining close working relationships with its customers early in the design phase of the customer's own product development cycle. 8 CUSTOMERS In 2000, the Company sold its products to over 1,000 customers in a wide range of industries and applications. The top five customers of the Company in 2000, 1999 and 1998 accounted for 46.7%, 39.8% and 43.5% of net sales, respectively. Among customers that exceeded 10% of the Company's net sales, Micron Technology, Inc. accounted for 20.8%, 17.6% and 15.8% of net sales of the Company in 2000, 1999 and 1998, respectively. Advanced Micro Devices, Inc. accounted for 12.7% of net sales in 1998. Sales to customers located outside the United States, either directly or through U.S. and foreign distributors, accounted for approximately 21.2%, 25.4%, and 21.9% of the net sales of the Company in the years ended 2000, 1999, and 1998, respectively. Examples of end users of the Company's products, by category, are presented below: Product Categories Representative Customers - ------------------ ------------------------ Semiconductor burn-in sockets.......... Advanced Micro Devices, Inc. Sharp Electronics Corporation Micron Technology, Inc. Motorola, Inc. Industrial Interconnects............... Groupe Schneider (Modicon, Inc./ Square D Co./Telemecanique) GE Fanuc Parker Hannifin Corporation Rockwell International Corp. (Allen-Bradley Company) Avionics Terminal Blocks and Sockets... The Boeing Company Bombardier Inc. (Canadair/deHavilland/Learjet Inc.) British Aerospace Ltd. Empresa Brasileira de Aeronautica S/A (Embraer) Smiths Industries MANUFACTURING AND ENGINEERING The Company is vertically integrated from the initial concept stage through final design and manufacturing with regard to the key production processes which the Company believes are critical to product performance and service. These processes include precision stamping, plastic injection molding and automated assembly. The Company believes that this vertical integration allows the Company to respond to customers quickly, control quality and reduce the time to market for new product development. The Company seeks to reduce costs in its manufacturing fabrication and assembly operations through formalized cost savings programs. Complementary programs are dedicated to maximizing the return on capital investments and reducing overhead expense. 9 The Company believes it is a leader in delivery responsiveness in its target markets. The introduction of just-in-time ("JIT") manufacturing, inventory control techniques and quick-change, in-house production tooling have substantially reduced delivery lead times. Production cells operate under a JIT pull system, with customer orders assembled as received. PCD carries minimal finished goods inventory. An additional advantage of JIT manufacturing is the almost complete elimination of rework. Shop floor orders are relatively small and are not handled in bulk, and problems are resolved as they occur, rather than continuing through an extended production run. The Company subcontracts a portion of its labor-intensive product assembly to a U.S.-based subcontractor with a manufacturing facility in Mexico. Wells- CTI KK, our Japanese subsidiary, subcontracts all of its product manufacturing and assembly operations to Japanese and Chinese vendors. The Company is not contractually obligated to do business with any subcontractor, believes it could substitute other subcontractors without significant additional cost or delay, and could perform assembly itself if the need were to arise. INTELLECTUAL PROPERTY The Company seeks to use a combination of patents and other means to establish and protect its intellectual property rights in various products. The Company intends to vigorously defend its intellectual property rights against infringement or misappropriation. Due to the nature of its products, the Company believes that intellectual property protection is less significant than the Company's ability to further develop, enhance and modify its current products. The Company believes that its products do not infringe on the intellectual property rights of others. However, many of the Company's competitors have obtained or developed, and may be expected to obtain or develop in the future, patents or other proprietary rights that cover or affect products that perform functions similar to those performed by products offered by the Company. There can be no assurance that, in the future, the Company's products will not be held to infringe patent claims of its competitors, or that the Company is aware of all patents containing claims that may pose a risk of infringement by its products. COMPETITION The markets in which PCD operates are highly competitive, and the Company faces competition from a number of different manufacturers. The Company has experienced significant price pressure with respect to certain products, including its TSOP and QFP products, and fixed mount and pluggable terminal Industrial blocks. The principal competitive factors affecting the market for the Company's products include design, responsiveness, quality, price, reputation and reliability. The Company believes that it competes favorably on these factors. Generally, the electronic connector industry is competitive and fragmented, with over 1,200 manufacturers worldwide. Competition in the Semiconductor burn-in 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 10 demanding nature of the military and customer specifications which control much of the markets and the cost and time required to tool and qualify military standard parts. In each of the markets in which the Company participates, the Company's significant competitors are much larger and have substantially broader product lines and greater financial resources than the Company. There can be no assurance that the Company will compete successfully, and any failure to compete successfully could have a material adverse effect on the financial condition, results of operations and business of the Company. BACKLOG The Company defines its backlog as orders that are scheduled for delivery within the next 12 months. The Company estimates that its backlog of unfilled orders was approximately $13.5 million at December 31, 2000 and $10.6 million at December 31, 1999. The level and timing of orders placed by the Company's customers vary due to customer attempts to manage inventory, changes in manufacturing strategy and variations in demand for customer products due to, among other things, introductions of new products, product life cycles, competitive conditions or general economic conditions. The Company generally does not obtain long-term purchase orders or commitments but instead seeks to work closely with its customers to anticipate the volume of future orders. Based on anticipated future volumes, the Company makes other significant decisions regarding the level of business it will accept, the timing of production and the levels and utilization of personnel and other resources. A variety of conditions, both specific to the individual customer and generally affecting the customer's industry, may cause customers to cancel, reduce or delay purchase orders that were either previously made or anticipated. Generally, customers may cancel, reduce or delay purchase orders and commitments without penalty. For these reasons, backlog may not be indicative of future demand or results of operations. ENVIRONMENTAL The Company is subject to a wide range of environmental laws and regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. A failure by the Company to comply with present or future laws and regulations could subject it to future liabilities or the suspension of production. Such laws and regulations could also restrict the Company's ability to expand its facilities or could require the Company to acquire costly equipment or incur other significant expenses. EMPLOYEES As of December 31, 2000, the Company had 325 employees and 167 contract workers. The Company's 492 employees and contract workers include 441 in manufacturing and engineering, 23 in sales and marketing and 28 in administration. Of the Company's U.S. employees, 25 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 with unionized employees expires on February 18, 2003. 11 FORWARD LOOKING INFORMATION/RISK FACTORS STATEMENTS IN THIS REPORT CONCERNING THE FUTURE REVENUES, EXPENSES, PROFITABILITY, FINANCIAL RESOURCES, PRODUCT MIX, MARKET DEMAND, PRODUCT DEVELOPMENT AND OTHER STATEMENTS IN THIS REPORT CONCERNING THE FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION AND BUSINESS OF PCD INC. ARE "FORWARD- LOOKING" STATEMENTS AS DEFINED IN THE SECURITIES ACT OF 1933 AND SECURITIES EXCHANGE ACT OF 1934. INVESTORS ARE CAUTIONED THAT THE COMPANY'S ACTUAL RESULTS IN THE FUTURE MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS DUE TO RISKS AND UNCERTAINTIES THAT EXIST IN THE COMPANY'S OPERATIONS AND BUSINESS ENVIRONMENT, INCLUDING: DEPENDENCE ON SEMICONDUCTOR BURN-IN INDUSTRY. The Company's semiconductor burn-in sockets are used by producers and testers of ICs and original equipment manufacturers ("OEMs"). For the years ended December 31, 2000, 1999 and 1998, the Company derived 68.5%, 64.5% and 71.7% of its net sales, respectively, from these products. The Company's future success will depend in substantial part on the vitality of the semiconductor and the related semiconductor burn-in industries. Historically, the Semiconductor burn-in 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 Semiconductor burn-in 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 Semiconductor burn-in sockets. DEPENDENCE ON PRINCIPAL CUSTOMERS. Micron Technology, Inc. ("Micron"), a provider of DRAMs, SRAMs and other semiconductor components, was the largest customer of the Company in 2000 and 1999. Micron accounted for 20.8% and 17.6% of the net sales of the Company for the years ended December 31, 2000, and 1999, respectively. The Company does not have written agreements with any of its customers, including Advanced Micro Devices, Inc. ("AMD") or Micron Technology Inc. ("Micron"), 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 AMD or Micron, for any reason, could have a material adverse effect on the financial condition, results of operations and business of the Company. AVAILABILITY OF CERTAIN RAW MATERIALS. The Company has had difficulty with the worldwide shortage of Beryllium Copper and has been successful in locating alternative materials to supplement this worldwide shortage. There can be no assurance that the Company will continue to locate adequate alternative materials if this worldwide shortage continues. RESTRICTIVE COVENANTS UNDER SENIOR CREDIT FACILITY. The agreement governing the Company's credit facility with Fleet Bank (the "Senior Credit Facility") contains numerous financial and operating covenants. Failure to meet such covenants would result in an event of default under the Senior Credit Facility. Among the operating covenants are restrictions that the Company (i) must maintain John L. Dwight, Jr. as chief executive officer of the Company or obtain the consent of the lenders under the Senior Credit Facility to any replacement of Mr. Dwight; (ii) may not, without the prior 12 consent of such lenders, acquire the assets of or ownership interests in, or merge with, other companies; and (iii) may not, without the prior consent of such lenders, pay cash dividends. The Senior Credit Facility also requires the Company to maintain certain financial covenants, including minimum EBITDA (earnings before interest, taxes, depreciation and amortization), minimum fixed charge coverage ratio, minimum quick ratio, maximum ratio of total senior debt to EBITDA, maximum ratio of total indebtedness for borrowed money to EBITDA, minimum interest coverage ratio, and maximum capital expenditures, during the term of the Senior Credit Facility. The Company has experienced difficulty meeting all of the covenants under its Senior Credit Facility. Accordingly, in September 1999, certain covenants were amended by agreement between the Company and its lenders. In March 2000, the Company obtained from its lenders a waiver of compliance with certain covenants for the fourth quarter of 1999. At the same time, certain covenants were amended by agreement between the Company and its lenders through June 30, 2000. In conjunction with the March 2000 agreement, the Company issued warrants to its lenders covering 203,949 shares of Common Stock at an exercise price of $4.90 per share. Since the Company did not obtain at least $10 million of subordinated debt or other capital infusions ("Junior Capital") junior to loans under the Senior Credit Facility by June 30, 2000, or by June 30, 2000 had not entered into definitive arrangements permitting repayment of amounts outstanding under the Senior Credit facility by December 31, 2000, the warrants became exercisable. In addition, since the Company did not obtain Junior Capital by April 30, 2000, the Company started on May 1, 2000 paying the lenders a quarterly fee of 0.25% of the sum of the total outstanding principal balance under the Term Loan plus the Revolving Credit Loan Commitment. At December 31, 2000, the Company was in compliance with its debt covenants. There can be no assurance, however, that the Company will be able to maintain compliance with its debt covenants in the future, and failure to meet such covenants would result in an event of default under the Senior Credit Facility. To avoid an event of default, the Company would attempt to obtain waivers from its lenders, restructure the Senior Credit Facility or secure alternative financing. Under these scenarios, there can be no assurance that the terms and conditions would be satisfactory to the Company or not disadvantageous to the Company's stockholders. INTERNATIONAL SALES AND OPERATIONS. Sales to customers located outside the United States, either directly or through U.S. and foreign distributors, accounted for approximately 21.2%, 25.4% and 21.9% of the net sales of the Company in the years ended December 31, 2000, 1999 and 1998, respectively. International revenues are subject to a number of risks, including: longer accounts receivable payment cycles; exchange rate fluctuations; difficulty in enforcing agreements and intellectual property rights and in collecting accounts receivable; tariffs and other restrictions on foreign trade; withholding and other tax consequences; economic and political instability; and the burdens of complying with a wide variety of foreign laws. Sales made to foreign customers or foreign distributors may be denominated in either U.S. dollars or in the currencies of the countries where sales are made. The Company has not to date sought to hedge the risks associated with fluctuations in foreign exchange rates and does not currently plan to do so. The Company's 13 foreign sales and operations are also affected by general economic conditions in its international markets. A prolonged economic downturn in its foreign markets could have a material adverse effect on the Company's business. The Company has an operating subsidiary in Japan, and sales and technical support operations in England. 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. 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. Because the Company's operating expenses are based on anticipated revenue levels and a high percentage of the Company's operating expenses are relatively fixed, any unanticipated shortfall in revenue in a quarter may have a material adverse impact on the Company's results of operations for the quarter. Results of operations for any period should not be considered indicative of the results to be anticipated for any future period. TECHNOLOGICAL EVOLUTION. The rapid technological evolution of the electronics industry requires the Company to anticipate and respond rapidly to changes in industry standards and customer needs and to develop and introduce new and enhanced products on a timely and cost-effective basis. In particular, the Company must target its development of Semiconductor burn-in 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. 