-----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, TjattzNv+LHqo++/ymqHKU7iPwaPEPGn4frnsB51O18K4qm1D4OqolU4NRKMjkQL VpKCtEOcgNy6RbGYYYyEaQ== 0000893877-99-000655.txt : 19991018 0000893877-99-000655.hdr.sgml : 19991018 ACCESSION NUMBER: 0000893877-99-000655 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19991013 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRAEGITZER INDUSTRIES INC CENTRAL INDEX KEY: 0001007519 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 930790158 STATE OF INCORPORATION: OR FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27932 FILM NUMBER: 99727804 BUSINESS ADDRESS: STREET 1: 1270 SE MONMOUTH CUT OFF RD CITY: DALLAS STATE: OR ZIP: 97338 BUSINESS PHONE: 5036239273 MAIL ADDRESS: STREET 1: 1270 SE MONMOUTH CUT OFF RD CITY: DALLAS STATE: OR ZIP: 97338 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________ Commission File Number: 0-27932 PRAEGITZER INDUSTRIES, INC. (Exact name of registrant as specified in its charter) OREGON (State or other jurisdiction of 93-0790158 incorporation or organization) (I.R.S. Employer Identification No.) 19801 SW 72nd Avenue Tualatin, Oregon 97062 (503) 454-6000 (Address of principal executive offices) (Registrant's zip code) (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock 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 the 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. ____ The aggregate market value of voting Common Stock held by non-affiliates of the registrant at September 20, 1999 was approximately $21,359,624. For purposes of this calculation, officers and directors are considered affiliates. Number of shares of Common Stock outstanding at September 20, 1999: 13,129,751. Documents Incorporated by Reference Part of Form 10-K Into Which Document Documents are Incorporated Proxy Statement for 1999 Annual Part III Meeting of Shareholders TABLE OF CONTENTS Part I Item 1 Business.......................................................... 1 Item 1(a) Executive Officers of the Registrant.............................. 8 Item 2 Properties........................................................ 9 Item 3 Legal Proceedings................................................. 9 Item 4 Submission of Matters to a Vote of Security Holders............... 9 Part II Item 5 Market for the Registrant's Common Equity and Related Shareholder Matters................................ 10 Item 6 Selected Financial Data........................................... 11 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 12 Item 7(a) Quantitative and Qualitative Disclosure About Market Risk......... 17 Item 8 Financial Statements and Supplementary Data....................... 17 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................... 40 Part III Item 10 Directors and Executive Officers of the Registrant................ 40 Item 11 Executive Compensation............................................ 40 Item 12 Security Ownership of Certain Beneficial Owners and Management.... 40 Item 13 Certain Relationships and Related Transactions.................... 40 Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K... 41 Signatures .................................................................. 43 Forward-Looking Statements The statements concerning working capital needs constitute forward-looking statements that are subject to risks and uncertainties. Factors that could adversely affect the Company's working capital needs include, but are not limited to, business conditions and growth in the electronics industry and general economies, both domestic and international, lower than expected customer orders, risks related to customer cancellation or postponement of orders, competitive factors (including increased competition, new product offerings by competitors and price pressures), the availability of third party parts and supplies at reasonable prices and technological difficulties and resource constraints encountered in developing new products. Additional factors include the economic situation in Asia, the ability to manage and utilize manufacturing capacity, production delays, product mix and yield issues associated with production, the ability to execute financing strategies, and any unanticipated costs associated with risks related to the Year 2000 issue. PART I Item 1. BUSINESS The Company is a leader in providing electronics original equipment manufacturers ("OEMs") and contract manufacturers with a full range of printed circuit board ("PCB") and interconnect solutions, including schematic capture and design, quick-turnaround, prototyping and pre-production, and large volume production. The Company provides its solutions to four key electronics industry segments (with corresponding percentages of Company revenue for the fiscal year ended June 30, 1999): (i) data and telecommunications (40%), (ii) computers and peripherals (32%), (iii) industrial and instrumentation (22%) and (iv) business and consumer (6%). The Company's growth has been driven by sales to industry leaders whose products require increasing complexity and technological advancement within the electronic interconnect industry. The Company has obtained ISO 9002 certifications for all of its manufacturing facilities, ISO 9001 certifications for all of its design centers and has received awards from a number of its customers in recognition of its superior performance in meeting their PCB needs. In fiscal 1999 the Company served more than 650 customers worldwide. Industry Overview PCBs, consisting of interconnected layers of etched copper patterns of electrical circuitry that have been laminated to insulating material, are the basic platforms used to interconnect the integrated circuits and other essential components of electronic products. The Company primarily focuses on the multilayer PCB market, which accounted for approximately 79.6% and 76.1% of U.S. PCB sales in 1998 and 1997, respectively, according to the Institute for Interconnecting Packaging Electronic Circuits ("IPC"). The overall market for electronic products has grown steadily over the past 20 years as end users increasingly seek products with attractive price/performance characteristics and as technological advances have created new markets. To compete in the broader electronics market, OEMs require product components with increased functionality at lower cost per function. The interconnect densities, signal speeds and layer counts of PCBs have increased to meet these requirements. Many of these increasingly complex PCBs are manufactured using a variety of complex processes and equipment, further complicating the production process. Furthermore, competitive pressures and rapid technological change have shortened product life cycles. As a result, time-to-market and time-to-volume have become increasingly important competitive factors. 1 To compete in the market for increasingly complex and technologically advanced PCBs and to meet shorter time-to-market and time-to-volume requirements, PCB manufacturers must make substantial capital investments and develop greater manufacturing specialization and expertise. These factors have resulted in two trends in the PCB industry. First, as capital requirements have increased, the industry has consolidated. According to IPC, the number of United States PCB manufacturers has decreased from over 2,500 in 1976 to fewer than 700 in 1998. Second, OEMs have increased the outsourcing of PCB production to focus resources on their core strengths and have relied on outside suppliers to overcome increasingly complex manufacturing challenges. According to IPC, the independent manufacturers' portion of the total PCB market increased to 95% in 1998 from 66% in 1991. IPC estimates that in 1998 the ten largest independent manufacturers accounted for about 44% of total PCB sales in the United States by independent manufacturers. PCB Design and Production Process The creation of PCBs progresses in stages: (1) initial design and simulation, (2) schematic capture and circuit design, (3) quick-turnaround, prototype and pre-production, and (4) volume production. 1. INITIAL DESIGN. Initial design is performed by the OEMs and encompasses the process of idea formation, conceptual analysis, engineering design (including specifications and features), functional simulation and simulation of the processed layout of a PCB. 2. SIMULATION. Simulation of proposed locations of holes and conductors (the "layout") provides information regarding potential layout problems to the initial design engineer and creates revised design guidelines for the schematic capture and circuit design technicians. Due to the increasing number of high-speed devices being used on PCBs, physical layout guidelines must be tailored to each particular design to resolve problems regarding circuit timing, signal-integrity and electromagnetic interference ("EMI"). These problems, if not resolved in up-front board layout design, can result in low manufacturing yields and inconsistent product performance that can increase time and cost to market for OEMs. Up-front simulation by knowledgeable professionals using computer aided design ("CAD") simulation tools is required to model and resolve problematic issues prior to manufacturing. 3. SCHEMATIC CAPTURE AND CIRCUIT DESIGN. Schematic capture involves the input of an electronic schematic diagram into a high-performance computer workstation that generates a list of the electronic components and interconnects required to design a PCB. Circuit design is accomplished using specialized CAD software programs. Computer-generated data describe the layout which, along with manufacturing information, may be transmitted electronically from the designer to the manufacturer. When transmitting data to its internal manufacturing organizations, the Company typically uses specialized computer aided manufacturing ("CAM") software prior to sending the data to ensure design for manufacturability ("DFM") and to help speed the quick-turnaround process. Historically, circuit design was the step in the PCB production process least likely to be outsourced by OEMs. As PCB related design-for-manufacture challenges become more complex, however, more OEMs are relying on outside resources for these services. 