14 PROPRIETARY TECHNOLOGY AND PRODUCT PROTECTION. The Company's success depends in part on its ability to maintain the proprietary and confidential aspects of its products as they are released. The Company seeks to use a combination of patents and other means to establish and protect its proprietary rights. There can be no assurance, however, that the precautions taken by the Company will be adequate to protect the Company's technology. In addition, many of the Company's competitors have obtained or developed, and may be expected to obtain or develop in the future, patents or other proprietary rights that cover or affect products that perform functions similar to those performed by products offered by the Company. There can be no assurance that, in the future, the Company's products will not be held to infringe patent claims of its competitors, or that the Company is aware of all patents containing claims that may pose a risk of infringement by its products. The inability of the Company for any reason to protect existing technology or otherwise acquire such technology could prevent distribution of the Company's products, having a material adverse effect on the financial condition, results of operations and business of the Company. LEGAL MATTERS. The Company and its subsidiaries are subject to legal proceedings arising in the ordinary course of business. On the basis of information presently available and advice received from legal counsel, it is the opinion of management that the disposition or ultimate determination of such legal proceedings will not have a material adverse effect on the Company's consolidated financial position, its consolidated results of operations or its consolidated cash flows. COMPETITION. The electronic connector industry is highly competitive and fragmented, with more than 1,200 manufacturers worldwide. The Company believes that competition in its targeted segments is primarily based on design, responsiveness, quality, price, reputation and reliability. The Company has experienced significant price pressure with respect to certain products, including its thin, small outline package ("TSOP") and quad-flat pack ("QFP") products, and fixed mount and pluggable Industrial terminal blocks. The Company's significant competitors are much larger and have substantially broader product lines and greater financial resources than the Company. There can be no assurance that the Company will compete successfully, and any failure to compete successfully would have a material adverse effect on the financial condition, results of operations and business of the Company. CONCENTRATION OF OWNERSHIP. The current officers, directors and Emerson Electric Co. ("Emerson"), the Company's largest stockholder, beneficially own approximately 34.2% of the outstanding shares of the Common Stock of the Company based on the number of shares of Common Stock outstanding as of December 31, 2000. Accordingly, such persons, if they act together, can exert substantial control over the Company through their ability to influence the election of directors and all other matters that require action by the Company's stockholders. Such persons could prevent or delay a change in control of the Company which may be favored by a majority of the remaining stockholders. Such ability to prevent or delay such a change in control of the Company also may have an adverse effect on the market price of the Company's Common Stock. DEPENDENCE ON KEY PERSONNEL. The Company is largely dependent upon the skills and efforts of John L. Dwight, Jr., its Chairman of the Board, 15 President and Chief Executive Officer, Jeffrey A. Farnsworth, its Vice President and General Manager, Wells-CTI-USA, John T. Doyle, Vice President and General Manager, Industrial/Avionics Division, and other officers and key employees. The Company does not have employment agreements with any of its officers or key employees providing for their employment for any specific term or non-competition agreements prohibiting them from competing with the Company after termination of their employment. The loss of key personnel or the inability to hire or retain qualified personnel could have a material adverse effect on the financial condition, results of operations and business of the Company. DEPENDENCE UPON INDEPENDENT DISTRIBUTORS. Sales through independent distributors accounted for 29.0%, 19.4%, and 21.9% of the net sales of the Company for the years ended December 31, 2000, 1999, and 1998, 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. PRODUCT LIABILITY. The Company's products provide electrical connections between various electrical and electronic components. Any failure by the Company's products could result in claims against the Company. Except with respect to avionics products, the Company does not maintain insurance to protect against possible claims associated with the use of its products. A successful claim brought against the Company could have a material adverse effect on the financial condition, results of operations and business of the Company. Even unsuccessful claims could result in the Company's expenditure of funds in litigation and management time and resources. There can be no assurance that the Company will not be subject to product liability claims. ENVIRONMENTAL COMPLIANCE. The Company is subject to a wide range of environmental laws and regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. A failure by the Company at any time to comply with environmental laws and regulations could subject it to liabilities or the suspension of production. Such laws and regulations could also restrict the Company's ability to expand its facilities or could require the Company to acquire costly equipment or incur other significant expense. 16 POSSIBLE VOLATILITY OF STOCK PRICE. The stock market historically has experienced volatility which has affected the market price of securities of many companies and which has sometimes been unrelated to the operating performance of such companies. The trading price of the Common Stock could also be subject to significant fluctuations in response to variations in quarterly results of operations, announcements of new products by the Company or its competitors, other developments or disputes with respect to proprietary rights, general trends in the industry, overall market conditions and other factors. In addition, there can be no assurance that an active trading market for the Common Stock will be sustained. POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company's Board of Directors has the authority without action by the Company's stockholders to fix the rights and preferences of and to issue shares of the Company's Preferred Stock, which may have the effect of delaying, deterring or preventing a change in control of the Company. At present the Company has no plans to issue any shares of Preferred Stock. The Company's Board of Directors also has the authority without action by the Company's stockholders to impose various procedural and other requirements that could make it more difficult for stockholders to effect certain corporate actions. In addition, the classification of the Company's Board of Directors and certain provisions of Massachusetts law applicable or potentially applicable to the Company, could have the effect of delaying, deterring or preventing a change in control of the Company. These statutory provisions include a requirement that directors of publicly-held Massachusetts corporations may only be removed for "cause," as well as a provision not currently applicable to the Company that any stockholder who acquires beneficial ownership of 20% or more of the outstanding voting stock of a corporation may not vote such stock unless the stockholders of the corporation so authorize. ITEM 2. PROPERTIES PCD, headquartered in Peabody, Massachusetts, operates leased production facilities in Peabody, Massachusetts (60,000 square feet), Phoenix, Arizona (29,000 square feet), South Bend, Indiana (50,000 square feet), and Yokohama, Japan (3,600 square feet). The Peabody facility is responsible for molding, assembly, manufacturing automation development and quality assurance functions relating to industrial terminal blocks and avionics terminal blocks. The Phoenix facility is responsible for assembly and quality assurance functions relating to burn-in sockets, as well as related product design and development. The South Bend and Yokohama facilities are responsible for design, assembly, manufacturing automation development and quality assurance for burn-in sockets. Stamping operations for Peabody, Phoenix and South Bend are handled at the Peabody facility. Molding fabrication of components for South Bend and Phoenix are handled at the South Bend facility. The Company also maintains distribution and technical sales support facilities in Northhampton, England. The Company believes that its facilities are adequate for its operations for the foreseeable future. 17 ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are subject to legal proceedings arising in the ordinary course of business. On the basis of information presently available and advice received from legal counsel, it is the opinion of management that the disposition or ultimate determination of such legal proceedings will not have a material adverse effect on the Company's consolidated financial position, its consolidated results of operations or its consolidated cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders in the fourth quarter of 2000. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market of the Nasdaq Stock Market, Inc. under the symbol "PCDI." The following table sets forth the reported high and low sale prices for the Common Stock for the periods indicated: High Low 2000 ------- -------- First Quarter.......................................... $ 7-1/2 $ 4-3/16 Second Quarter......................................... 9-1/8 3 Third Quarter.......................................... 11-1/2 6-1/2 Fourth Quarter......................................... 11 5-5/8 1999 First Quarter.......................................... $20 $ 8 Second Quarter......................................... 13-3/8 7-1/4 Third Quarter.......................................... 9 7-3/8 Fourth Quarter......................................... 10-1/2 4-3/4 On February 12, 2001, the last reported sale price for the Common Stock on the Nasdaq National Market was $7.125 per share. As of January 31, 2001, there were approximately 1,200 holders of record of Common Stock. The Company has never declared or paid any cash dividends on the Common Stock. The Company currently intends to retain future earnings, if any, to fund the development and growth of its business and does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. The Board of Directors of the Company intends to review this policy from time to time, after taking into account various factors such as the Company's financial condition, results of operation, current and anticipated cash needs and plans for expansion. The Senior Credit Facility contains a covenant that prohibits the Company from paying cash dividends. 18 ITEM 6. SELECTED FINANCIAL DATA The statement of operations data for the years ended 2000, 1999 and 1998 are derived from audited consolidated financial statements included elsewhere in this annual report on Form 10-K. The statement of operations data for the years ended 1997 and 1996 are derived from audited consolidated financial statements on file with the Securities and Exchange Commission. The balance sheet data as of December 31, 2000 and 1999 is derived from audited consolidated financial statements included elsewhere in this annual report on Form 10-K and the balance sheet data as of December 31, 1998, 1997 and 1996 are derived from audited consolidated financial statements on file with the Securities and Exchange Commission. Year Ended December 31, ----------------------------------------------- 2000 1999 1998(1) 1997(2) 1996 -------- -------- -------- -------- ------- (in thousands, except per share amounts) Consolidated Statement of Operations Data: Net sales..................... $ 61,957 $ 51,838 $ 64,391 $ 29,796 $26,857 Gross profit.................. 28,467 23,855 37,060 14,676 12,400 Write-off of acquired in-process research and development............. - - - (44,438) - Income (loss) from operations. 11,067 5,636 17,679 (35,578) 6,955 Interest income (expense), net (4,630) (4,558) (8,813) 940 725 Net income (loss) before extraordinary item......... 3,783 679 5,191 (22,836) 4,785 Extraordinary item, net of income tax benefit of $567.. - - (888) - - Net income (loss)............. 3,783 679 4,303 (22,836) 4,785 Net income (loss) per share before extraordinary item: Basic................... $ 0.44 $ 0.08 $ 0.69 $ (3.83) $ 0.87 Diluted................. $ 0.42 $ 0.08 $ 0.57 $ (3.83) $ 0.76 Net income (loss) per share: Basic................... $ 0.44 $ 0.08 $ 0.64 $ (3.83) $ 0.87 Diluted................. $ 0.42 $ 0.08 $ 0.53 $ (3.83) $ 0.76 Weighted Average Shares: Basic................... 8,624 8,521 7,487 5,955 5,478 Diluted................. 9,088 9,049 8,168 5,955 6,292 December 31, -------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- ------- (in thousands) Consolidated Balance Sheet Data: Working capital (deficit)..... $(10,934) $(12,910) $(11,839) $(12,632) $23,054 Total assets.................. 109,113 114,786 119,104 126,592 32,456 Total debt.................... 35,873 49,600 55,700 105,903 - Stockholders' equity.......... 62,547 58,024 57,277 8,995 28,706 19 1. Net loss for the year ended December 31, 1998 includes a non-recurring charge relating to the Wells acquisition for the valuation of the Emerson Warrant and an extraordinary charge relating to the write off of the valuation of the Emerson Warrant and the prepayment penalty associated with the Debenture (for the meaning of capitalized terms, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources"). Before deducting for the non-recurring and extraordinary charges, net income per share - basic was $0.89 (based on a weighted average number of shares outstanding of 7,486,915), and net income per share - diluted was $0.81 (based on a weighted average number of common and common equivalent shares outstanding of 8,167,525). 2. Net loss for the year ended December 31, 1997 includes a non-recurring write-off relating to the Wells acquisition for acquired in-process research and development. Before deducting the write-off, net income per share - basic was $1.04 (based on a weighted average number of shares outstanding of 5,954,657), and net income per share - diluted was $0.94 (based on a weighted average number of common and common equivalent shares outstanding of 6,634,125). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In 2000, net sales of the Company increased to $62.0 million from $51.8 million in 1999. This increase was due primarily to increased shipments of burn-in sockets resulting from increased demand by semiconductor manufacturers. The Company realized approximately 51.3% of its net sales in 2000 from products introduced in the last five years. The Company distributes its products through a combination of its own dedicated direct sales force, a worldwide network of manufacturers' representatives and authorized distributors. Sales to customers located outside the United States, either directly or through U.S. and foreign distributors, accounted for approximately 21.2%, 25.4%, and 21.9% of the net sales of the Company in the years ended December 31, 2000, 1999 and 1998, respectively. The following table sets forth the relative percentages of the total net sales of the Company attributable to each of the Company's product categories for the periods indicated. PRODUCT CATEGORIES 2000 1999 1998 ------------------ ------ ------ ------ Semiconductor burn-in sockets........... 68.5% 64.5% 71.7% Industrial interconnects................ 14.2 14.1 11.4 Avionic terminal blocks and sockets..... 17.3 21.4 16.9 ------ ------ ------ Total.............................. 100.0% 100.0% 100.0% ====== ====== ====== 20 RESULTS OF OPERATIONS The following table sets forth certain items from the Company's Consolidated Statements of Operations as (1) a percentage of net sales and (2) the percentage period-to-period change in dollar amounts of such items for the periods indicated. The information for 1998 excludes the non-recurring and extraordinary charges related to the Wells acquisition. The table and the discussion below should be read in conjunction with the Consolidated Financial Statements and Notes thereto. Year Ended December 31, Period-to-Period Change ------------------------- ----------------------------- 2000 1999 1998 2000 vs. 1999 1999 vs. 1998 ------ ------ ------ ------------- ------------- Net sales............. 100.0% 100.0% 100.0% 19.5% (19.5%) Gross profit.......... 45.9 46.0 57.6 19.3 (35.6) Income from operations before non-recurring and extraordinary charges.............. 17.9 11.4 27.5 87.7 (66.7) Non-operating income (expense), net (7.5) (9.3) (10.1) 1.6 (45.3) Net income............ 6.1 1.3 10.3 457.1 (84.2) YEARS ENDED DECEMBER 31, 2000 AND 1999 NET SALES. Net sales increased 20% to $62.0 million for 2000, from $51.8 million for 1999. The increase was due primarily to higher net sales in the burn-in socket product lines which were up $9.0 million or 27% from 1999. The net sales increase in this business was due to strong market conditions during 2000 together with new products introduced by the Company. Incoming orders for burn-in sockets rose $8.9 million or 25% to $44.5 million in 2000. Industrial/Avionics division net sales were up $1.1 million or 6% from 1999. GROSS PROFIT. Gross profit increased by $4.6 million or 19.3% in 2000 from $23.9 million in 1999. As a percentage of net sales, gross profit was 45.9% in 2000 and 46.0% in 1999. The gross profit percentage was impacted by several factors in 2000. First, depreciation increased by $0.6 million in 2000. Second, the burn-in socket business experienced higher than expected manufacturing inefficiencies and inventory write-offs during the second half of the year. This was due in part to the inconsistent availability of certain material during a period of rapid increase in demand from the Company's customers. Finally, the Industrial/Avionics division experienced an unfavorable product mix shift in 2000. These negative factors were partially offset by the favorable impact of higher sales volume in 2000. Changes in the Company's product mix (most particularly in the burn-in socket business) can have a material impact on the Company's gross profit percentage. These changes cannot always be predicted with certainty. OPERATING EXPENSES. Operating expenses include selling, general and administrative expenses and costs of product development. Operating expenses 21 decreased by $0.6 million to $13.2 million or 21.3% of net sales in 2000 from $13.8 million or 26.6% of net sales in 1999. The decrease in 2000 was primarily due to specific actions taken to reduce expenses at the Wells-CTI division in 1999 and 2000. RESTRUCTURING COSTS. In 1999, the Company recorded a charge of $259,000 in connection with its Wells-CTI cost reduction program. During 1999, the Pennsylvania stamping facility was closed and operations transferred to Peabody, MA. The Japan subsidiary was downsized and restructure of manufacturing operations was begun as certain assembly operations were transferred from South Bend, IN to Phoenix, AZ. The expenses incurred were for severance payments of $177,000, write-off of fixed assets of $42,000, remodeling of Japanese office of $32,000 and other miscellaneous expenses of $8,000. There are no amounts accrued for restructuring at December 31, 2000. The annualized cost savings from the restructuring program approximate $1.0 million. NON-OPERATING INCOME (EXPENSE), NET. Interest expense was $4.4 million in 2000 as compared with $4.6 million in 1999. Interest expense includes interest on the Senior Credit Facility of which the balance was reduced by $13.5 million during the year. The lower debt balances were partly offset by higher borrowing costs in 2000. The higher borrowing costs were due to higher interest rates in 2000 together with amortization of additional amendment fees. PROVISION FOR INCOME TAXES. The effective income tax rates for 2000 and 1999 were 41.2% and 37.0%, respectively. The increase in the effective rate in 2000 was due to profitability in the Company's Wells-CTI Japan operation, which carries a higher effective rate than the combined U.S. federal/state effective rate. In 1999, the Japan operation reported a loss. YEARS ENDED DECEMBER 31, 1999 AND 1998 NET SALES. Net sales decreased 20% to $51.8 million for 1999, from $64.4 million for 1998. The decrease was due to lower net sales in the burn- in socket product lines, which were negatively impacted by several factors in 1999. First, sales volume changes in this segment typically lag the semiconductor industry overall. The worldwide slowdown in the semiconductor industry began to impact the Company's shipments