4. QUICK-TURNAROUND, PROTOTYPE AND PRE-PRODUCTION. Quick-turnaround is characterized by shorter than standard lead time requirements, typically one to 10 days, and involves producing a small quantity, usually fewer than 50 PCBs. Prototype evaluation is critical to product development and frequently requires several iterations to finalize the design. Because time is critical, most prototypes are manufactured on a quick-turnaround basis. Consequently, high quality and timely delivery generally are the most important competitive factors for the quick-turnaround market. Pre-production runs involve the manufacture of limited quantities of PCBs during the transition from prototype to volume production. Pre-production may require quick-turnaround delivery because of overall time-to-market pressures and shorter product life cycles or as a temporary solution in the event of volume production delay. Accordingly, high quality and timely delivery continue to be the factors most important to the OEM or contract manufacturer, although price is also a significant factor. Many OEMs take advantage of a PCB 2 manufacturer's quick-turnaround capability, even when circuit design or volume production is done in-house or by other PCB manufacturers. PCB manufacturers use quick-turnaround capabilities to build relationships with OEMs, thereby developing additional OEM design and volume production business. 5. VOLUME PRODUCTION. Volume production is characterized by longer lead times and increased emphasis on lower cost as the product moves to full-scale commercial production. At this stage of production, price, quality, on-time delivery and process capability are the factors most important to the OEM or contract manufacturer. As product life cycles grow shorter, the ability to meet shorter lead time requirements becomes an increasingly significant competitive factor. Each stage of the PCB creation process requires substantially different capabilities and as a result most companies specialize in only one stage. Consequently, OEMs and contract manufacturers typically use different suppliers at each stage, which requires costly and time-consuming duplicative tooling and pre-production engineering. Accordingly, many OEMs and contract manufacturers are establishing strategic relationships with fewer suppliers such as the Company that provide a full range of services. The Praegitzer Approach The Company provides a full range of PCB and electronic interconnect solutions that meet the growing technological demands of electronics OEMs and contract manufacturers. The Company provides design services, quick-turnaround, prototyping, pre-production and volume production of PCBs to its customers using integrated processes that allow shorter time-to-market and time-to-manufacture at a lower cost of manufacturing. The Company seeks to expand its supplier relationships with electronics OEMs because these customers have the greatest incentive to fully exploit the advantages provided by the Company's integrated design and fabrication of complex PCBs. By working with high-end customers, the Company can influence the design of customers' PCBs, optimize performance, minimize production costs and shorten development and production time. Markets The Company concentrates on the broad electronics market, which is characterized by high growth, rapid technological advances, short product development cycles and accelerated time-to-market and time-to-volume requirements. In response to this market's broadening requirements, the Company became a complete solution provider and expanded its design, quick-turnaround and production volume capabilities. The Company's principal customers are electronics OEMs and contract manufacturers in four vertical markets--(i) computers and peripherals, (ii) data communications and telecommunications, (iii) instrumentation and industrial, and (iv) business and consumer. Computers and Peripherals. The computer and peripheral market accounted for approximately $70.4 million, or 32%, of the Company's 1999 revenue. The most significant component of growth in this market is unit sales of computers. Since fiscal 1996, Company sales to this sector have increased at a compound annual rate of 50%. Future drivers of growth in this area include (i) growth in the personal computer (PC) market, (ii) emerging global markets and (iii) rapid advancement of technology. Data Communications and Telecommunications. The data communications and telecommunications market accounted for approximately $86.3 million, or 40%, of the Company's fiscal 1999 revenue. Products incorporating the Company's PCBs include portable communication devices such as cellular telephones, microwave relays, telecommunications and telephone switching equipment, and mobile radios. Since fiscal 1996, Company sales to this sector have increased at a compound annual rate of 40%. Future drivers of growth in this area include (i) heavy demand expected for portable communication devices, (ii) infrastructure build-out in the telecommunications industry, and (iii) rapid pace of new product introductions. 3 Instrumentation and Industrial. The instrumentation and industrial market accounted for approximately $47.4 million, or 22%, of the Company's 1999 revenue. Products incorporating the Company's circuit boards include machine and process controls, sensors, test and measurement equipment and medical instruments. Demand is expected to increase as the use of electronic measuring equipment and medical technologies such as magnetic resonance imaging (MRIs) and laser surgery continues to increase. Since fiscal 1996, Company sales to this sector have increased at a compound annual rate of 13%. Future drivers of growth in this area include (i) increasing capital expenditures by OEMs, (ii) improvements in technology, (iii) increasing research and development budgets, and (iv) emerging global healthcare markets. Business and Consumer. The business and consumer market accounted for approximately $13.6 million, or 6%, of the Company's 1999 revenue. Products incorporating the Company's circuit boards include copy machines, inventory tracking systems and cash registers. Demand has been driven by a number of factors, the most significant of which is the expanding consumer market for electronics. Since fiscal 1996, Company sales to this sector have increased at a compound annual rate of 13%. Future drivers of growth in this area include (i) increasing demand for complex consumer electronics and (ii) continued investment by companies in modern business systems. Manufacturing and Engineering Processes and Quality Assurance The Company believes its substantial capital investment and manufacturing expertise in a number of specialized areas have contributed to its position as one of the leaders in the production of complex, rigid multilayer PCBs. The Company's complete solution strategy, incorporating design, quick-turnaround and prototyping, and volume production requires periodic upgrades of the Company's capabilities and resources. The Company believes that its design capabilities are facilitated by tools focused on DFM and CAM systems. These systems take full advantage of the Company's materials technologies, including the ability to use materials as thin as .0015 inches, alternative surface finishes, electroless nickel/immersion gold, selective gold plate and OSP (organic surface protection). The Company also uses specialty materials such as GETEK(R), OHMEGA-PLY(R), cyanate ester and polyimide for high temperature, fast signal speed and other high-performance requirements. The Company's substantial investment in its modern prototyping and volume production facilities and state-of-the-art equipment permits high-yield fabrication of complex PCBs. The Company can produce PCBs with more than 20 layers incorporating blind vias, buried vias, laser microvias and buried resistors and capacitance. Most vias (holes drilled in the PCBs to facilitate electronic interconnects) are made with computer-controlled drills, with tolerances as small as .004 inches. The performance of a PCB is highly sensitive to quality standards. In recognition of the need for quality, the Company has obtained ISO 9002 certifications for all of its manufacturing facilities and ISO 9001 certification for all of its design centers. Certain of the Company's manufacturing facilities also are Bellcore compliant. The Company's fine-line circuitry is produced within the Company's Class 10,000 clean room environment, and completed PCBs are subject to rigorous automated optical inspection, dual-side simultaneous testing, flying probe technology and a variety of customized test fixtures that have been designed and produced by the Company. Sales and Marketing The Company's sales organization emphasizes the Company's solution strategy. The Company has sales personnel located in Alabama, Arizona, California, Florida, Georgia, Illinois, Israel, Malaysia, Massachusetts, Minnesota, New Hampshire, Oregon, Scotland, Singapore, Texas and Washington, locations that are in close proximity to many of the Company's existing and potential customers. The 4 Company's sales organization consists of a senior vice president of sales and marketing, a vice president of customer service, 6 regional managers, 22 account executives and one global account manager. Each division of the Company also has an experienced inside sales and customer service organization to support its outside sales personnel and to promote customer relationships. The Company engages in a number of marketing activities to enhance awareness of its broad range of products and services. In addition to paid advertisements and promotional items, the marketing efforts include business and technical editorials for industry publications, participation in trade shows and industry conferences, customer newsletters and satisfaction surveys as well as scheduled press releases. Materials and Supplies The Company orders certain materials and supplies based on purchase orders received and seeks to minimize its inventory of other materials that are not identified for use in filling specific orders. Although the Company uses a select group of suppliers, the materials necessary to manufacture PCBs are generally available from multiple suppliers. To enhance its relationships with suppliers, in 1991 the Company implemented a "STAR Supplier" program to improve key supplier performance by measuring product quality, on-time delivery, technological support, sales support and other criteria. The Company believes it has realized significant benefits from the program, including lower costs of materials. The Company has established strategic relationships and stocking programs with certain key vendors and negotiated price discounts based on the volume of the Company's purchases. For example, certain laminate suppliers operate warehouses near the Company and are beginning to work directly from the Company's materials requirement projections to better meet the Company's needs. The Company also uses suppliers' technical support and engineering capabilities. For example, several proprietary chemistry and equipment vendors have provided personnel to work full-time within the Company's facilities. Management Information Systems The Company uses its management information systems to shorten turnaround times for customer orders, increase output, improve inventory management, and reduce costs by allowing the Company to more efficiently manage and control the PCB production process. The Company has developed information systems that integrate key management data to facilitate operations under its complete solution strategy. The Company uses both internally developed and third party software, with applications for manufacturing and shop floor control, DFM analysis, quality assurance, CAD/CAM, human resources, and finance and accounting. In fiscal 1999, the Company substantially completed Phase I of a rapid multiphase rollout of the SAP R/3 enterprise resource planning software solution ("Phase I"). Costs associated with Phase I were approximately $5.6 million in fiscal 1999. Phase I integrated the Company's financial and accounting systems as well as provided manufacturing, sales order entry and materials management for the Fremont facility and all the design centers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Compliance." The Company anticipates utilizing the SAP R/3 system to shorten turnaround times for customer orders, increase output, improve inventory management and reduce costs by eliminating duplication of work and reducing errors in ordering of parts. The fully installed system will consist of a material resources planning module, a shop floor control module, an inventory control and parts tracing module and a general accounting module. 5 Competition The PCB industry is highly fragmented and characterized by intense competition, which the Company believes will increase. The Company's competitors include large domestic manufacturers, offshore manufacturers located primarily in Asia, small or regional domestic manufacturers and captive PCB operations of larger OEMs. The principal competitors of the Company include Nanya (Taiwan), Compeq (Taiwan and North America), Hadco (North America and Malaysia) and Viasystems (North America and Europe). The Company believes the primary competitive factors in the market for complex, rigid multilayer printed circuit boards are product quality, responsiveness to customers, on-time delivery, lead time, volume production capabilities, advanced manufacturing technology, engineering skills and price. The Company believes its primary competitive strengths stem from its solutions offerings, including its ability to provide technologically advanced manufacturing services, respond to customers reliably and effectively and deliver finished products on a quick-turnaround through high volume basis while maintaining superior product quality. Backlog The Company's backlog at June 30, 1999 was approximately $22.9 million, compared to a backlog of approximately $23.4 million at June 30, 1998. The Company includes in its backlog all purchase orders scheduled for delivery within the next 12 months, although the majority of the backlog typically is scheduled for delivery within 60 days. There are no orders in the Company's backlog that it does not reasonably expect to have filled by June 30, 2000. For a variety of reasons, including timing of orders and shipments, delivery intervals, customer and product mix and the possibility of customer changes in delivery schedules, backlog as of any particular date may not be a reliable measure of sales for any succeeding period. Cancellation charges generally vary depending upon the time of cancellation and, therefore, the Company's backlog may be subject to cancellation without significant penalty to the customer. Environmental Matters The Company is subject to environmental laws relating to the storage, use and disposal of chemicals, solid waste and other hazardous materials, as well as air quality regulations. Water used in the manufacturing process must be treated to remove metal particles and other contaminates before it can be discharged into the municipal sanitary sewer system. The Company operates and maintains effluent water treatment systems and uses approved laboratory testing procedures at its manufacturing facilities. The Company operates these systems under effluent discharge permits issued by a number of governmental authorities. These permits must be renewed periodically and are subject to revocation in the event of violations of environmental laws. See "Risk Factors--Environmental Matters." The Company believes its activities and facilities are in compliance with applicable environmental laws in all material respects. The Company eliminated all ozone depleting compounds from its manufacturing processes in December 1993. In 1993 the Company was also recognized by the United Nations as an environmentally conscious manufacturer. In 1994 the Environmental Protection Agency recognized the Company for its participation in the 33/50 Program, a voluntary initiative aimed at reducing emissions and disposals of toxic substances. Insurance The Company maintains insurance against property damage (including business interruption) and against product liability claims in amounts that the Company believes to be adequate. There is no assurance that such coverages will continue to be available in the amounts desired or on terms acceptable to the Company, or that these coverages will be adequate for losses or liabilities actually incurred. Any 6 uninsured or underinsured loss suffered by, or claim brought against, the Company, or any claim or product recall that results in significant cost to or adverse publicity against the Company, could have a material adverse effect on the Company. Employees At June 30, 1999, the Company had approximately 1,700 employees. None of the Company's employees are represented by a labor union, and the Company has never experienced a work stoppage, slowdown or strike. The Company believes it maintains good employee relations. 7 Item 1A. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth, as of August 31, 1999, executive officers of the Company. Name Age Position - ---- --- -------- Robert L. Praegitzer 68 Chief Executive Officer and Chairman of the Board Matthew J. Bergeron 36 President, Chief Operating Officer and Director Robert J. Versiackas 50 Senior Vice President of Operations James M. Buchanan 52 Senior Vice President of Sales and Marketing Gregory L. Lucas 54 Senior Vice President of Technology Robert G. Schmelzer 48 Senior Vice President of Administration ROBERT L. PRAEGITZER founded the Company in 1981 and has been its Chief Executive Officer and Chairman of the Board since that time and was the President since that time until January 1998. He was also the founder and President of Praegitzer Design, Inc. which merged into the Company in 1995, and Praegitzer Property Group, the assets of which were acquired by the Company in 1996. MATTHEW J. BERGERON joined the Company in 1990 as Chief Financial Officer. He became Senior Vice President in 1993, a director in November 1995, the Executive Vice President and Chief Operating Officer in April 1997 and President and Chief Operating Officer in January 1998. Prior to joining the Company, Mr. Bergeron was an accountant at Johnson & Shute P.S., a public accounting firm. ROBERT J. VERSIACKAS joined Trend in 1990 as Vice President of Operations and upon the merger of Trend into the Company in August 1996 was appointed Vice President of Operations - Fremont Division. In February 1997 Mr. Versiackas became Senior Vice President of Operations. JAMES M. BUCHANAN joined the Company as Senior Vice President of Sales and Marketing in April 1998. Prior to joining the Company, Mr. Buchanan served as Vice President of Sales for Zycon Corporation from 1984 until January 1997, Vice President of Sales for Hadco Corporation from January 1997 until August 1997 and Senior Vice President of Sales for Continental Circuits from August 1997 until April 1998. GREGORY L. LUCAS joined the Company in June 1997 as Senior Vice President of Technology. Prior to joining the Company, Mr. Lucas had been Vice President of Technology for Zycon Corporation since 1991. Mr. Lucas holds several patents primarily in the field of buried passive components. ROBERT G. SCHMELZER joined the Company in 1997 as Vice President of Human Resources. He became Senior Vice President of Administration in March of 1999. Prior to joining the Company, Mr. Schmelzer served as Vice President of Human Resources with Penwest, Ltd. and Penford Products Company from 1993 to 1997 and held a senior Human Resources position with Air Products and Chemicals, Inc. from 1985 to 1993. 8 Item 2. PROPERTIES The Company's principal properties are as follows: Ownership Square Location Purpose Status Feet -------- ------- --------- ----- Dallas, Oregon Volume production Owned 130,000 White City, Oregon Volume production Owned 105,000 Fremont, California Quick-turnaround Leased 60,000 - ------------------- The Dallas and White City manufacturing facilities specialize in medium to high volume production of complex, rigid multilayer PCBs, and the Fremont facility specializes in quick-turnaround prototype production. The Company also has 11 design centers worldwide, 9 in the U.S., one in Israel and one in Scotland. The Fremont facility is subject to a monthly lease cost of approximately $54,500, which expires in 2009. Item 3. LEGAL PROCEEDINGS On June 4, 1999, Intergraph Corporation filed a complaint in the Northern District of Alabama United States District Court against the Company and seeks a declaratory judgment that Intergraph is not in default under a 1998 Purchase Agreement. Intergraph also claims that printed circuit boards purchased from Praegitzer were defective and not timely delivered. Intergraph claims damages in excess of $75,000. The Company has counterclaimed, seeking damages of approximately $25 million as a result of what the Company believes to have been inaccurate information provided by Intergraph in connection with the sale of the Huntsville, Alabama facility. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended June 30, 1999. 