during the second half of 1998. Although the industry began to show signs of a recovery during the second half of 1999, the Company's sales orders did not return to early 1998 levels. Also, in 1999, certain key customers of the Company exited segments of the semiconductor business while others lost market share to their competitors. Finally, the memory burn-in sockets market experienced significant price pressure due to over capacity and an increasing emphasis on low cost, standardized products. GROSS PROFIT. Gross profit decreased by $13.2 million or 35.6% in 1999 from $37.1 million in 1998. As a percentage of net sales, gross profit declined to 46.0% in 1999 from 58% in 1998. The decline in dollar and percentage terms was due to lower sales volume, pricing pressure in certain segments of the burn-in socket market and a shift in product mix which resulted in a higher percentage of Industrial/Avionics net sales in 1999. As 22 presented in the table above, Industrial/Avionics net sales comprised 35.5% of total net sales in 1999 as compared with 28.3% in 1998. OPERATING EXPENSES. Operating expenses include selling, general and administrative expenses and costs of product development. Operating expenses decreased by $1.4 million to $13.8 million or 26.6% of net sales in 1999 from $15.2 million or 23.6% of net sales in 1998. The decrease in 1999 was the result of actions taken to reduce expenses in response to lower sales volume. These actions included merging the PCD Control Systems Interconnect division with the Industrial/Avionics division and closing the Pennsylvania sales office during the first quarter of 1999. Cost reductions at the Wells-CTI division instituted during the third and fourth quarters of 1998 together with downsizing of its Japan operations during the third quarter of 1999 also contributed to reduced operating expenses. RESTRUCTURING COSTS. In 1999, the Company recorded a charge of $259,000 in connection with its Wells-CTI cost reduction program. During the year, the Pennsylvania stamping facility was closed and operations transferred to Peabody, MA. The Japan subsidiary was downsized and restructure of manufacturing operations was begun as certain assembly operations were transferred from South Bend, IN to Phoenix, AZ. The expenses incurred were for severance payments of $177,000, write-off of fixed assets of $42,000, remodeling of Japanese office of $32,000 and other miscellaneous expenses of $8,000. At December 31, 1999, the only accrued expenses for these restructuring costs were for severance payments in the amount of $48,000. NON-OPERATING INCOME (EXPENSE), NET. Interest expense was $4.6 million in 1999 as compared with $10.3 million in 1998. Interest expense in 1999 includes interest on the Senior Credit Facility of which the balance was reduced by $6.1 million during the year. As more fully discussed below, interest expense in 1998 includes interest on the Senior Credit Facility in addition to interest costs associated with the Emerson financing. See "Liquidity and Capital Resources." PROVISION FOR INCOME TAXES. The effective income tax rates for 1999 and 1998 were 37.0% and 41.9%, respectively. The decrease in the effective rate in 1999 was due to losses incurred by the Company's Wells-CTI Japan operation, which carries a higher effective rate than the combined U.S. federal/state effective rate. In 1998, the Japan operation was profitable. INCOMPLETE TECHNOLOGY UPDATE The acquired in-process research and development ("IPR&D") which was expensed in 1997 in connection with the Wells acquisition related to in- process burn-in socket designs and manufacturing process for various next generation high density IC package types. More specifically, there were six projects for dual-sided surface mount ("SO") packages, six for chip scale packages ("CSP"), three for land grid array ("LGA"), two for ball grid array ("BGA"), two for test sockets and one for a miscellaneous package. As of December 31, 2000, none of the projects remain active. 23 LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities in 2000 was $17.2 million, compared to $9.4 million in 1999. These funds were sufficient to meet working capital requirements and to fund capital expenditures of approximately $3.0 million. The Company currently anticipates that its capital expenditures for 2001 will be approximately $5.0 million, which consist primarily of purchased tooling and equipment required to support the Company's business. The amount of these anticipated capital expenditures will frequently change based on future changes in business plans and conditions of the Company and changes in economic conditions. In December 1997, the Company obtained a Senior Credit Facility for $90 million from Fleet National Bank and other lenders (the "Senior Credit Facility") to finance in part the Wells acquisition. The Senior Credit Facility is secured by all of the assets of the Company. In conjunction with the Senior Credit Facility, PCD and Wells-CTI (formerly Wells Electronics, Inc.) each entered into a stock pledge agreement with Fleet and the other lenders pledging all or substantially all of the stock of the subsidiaries of PCD and Wells-CTI. Each of PCD, Wells-CTI and certain of their subsidiaries also entered into a security agreement and certain other collateral or conditional assignments of assets with Fleet and other lenders. In August 1998, the Company renegotiated the Senior Credit Facility. As a result, the interest rate premium of 50 basis points charged on approximately $40 million of the Senior Credit Facility was eliminated. According to its terms, the re- negotiated Senior Credit Facility will terminate on or before December 31, 2003. At December 31, 2000 and 1999, borrowings of $36.1 million and $49.6 million were outstanding under the Senior Credit Facility at weighted average interest rates of 8.70% and 7.78%, respectively. The agreement governing the Senior Credit Facility contains numerous financial and operating covenants. Among the operating covenants are restrictions that the Company (i) must maintain John L. Dwight, Jr. as chief executive officer of the Company or obtain the consent of the lenders under the Senior Credit Facility to any replacement of Mr. Dwight; (ii) may not, without the prior consent of such lender, acquire the assets of or ownership interest in, or merge with other companies; and (iii) may not, without the prior consent of such lenders, pay cash dividends. The Senior Credit Facility also requires the Company to maintain certain financial covenants, including minimum earnings before interest, taxes, depreciation and amortization ("EBITDA"), minimum fixed charge coverage ratio, minimum quick ratio, maximum ratio of total senior debt to EBITDA, maximum ratio of total indebtedness for borrowed money to EBITDA, minimum interest coverage ratio, and maximum capital expenditures, during the terms of the Senior Credit Facility. The Company has experienced difficulty meeting all of the covenants under its Senior Credit Facility. Accordingly, in September 1999, certain covenants were amended by agreement between the Company and its lenders. In March 2000, the Company obtained from its lenders a waiver of compliance with certain covenants for the fourth quarter of 1999. At the same time, certain covenants were amended by agreement between the Company and its lenders through June 30, 2000. In conjunction with the March 2000 agreement, the Company issued warrants to its lenders covering a total of 203,949 shares of Common Stock at an exercise price of $4.90 per share. The warrants were structured to become 24 exercisable on June 30, 2000 if the Company had not obtained at least $10 million of subordinated debt or other capital infusions ("Junior Capital") junior to loans under the Senior Credit Facility by June 30, 2000, or by June 30, 2000 had not entered into definitive agreements permitting repayment of amounts outstanding under the Senior Credit Facility by December 31, 2000. In addition, since the Company did not obtain the Junior Capital by April 30, 2000, the Company started on May 1, 2000 paying the lenders a quarterly fee of 0.25% of the sum of the total outstanding principal balance under the Term Loan plus the Revolving Credit Loan Commitment. During the second quarter of 2000, the Company's management and board of directors, in conjunction with its outside financial advisors, concluded that the cost of Junior Capital would have been prohibitively expensive under the existing market conditions. Accordingly, the Company ceased efforts to raise Junior Capital. The warrants for 203,949 shares of the Company's stock became exercisable on June 30, 2000 and the lenders' 0.25% quarterly fee began on May 1, 2000. At December 31, 2000, the Company was in compliance with its debt covenants. There can be no assurance, however, that the Company will be able to maintain compliance with its debt covenants in the future, and failure to meet such covenants would result in an event of default under the Senior Credit Facility. To avoid an event of default, the Company would attempt to obtain waivers from its lenders, restructure the Senior Credit Facility or secure alternative financing. Under these scenarios, there can be no assurance that the terms and conditions would satisfactory to the Company or not disadvantageous to the Company's stockholders. In December 1997, the Company entered into a Subordinated Debenture and Warrant Purchase Agreement ("Purchase Agreement") with Emerson Electric Co. ("Emerson"), the Company's largest stockholder. Pursuant to the Purchase Agreement, the Company issued to Emerson a Subordinated Debenture ("Debenture") with a principal amount of $25 million at an annual rate of interest of 10% and a Common Stock Purchase Warrant (the "Emerson Warrant") for the purchase of up to 525,000 shares of PCD Common Stock at a purchase price of $1.00 per share. In April 1998, the Company paid the principal, interest and prepayment penalty of 3.25%, or $812,500, in full, resulting in an extraordinary charge to income of $888,000, net of taxes, in the second quarter of 1998. Accordingly, 375,000 shares of the Emerson Warrant terminated by the terms thereof, leaving the Emerson Warrant only exercisable for 150,000 shares of PCD Common Stock. The Emerson Warrant for 150,000 shares was exercised in 2000. The Company believes its existing working capital and borrowing capacity, coupled with the funds generated from the Company's operations, will be sufficient to fund its anticipated working capital, capital expenditure and debt payment requirements through 2001. 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. 25 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. ITEM 7A. MARKET RISK INTEREST RATE RISK PCD is exposed to fluctuations in interest rates in connection with its variable rate term loan. In order to minimize the effect of changes in interest rates on earnings, PCD entered into an interest rate swap that fixed the interest rate on a notional amount of its variable rate term loan. Under the swap agreement, PCD pays a variable rate under LIBOR and receives a fixed rate of 5.72% on a notional amount of $35,000,000. The potential increase in the fair value of its term loan when adjusting for the interest rate swap paying at a fixed rate resulting from a hypothetical 10% decrease in interest rates was not material. 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Accountants....................................... 21 Consolidated Balance Sheets as of December 31, 2000 and 1999............ 22 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998................... 23 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998................... 24 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998................... 25 Notes to the Consolidated Financial Statements.......................... 26 27 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of PCD Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and stockholders' equity present fairly, in all material respects, the financial position of PCD Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 5, 2001 28 PCD INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, ------------------- 2000 1999 -------- -------- ASSETS Current assets: Cash.............................................. $ 837 $ 652 Accounts receivable - trade (less allowance for uncollectible accounts of $347 in 2000 and $367 in 1999)................ 8,318 6,831 Inventory.......................... .............. 6,199 5,479 Income tax refund receivable...................... - 1,416 Prepaid expenses and other current assets......... 823 674 -------- -------- Total current assets...................... 16,177 15,052 Equipment and improvements, net..................... 15,801 17,542 Deferred tax asset.................................. 11,151 12,258 Goodwill, net....................................... 52,423 55,506 Intangible assets, net.............................. 10,381 11,418 Debt financing fees................................. 1,574 1,276 Other assets........................................ 1,606 1,734 -------- -------- Total assets.............................. $109,113 $114,786 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt................................... $ 7,300 $ 12,000 Current portion of long-term debt................. 9,118 8,800 Accounts payable - trade.......................... 5,134 3,972 Accrued liabilities............................... 5,559 3,190 Total current liabilities................. 27,111 27,962 -------- -------- Long-term debt, net of current portion.............. 19,455 28,800 -------- -------- Total liabilities......................... 46,566 56,762 Commitments and contingencies (Notes 8, 9 and 11) Stockholders' equity: Preferred stock - $0.10 par value; 1,000,000 shares authorized; no shares issued Common stock - $0.01 par value; 25,000,000 shares authorized; 8,811,822 and 8,561,735 shares issued and outstanding in 2000 and 1999, respectively.... 88 86 Additional paid-in capital.......................... 62,642 61,913 Accumulated deficit................................. (165) (3,948) Accumulated other comprehensive income (loss) ...... (18) (27) -------- -------- Total stockholders' equity................ 62,547 58,024 -------- -------- Total liabilities and stockholders' equity $109,113 $114,786 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 29 PCD INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Years Ended December 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Net sales................................... $ 61,957 $ 51,838 $ 64,391 Cost of sales............................... 33,490 27,983 27,331 -------- -------- -------- Gross profit.............................. 28,467 23,855 37,060 Operating expenses.......................... 13,210 13,770 15,172 Restructuring costs......................... - 259 - Amortization................................ 4,190 4,190 4,209 -------- -------- -------- Income from operations.................... 11,067 5,636 17,679 Interest and other income/(expense), net.... (253) 33 421 Interest expense............................ (4,377) (4,591) (9,234) -------- -------- -------- Income before provision for income taxes and extraordinary item..... 6,437 1,078 8,866 Provision for income taxes.................. 2,654 399 3,675 -------- -------- -------- Net income before extraordinary item........ 3,783 679 5,191 Extraordinary item, net of income tax benefit of $567 (Note 3) - - (888) -------- -------- -------- Net income.................................. $ 3,783 $ 679 $ 4,303 ======== ======== ======== Basic earnings per share: Income before extraordinary item....... $ 0.44 $ 0.08 $ 0.69 Extraordinary item..................... - - (0.12) -------- -------- -------- Net income............................. $ 0.44 $ 0.08 $ 0.57 ======== ======== ======== Diluted earnings per share: Income before extraordinary item....... $ 0.42 $ 0.08 $ 0.64 Extraordinary item..................... - - (0.11) -------- -------- -------- Net income............................. $ 0.42 $ 0.08 $ 0.53 ======== ======== ======== Weighted average number of common and common equivalent shares outstanding: Basic.................................. 8,624 8,521 7,487 ======== ======== ======== Diluted................................ 9,088 9,049 8,168 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 30
PCD INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For The Years Ended December 31, 1998, 1999 and 2000 (In thousands, except share amounts) Accumulated Common Stock Additional Other Total ------------------- Paid-in Accumulated Comprehensive Deferred Stockholders' Comprehensive Shares Par Value Capital (Deficit) Income (Loss) Compensation Equity Income --------- --------- ---------- ----------- ------------- ------------ ------------- ------------- Balance, December 31, 1997 6,020,182 $ 60 $ 17,904 $ (8,930) $ - $ (39) $ 8,995 Comprehensive income: Net income............. 4,303 4,303 $ 4,303 Foreign currency translation adjustment 146 146 146 ------- Comprehensive income $ 4,449 ======= Public stock offering, net 2,300,000 23 42,439 42,462 Exercise of stock options. 119,500 1 149 150 Tax benefit from stock options exercised.. 357 357 Valuation of stock warrant 820 820 Purchase of stock warrant. 5 5 Amortization of deferred compensation.... 39 39 --------- ---- -------- -------- -------- --------- ---------- Balance, December 31, 1998 8,439,682 84 61,674 (4,627) 146 - 57,277 Comprehensive income: Net income............. 679 $ 679 Foreign currency translation adjustment (173) (173) (173) ------- Comprehensive income $ 506 ======= Employee stock purchase plan............ 7,053 65 65 Exercise of stock options. 115,000 2 135 137 Tax benefit from stock options exercised.. 39 39 --------- ---- -------- -------- -------- --------- ---------- Balance, December 31, 1999 8,561,735 86 61,913 (3,948) (27) - 58,024 Comprehensive income: Net income............. 3,783 3,783 $ 3,783 Foreign currency translation adjustment 9 9 9 ------- Comprehensive income $ 3,792 ======= Employee stock purchase plan............ 9,737 42 42 Exercise of stock options. 90,350 1 116 117 Exercise of warrant....... 150,000 1 149 150 Valuation of stock warrant 289 289 Tax benefit from stock options exercised.. 133 133 --------- ---- -------- -------- -------- --------- ---------- Balance, December 31, 2000 8,811,822 $ 88 $ 62,642 $ (165) $ (18) $ - $ 62,547 ========= ==== ======== ======== ======== ========= ========== The accompanying notes are an integral part of these consolidated financial statements.