9 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock is listed for trading on the Nasdaq National Market under the symbol "PGTZ". The following table sets forth for the periods indicated the highest and lowest closing sales prices for the Common Stock, as reported by the Nasdaq National market. Fiscal 1998 First quarter $14.938 $10.50 Second quarter $15.000 $9.250 Third quarter $11.125 $8.500 Fourth quarter $9.438 $5.469 Fiscal 1999 First quarter $9.000 $5.500 Second quarter $9.500 $6.375 Third quarter $8.750 $4.500 Fourth quarter $6.063 $4.625 As of September 20, 1999, there were approximately 1,424 shareholders of record, and the last per share sales price of the Common Stock on that date was $4.625. On February 18, 1999, the Company sold to Matthew Bergeron, the Company's President and Chief Operating Officer, 100,000 shares of the Company's common stock for $520,350, which must be paid, without interest, on or before January 1, 2006. This transaction is exempt from registration under Rule 506 of the Securities Act. As of May 7,1999, the Company issued 99,998 shares of Common Stock in a private placement exempt from registration under Rule 903 of the Securities Act to the shareholders of Intracon Design Limited of Scotland, U.K. as consideration for the merger of Intracon Design Limited with and into the Company. The Company has not declared any cash dividends in the past two fiscal years. The Company expects to retain any earnings to finance the expansion and development of its business and has no plans to declare cash dividends and would be required to receive written consent of its primary lender in order to declare any dividends. The payment of dividends is within the discretion of the Company's Board of Directors and will depend on the earnings, capital requirements and operating and financial condition of the Company, among other factors. 10 Item 6. SELECTED FINANCIAL DATA Year Ended June 30, ------------------------------------------------------------------ 1999 1998 1997 1996 1995 ------------------------------------------------------------------ Statement of Income Data: (in thousands, except per share data) Revenue $ 217,665 $ 182,773 $ 147,947 $ 95,101 $ 58,096 Cost of goods sold 191,172 148,487 122,013 72,941 48,343 Gross Profit 26,493 34,286 25,934 22,160 9,753 Selling, general and administrative expenses 29,046 23,456 19,188 8,896 6,406 Restructuring expense 29,818 -- -- -- -- Impairment and in-process technology expense -- -- 11,650 -- -- Income (loss) from operations (32,370) 10,830 (4,904) 13,264 3,347 Interest expense 5,848 3,757 2,295 1,799 1,563 Income (loss) from continuing operations before income taxes (36,437) 7,297 (6,631) 11,767 1,876 Provision (benefit) for income taxes (10,898) 2,215 1,670 4,472(1) 691(1) Income (loss) from continuing operations (25,539) 5,082 (8,301) 7,295(1) 1,185(1) Net income (loss) $(25,539) $ 5,082 $(8,301) 6,916(1) 1,185(1) Net income (loss) per share - basic and diluted $ (1.97) $ 0.40 $ (0.68) $ 0.76(1) $ 0.13(1) Weighted average number of shares outstanding 12,973 12,694 12,234 9,070 8,824 - - basic Weighted average number of shares outstanding 12,973 12,846 12,234 9,110 8,824 - - diluted Balance Sheet Data: June 30, ------------------------------------------------------------------ 1999 1998 1997 1996 1995 ------------------------------------------------------------------ Working capital $ 18,794 $ 19,297 $ 17,031 $ 10,743 $ (1,897) Inventories 16,652 16,491 8,534 6,212 4,002 Total assets 143,897 151,494 87,286 52,836 30,352 Notes payable and current portion of long-term 6,438 6,394 3,565 871 1,302 obligations Long-term obligations, net of current portion 73,216 73,413 29,785 7,695 10,188 Shareholders' equity 19,352 43,980 37,641 34,641 5,699
- ------------------------------------------------ (1) The Company was an S corporation prior to April 1996 and accordingly was not subject to federal and state income taxes prior to April 1996. For this portion of the year presented, income tax expense, net income and net income per share are shown pro forma. Pro forma amounts reflect federal and state income taxes as if the Company had been a C corporation based on the effective tax rates that would have been in effect during these periods. 11 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company is a leading provider of a full range of PCB and interconnect solutions, including schematic capture and design, quick-turnaround, prototyping and pre-production, and large volume production to electronics OEMs and contract manufacturers. The Company provides its solutions to four key electronics industry segments (with corresponding percentages of Company revenue for fiscal 1999): (i) data and telecommunications (40%), (ii) computers and peripherals (32%), (iii) industrial and instrumentation (22%) and (iv) business and consumer (6%). The majority of customers are based in the United States. During the years ended June 30, 1999, 1998, and 1997, sales to international customers represented 9.0%, 2.1%, and 2.6% of total revenue, respectively. The only significant long-lived assets the Company holds outside the United States are in Melaka, Malaysia and are held for sale as disclosed in the financial statements. In 1997, the Company implemented its complete solutions offering to provide its customers with advanced technology and integrated manufacturing capabilities for the entire cycle of PCB creation. As part of that implementation the Company has made a number of strategic acquisitions. In November 1995 the Company acquired Circuit Technology, Inc. ("CTI") to increase its prototype production capability. In August 1996 the Company acquired Trend Circuits ("Trend") (now its Fremont facility) to increase its quick-turnaround capability. In March 1998 the Company acquired its Huntsville facility to increase its pre-production capability. In the last three years, Praegitzer also acquired or opened 11 design centers: 9 in the United States, one in Israel and one in Scotland. In 1999, the Company restructured its operations to reflect a general decline in customer demand, which caused pricing and margin pressure in the PCB industry, along with the unprofitable results of its facilities in Huntsville and Malaysia. The Company closed its Redmond, Washington facility when it consolidated its West Coast quick-turn facilities into the Company's Fremont, California facility, closed its Huntsville, Alabama facility, adjusted Malaysia's net assets to net realizable value in conjunction with the Company's intent to divest its controlling interest in its Malaysian facility, and eliminated 114 overhead positions primarily in its selling, general and administrative areas. See Note 7 to the consolidated financial statements. The Company will concentrate on manufacturing operations in the United States and will continue to grow through existing operations. Praegitzer intends to focus on upscale technology product manufactured in the United States, the quick-turnaround market and high-end design and engineering services. The Company attributes its revenue growth since 1995, in part, to its complete solutions offering, which is intended to provide the full spectrum of PCB services, from initial design, schematic capture and layout to prototype fabrication and full-volume production. By providing extensive design and engineering services, the Company has been able to attract additional quick-turnaround and high volume production business. 12 Results of Operations The following table sets forth certain financial data for the Company for the periods indicated as a percentage of revenue. Years Ended June 30, -------------------------------------------- 1999 1998 1997 ------------- ------------- ------------ Revenue 100.0% 100.0% 100.0% Cost of goods sold 87.8 81.2 82.5 ------------- ------------- ------------ Gross profit 12.2 18.8 17.5 Selling, general & administrative expense 13.3 12.8 12.9 Restructuring expense 13.7 - - Impairment and in-process technology expense - - 7.9 ------------- ------------- ------------ Income (loss) from operations (14.8) 6.0 (3.3) Interest expense 2.7 2.1 1.6 Minority interest 0.8 0.0 - Other income 0.0 0.1 0.4 ------------- ------------- ------------ Income (loss) from operations (16.7) 4.0 (4.5) Provision (benefit) for income taxes (5.0) 1.2 1.1 ------------- ------------- ------------ Net income (loss) (11.7)% 2.8% (5.6)% ============= ============= ============
- --------------- Year Ended June 30, 1999 ("fiscal 1999") Compared to Year Ended June 30, 1998 ("fiscal 1998") Revenue. Revenue in fiscal 1999 increased 19.1% to $217.7 million from $182.8 million in fiscal 1998. The Company's three primary products and services, (i) volume production, (ii) quick-turnaround, prototype and pre-production, and (iii) design, accounted for 63.1%, 28.6%, and 8.3% of revenues, respectively, in fiscal 1999 compared to 56.7%, 35.7%, and 7.6%, respectively, in fiscal 1998. Revenue growth in fiscal 1999 was the result of several factors, including the purchases in 1998 of the Company's Huntsville and Malaysian facilities, gains in market share due to industry consolidation, increased capacity, improved technological capabilities and strategic advantages offered by the Company's complete solutions offering. Volume production revenue increased 32.7% to $137.5 million in fiscal 1999 from $103.6 million in fiscal 1998. The increase in volume production business can be attributed to additional capacity due to purchase of the Huntsville and Malaysian facilities and capital expenditures, new customers, increased sales to existing customers, and new technology offerings. Significant new volume customers in fiscal 1999 included Benchmark, Celestica, EMC, Solectron and Teradyne, among others. Existing customers with increased sales in 1999 included Xerox, Motorola, and SCI. Quick-turnaround, prototype and pre-production revenue decreased 4.7% to $62.2 million in fiscal 1999 from $65.3 million in fiscal 1998. These decreases in revenue were the result of the restructuring, which involved the closure of the Redmond, Washington and Huntsville, Alabama facilities. Design revenue increased 29.5% to $18.0 million in fiscal 1999 compared to $13.9 million in fiscal 1998. The revenue increase can be primarily attributed to higher average bill rates, more designers and other factors, including increased business from existing and new customers such as Intel, NEC, Nortel and 3Com. 13 Cost of Goods Sold. Cost of goods sold includes direct labor, materials and manufacturing overhead costs. The cost of goods sold in fiscal 1999 was $191.2 million, or 87.8% of revenue, compared to $148.5 million, or 81.2% of revenue, in fiscal 1998. This increase was primarily the result of low yields and substantial under-utilization of capacity in the Company's Huntsville and Malaysia circuit board manufacturing facilities as well as Company-wide price pressure. Gross Profit. Gross profit in fiscal 1999 decreased 22.7% to $26.5 million from $34.3 million in fiscal 1998. Gross margin decreased to 12.2% in fiscal 1999 compared to 18.8% in fiscal 1998. These decreases were due to the increased cost of goods sold as a percentage of revenue resulting from the items discussed above, in addition to general margin pressure experienced by the industry as a whole. Restructuring Expense. Results from operations in fiscal year 1999 includes a $32.7 million charge for the costs associated with a restructuring plan announced