31 PCD INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended December 31, -------------------------- 2000 1999 1998 ------- ------- ------- Cash flows from operating activities: Net income....................................... $ 3,783 $ 679 $ 4,303 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................... 4,885 4,315 3,472 Amortization of warrant........................ 69 - 2,917 Amortization of goodwill and intangible assets. 4,190 4,190 4,209 Loss on disposal of equipment.................. 13 19 9 Amortization of deferred compensation.......... - - 39 Amortization of debt financing fees............ 470 348 269 Tax refunds.................................... 1,380 - - Tax benefit from stock options exercised....... 133 39 357 Provision for deferred taxes................... 1,082 1,934 1,143 Changes in operating assets and liabilities: Accounts receivable........................... (1,925) (1,078) 1,262 Inventory..................................... (825) (363) (93) Prepaid expenses and other current assets..... (92) (1,418) 949 Other assets.................................. 45 (61) (100) Accounts payable.............................. 1,416 649 (1,448) Accrued liabilities........................... 2,584 116 (4,972) ------- ------- ------- Total adjustments............................ 13,425 8,690 8,013 ------- ------- ------- Net cash provided by operating activities... 17,208 9,369 12,316 ------- ------- ------- Cash flows from investing activities: Equipment and improvements expenditures.......... (3,037) (3,703) (5,827) ------- ------- ------- Net cash used in investing activities....... (3,037) (3,703) (5,827) ------- ------- ------- Cash flows from financing activities: Borrowings of short-term debt.................... - 2,300 - Payments for short-term debt..................... (4,700) - (3,300) Payments for long-term debt...................... (8,800) (8,400) (24,000) Payments for subordinated debenture.............. - - (25,000) Proceeds from employee stock purchase plan....... 42 65 - Proceeds from exercise of common stock options... 117 137 150 Proceeds from exercise of warrant................ 150 - - Proceeds from issuance of warrant................ - - 5 Deferred financing and loan amendment fees....... (768) - - Proceeds from issuance of common stock, net...... - - 42,462 ------- ------- ------- Net cash used in financing activities........... (13,959) (5,898) (9,683) ------- ------- ------- Net increase (decrease) in cash................... 212 (232) (3,194) Effect of exchange rate on cash................... (27) 32 56 Cash and cash equivalents at beginning of year.... 652 852 3,990 ------- ------- ------- Cash and cash equivalents at end of year.......... $ 837 $ 652 $ 852 ======= ======= ======= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest........................................ $ 3,436 $ 4,140 $ 7,580 ======= ======= ======= Income taxes.................................... $ 302 $ 395 $ 4,793 ======= ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 32 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 semiconductor burn-in 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. 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. Certain reclassifications have been made to prior year footnote amounts to conform with current year presentation. 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 had all its cash in interest bearing accounts at December 31, 2000 and December 31, 1999. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables. Collateral is not required for trade receivables, but ongoing credit evaluations of customer's financial condition are performed. A greater portion of the Company's accounts receivables are concentrated in the Semiconductor burn-in industry. The Company has not experienced significant losses related to receivables from individual customers or groups of customers in the Semiconductor burn-in industry 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. 33 MANAGEMENT ESTIMATES 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 allowances for uncollectible accounts, allowances for inventory valuation, goodwill, intangible assets and deferred taxes. INTEREST RATE SWAP The Company uses derivative financial instruments for purposes other than trading and does so to reduce its exposure to fluctuations in interest rates. Gains and losses on hedges of existing assets and liabilities are included in the carrying amounts of those assets or liabilities and are ultimately recognized in income. The amounts receivable and payable are recorded as a current liability with realized gains or losses recognized as adjustments to interest expense. Under the interest rate swap contract, the Company agrees to pay an amount equal to a specified floating rate of interest times a notional principal amount, and to receive in return an amount equal to the difference between the specified floating rate and the specified fixed rate of interest times the same notional principal amount. The notional amounts of the contract are not exchanged. No other cash payments are made unless the contract is terminated prior to maturity, in which case the amount paid or received in settlement is established by agreement at the time of termination, and usually represents the net present value, at current rates of interest, of the remaining obligations to exchange payments under the terms of the contract. The interest rate swap contract is entered into with a major financial institution in order to minimize credit risk. This contract has a term from February 1998 through March 2001. At December 31, 2000, the Company was a variable rate payer of 6.67% and received a fixed rate of 5.72% on notional amount of $35,000,000. The fair value at December 31, 2000, was an unfavorable $17,600. INVENTORY Inventories are stated at the lower of cost, determined on a first-in, first-out method, or market. RESEARCH AND DEVELOPMENT Research and development costs are charged to expense as incurred. NET INCOME (LOSS) PER COMMON SHARE The following table reconciles net income 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, 2000, 1999 and 1998. 34 Net Income Per Share (Loss) Shares Amount For the year ended December 31, 2000 ---------- --------- --------- Basic earnings............................... $3,783,000 8,623,976 $ 0.44 Assumed exercise of options (treasury method) - 464,005 - ---------- --------- ------ Diluted earnings............................. $3,783,000 9,087,981 $ 0.42 ========== ========= ====== For the year ended December 31, 1999 Basic earnings............................... $ 679,000 8,520,670 $ 0.08 Assumed exercise of options (treasury method) - 528,043 - ---------- --------- ------ Diluted earnings............................. $ 679,000 9,048,713 $ 0.08 ========== ========= ====== For the year ended December 31, 1998 Basic earnings before extraordinary item..... $5,191,000 7,486,915 $ 0.69 Assumed exercise of options (treasury method) - 680,610 - ---------- --------- ------ Diluted earnings before extraordinary item... $5,191,000 8,167,525 $ 0.64 ========== ========= ====== Extraordinary item........................... $ (888,000) 7,486,915 $(0.12) Assumed exercise of options (treasury method) - 680,610 - ---------- --------- ------ Diluted extraordinary item................... $ (888,000) 8,167,525 $(0.11) ========== ========= ====== Basic earnings............................... $4,303,000 7,486,915 $ 0.57 Assumed exercise of options (treasury method) - 680,610 - ---------- --------- ------ Diluted earnings............................. $4,303,000 8,167,525 $ 0.53 ========== ========= ====== In 2000, 1999 and 1998, anti-dilutive Common Stock equivalents of 145,357, 125,963 and 79,366 shares, respectively, were not included in the calculation of diluted EPS. EQUIPMENT AND IMPROVEMENTS Equipment and improvements are recorded at cost and are depreciated utilizing the straight-line method over their estimated useful lives (Note 5). 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 operations. 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 35 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 AND INTANGIBLE ASSETS Goodwill is accounted for in accordance with Accounting Principles Board ("APB") No. 17, Intangible Assets. Goodwill represents costs in excess of net assets of the business acquired and is amortized on a straight-line basis over the expected periods to be benefited, which is currently 20 years. The Company's policy is to assess the goodwill based on an evaluation of such factors as the occurrence of a significant adverse event or change in the environment in which the business operates. An impairment loss would be recorded in the period such determination is made based on the undiscounted cash flows of the related businesses. No impairment losses have been recognized in any of the periods presented. Intangible assets 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 their estimated remaining economic lives of 20 years, consistent with industry norms. Patented technologies are amortized over their estimated remaining economic lives of 6 years. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with Financial Accounting Standards ("FAS") 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company reviews long-lived assets for impairment whenever events of change in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Each impairment test is based on comparison of undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written down to its fair value. No impairment losses have been recognized in any of the periods indicated. FOREIGN CURRENCY TRANSLATION ADJUSTMENT The functional currency of the Company's foreign operation is the foreign subsidiary's local currency. Assets and liabilities of the foreign subsidiary are translated using the current exchange rate in effect at the balance sheet date. Revenue and expense items are translated at average exchange rates for the period. The resulting translation adjustments are recorded as a component of stockholders' equity. Gains or losses resulting from foreign currency transactions of approximately $5,000 are included in other income. NEW ACCOUNTING STANDARDS In 1998, the Financial Accounting Standards Board ("FASB") released FAS 133, Accounting for Derivative Instruments and Hedging Activities, which initially would have been effective for all fiscal quarters beginning after June 15, 1999. In June 1999, the FASB released FAS 137, Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133. FAS 137 deferred the effective date of FAS 133 until June 15, 2000. In July 2000, the FASB released FAS 138, Accounting for 36 Certain Derivative Instruments and Certain Hedging Activities an amendment of FASB Statement No. 13. FAS 138 amended the requirements of FAS 133 but maintained the effective date as June 15, 2000. FAS 138, as FAS 133 did, standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. The Company has evaluated the impact that FAS 138 and found it to be immaterial. 3. EXTRAORDINARY ITEM: In the second quarter of 1998, the Subordinated Debenture issued to Emerson Electric was paid in full. The Company incurred additional interest expense of $642,500, which represents the amortized portion of the Emerson Warrant applicable to the second quarter of 1998, and prepayment penalties of $812,500, which represents the prepayment penalty associated with the Subordinated Debenture. 4. INVENTORY: Inventory consisted of the following at December 31: 2000 1999 ------ ------ (In thousands) Raw materials and finished subassemblies......... $4,213 $3,803 Work in process.................................. 34 308 Finished goods................................... 1,952 1,368 ------ ------ Total.......................................... $6,199 $5,479 ====== ====== 5. EQUIPMENT AND IMPROVEMENTS: Equipment and improvements consisted of the following at December 31: Estimated Useful Life In Years 2000 1999 --------------------- ------- ------- (In thousands) Tools, dies and molds........... 5 $18,928 $17,123 Machinery and equipment......... 10 6,485 6,155 Office furniture and fixtures... 5 2,867 2,736 Computer software............... 3 1,421 1,205 Transportation equipment........ 4 131 134 Leasehold improvements.......... Shorter of lease term or useful life 1,067 1,065 ------- ------- 30,899 28,418 Less accumulated depreciation... 16,315 11,547 ------- ------- 14,584 16,871 Capital expenditures in progress 1,217 671 ------- ------- Equipment and improvements, net. $15,801 $17,542 ======= ======= 37 6. INTANGIBLE ASSETS AND GOODWILL: Intangible assets and goodwill consisted of the following at December 31: 2000 1999 ------- ------- (In thousands) Patented technology.............................. $ 3,109 $ 3,109 Trade names/trademarks........................... 10,384 10,384 ------- ------- Subtotal....................................... 13,493 13,493 Less accumulated amortization.................. 3,112 2,075 ------- ------- Net intangibles.............................. $10,381 $11,418 ======= ======= Goodwill......................................... $61,674 $61,674 Less accumulated amortization.................... 9,251 6,168 ------- ------- Net goodwill............. ................... $52,423 $55,506 ======= ======= 7. ACCRUED LIABILITIES: Accrued liabilities consisted of the following at December 31: 2000 1999 ------- ------- (In thousands) Compensation and benefits..................... $ 1,781 $ 1,220 Commissions................................... 295 266 Income taxes payable.......................... 1,485 487 Interest...................................... 568 133 Professional fees............................. 238 269 Other......................................... 1,192 815 ------- ------- Total....................................... $ 5,559 $ 3,190 ======= ======= 8. LINE OF CREDIT AND LONG-TERM DEBT: On December 26, 1997, the Company entered into a secured $20,000,000 Revolving Credit Agreement ("Revolver"), $30,000,000 Secured Term Loan Agreement A and $40,000,000 Secured Term Loan Agreement B (collectively referred to as the "Senior Credit Facility") with several banks. The Senior Credit Facility is collateralized by all of the assets of PCD and its subsidiaries. In conjunction with the Senior Credit Facility, PCD and Wells- CTI (formerly Wells Electronics, Inc.) each entered into a stock pledge agreement pledging all or substantially all of the stock of the subsidiaries of PCD and Wells-CTI. Each of PCD, Wells-CTI and certain of their subsidiaries also entered into a security agreement and certain other collateral or conditional assignments of assets. 38 In August 1998, the Company renegotiated the Senior Credit Facility. As a result, Term Loan A and Term Loan B were combined into a single term loan. Accordingly, the interest rate premium of 50 basis points charged on Term Loan B was eliminated. According to its terms, the re-negotiated Senior Credit Facility will terminate on or before December 31, 2003. At December 31, 2000 and 1999, borrowings of $36,100,000 and $49,600,000 were outstanding under the Senior Credit Facility at a weighted average interest rate of 8.70% and 7.78%, respectively. The unused portion of the Revolver at December 31, 2000 and 1999 was $12,700,000 and $8,000,000, respectively. The agreement governing the Senior Credit Facility contains numerous financial and operating covenants. Among these covenants are restrictions that the Company (i) must maintain John L. Dwight, Jr. as chief executive officer of the Company or obtain the consent of the lenders under the Senior Credit Facility to any replacement of Mr. Dwight; (ii) may not, without the prior consent of such lender, acquire the assets of or ownership interest in, or merge with, other companies; and (iii) may not, without the prior consent of such lenders, pay cash dividends. The Senior Credit Facility also requires that 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 earnings before interest, taxes, depreciation and amortization ("EBITDA"), minimum interest coverage ratio, maximum capital expenditures, as defined, during the terms of the Senior Credit Facility. In March 2000, the Company obtained from its lenders a waiver of compliance with certain covenants for the fourth quarter of 1999. In addition, certain covenants were amended by agreement between the Company and its lenders through June 30, 2000. In conjunction with the March 2000 agreement, the Company issued warrants to its lenders covering a total of 203,949 shares of Common Stock at an exercise price of $4.90 per share. The value of this warrant, utilizing the Black Scholes option pricing method, was determined to be $289,000. The assumptions utilized under the Black Scholes method were 96% volatility, 5.3675% riskless rate of return, no dividends and a term of six months. This adjustment was made to offset the debt outstanding and the contra amount was credited to additional paid in capital. This warrant is being amortized over the remaining life of the debt. The following debt information is being presented gross of this warrant valuation. Since the Company did not obtain at least $10 million of subordinated debt or other capital infusions ("Junior Capital") by June 30, 2000, the warrants became exercisable. In addition, since the Company did not obtain the Junior Capital by April 30, 2000, the Company started paying on May 1, 2000 the lenders a fee of 0.25% of the sum of the total outstanding principal balance under the Term Loan plus the Revolving Credit Loan Commitment. The Company was in compliance with all of its debt covenants as of December 31, 2000. Long-term debt consists of the following: 2000 1999 ------- ------- (In thousands) Total long-term debt............................. $28,800 $37,600 Less - current portion........................... 9,200 8,800 ------- ------- $19,600 $28,800 ======= ======= 39 Maturities of long-term debt are as follows: Year Ended December 31, Amount (In thousands) 2001.................... $ 9,200 2002.................... 9,600 2003.................... 10,000 ------- $28,800 ======= 9. SUBORDINATED DEBENTURE: On December 26, 1997, the Company entered into a Subordinated Debenture and Warrant Purchase Agreement ("Purchase Agreement") with Emerson Electric Co. ("Emerson"), the Company's largest stockholder. Pursuant to the Purchase Agreement, the Company issued to Emerson a Subordinated Debenture ("Debenture") with a principal amount of $25 million at an annual rate of interest of 10% and a Common Stock Purchase Warrant (the "Emerson Warrant") for the purchase of up to 525,000 shares of PCD Common Stock at a purchase price of $1.00 per share. In April 1998, the Company paid the principal, interest and prepayment penalty of 3.25%, or $812,500, in full. Accordingly, 375,000 shares of the Emerson Warrant terminated by the terms thereof, leaving the Emerson Warrant only exercisable for 150,000 shares of PCD Common Stock. The Emerson Warrant was exercised during 2000. 10. INCOME TAXES: The provision (benefit) for income taxes for the years ended December 31, 2000, 1999, and 1998 was as follows: 2000 1999 1998 ------ ------- ------ (In thousands) Current Federal.................... $ 366 $(1,271) $ (220) State...................... 166 111 625 Foreign.................... 1,015 (181) 1,560 ------ ------- ------ Total current............ 1,547 (1,341) 1,965 ------ ------- ------ Deferred Federal.................... 977 1,647 1,345 State...................... 151 193 (32) Foreign.................... (21) (100) (170) ------ ------- ------ Total deferred........... 1,107 1,740 1,143 ------ ------- ------ $2,654 $ 399 $3,108 ====== ======= ====== 40 The components of the net deferred tax asset consisted of the following at December 31, 2000 and 1999: 2000 1999 ------- ------- (In thousands) Deferred tax assets (liabilities): Difference in accounting for inventory $ 493 $ 193 Accounts receivable allowances........ 128 81 Vacation and other accruals........... 570 357 Net operating loss carryforwards...... 426 416 Foreign tax credit carryforwards...... 808 744 Amortization.......................... (1,250) (906) In-process research and development... 12,286 13,312 Difference in depreciation methods.... (1,751) (1,417) Alternative minimum tax credits....... 30 24 Valuation allowance................... (589) (546) ------- ------- Net deferred tax asset.............. $11,151 $12,258 ======= ======= 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. At December 31, 2000 and December 31, 1999, for state tax purposes, the Company has net operating loss carryforwards of approximately $7,882,000 and $7,218,000 respectively. These losses begin to expire after 2001. In addition, the Company has foreign tax credit carryforwards of approximately $808,000 and $744,000 at December 31, 2000 and December 31, 1999, respectively. These foreign tax credit carryforwards are offset by valuation allowances of $589,000 and $546,000 at December 31, 2000 and December 31, 1999, respectively. These credits begin to expire after 2003. 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: 2000 1999 1998 ------ ------- ------ (In thousands) Income taxes at U.S. statutory rate of 34% $2,189 $ 366 $2,520 State income taxes........................ 209 177 391 Benefit of foreign sales corporation...... (113) (91) (127) Benefit of foreign tax credits............ - - (156) Foreign tax rate differential............. 210 (87) 501 Other, net................................ 159 34 (21) ------ ------- ------ $2,654 $ 399 $3,108 ====== ======= ====== 41 11. COMMITMENTS AND CONTINGENCIES: LITIGATION: The Company and its subsidiaries are subject to legal proceedings arising in the ordinary course of business. On the basis of information presently available and advice received from legal counsel, it is the opinion of management that the disposition or ultimate determination of such legal proceedings will not have a material adverse effect on the Company's consolidated financial position, its consolidated results of operations or its consolidated cash flows. LEASES: The Company leases office and production facilities in Peabody, Massachusetts, South Bend, Indiana, Yokohama, Japan, and Phoenix, Arizona and leases distribution and a technical sales support facility in Northhampton, England. These rentals are subject to escalation in real estate taxes and operating expenses. Rental expense for the years ended December 31, 2000, 1999, and 1998 was $1,083,000, $1,116,000 and $1,270,000, respectively. Minimum future rental commitments under leases with remaining terms in excess of one year (including a lease extension entered into during January 2001) are approximately as follows: Year Ended December 31, Amount ------ (In thousands) 2001................... $ 956 2002................... 918 2003................... 760 2004................... 510 2005................... 516 Thereafter............. 2,219 12. STOCKHOLDERS EQUITY: 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 42 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. As of December 31, 2000, 12,000 shares of the Company's common stock were available for future grants and 18,000 of the 24,000 options which are outstanding under the 1996 Directors Stock Plan were exercisable. 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 and the typical vesting plan is in four approximately equal annual installments, the first of which vests on the date of grant. As of December 31, 2000, 119,250 shares of the Company's common stock were available for future grants and 98,750 of the 198,000 options which are outstanding under the 1996 Stock Plan were exercisable. 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 provided 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 Compensation Committee administers the 1992 Stock Option Plan. 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 and the typical vesting plan is in four approximately equal annual installments, the first of which vests on the date of grant. The aggregate number of shares of Common Stock available for awards under the Plan is 954,000. As of December 31, 2000, 36,000 shares of the Company's common stock were available for 43 future grants and all 276,750 options which are outstanding under the 1996 Stock Plan are exercisable. No awards may be made under the 1996 Stock Plan after January 29, 2006. The following table summarizes the transactions from these plans: Weighted average Options exercise price ------- -------------- Options outstanding at December 31, 1997 719,850 3.46 Options exercised..................... (119,500) 1.26 Options canceled...................... (2,000) 21.50 Options granted....................... 36,500 19.45 ------- Options outstanding at December 31, 1998 634,850 4.74 Options exercised..................... (115,000) 1.19 Options canceled...................... (19,500) 16.78 Options granted....................... 153,000 8.39 ------- Options outstanding at December 31, 1999 653,350 5.86 Options exercised..................... (90,350) 1.30 Options canceled...................... (133,750) 12.91 Options granted....................... 69,500 6.21 ------- Options outstanding at December 31, 2000 498,750 4.84 ======= Summarized information about stock options outstanding at December 31, 2000 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 --------------- ----------- ----------- -------- --------- -------- $ 1.15 199,750 1.90 $ 1.15 199,750 $ 1.15 1.54-2.08 77,000 4.38 1.65 77,000 1.65 3.75 4,500 9.42 3.75 4,500 3.75 5.00-5.88 77,000 9.06 5.40 28,000 5.55 7.87-8.37 79,000 8.75 8.25 39,000 8.21 9.375 10,000 9.83 9.94 2,500 9.94 11.00 4,500 8.42 11.00 4,500 11.00 16.125-17.75 39,000 7.25 16.75 32,250 16.78 21.50 8,000 7.08 21.50 6,000 21.50 For the years ended December 31, 2000, 1999, and 1998, options to purchase 393,500, 504,851, and 560,768 shares, respectively, of Common Stock were exercisable with the remaining options becoming exercisable at various dates through October 27, 2003. 44 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 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 and earnings per share for the years ended December 31, 2000, 1999, and 1998 would have been reduced to the pro forma amounts indicated below:
2000 1999 1998 -------------------------- -------------------------- -------------------------- Net income Net income Net income Per share Per Share Per Share ------------- ------------- ------------- Net income Basic Diluted Net income Basic Diluted Net income Basic Diluted ----------- ----- ------- ---------- ----- ------- ---------- ----- ------- As reported.......... $ 3,783 $0.44 $0.42 $ 679 $0.08 $0.08 $ 4,303 $0.57 $0.53 Pro forma............ $ 3,534 $0.41 $0.39 $ 323 $0.04 $0.04 $ 3,898 $0.52 $0.48
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: 2000 1999 1998 Dividend yield.............. None None None Expected volatility......... 119.3% 81.6% 61.7% Risk free interest rate..... 5.0% 5.62% 5.40% Expected life (years)....... 5.0 5.0 5.0 Weighted average fair value of options granted at fair value at date of grant: 1998............... $12.57 ====== 1999............... $ 6.26 ====== 2000............... $ 5.44 ====== 45 The effect of applying SFAS 123 in this pro forma disclosure is not indicative of future amounts. Additional awards in future years are anticipated. 14. PROFIT SHARING PLAN: The Company has Employee Savings and Profit Sharing Plans (the "Plans") under section 401(k) of the Internal Revenue Code of 1986, as amended. All employees of the Company, after reaching the applicable service level, are eligible to participate in the Plans. A participating employee may elect to defer on a pre-tax basis up to 15% of his or her salary. This amount, plus a matching amount provided by the Company, is contributed to the Plan. Company contributions to the Plans for the years ended December 31, 2000, 1999, and1998 amounted to $235,509, $210,170 and $190,000, respectively. 15. EMPLOYEE STOCK PURCHASE PLAN: During 1998, the stockholders of the Company approved the 1998 Employee Stock Purchase Plan (the "1998 Employee Stock Purchase Plan") covering 80,000 shares of the Company's Common Stock. All employees who have completed twelve months of employment, except for those employees who possess at least 5% of the voting power of the Company's Common Stock are entitled, through payroll deductions of amounts up to 10% of his or her salary, to purchase shares of the Company's Common Stock at the lesser of 85% of the market price at the offering date or the offering termination date. During the years 2000 and 1999, 9,737 and 7,053 shares were issued, respectively and no shares were issued in 1998, leaving 63,210 shares available for future issuance. 16. RESTRUCTURING CHARGE: During 1999, the Company recorded a charge of $259,000 in connection with the restructuring program at Wells-CTI. During the year, the Pennsylvania stamping facility was closed with operations transferred to Peabody, MA and the Japan subsidiary of Wells-CTI was downsized. The expenses incurred were for severance payments of $177,000, write-off of fixed assets of $42,000, remodeling of Japanese office of $32,000 and other miscellaneous expenses of $8,000. At December 31, 1999, the only accrued expenses for these restructuring costs were for severance payments in the amount of $48,000 and there was no accrued expense at December 31, 2000. 