in the second half of the fiscal year, intended to lower the Company's break-even point, reduce overall costs and improve profitability. The restructuring plan consisted of the closure of its Redmond, Washington facility when it consolidated the Company's West Coast quick-turn facilities into the Company's Fremont, California facility, the closure of its Huntsville, Alabama facility, the reduction of 114 overhead positions primarily in its selling, general and administrative areas, and the adjustment of the Malaysian facility's net assets to net realizable value in conjunction with the Company's intention to divest its controlling interest in its Malaysian facility. The total charges associated with the consolidation of the quick-turn facilities were $11.0 million, the total charges associated with Huntsville were $16.7 million and the total charges associated with Malaysia were $5.0 million. See Note 7 to the consolidated financial statements. Selling, General and Administrative Expenses. Selling, general and administrative expenses in fiscal 1999 increased $5.5 million, or 23.8%, to $29.0 million from $23.5 million in fiscal 1998. As a percentage of revenue, selling, general and administrative expenses remained relatively flat at approximately 13% year-over-year. Net Income (Loss) from Operations. Operating income in fiscal 1999 decreased $43.2 million to a loss of $32.4 million, or 14.9% of total revenues, compared to operating income of $10.8 million in fiscal 1998. The losses in fiscal 1999 were driven by a lower gross margin and the restructuring expense discussed above. The decrease in income from operations in fiscal 1999, excluding non-recurring charges in 1999, was primarily the result of the poor yields and capacity under-utilization in the Company's Huntsville and Malaysian facilities. Interest Expense. Interest expense in fiscal 1999 increased $2.1 million, or 55.7%, to $5.8 million from $3.8 million in the prior year. The increase was primarily the result of increased borrowings required to finance the acquisition of the Huntsville facility, equipment purchases and the Company's issuance of $11.5 million of subordinated convertible notes in December 1998. Income Taxes (Benefit). Income tax benefit in fiscal 1999 was $10.9 million compared to an income tax provision of $2.2 million in fiscal 1998. The effective tax rate in fiscal 1999 was 29.9%, compared to 30.4% in fiscal 1998. Net Income. As a result of the factors described above, including the restructuring and other charges of $32.7 million related to the closure of the Huntsville and Redmond facilities and the asset write-downs of Malaysia, the net loss in fiscal 1999 of $25.5 million represents a decrease of $30.6 million compared to the net income of $5.1 million in fiscal 1998. Year Ended June 30, 1998 Compared to Year Ended June 30, 1997 ("fiscal 1997") Revenue. Revenue in fiscal year 1998 was $182.8 million, an increase of $34.8 million, or 23.5%, from fiscal 1997. The increase was the result of several factors, including gains in market share due to 14 industry consolidation, increased capacity, improved technological capabilities and strategic advantages offered by the Company's One-Stop ShoppingTM strategy. The balance of the increase in revenue was the result of several acquisitions in fiscal 1998, including the acquisition of the Huntsville facility in March 1998, and the acquisitions of two design centers, which added $3.2 million and $3.6 million to revenue during fiscal 1998, respectively. Cost of Goods Sold. Cost of goods sold was $148.5 million in fiscal 1998, or 81.2% of revenue, as compared to $122.0 million in fiscal 1997, or 82.5% of revenue. This decrease was primarily due to lower materials costs and labor costs as a percentage of revenues, achieved through supplier price concessions, lower scrap rates, improved yields, higher employee productivity and improved process efficiencies. Gross Profit. Gross profit in fiscal 1998 was $34.3 million, or 18.8% of revenue, compared to $25.9 million, or 17.5% of revenue, in fiscal 1997. This increase was due primarily to both increased revenue and a decrease in the cost of goods sold as a percentage of revenue, as discussed above. Selling, General and Administrative Expense. Selling, general and administrative expense in fiscal 1998 was $23.5 million, or 12.8% of revenue, compared to $19.2 million, or 13.0% of revenue, in fiscal 1997. The increase in expenses was due to increased personnel and fixed costs associated with the expansion of the design division and corporate sales force. As a percentage of revenue, selling, general and administrative expenses decreased slightly year-over-year. Impairment and In-Process Technology Expense. In the first quarter of fiscal 1997, the Company recorded a write-off of $11.7 million of certain goodwill associated with the CTI acquisition and purchased research and development costs related to the acquisition of Trend. Net Income (Loss) from Operations. Operating income in 1998 was $10.8 million compared to a net loss from operations of $4.9 million in fiscal 1997. The gains in operating income were driven by improvements in gross margin and the benefit from the elimination of the $11.7 million nonrecurring expense related to impairment and in-process technology in fiscal 1997. The increase in income from operation in fiscal 1998, excluding the one-time write-off from fiscal 1997, was primarily the result of increased efficiency in the Company's expanded manufacturing facilities. Interest Expense. Interest expense in fiscal 1998 was $3.8 million, an increase of $1.5 million, or 63.7%, from fiscal 1997. The increase was the result of increased borrowings required to finance the acquisition of the Huntsville facility and equipment purchases. Income Taxes. Income taxes in fiscal 1998 were $2.2 million compared to an income tax provision of $1.7 million in fiscal 1997. The effective tax rate in fiscal 1998 was 30.4%. During fiscal 1997, the Company had a tax expense on a pre-tax book loss primarily due to the add-backs of a goodwill and an in-process technology write-off, neither of which were tax deductible. Federal and state research and experimental tax credits, however, partially offset the effect of these add-backs. Absent the add-back of the goodwill and in-process technology write-offs, the Company's effective tax rate for fiscal 1997 would have been 29.4%. Net Income (Loss). As a result of the factors described above, including the write-off of $11.7 million non-recovery expenses related to impairment and in-process technology expense, the net income in fiscal 1998 of $5.1 million represents an increase of $13.4 million compared to the net loss of $8.3 million in fiscal 1997. 15 Liquidity and Capital Resources Since its inception, the Company has financed its operations and capital expenditures with cash from operations, debt financing, and an initial public offering in April 1996. Net cash provided by operating activities was $11.6 million, $10.4 million and $1.7 million for fiscal 1999, 1998 and 1997, respectively. During the fiscal year ended June 30, 1999, the Company completed an offering of $11.5 million principal amount of convertible subordinated notes. These notes accrue interest at 9% per annum and mature on December 29, 2008. As of June 30, 1999, the Company had $570,000 in cash and cash equivalents and working capital of approximately $18.8 million. Capital expenditures were $46.2 million, $39.3 million and $24.8 million for fiscal 1999, 1998 and 1997, respectively. These capital expenditures were primarily for manufacturing equipment and plant expansions and modernization. Although the Company has no commitments in material amounts, it expects capital expenditures for fiscal 2000 to be approximately 4% of revenue for facility expansions and equipment. The Company increased its bank line of credit to $40.0 million at June 30, 1998 from $15.0 million at June 30, 1997. At June 30, 1999 borrowings of $38.8 million were outstanding and $407,000 was available for borrowings based on eligible accounts receivable and inventory. Amounts outstanding under the line of credit bear interest at the bank's prime rate (7.75% per annum at June 30, 1999). The Company has the option of placing the line of credit borrowings Subsequent to June 30, 1999, Company entered into a Deferral Loan and Lease Modification Agreement dated October 12, 1999 with its equipment lenders and lessors (the "Modification Agreement"). Pursuant to the Modification Agreement (i) the Company's capital equipment lessors revised the Company's lease payment schedules and (ii) each lender either (a) made a loan to the Company (each a "Deferral Loan"), the proceeds of which were used to pay amounts owing under the Company's existing loan obligations and to prepay future payments owing under those obligations through February 2000 or (b) deferred certain payments on its existing obligations through February 2000 (the aggregate of such Deferral Loans, deferred payments and revised lease payments collectively, the "Deferred Amount"). In January 2000, the Company will pay an aggregate fee to the lenders and lessors equal to two percent of the Deferred Amount ($201,207). Each lender and lessor also has the option of receiving (i) an additional fee equal to three percent of its portion of Deferred Amount (a maximum aggregate amount of ($301,810) or (ii) the right to convert all or a portion of its share of the Deferred Amount into the Company's common stock at $5.77 per share. The amount that may be converted decreases over the term of the loan or lease and conversion is subject to certain other restrictions. Under the terms of the Modification Agreement, the lenders and lessors each waived the Company's prior defaults under its existing loan and/or lease agreements. The Company believes existing cash and cash equivalents, funds generated from operations, its credit facility with the bank and equipment financings will be sufficient to fund its operations for the next twelve months. To enhance its ability to fund its operations, the Company is actively exploring additional and alternative sources of financing to supplement or replace its existing credit agreements. Recent Accounting Pronouncement In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new statement will require recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The new statement becomes effective for the first quarter of fiscal year ending June 30, 2001. Management has not completed an evaluation of the effects this standard will have on the Company's financial position or results of operations. 