17. SIGNIFICANT CUSTOMERS AND EXPORT SALES: One customer accounted for approximately 20.8% and 17.6% of the Company's net sales in 2000 and 1999, respectively. A second customer accounted for approximately 12.7% of the Company's net sales in 1998. The Company had export sales of approximately $13.1 million, $13.2 million and $13.7 million in 2000, 1999 and 1998, respectively. All export sales are in U.S. dollars. No one country or region (other than the United States) accounted for greater than 10% of net sales. 46 18. SEGMENT INFORMATION: The Company designs, manufactures and markets electronic connectors for use in Semiconductor burn-in applications, industrial equipment and avionics. The Company has two principal businesses: Semiconductor burn-in segment and industrial and avionics segment. Each of these is a business segment with its respective financial performance detailed in this report. Net income of the two principal businesses excludes the effects of special charges and gains. The results for Semiconductor burn-in include the effects of royalty revenues from IC package-related cross-license agreements. Business assets are the owned or allocated assets used by each business. Included in corporate activities are general corporate expenses, net of elimination of inter-segment transactions, which are generally intended to approximate market prices. Assets of corporate activities include cash, corporate equipment and improvements, net, and Company tax assets. 2000 1999 1998 -------- -------- -------- (In thousands) Sales: Industrial/Avionics..................... $ 19,516 $ 18,385 $ 18,214 Semiconductor burn-in................... 42,441 33,453 46,177 -------- -------- -------- Totals................................ $ 61,957 $ 51,838 $ 64,391 ======== ======== ======== Net income(loss): Industrial/Avionics..................... $ 2,477 $ 2,528 $ 2,426 Semiconductor burn-in................... 1,336 (1,832) 2,866 Corporate activities.................... (30) (17) (101) Special charges - Semiconductor burn-in. - - (888) -------- -------- -------- Totals................................ $ 3,783 $ 679 $ 4,303 ======== ======== ======== Special charges: Acquired research & development......... $ - $ - $ - Extraordinary item...................... - - 888 -------- -------- -------- Totals................................ $ - $ - $ 888 ======== ======== ======== Assets: Industrial/Avionics..................... $ 9,255 $ 9,269 $ 8,960 Semiconductor burn-in................... 86,976 90,004 94,499 Corporate activities.................... 12,882 15,513 15,645 -------- -------- -------- Totals.................................. $109,113 $114,786 $119,104 ======== ======== ======== 47 2000 1999 1998 -------- -------- -------- (In thousands) Equipment and improvements: Industrial/Avionics..................... $ 8,588 $ 7,829 $ 7,042 Semiconductor burn-in................... 21,920 19,763 17,522 Corporate activities.................... 1,608 1,497 1,005 -------- -------- -------- Totals................................ $ 32,116 $ 29,089 $ 25,569 ======== ======== ======== Additions: Industrial/Avionics..................... $ 725 $ 603 $ 1,341 Semiconductor burn-in................... 2,208 2,547 3,550 Corporate activities.................... 104 553 885 -------- -------- -------- Totals................................ $ 3,037 $ 3,703 $ 5,776 ======== ======== ======== Depreciation: Industrial/Avionics..................... $ 1,031 $ 965 $ 843 Semiconductor burn-in................... 3,549 3,199 2,588 Corporate activities.................... 305 151 41 -------- -------- -------- Totals................................ $ 4,885 $ 4,315 $ 3,472 ======== ======== ======== Intangible assets: Industrial/Avionics..................... $ - $ - $ - Semiconductor burn-in................... 75,167 75,167 75,167 Corporate activities.................... - - - -------- -------- -------- Totals................................ $ 75,167 $ 75,167 $ 75,167 ======== ======== ======== Amortization: Industrial/Avionics..................... $ - $ - $ - Semiconductor burn-in................... 4,190 4,190 4,209 Corporate activities.................... - - - -------- -------- -------- Totals................................ $ 4,190 $ 4,190 $ 4,209 ======== ======== ======== The following geographic area data include trade revenues based on product shipment destination and royalty payor per location, and property, plant and equipment based on physical location: 48 2000 1999 1998 -------- -------- -------- (In thousands) Geographic area net trade revenue: United States........................... $ 48,311 $ 38,650 $ 50,682 Japan................................... 9,838 8,501 1,131 Singapore............................... - - 3,573 Rest of world........................... 3,808 4,687 9,005 -------- -------- -------- Totals................................ $ 61,957 $ 51,838 $ 64,391 ======== ======== ======== Geographic area equipment and improvements: United States........................... $ 27,373 $ 24,975 $ 22,594 Japan................................... 4,743 4,114 2,975 Singapore............................... - - - -------- -------- -------- Totals................................ $ 32,116 $ 29,089 $ 25,569 ======== ======== ======== 19. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED): For the Three Months Ended ------------------------------------ Apr 1, Jul 1, Sep 30, Dec 31, ------- ------- ------- ------- (In thousands, except per share data) 2000 Net sales................. $13,905 $14,330 $16,130 $17,592 Gross profit.............. 6,183 6,757 7,369 8,158 Net income................ 322 735 1,179 1,547 Earnings per share: Basic................... $ 0.04 $ 0.09 $ 0.14 $ 0.18 Diluted................. $ 0.04 $ 0.08 $ 0.13 $ 0.17 For the Three Months Ended ------------------------------------ Apr 3, Jul 3, Oct 2, Dec 31, ------- ------- ------- ------- (In thousands, except per share data) 1999 Net sales................. $12,633 $13,210 $13,489 $12,506 Gross profit.............. 6,254 6,593 6,305 4,703 Net income (loss) ........ 365 524 282 (492) Earnings (loss) per share: Basic................... $ 0.04 $ 0.06 $ 0.03 $ (0.06) Diluted................. $ 0.04 $ 0.06 $ 0.03 $ (0.06) 49 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON AUDITING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE OFFICERS Set forth below are the executive officers of the Company and their ages as of December 31, 2000 and positions held with the Company, as follows: Name Age Position John L. Dwight, Jr. 56 Chairman of the Board, Chief Executive Officer, President and Director John T. Doyle 40 Vice President and General Manager, PCD Industrial/Avionics Division Jeffrey A. Farnsworth 54 Vice President and General Manager, Wells-CTI - USA Roddy J. Powers 57 Vice President, Operations John J. Sheehan III 44 Vice President, Finance and Administration, Chief Financial Officer, and Treasurer 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 29 years of management and operating experience in the connector industry. Mr. Doyle rejoined PCD as Vice President and General Manager, Industrial/Avionics Division in August 1999. From January 1996 to July 1999, Mr. Doyle held various positions with Thomas & Betts including Vice President - - Worldwide Engineering, VP/GM - Communications Division and VP/GM - Automotive Division. From August 1992 to January 1996, he held positions at Amphenol Corp., RF/Microwave Division as Director of Engineering and Director of Operations. Prior to August 1992, he was VP - Engineering & Quality Assurance at PCD. Mr. Doyle has 19 years of experience in the connector industry. Mr. Farnsworth has served as Vice President and General Manager, Wells-CTI - - USA since July 2000. From August 1999 to July 2000, he served as Vice President - Sales and Marketing, Wells-CTI. From December 1997 to August 1999, he was Vice President and General Manager - CTI. 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 50 Company, in various positions in sales and marketing, following the acquisition of Component Technologies, Inc. by the Company in 1988. Mr. Farnsworth has 24 years of experience in the connector industry. 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. Sheehan joined PCD as Vice President Finance and Administration, Chief Financial Officer and Treasurer in August 1999. From 1997 to 1999 he was Corporate Controller of Sappi Fine Paper North America, a manufacturer and distributor of coated paper for the printing and publishing industry. From 1991 to 1997 he was Corporate Controller of Value Health, Inc. a NYSE - listed specialty health care services company. Mr. Sheehan is a certified public accountant with previous experience as an auditor for PricewaterhouseCoopers LLP. DIRECTORS For information with respect to the Directors of the Company, see "Election of Directors" in the Proxy Statement (the "2001 Proxy Statement") for the PCD Inc. 2001 Annual Meeting of Stockholders, which portion of the Proxy Statement is incorporated herein by reference. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's executive officers, directors, and persons owning ten percent or more of a registered class of the Company's equity securities to file reports of ownership and changes in ownership of all equity and derivative securities of the Company with the Securities and Exchange Commission ("SEC"). SEC regulations also require that a copy of all such Section 16(a) forms filed must be furnished to the Company by such officers, directors and shareholders. Based solely on a review of the copies of such forms and amendments thereto received by the Company, or written representations from the Company's officers and directors that no Forms 5 were required to be filed, the Company believes that during 2000 all Section 16(a) filing requirements applicable to its officers, directors and shareholders were met. ITEM 11. EXECUTIVE COMPENSATION The information contained under the caption Executive Compensation in the 2001 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the caption Security Ownership Of Management and Principal Stockholders in the 2001 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained under the caption "Certain Relationships and Related Transactions" in the 2001 Proxy Statement is incorporated herein by reference. 51 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed as a part of the Form 10-K Report 1) Financial Statements PCD INC. DECEMBER 31, 2000 and 1999 Report of Independent Accountants Consolidated Balance Sheets as of December 31, 2000 and 1999 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements 2) The Report of Independent Accountants on the Financial Statement Schedule and the schedule listed below are filed as part of this annual report on Form 10-K. PAGE Report of Independent Accountants of Financial Statement Schedule......................... S-1 Schedule II - Valuation and Qualifying Accounts.......... S-2 3) Listing of Exhibits Copies of all exhibits to this Form 10-K (including exhibits incorporated by reference) are available without charge upon the request of any stockholder addressed to John J. Sheehan III, PCD Inc., 2 Technology Drive, Centennial Park, Peabody, MA 01960.
3) Listing of Exhibits 2.1(1) Share Purchase Agreement among UL America, Inc., Wells Electronics, Inc. and PCD Inc. dated as of November 17, 1997. 2.2(1) Undertaking to Furnish Copies of Omitted Schedules to Share Purchase Agreement dated as of November 17, 1997 3.1(2) Restated Articles of Organization of Registrant effective March 22, 1996. 3.2(2) By-Laws of Registrant, as amended, effective April 1, 1996. 4.1(2) Articles 3, 4, 5 and 6 of the Restated Articles of Organization of Registrant (included in Exhibit 3.1). 4.2(2) Specimen Stock Certificate. 10.1(1) Loan Agreement between PCD Inc. and Fleet National Bank dated as of December 26, 1997.
52
10.2(1) Unlimited Guaranty from Wells Electronics, Inc. to Fleet National Bank dated as of December 26, 1997. 10.3(1) Security Agreement between PCD Inc. and Fleet National Bank dated as of December 26, 1997. 10.4 Amended and Restated Security Agreement between Wells-CTI, Inc. and Fleet National Bank dated as of July 31, 1998. 10.5(1) Stock Pledge Agreement between PCD Inc. and Fleet National Bank dated as of December 26, 1997. 10.6(1) Stock Pledge Agreement between Wells Electronics, Inc. and Fleet National Bank dated as of December 26, 1997. 10.7(1) Conditional Patent Assignment from PCD Inc. to Fleet National Bank dated as of December 26, 1997. 10.8(1) Conditional Patent Assignment from Wells Electronics, Inc. to Fleet National Bank dated as of December 26, 1997. 10.9(1) Conditional Patent Assignment from Wells Japan Kabushiki Kaisha to Fleet National Bank dated as of December 26, 1997. 10.10(1) Conditional Trademark Collateral Assignment from PCD Inc. to Fleet National Bank dated as of December 26, 1997. 10.11(1) Conditional Trademark Collateral Assignment from Wells Electronics, Inc. to Fleet National Bank dated as of December 26, 1997. 10.12(1) Collateral Assignment of Contracts, Leases, Licenses and Permits from PCD Inc. to Fleet National Bank dated as of December 26, 1997. 10.13(1) Collateral Assignment of Contracts, Leases, Licenses and Permits from Wells Electronics, Inc. to Fleet National Bank dated as of December 26, 1997. 10.14(1) Undertaking to Furnish Copies of Omitted Exhibits and Schedules to Loan Agreement and Related Documents dated as of December 26, 1997. 10.15(1) Subordinated Debenture and Warrant Purchase Agreement between PCD Inc. and Emerson Electric Co. dated as of December 26, 1997. 10.16(1) Subordinated Debenture issued to Emerson Electric Co. dated December 26, 1997. 10.17(1) Common Stock Purchase Warrant issued to Emerson Electric Co. dated December 26, 1997. 10.18(1) Registration Rights Agreement between PCD Inc. and Emerson Electric Co. dated as of December 26, 1997. 10.19(1) Subordination Agreement among PCD Inc., Emerson Electric Co. and Fleet National Bank dated as of December 26, 1997. 10.20(1) Undertaking to Furnish Copies of Omitted Exhibits to Subordinated Debenture and Warrant Purchase Agreement dated as of December 26, 1997. 10.21(2) 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(3) Second Amendment to lease agreement dated July 15, 1993, between Centennial Park Associates Limited Partnership III and the Company. 10.23(4) Third Amendment to lease agreement dated as of June 25, 1996, between the Company and Centennial Park Associates Limited Partnership III.
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10.24(2) Lease dated May 1995, between CMD Southwest Four and CTi Technologies, Inc., for premises located at 2102 W. Quail Avenue, Phoenix, Arizona. 10.25(3) 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(3) 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(3) 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(3) Lease dated September 25, 1997, between United Building and Leasing Corporation and Well Electronics, Inc. for premises located at 421 Amity Road, Swatara, Pennsylvania. 10.29(2) Registrant's 1992 Stock Option Plan and related forms of stock option agreement. 10.30(2) Registrant's 1996 Stock Plan and superceded forms of stock option agreement. 10.31(2) Registrant's 1996 Eligible Directors Stock Plan and superceded form of stock option agreement. 10.32(5) Form of option agreements for the 1996 Stock Plan. 10.33(5) Form of option agreement for the 1996 Eligible Directors Stock Plan. 10.34(2) April 2, 1985 Stock Purchase Agreement and Amendment to Stock Purchase Agreement dated March 31, 1983. 10.35(3) Collective Bargaining Agreement between Wells Electronics, Inc. and Local Union 1392, International Brotherhood of Electrical Workers, dated February 19, 1997. 10.36(2) Letter of Agreement dated September 18, 1995, between International Assemblers, Inc. and Cti Technologies, Inc. 10.37(3) Letter Agreement with Richard J. Mullin, effective December 26, 1997. 10.38(3) Management Incentive Plan. 10.39(6) Registrant's Employee Stock Purchase Plan. 10.40(6) Form of option agreement for the 1998 Employee Stock Purchase Plan. 10.41(7) First Amendment to Loan Agreement between Fleet National Bank and other lenders dated July 31, 1998. 10.42(7) Second Amendment to Loan Agreement between Fleet National Bank and other lenders dated August 31, 1998. 10.43(8) Third Amendment to Loan Agreement between Fleet National Bank and other lenders dated March 19, 1999. 10.44(8) Fourth Amendment to Loan Agreement between Fleet National Bank and other lenders dated September 29, 1999. 10.45(8) Fifth Amendment to Loan Agreement between Fleet National Bank and other lenders dated March 6, 2000. 10.46(8) Warrant issued to Fleet National Bank and other lenders under the Senior Credit Facility dated March 6, 2000.
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10.47(8) Registration Rights Agreement between Fleet National Bank and other lenders under the Senior Credit Facility dated March 6, 2000. 10.48(8) Executive Separation Benefits Plan effective March 6, 2000. 10.49 Amended 1996 Eligible Directors Stock Plan. 10.50 Amended lease dated January 2000, between 779 Woodlake, LLC and CTI Technologies, Inc. for premises located at 2102 W. Quail Avenue, Phoenix, Arizona. 21.1 Subsidiaries of the Registrant. 23.1 Consent of PricewaterhouseCoopers, LLP. 27.1 Financial Data Schedule. - ----------
(1) 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 as amended on March 11 and 24, 1998 and April 20, 1998 and is incorporated in this document by reference. (2) 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. (3) A copy has been previously filed with the Company's registration statement on form S-1 (Registration no. 333- 46137), as filed on February 12, 1998 and as amended on March 20, 1998 and April 13, 1998 and is incorporated in this document by reference. (4) 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. (5) 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. (6) A copy has been previously filed with the Company's registration statement on Form S-8 (Registration no. 333- 57805), as filed on June 26, 1998, and is incorporated in this document by reference. 55 (7) A copy has been previously filed with the Company's registration statement on Form 10-K (Commission file no. 0-27744), as filed on March 26, 1999, and is incorporated in this document by reference. (8) A copy has been previously filed with the Company's registration statement on Form 10-K (Commission file no. 0-27744), as filed on March 17, 2000, and is incorporated in this document by reference.
Management Contracts and Compensatory Plans 10.29(1) Registrant's 1992 Stock Option Plan and related forms of stock option agreement. 10.30(1) Registrant's 1996 Stock Plan and superceded forms of stock option agreement. 10.31(1) Registrant's 1996 Eligible Directors Stock Plan and superceded form of stock option agreement. 10.32(2) Form of option agreements for the 1996 Stock Plan. 10.33(2) Form of option agreement for the 1996 Eligible Directors Stock Plan. 10.37(3) Letter Agreement with Richard J. Mullin, effective December 26, 1997. 10.38(3) Management Incentive Plan. 10.39(4) Registrant's Employee Stock Purchase Plan. 10.40(4) Form of option agreement for the 1998 Employee Stock Purchase Plan. 10.48(5) Executive Separation Benefits Plan effective March 6, 2000. 10.49 Amended 1996 Eligible Directors Stock Plan. - ----------
(1) 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. (2) 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. (3) A copy has been previously filed with the Company's registration statement on form S-1 (Registration no. 333- 46137), as filed on February 12, 1998 and as amended on March 20, 1998 and April 13, 1998 and is incorporated in this document by reference. 56 (4) A copy has been previously filed with the Company's registration statement on Form S-8 (Registration no. 333- 57805), as filed on June 26, 1998, and is incorporated in this document by reference. (5) A copy has been previously filed with the Company's registration statement on Form 10-K (Commission file no. 0-27744), as filed on March 17, 2000, and is incorporated in this document by reference. (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the fourth quarter of 2000. 57 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PCD INC. Dated: March 9, 2001 By: /s/ John L. Dwight, Jr. ------------------------------ John L. Dwight, Jr. Chairman of the Board, President and Chief Executive Officer. POWER OF ATTTORNEY AND SIGNATURES Each person whose signature appears below hereby authorizes and appoints John L. Dwight, Jr. and John J. Sheehan III, 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 Form 10-K for the fiscal year ended December 31, 2000. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates, indicated. Dated: March 9, 2001 By: /s/ John L. Dwight, Jr. ------------------------------ John L. Dwight, Jr. Chairman of the Board, President and Chief Executive Officer (principal executive officer) Dated: March 9, 2001 /s/ John J. Sheehan III ------------------------------ John J. Sheehan III Vice President - Finance and Administration, Chief Financial Officer, and Treasurer (principal financial and accounting officer) Dated: March 9, 2001 /s/ Jerome D. Brady ------------------------------ Jerome D. Brady Director Dated: March 9, 2001 /s/ John E. Stuart ------------------------------ John E. Stuart Director Dated: March 9, 2001 /s/ James D. Switzer ------------------------------ James D. Switzer Director Dated: March 9, 2001 /s/ Theodore C. York ------------------------------ Theodore C. York Director 58 REPORT OF INDEPENDENT ACCOUNTANTS Report of Independent Accountants on Financial Statement Schedule To the Board of Directors and Shareholders of PCD Inc. Our audits of the consolidated financial statements referred to in our report dated February 5, 2001, appearing in Item 8 in this Form 10-K also included an audit of the financial statement schedule listed in Item 14 (a) (2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 5, 2001 S-1
PCD INC SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS ENDED 2000, 1999 AND 1998 (In Thousands) Additions Balance at Charged to Balance at Beginning of Year Costs & Expenses Deductions End of Year Year ended December 31, 2000, Allowance for doubtful accounts $ 367 $ 33 $ 53(1) $ 347 ======= ====== ======== ======= Year ended December 31, 1999, Allowance for doubtful accounts $ 319 $ 51 $ 3 $ 367 ======= ====== ======== ======= Year ended December 31, 1998, Allowance for doubtful accounts $ 305 $ 14 $ - $ 319 ======= ====== ======== =======
S-2 EXHIBIT 10.49 PCD INC. PCD 1996 ELIGIBLE DIRECTORS STOCK PLAN 1. PURPOSE. The purpose of this plan (the "Plan") is to grant options to purchase shares of the common stock, $0.01 par value (the "Common Stock"), of PCD Inc., a Massachusetts corporation (the "Company") to Eligible Directors (as defined in Section 5 of the Plan) of the Company at market value on the date of grant. The Company believes that the granting of such options will serve to enhance the Company's ability to attract and retain the services of such persons, to provide additional incentives to them and to encourage the highest level of performance by them by offering them a proprietary interest in the Company's success. The Company also believes that the Plan will encourage directors to make greater equity investment in the Company, more closely aligning the interests of the directors and the stockholders. 2. EFFECTIVE DATE. This Plan was adopted by the Board of Directors of the Company (the "Board") on January 30, 1996 (the "effective date" of the Plan). Options granted under this Plan are subject to approval of such Plan by the stockholders of the Company on or before January 29, 1997. 3. STOCK COVERED BY THE PLAN. Subject to the adjustment provided in Section 8, the aggregate number of shares of Common Stock which may be issued and sold pursuant to options granted under the Plan shall not exceed 36,000 shares (giving effect to the 12-for-1 stock split approved by the Board of Directors on January 26, 1996), which may be either authorized but unissued shares or treasury shares. If any option granted under the Plan shall terminate or expire without being fully exercised, the shares which have not been purchased thereunder will again become available for purposes of the Plan. 4. ADMINISTRATION. The Plan is intended to meet the requirements of Rule 16b-3(c)(2)(ii) adopted under the Securities Exchange Act of 1934 (the "Act") with respect to the Regular Options (as defined in Section 5 of the Plan) granted hereunder and accordingly is intended to be self-governing. To this end the Plan requires no discretionary action by any administrative body with regard to any transaction under the Plan. To the extent, if any, that any questions of interpretation arise, these shall be resolved by the compensation committee (the "Committee") consisting of at least two (2) members of the Board, each of whom shall be, and shall have been at all times within the one-year period ending on the date of his appointment to the Committee, a person who in the opinion of counsel to the Company is a "disinterested person" as such term is used in said Rule 16b-3. The interpretation and administration by the Committee of any provisions of the Plan and any option granted thereunder shall be final and conclusive on all persons having any interest therein. No members of the Committee or the Board shall be held liable for any action or determination under the Plan made in good faith with respect to the Plan or any option granted thereunder. 5. OPTION GRANTS. "Eligible Directors" shall mean directors of the Company who are directors on the date of grant, who are not employees of the Company and who are not eligible to participate under any other Company stock related plan unless in the opinion of counsel to the Company such participation would not impair the status of such Eligible Director as a "disinterested person" within the meaning of Rule 16b-3 promulgated under the Act. All options granted under the Plan shall be non-statutory stock options which are not intended to meet the requirements of Section 422 of the Internal Revenue Code of 1986 as amended (the "Code") and which are intended to be taxed under Section 83 of the Code. No options shall be granted under the Plan before the date which is 30 days following the first Annual Meeting of Stockholders of the Company occurring after December 31, 1996. Thereafter, there shall be granted, on such 30th day or, if an Eligible Director is not a director of the Company on such 30th day, on the 30th day following an Eligible Director's initial election as a director of the Company, and on the 30th day following each subsequent Annual Meeting of Stockholders of the Company which occurs no earlier than six months after such initial election: (i) to each Eligible Director who has not theretofore been granted an option to purchase shares of Common Stock, an option to purchase 3,000 shares of Common Stock; and (ii) to each Eligible Director not described in (i), an option to purchase 1,500 shares of Common Stock. Each such option is referred to herein as a "Regular Option." The date of grant of an option to an Eligible Director under the Plan shall be the applicable day referred to immediately above. 6. OPTION PRICE. The price per share at which each Regular Option granted under the Plan to an Eligible Director may be exercised ("Regular Option Price") shall be the Market Price of the Common Stock as determined by the closing price of such Common Stock as reported on the Nasdaq National Market for the relevant date (or, if such date is not a trading date or if no trades took place on such date, then such closing price for the last previous trading date or the last previous date on which a trade occurred, as the case may be); provided that if the Common Stock is no longer traded on the Nasdaq National Market on the relevant date, then the Market Price as of such date shall be determined by the Committee. In no event shall the Option Price per share for any option under the Plan be less than the par value per share. 7. TERMS AND CONDITIONS OF OPTIONS. Each option granted under the Plan shall be evidenced by and subject to the terms and conditions of an Option Agreement attached hereto as EXHIBIT A. Each Option Agreement executed and delivered to an Eligible Director shall contain the following terms and conditions: (a) EXERCISE OF OPTIONS. Each option shall expire 10 years from the date of grant of such option, and shall in no event be exercisable until on or after the date which is 6 months after the date of grant thereof. (b) PAYMENT. Each Eligible Director to whom an option is granted may exercise such option from time to time, in whole or in part, during the period that it is exercisable, by payment of the Option Price of each share purchased, in cash, or by delivery to the Company of a number of shares of Common Stock (provided that such shares have been held by such Eligible Director for at least 6 months before such delivery) having an aggregate Market Price of not less than the product of the Option Price multiplied by the number of shares the participant intends to purchase upon exercise of the option on the date of delivery. Notwithstanding the foregoing, the exercise price of an option may not be paid by delivery to the Company of shares of Common Stock to the extent that such delivery would constitute a violation of the provisions of any law (including without limitation Section 16 of the Act) or related regulation or rule. (c) TRANSFER RESTRICTIONS. The shares of Common Stock issued upon exercise of an option granted under this Plan will be acquired for investment and not with a view to distribution thereof unless there shall be an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), with respect thereto. In the event that the Company, upon the advice of counsel, deems it necessary to list upon official notice of issuance shares to be issued pursuant to the Plan on a national securities exchange or to register under the 1933 Act or other applicable federal or state statute any shares to be issued pursuant to the Plan, or to qualify any such shares for exemption from the registration requirements of the 1933 Act under the Rules and Regulations of the Securities and Exchange Commission or for similar exemption under state law, then the Company shall notify each Eligible Director to that effect and no shares of Common Stock subject to an option shall be issued until such registration, listing or exemption has been obtained. The Company shall make prompt application for any such registration, listing or exemption pursuant to federal or state law or rules of such securities exchange which it deems necessary and shall make reasonable efforts to cause such registration, listing or exemption to become and remain effective. The shares of Common Stock issued on exercise of the option shall be subject to any restrictions on transfer then in effect pursuant to the Articles of Organization or By-laws of the Company. (d) NON-TRANSFERABILITY. No stock option may be transferred by the optionee, other than by will or the laws of descent and distribution. A stock option can be exercised during such individual's lifetime only by him or her. (e) TERMINATION OF DIRECTORSHIP. Nothing in this Plan or in any Option Agreement shall confer upon any Eligible Director the right to continue as a director of the Company. An Eligible Director's right to participate in the Plan shall automatically terminate if and when such Director becomes an employee of the Company. Each Option shall terminate and may no longer be exercised if the Eligible Director ceases to provide services to the Company in accordance with the following provisions: (i) Options granted to an Eligible Director shall cease to be exercisable 12 months after the date such Director ceases to be a director for any reason other than death, but in no event after the expiration of the option. (ii) If an Eligible Director ceases to be a director on account of his death, any option previously granted to him, whether or not exercisable at the date of death, may be exercised by his executor, administrator or the person or persons to whom his rights under the option shall pass by will or the applicable laws of descent and distribution, at any time within 12 months after the date of death, but in no event after the expiration of the option. 