16 Year 2000 Compliance The Company has developed a program to perform assessment and remediation of its computer software programs and operating systems, including applications used in its financial, shop-floor control and manufacturing equipment control systems, to determine their readiness for the Year 2000. The inability of computer software programs and operating systems to accurately recognize, interpret and process date codes designating the Year 2000 and beyond could cause systems to yield inaccurate results or encounter operating problems, including disruption of the business operations these systems control. The Company has completed its assessment of the financial, shop-floor control systems and manufacturing equipment control systems. Remediation of the financial systems is 100% complete and remediation of the manufacturing equipment control and shop-floor control systems systems is 85% complete. The Company expects to complete its remediation of all of its systems by the end of October 1999. The Company also may be exposed to risks from computer systems of parties with which the Company transacts business. The Company has contacted all of its critical suppliers to determine the extent to which the Company may be vulnerable to those parties' failure to remedy their own Year 2000 issues and to ascertain what actions, if needed, may be taken by the Company in response to such risks. To date, approximately 90% of the suppliers contacted have indicated they are, or expect to be, Year 2000 compliant. The Company currently estimates that it will spend between $650,000 and $750,000 in addressing the Year 2000 issue, of which approximately $575,000 has been incurred through June 30, 1999. The estimates are subject to change as additional information is obtained in connection with the Year 2000 Program. Based on its assessments to date, the Company believes it will not experience any material disruption as a result of Year 2000 issues in its computer software programs and operating systems used in its internal operations, its interface with key suppliers and customers, or processing orders and billing. However, if certain critical third party suppliers, such as those supplying electricity, water, telephone service or critical materials, experience difficulties resulting in disruption of the service or delivery of supplies to the Company, or if the Company's internal operating systems fail to comply, a shutdown of the Company's operations could occur for the duration of the disruption. The Company is finalizing its contingency plans to mitigate the effect of such events, and intends to complete its contingency plans by the end of October 1999. Furthermore, due to the general uncertainty inherent in the Year 2000 problem, there can be no assurances that Year 2000 issues will not have a material adverse effect on the Company's business, financial condition or results of operations. Item 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company does not currently use derivative financial instruments for speculative purposes which expose the Company to market risk. The Company is exposed to cash flow and fair value risk due to changes in interest rates with respect to its outstanding debt. Information required by this item is set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Report and in Note 9 of Notes to Financial Statements in Item 8 of this Report. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The Company's Financial Statements and the Independent Auditors Report thereon are presented in the following pages. The Financial Statements filed in Item 8 are as follows: Independent Auditors' Report Consolidated Balance Sheets as of June 30, 1999 and 1998 17 Consolidated Statements of Operations for the years ended June 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows of the years ended June 30, 1999, 1998 and 1997 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements 18 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Praegitzer Industries, Inc. We have audited the accompanying consolidated balance sheets of Praegitzer Industries, Inc. and subsidiary as of June 30, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Praegitzer Industries, Inc. and subsidiary as of June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Portland, Oregon October 13, 1999 19 PRAEGITZER INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 AND 1998 - ----------------------------------------------------------------------------------------------------- ASSETS 1999 1998 CURRENT ASSETS: Cash and cash equivalents $ 569,796 $ 1,169,912 Receivables, net of allowance for doubtful accounts of $1,050,000 at June 30, 1999 and $400,000 at June 30, 1998 29,645,457 28,562,209 Inventories (Note 4) 16,651,739 16,491,325 Prepaid expenses 3,790,063 2,438,844 Current deferred tax asset (Note 12) 7,009,871 474,175 Assets held for sale (Note 7) 4,389,417 - ------------- ------------- Total current assets 62,056,343 49,136,465 PROPERTY, PLANT, AND EQUIPMENT, Net (Note 5) 72,009,584 88,825,496 OTHER ASSETS (Note 6) 9,830,977 13,532,050 ------------- -------------- TOTAL $ 143,896,904 $ 151,494,011 ============= ============== LIABILITIES AND EQUITY CURRENT LIABILITIES: Bank overdraft $ 1,924,048 $ 3,709,446 Accounts payable 21,022,486 13,929,852 Accrued payroll and related benefits 4,095,269 3,955,300 Other current liabilities 3,892,198 1,851,425 Current portion of long-term obligations (Note 9) 12,328,118 6,393,664 ------------- ----------- Total current liabilities 43,262,119 29,839,687 LONG-TERM OBLIGATIONS, Net of current portion (Note 9) 67,326,111 73,413,472 DEFERRED TAX LIABILITY (Note 12) 2,286,802 4,197,481 COMMITMENTS AND CONTINGENCIES - - DEFERRED LIABILITY 170,047 63,550 CONVERTIBLE SUBORDINATED NOTES (Note 10) 11,500,000 - SHAREHOLDERS' EQUITY: Preferred stock; 500,000 shares authorized, no shares issued and outstanding - - Common stock, 50,000,000 shares, no par value authorized and 12,968,868 shares issued and outstanding at June 30, 1999 and 12,750,214 at June 30, 1998 43,886,386 42,324,553 Note receivable from officer (520,350) Deferred compensation, net (130,050) - Retained earnings (deficit) (23,884,161) 1,655,268 ------------- -------------- Total shareholders' equity 19,351,825 43,979,821 ------------- -------------- TOTAL $ 143,896,904 $ 151,494,011 ============= ============== See notes to Consolidated financial statements.
20 PRAEGITZER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1999, 1998, AND 1997 - ---------------------------------------------------------------------------------------------------- 1999 1998 1997 REVENUE $ 217,665,361 $ 182,773,158 $ 147,947,303 COST OF GOODS SOLD 191,172,229 148,487,031 122,012,818 -------------- -------------- -------------- Gross profit 26,493,132 34,286,127 25,934,485 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE 29,045,696 23,456,329 19,188,455 Restructuring Expense (Note 7) 29,817,562 - - Impairment and in-process technology expense (Notes 3 and 8) - - 11,650,000 -------------- -------------- -------------- INCOME (LOSS) FROM OPERATIONS (32,370,126) 10,829,798 (4,903,970) Interest expense 5,848,147 3,757,236 2,295,140 Minority interest in net income (loss) of consolidated subsidiary (1,778,022) 10,731 - Other income, net 3,319 234,856 568,412 -------------- -------------- -------------- INCOME (LOSS) BEFORE INCOME TAXES (36,436,932) 7,296,687 (6,630,698) Income tax expense (benefit) (Note 12) (10,897,503) 2,214,938 1,669,809 -------------- -------------- -------------- NET INCOME (LOSS) $ (25,539,429) $ 5,081,749 $ (8,300,507) ============== ============== ============== BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ (1.97) $ 0.40 $ (0.68) ============== ============== ============== See notes to consolidated financial statements.
21 PRAEGITZER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1999, 1998, AND 1997 - ------------------------------------------------------------------------------------------------------- 1999 1998 1997 Net income (loss) $ (25,539,429) $ 5,081,749 $ (8,300,507) Minority interest in net loss of consolidated subsidiary (1,778,022) - - Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 13,167,999 8,902,708 7,376,595 Loss (gain) on sale of fixed assets 128,550 (53,445) (564,858) Deferred taxes (8,452,669) 2,045,421 474,325 Provision for doubtful accounts 650,000 - 135,000 Restructuring charges 26,750,055 - - Impairment and in-process technology expense - - 11,650,000 Changes in operating assets and liabilities: Receivables (2,865,098) (3,186,023) (8,474,182) Inventory (4,137,771) (6,475,384) (1,366,761) Accounts payable 7,986,560 4,479,382 1,301,094 Income taxes payable (1,299,833) (1,892,929) (980,835) Accrued payroll and related benefits 139,969 1,074,422 345,317 Other current liabilities 3,026,593 453,904 214,561 Other current assets 3,558,010 (68,225) (76,092) Other 314,859 (9,037) (14,820) -------------- ------------ ------------ Net cash provided by operating activities 11,649,773 10,352,543 1,718,837 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant, and equipment (46,178,261) (39,334,464) (24,760,670) Proceeds from sale of property, plant, and equipment 23,008,083 4,244,785 11,187,029 Acquisitions, net of cash acquired 3,816 (19,170,255) (5,375,122) Other (155,525) - - Change in restricted cash (2,525,112) 162,903 143,053 -------------- ------------ ------------- Net cash used in investing activities (25,846,999) (54,097,031) (18,805,710) CASH FLOWS FROM FINANCING ACTIVITIES: Net additions to short-term borrowings 1,515,516 25,063,359 11,463,066 Borrowing of long-term debt 9,426,336 21,300,000 21,814,498 Payments on long-term debt (7,861,841) (3,261,600 (16,386,981) Issuance of convertible subordinated notes 11,500,000 - - Debit issuance costs (1,548,901) (746,927 (121,502) Issuances of common stock under ESPP 674,294 1,091,051 307,964 Payments on capital leases (676,573) (641,325) (636,884) Increase in bank overdrafts 706,633 1,667,892 1,049,975 -------------- ------------ ------------- Net cash provided by financing activities 13,735,464 44,472,450 17,490,136 (continued)
22 PRAEGITZER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1999, 1998, AND 1997 - ------------------------------------------------------------------------------------------------------------- 1999 1998 1997 Cummulative effect of foreign currency translations $ (138,354) $ - $ - INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (600,116) 727,962 403,263 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,169,912 441,950 38,687 -------------- -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 569,796 $ 1,169,912 $ 441,950 ============== ============== ============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid during the year for interest (net of amounts capitalized) 5,417,374 $ 3,734,173 $ 1,915,515 Cash paid (received) during the year for income taxes, net $ (1,143,221) $ 2,062,324 $ 2,165,392 See notes to consolidated financial statements. (Concluded)