8. ADJUSTMENTS. Upon the occurrence of any of the following events, after the effective date of the 12-for-1 stock split referred to in Section 3, an Eligible Director's rights with respect to options granted to such Eligible Director hereunder shall be adjusted as hereinafter provided, unless otherwise specifically provided in the written agreement between the Eligible Director and the Company relating to such option: (a) STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of options shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. (b) CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated with or acquired by another entity in a merger or other reorganization in which the holders of the outstanding voting stock of the Company immediately preceding the consummation of such event, shall, immediately following such event, hold, as a group, less than a majority of the voting securities of the surviving or successor entity, or in the event of a sale of all or substantially all of the Company's assets or otherwise (each, an "Acquisition"), the Committee or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board"), shall, as to outstanding options, either (i) make appropriate provision for the continuation of such options by substituting on an equitable basis for the shares then subject to such options either (a) the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition, (b) shares of stock of the surviving or successor corporation or (c) such other securities as the Successor Board deems appropriate, the fair market value of which shall not materially exceed the fair market value of the shares of Common Stock subject to such options immediately preceding the Acquisition; or (ii) upon written notice to the Eligible Directors, provide that all options must be exercised, to the extent then exercisable or to be exercisable as a result of the Acquisition, within a specified number of days of the date of such notice, at the end of which period the options shall terminate; or (iii) terminate all options in exchange for a cash payment equal to the excess of the fair market value of the shares subject to such options (to the extent then exercisable or to be exercisable as a result of the Acquisition) over the exercise price thereof. (c) RECAPITALIZATION OR REORGANIZATION. In the event of a recapitalization or reorganization of the Company (other than a transaction described in subparagraph (b) above) pursuant to which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, an Eligible Director upon exercising an option shall be entitled to receive for the purchase price paid upon such exercise the securities he or she would have received if he or she had exercised such option prior to such recapitalization or reorganization. (d) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, each option will terminate immediately prior to the consummation of such proposed action or at such other time and subject to such other conditions as shall be determined by the Committee. (e) ISSUANCES OF SECURITIES. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to options. No adjustments shall be made for dividends paid in cash or in property other than securities of the Company. (f) FRACTIONAL SHARES. No fractional shares shall be issued under the Plan and the Eligible Director shall receive from the Company cash in lieu of such fractional shares. 9. TERMINATION OR AMENDMENT OF PLAN. The Committee may amend, suspend, or terminate the Plan, including the form of Option Agreement incorporated herein by reference. No such action, however, may, without approval or ratification by the stockholders, increase the maximum number of shares reserved under the Plan except as provided in Section 8, alter the class or classes or individuals eligible for options, change the number of shares of Common Stock subject to options to be granted to Eligible Directors or the exercise price thereof (other than pursuant to Section 8), or the date of grant or the terms and conditions expressly set forth in Sections 5, 6, and 7 of this Plan, or make any other change which, pursuant to the Code or regulations thereunder or Section 16(b) of the Act and the rules and regulations promulgated thereunder, requires action by the stockholders. No such action may, without the consent of the holder of the option, alter or impair any option previously granted. No such action which would amend the Plan to change the amount, timing or price of the Regular Option grant made to Eligible Directors hereof may be made more often than once every six months except to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the applicable rules and regulations thereunder. In any event, the Plan shall terminate 10 years from the date of adoption by the Board of Directors, or if earlier, from the date of approval by the stockholders. Any shares remaining under the Plan at the time of termination which are not subject to outstanding options and any shares which thereafter become available because of the expiration or termination of an option shall cease to be reserved for purposes of the Plan. EXHIBIT 10.50 SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE ("Second Amendment") is made on this 9th day of January, 2000 between the 799 Woodlake, LLC ("Landlord") and CTI Technologies, Inc., an Arizona Corporation, ("Tenant"). A. Landlord and Tenant previously entered previously entered into that certain Lease dated 18th day of May, 1995 ("LEASE"), for the lease of certain premises ("DEMISED PREMISES") consisting of approximately 24,158 square feet and commonly known as Suite I within the building ("Building") located at 2102 West Quail Road, Phoenix, Arizona 85027 according to the terms thereof Please note the suite number listed in original lease is incorrect. THE CORRECT SUITE NUMBER FOR THIS SUITE IS 2 AND IS REFERRED TO CORRECTLY IN THIS DOCUMENT B. Landlord and Tenant desire to modify the term of the Lease, and the square footage, all subject to the terms and conditions set forth herein. In consideration of the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. DEFINITIONS. All of the terms used in this Second Amendment shall have the same meanings as set forth in the Lease, except to the extent expressly set forth herein. 2. Sec. 201. TERM. SECTION 2.01 of the Lease is amended to extend the term of the lease through December 31, 2010, which shall now be the Termination Date thereunder. 3. RENT. Monthly Net Basic Rent pursuant to Section 301 of the Lease shall be as follows for the balance of the Term as so extended. MONTHLY NET BASIC RENT FOR ORIGINAL PREMISES 12/1/00 to 11/30/03 - Suite #2, approximately 24,158 sf December 1, 2000 - November 30, 2001 $10,001.41 + CAM + Taxes December 1, 2001 - November 30, 2002 $10,194.68 + CAM + Taxes December 1, 2002 - November 30, 2003 $1O,194.68 + CAM + Taxes MONTHLY NET BASIC RENT FOR ADDITIONAL SPACE 1/l/01 to 12/31/03 - Suite #2A, approximately 4,671 sf January 1, 2001 - December 31, 2001 $3,033.96 + CAM + Taxes January 1, 2002 - December 31, 2002 $3,073.19 + CAM + Taxes January 1, 2003 - December 31, 2003 $3,113.36 + CAM + Taxes MONTHY NET BASIC RENT FOR BOTH SPACES TOGETHER 1/1/04 to 12/21/10 - Suite 2 and 2a (approximately 28,829 sf) January 1, 2004 - December 31, 2004 $18,446.65 + CAM + Taxes January 1, 2005 - December 31, 2005 $18,936.74 + CAM + Taxes January 1, 2006 - December 31, 2006 $19,464.31 + CAM + Taxes January 1. 2007 - December 31, 2007 $19,994.77 + CAM + Taxes January 1, 2008 - December 31, 2008 $20,542.52 + CAM + Taxes January 1, 2009 - December 31, 2009 $21,107.57 + CAM + Taxes January 1, 2010 - December 31, 2010 $21,689.91 + CAM + Taxes Tenant's proportionate share-of operating and maintenance expenses and taxes (the CAM + Taxes referred to above) shall continue to be calculated in manner set forth in the Lease. 4. CURRENT DEMISED PREMISES. The Demised Premises originally and currently covered by the Lease are confirmed to be those certain premises in Building commonly referred to as Suite 2, consisting of approximately 24,158 square feet. 5. ADDITIONAL SPACE. From and after January 1. 200l, the Demised Premises shall be expanded to include as additional space those certain premises in the Building commonly referred to as Suite 2a, consisting of approximately 4,671 square feet. 6. COMBINED PREMISES. With the expansion effected by the preceding paragraph, from and after January 1, 2001 the Demised Premises under the Lease shall be both Suite 2 and Suite 2A together, consisting of approximately 28,829 square feet. 7. OPTION TO EXPAND INTO PRECISION ROLLER SPACE. Landlord hereby grants Tenant the option to expand into an additional 13,876 square feet in the Building, currently occupied by Precision Roller and commonly known as Suite 1. Precision Roller's current lease expires on July 31, 2005. CTI must provide written notification to the Landlord of CTI'S intention to lease Suite I no later 5:00 PM Mountain Standard Time, January 31, 2005. Lease must be fully executed by both parties by the later of (a) 30 days after Landlord delivers a proposed lease document to Tenant or (b) 5:00 PM Mountain Standard Time February 28, 2005, or option to lease expires. Lease space will be rented at then market rental rates + 3% CPI increase each year plus CAM and Taxes as set forth above and will terminate concurrently with CTI Technologies, Inc.'s existing Lease on December.30, 2010. The parties shall each negotiate in good faith in attempting to conclude such lease. In the event the parties disagree as to what the prevailing market rental rates then are, such dispute shall be resolved in the same manner as set forth in Schedule 4, Section I.2(a)(iii) of the existing Lease (which sets forth a procedure for a similar determination to be made with respect to the term extension option thereunder). 8. OPTION TO EXPAND INTO DESERT X RAY SALES, INC. SPACE. Landlord hereby grants Tenant the option to expand into an additional 7,266 square feet, currently occupied by Desert X Ray Sales, Inc. and commonly known as Suite 3. Desert X Ray's current lease expires on November 30, 2004. CTI must provide written notification to the Landlord of CTI'S intention to lease Suite 3 no later than 5:00 PM Mountain Standard Time, May 31, 2004. Lease must be fully executed by both parties by the later of a) 30 days after Landlord delivers a proposed lease document to Tenant or (b) 5:00 PM Mountain Standard Time June 30, 2004, or option to lease expires. Lease space will be rented at then market rental rates + 3% CPI increase each year plus CAM and Taxes and will terminate concurrently with CTI Technologies, Inc.'s existing lease on December 30, 2010. The parties shall each Negotiate in good faith in attempting to conclude such Lease. In the Event the parties disagree as to what the prevailing market rental rates then are, such dispute will be resolved in the same manner as Set forth in Schedule 4, Section I.2(a)(iii) of the existing Lease (which sets forth a procedure for a similar determination to be made with respect to the term extension option thereunder). 9. ASSISTANCE IN EFFORTS TO BUY OUT DESERT X_RAY. Landlord shall reasonably and diligently assist in a lease buyout of the current tenant, Desert X Ray Sales, Inc. space. Landlord and CTI must agree agree on buyout terms. Should a buyout occur, Landlord will require a Letter of Credit from CTI Technologies, Inc. in an amount equal to the cost of the buyout at the time the option is exercised for the term of the lease. The cost of the buyout will be amortized over the term of the lease with the termination date being December 30, 2010. Amortization will be at the then current market interest rate, not less than 10%, and the rental rate will be at the then current rental rate plus a 3% CPI increase each year plus CAM and Taxes. Any dispute as to the prevailing market rental rate shall be resolved in the same manner set forth in the preceding paragraph. 10. DELIVERY OF SPACE. Landlord shall deliver all additional space to Tenant provided forth in this Amendment free and clear of all other tenants and occupants, and Tenant shall not be obligated to commence paying rent for any such space until Landlord does so. Tenant shall be entitled to inspect all such space before accepting and occupying it, and may reject any space which is significantly damaged, contains any hazardous materials, substances or other pollutants, or has similar serious defects. 11. FULL FORCE AND EFFECT. All of the terms and conditions set forth in the Lease shall remain in full force and effect, except to the extent otherwise expressly set forth in this Second Amendment. 12. CONFLICTS. In the event that any of the provisions of the Lease conflict with any of the terms and provisions of this Second Amendment, the terms and conditions of this Second Amendment shall prevail. 13. TIME IS ESSENCE. Time is of the essence of each and every term of this Agreement. IN WITNESS WHEREOF, said Landlord and Tenant have caused this instrument to be executed by their respective duly authorized officers, all as of the day and year first written above. LANDLORD: 799 Woodlake, LLC BY: Schirmer Management and Development, Inc. Its: Agent By: /s/ Charlie Nickelson 1/9/01 ----------------------------- ------ Charlie Nickelson Date TENANT: CTI Technologies, Inc. By: /s/ Jeffrey Farnsworth 1/9/01 ----------------------------- ------ Jeffrey Farnsworth Date EXHIBIT 21.1 SUBSIDIARIES OF PCD INC. PCD Control Systems Interconnect, Inc., a Massachusetts corporation PCD USVI, Inc., a United States Virgin Islands corporation WELLS-CTI, Inc., an Indiana corporation SUBSIDIARIES OF WELLS-CTI, INC. Wells-CTI Kabushiki Kaisha, 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 EXHIBIT 23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLP We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-07393, 333-07403, 333-07405 and 333-57805) of our report dated February 5, 2001, relating to the financial statements and consolidated financial statement schedule, which appear in this Form 10-K. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 28, 2001 EX-27 2 fds-123100.xfd FDS SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PCD INC.'S FORM 10-K FOR PERIOD ENDED DECEMBER 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY FROM REFERENCE TO SUCH FINANCIAL INFORMATION 1,000 U.S.DOLLARS 12-MOS Jan-01-2000 Dec-31-2000 Dec-31-2000 1 837 0 8,665 347 6,199 16,177 32,116 16,315 109,113 27,111 19,455 0 0 88 62,459 109,113 61,957 61,957 33,490 33,490 17,400 0 4,377 6,437 2,654 3,783 0 0 0 3,783 0.44 0.42
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