23 PRAEGITZER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED JUNE 30, 1999, 1998, AND 1997 - -------------------------------------------------------------------------------------------------------------------------------- Common Stock ----------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- Note Retained Number Receivable Deferred Earnings of Shares Amount from Officer Compensation (Deficit) Total BALANCES, JUNE 30, 1996 11,061,875 29,932,049 - - 4,708,884 34,640,933 Stock issued in connection with acquisitions 1,330,000 10,992,489 - - - 10,992,489 Proceeds from exercise of Incentive Stock Options 12,000 114,000 - - - 114,000 Net loss June 30, 1997 - - - - (8,300,507) (8,300,507) Proceeds from issuance under the ESPP 30,643 193,964 - - - 193,964 ------------ ---------- ------------ ------------ ----------- ------------ BALANCES, JUNE 30, 1997 12,434,518 41,232,502 - - (3,591,623) 37,640,879 Stock issued in connection with acquisitions 200,000 1,000 - - 165,142 166,142 Proceeds from exercise of Incentive Stock Options 54,048 499,738 - - - 499,738 Proceeds from issuance under the ESPP 61,648 591,313 - - - 591,313 Net earnings June 30, 1998 - - - - 5,081,749 5,081,749 ------------ ---------- ------------ ------------ ----------- ------------ BALANCES, JUNE 30,1998 12,750,214 42,324,553 - - 1,655,268 43,979,821 Stock issued in connection with acquisitions 99,998 193,789 - - - 193,789 Subscribed but unissued stock - 693,750 (520,350) - - 173,400 Deferred compensation, net - - - (130,050) - (130,050) Proceeds from issuance under the ESPP 118,656 674,294 - - - 674,294 Net loss June 30, 1999 - - - - (25,539,429) (25,539,429) ------------ ---------- ------------ ------------ ----------- ----------- BALANCES, JUNE 30,1999 $ 12,968,868 $ 43,886,386 $ (520,350) $ (130,050) $(23,884,161) $19,351,825 ============ =========== =========== ============ =========== ==========
See notes to consolidated financial statements. 24 PRAEGITZER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business - Praegitzer Industries, Inc. (the "Company" or "Praegitzer") is incorporated under the laws of the State of Oregon, and its principal business is the design, manufacture and sale of electronic circuit boards. Principles of Consolidation - The accompanying financial statements include the accounts of the Company and its majority owned subsidiary, Praegitzer Asia SDN, Bttd. All significant intercompany transactions and balances have been eliminated. Use of 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. Revenue Recognition - Revenue is recognized when goods are shipped to the customer. Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Cash and Cash Equivalents includes all cash and short-term debt instruments, purchased with a maturity of three months or less at the date of acquisition. Concentration of Credit Risk - Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable. The risk is limited due to the fact that the Company's trade accounts receivable are derived from sales in various geographic areas to numerous companies varying in size within the electronics industry. Additionally, the Company performs ongoing credit evaluations of its customers' financial condition and generally does not require collateral, such as letters of credit or security agreements. Credit losses have consistently been within management's expectations. Property, Plant, and Equipment - Depreciation of property and equipment is provided on the straight-line method based on the estimated useful lives of the individual assets. Loan Fees - Other assets include loan fees incurred by the Company. These fees are being amortized over the terms of the loans. Goodwill - The Company amortizes costs in excess of fair value of net assets of businesses acquired using the straight-line method over a period of fifteen years. Management reviews, on an ongoing basis, the continuing appropriateness of the remaining amortizable life and the net realizable value of the unamortized balance. Asset Impairments - Long-lived assets to be held and used by the Company are reviewed for impairment when events and circumstances indicate costs may not be recoverable. 25 Losses are recognized when the book values exceed expected undiscounted future cash flows. If impairment exists, the asset's book value is written down to its estimated fair value. Assets to be disposed are written down to their fair value, less sales costs. See Notes 7 and 8 for a discussion of charges related to impairments of assets and goodwill. Derivative Financial Instruments - The Company has only limited involvement with derivative financial instruments consisting solely of an interest rate swap discussed in Note 9. Income Taxes - The Company uses the liability method of accounting for deferred income taxes. Deferred tax liabilities and assets reflect the expected future tax consequences, based on enacted tax law, of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts. Future Accounting Pronouncements - Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, will require recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The new statement becomes effective at the beginning of the fiscal year ending June 30, 2001. Management has not completed an evaluation of the effects this standard will have on the Company's financial position or results of operations. Comprehensive Income - SFAS No. 130, Reporting Comprehensive Income, establishes standards for the reporting of comprehensive income and its components, but has no impact on the Company's net earnings or total shareholders' equity. To date, such transactions that are required to be reported in comprehensive income are not material to the Company's financial position or results of operations. Segments - SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for disclosure about operating segments in annual financial statements and selected information in interim financial reports. At June 30, 1999, the Company operates in one segment. The Company operates primarily in the United States ("U.S."). During the years ended June 30, 1999, 1998, and 1997, sales to U.S. customers totaled $198.2 million, $179.0 million, and $144.2 million, respectively, and sales to international customers totaled $19.5 million, $3.8 million, and $3.8 million, respectively. Long-lived assets located outside of the U.S. are primarily held at the Melaka, Malaysia facility and were held for sale as of June 30, 1999 as disclosed in Note 7. Reclassifications - Certain amounts from the prior year's financial statements have been reclassified to be consistent with the current year presentation. 2. EARNINGS PER SHARE Basic earnings per share ("EPS") is computed on the basis of weighted average number of common shares outstanding. Diluted EPS is computed on the basis of weighted average common shares outstanding plus the effect of outstanding stock options and warrants using the "treasury stock" method, if the common stock equivalent shares were not anti-dilutive. The calculation of the weighted average shares outstanding is as follows: 26 For the year ended June 30, 1999 1998 1997 ------------- -------------- -------------- Weighted average common stock outstanding-basic 12,972,813 12,694,039 12,233,769 Common stock equivalents - 151,757 - ------------- -------------- -------------- Weighted average common stock outstanding-diluted 12,972,813 12,845,796 12,233,769 ============= ============== ==============
Common stock equivalents were anti-dilutive for 1999 and 1997. 3. ACQUISITIONS Effective April 13, 1998, the Company acquired 51% of the outstanding capital stock of Likom PCB Sdn Bhd ("Likom"), a printed circuit board manufacturer located in Malaysia. The purchase price was up to 5.2 million Ringgit, $1,432,000 based on the currency exchange rate on April 27, 1998, which consisted of the transfer and contribution to Likom of third-party software license rights, machinery and equipment currently owned or purchased by the Company and cash. The acquisition of Likom has been accounted for using the purchase method of accounting. The operating results from the date of purchase have been consolidated in the Company's financial statements. No goodwill was recognized related to this acquisition. On March 31, 1998, the Company acquired a printed circuit board fabrication facility located in Huntsville, Alabama from Intergraph Corporation ("Intergraph"). The acquisition consisted of land, building, equipment and inventory. The purchase price for the assets was $15,950,000, which was paid in cash. The acquisition was accounted for under the purchase method of accounting and, accordingly, the operating results of Intergraph from the date of purchase are included in the Company's financial statements. The estimated fair market value of assets approximate the fair market value of the liabilities and, accordingly, no goodwill was recognized. On August 28, 1996, the Company acquired Trend Circuits, Inc. ("Trend"), a circuit board manufacturing company. The acquisition was accomplished by a merger of Trend with and into Praegitzer. The purchase price included $5,000,000 of cash and 1,000,000 shares of Praegitzer's common stock valued at $10.65 per share. The acquisition was accounted for under the purchase method of accounting and, accordingly, the operating results of Trend from the date of purchase are included in the Company's financial statements. The estimated fair market value of assets and liabilities acquired was approximately $9,600,000 and $11,900,000, respectively. The Company incurred a one-time charge of $8,000,000 related to a portion of the purchase price allocated to in-process technology which was expensed at the closing of the transaction. The remaining excess of the aggregate purchase price over the fair market value of the net 27 assets acquired of $9,900,000 was recognized as goodwill and is being amortized over fifteen years. The following unaudited pro forma results of operations assume the acquisitions occurred on July 1, 1996: Year Ended June 30, -------------------------------------- 1998 1997 Revenue $ 197,332,158 $ 172,511,303 Net income (loss) $ 2,630,749 $ (2,761,507) Net income (loss) per share 0.21 (0.23) The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the Likom, Intergraph and Trend acquisitions been consummated as of July 1, 1996 nor is it necessarily indicative of future operating results. In addition, the Company acquired several other companies during the last three years, which were not significant individually or in the aggregate to the Company's financial position, results of operations or cash flows. To accomplish the acquisitions a total of 99,998, 200,000 and 330,000 shares were issued during the years ended June 30, 1999, 1998 and 1997, respectively. 4. INVENTORIES Inventories consist of the following: June 30, ----------------------------------------- 1999 1998 ------------------- -------------------- Raw materials and supplies $ 6,271,100 $ 6,430,638 Work-in-process 10,380,639 10,060,687 ----------- ------------ Total inventories $16,651,739 $ 16,491,325 ============ ============ 28 5. PROPERTY, PLANT, AND EQUIPMENT Useful Life June 30, --------------------------------------------------- (Years) 1999 1998 ------------------------- ------------------------ Land - $ 1,170,008 $ 1,468,212 Buildings and leasehold improvements 10 to 31 19,821,822 21,899,123 Equipment 3 to 10 70,885,575 83,949,892 Office furniture and fixtures 5 to 7 921,057 1,086,121 Construction in progress - 5,762,982 10,670,668 Deposits on equipment - 8,772,873 5,726,843 ------------- -------------- 107,334,317 124,800,859 Accumulated depreciation (35,324,733) (35,975,363) ------------- -------------- Property, plant, and equipment $ 72,009,584 $ 88,825,496 ============= ==============
During the years ended June 30, 1999 and 1998, the Company capitalized interest on construction in progress in the amounts of $993,200 and $191,700, respectively. The Company did not capitalize any interest during the year ended June 30, 1997. 6. OTHER ASSETS June 30, ------------------------------------------------------ 1999 1998 ------------------------- ------------------------- Goodwill $ 7,635,524 $ 11,486,072 Deferred loan fees 2,039,928 771,620 Other 155,525 1,274,358 ------------- ------------- Total other assets $ 9,830,977 $ 13,532,050 ============= =============
Other assets are presented net of related accumulated amortization of $2,639,023 and $3,302,606 at June 30, 1999 and 1998, respectively. 29 7. RESTRUCTURING AND OTHER WRITE-DOWNS During fiscal 1999, the Company undertook several actions to reduce future operating costs and capital expenditures. Those action's resulted in a total restructuring expense of $29.8 million and other write-downs totaling $2.9 million. In June 1999, the Company adopted a plan to divest its controlling interest in its Malaysian printed circuit board manufacturing facility, Praegitzer Asia Sdn. Bd. ("PASB"). As a result, the Company adjusted the net assets of PASB by $5,029,330 to net realizable value. Net assets of PASB held for sale are approximately $2,100,000 at June 30, 1999. In June 1999, the Company announced the closure of the Huntsville, Alabama printed circuit board fabrication facility and a limited restructuring at the Company's Corporate offices and other facilities. The closure of the Huntsville facility resulted in the termination of 192 manufacturing and administrative employees. The limited restructuring resulted in the elimination of 114 sales, general and administrative positions at the Company's corporate headquarters and throughout the remaining manufacturing and design facilities. In connection with the closure and limited restructuring, the Company recorded a net charge of $19.1 million, comprised of approximately $17.3 million of non-cash charges, which related to asset write-downs, and $1.8 million of cash charges for severance benefits. The Company will utilize certain production equipment from its Huntsville, Alabama facility in other Praegitzer facilities. Assets held for sale at Huntsville consist of $2.3 million relating to the estimated proceeds to be received from the sales of the building and certain equipment. It is expected that the plan will be completed by the second quarter of fiscal year 2000. In March 1999, the Company announced the consolidation of two West Coast facilities. This restructuring plan was designed to increase capacity utilization and reduce overall on-going costs. It included consolidating the Company's Redmond, Washington facility into the Company's Fremont, California facility and the termination of 267 employees from the Redmond, Washington facility. The Company expects that sales and orders from the Redmond facility will be completely assumed by other Company facilities, principally, Fremont. In connection with the restructuring the Company recorded a charge of $11.0 million, comprised of approximately $3.6 million of cash charges and approximately $7.4 million of non-cash charges, which related to severance benefits, lease termination costs, restoration costs associated with the building housing the Redmond facility, and asset impairments, including goodwill. The goodwill arose upon acquisition of the Redmond facility in fiscal year 1996. The Company will utilize certain production equipment from its Redmond, Washington facility in other Praegitzer facilities. It is expected that the plan will be completed by the second quarter of fiscal year 2000. The components of the restructuring charge and other write-downs recorded in fiscal year 1999 were as follows (in thousands): 30 Non-cash charges: Inventory write-down (included in cost of sales) $ 2,224 Abandonment of construction in progress 2,674 Fixed asset impairment (includes leasehold improvements) 13,748 Uncollectible receivables (included in G&A expense) 703 Write-off of goodwill 3,012 Write-down of Malaysian operations to net realizable value 5,029 ------------- 27,390 Cash charges: Severance benefits and legal $ 3,575 Lease termination loss 564 Leasehold restoration costs and other 1,216 ------------- 5,355 Total restructuring related charges $ 32,745 Less: charges included in cost of sales and G&A expense (2,927) ------------- Total restructuring related expense $ 29,818 ============= At June 30, 1999, $2.8 million was included in other current liabilities for the Huntsville and Redmond accrued liabilities. The Company expects that the accruals will be utilized for their intended purposes by the end of the second quarter of fiscal year 2000 when the restructuring plans are complete. 8. IMPAIRMENT OF GOODWILL During the year ended June 30, 1997, the Company recorded an impairment of $3,650,000 of certain goodwill associated with the Redmond facility. The impairment was due to the inability of the Redmond facility, which was originally purchased to serve as the Company's quick-turn operation, to move its product mix to more quick-turnaround. In determining the amount of the impairment charge, the Company developed estimates of operating cash flows over the remaining business life cycle. Future cash flows, excluding interest charges, were discounted using an estimated 8% incremental borrowing rate. 31 9. LONG-TERM OBLIGATIONS June 30, ------------------------------------- 1999 1998 ----------------- ----------------- Line of credit of $40,000,000 payable to Key Bank, 7.25% to 7.75% at June 30, 1999 collateralized by inventory and accounts receivable, expires March 31, 2001 $ 38,810,794 $ 37,511,017 Interim funding promissory note payable to Key Bank, 8.75% at June 30, 1999 collateralized by equipment, due December 30, 1999 5,365,703 - Note payable to Heller Financial, Inc., 9.1875% at June 30, 1999 payable in monthly installments of $180,952 beginning February 1, 1999 plus accrued interest at LIBOR plus 4.25% collaterialized by real property and equipment at the Huntsville, Alabama facility, $6.1 million due April 1, 2003 14,295,238 15,200,000 Note payable to Heller Financial, Inc., 7.6875% at June 30, 1999 payable in monthly installments of $111,111 plus accrued interest at LIBOR plus 2.75%, collaterialized by real property and equipment at the Dallas, Oregon facility due November 1, 2004 7,333,760 8,666,667 Notes payable to Heller Financial, Inc., 7.8% to 7.9%, due in monthly installments of $94,697 including interest, collateralized by machinery and equipment due January 1, 2005 and April 1, 2005 5,165,403 5,864,824 Note payable to Heller Financial, Inc., 7.4875% at June 30, 1999 payable in monthly installments of $55,555 plus accrued interest at LIBOR plus 2.55%, collateralized by real property and equipment at the White City, Oregon facility, due February 1, 2004 3,166,875 3,833,333 Note payable to Finova Capital Corporation, 9.93%, payable in 35 monthly installments plus accrued interest, through August 1, 1999, $2.2 million paid September 1, 1998 - 3,251,862 Note payable to Transamerica Equipment Financial Services, 8.87%, payable in 60 monthly installments of $101,335 including interest, through March 10, 2004 4,699,628 - Shareholder loan payable to Rubitasi Holding Company, 0%, at June 30, 1998 payable in 36 monthly installments plus accrued interest - 1,763,224 Capital lease obligations, monthly payments of $59,174 and $143,591, imputed interest of 9.25% and 9.25% to 31.03% at June 30, 1999 and 1998, respectively 782,864 2,739,205 Other notes payable, 7.06% to 10% at June 30, 1999 33,964 977,004 ------------ ------------ Subtotal 79,654,229 79,807,136 Current portion (12,328,118) (6,393,664) ------------ ------------ Total long-term obligations $ 67,326,111 $ 73,413,472 ============ ============
The line of credit and interim funding note with Key Bank are classified as long-term based on ability and management's intention. To reduce the risk of fluctuations in interest rates, the Company entered into an interest rate swap agreement with Key Bank during the year ended June 30, 1997. The swap has a notional amount of $5 million and effectively changes the Company's interest rate exposure on the Key Bank lease line from a variable rate to a 6.10% fixed rate. This agreement matures in 2003. 32 The Company's loan agreements with Heller Financial, Inc. and Key Bank contain covenants pertaining to maintenance of consolidated net worth and certain financial ratios, including a fixed charge ratio to earnings before interest, taxes, and depreciation, amortization ("EBITDA") of 1.5 to 1, an EBITDA plus rents to interest expense plus rents of 1.75 to 1, a funded debt to EBITDA ratio of not more than 4.5 to 1, and a senior funded debt to EBITDA ratio of not more than 3.75 to 1. Dividends may not be declared without written consent of Key Bank. At June 30, 1999, the Company was in violation of all of the preceding covenants. The Company obtained waivers from the lenders and was in compliance with all other covenants at June 30, 1999. Maturities on the long-term obligations as of June 30, 1999 were as follows: Notes Capital Year Ending June 30, Payable Leases ----------------------------------------------------------- 2000 11,662,702 665,416 2001 48,758,352 117,448 2002 4,720,286 - 2003 10,490,227 - 2004 2,415,010 - Thereafter 824,788 - ------------- ---------- Total $ 78,871,365 $ 782,864 ============= ========== 10. CONVERTIBLE SUBORDINATED NOTES During the fiscal year ended June 30, 1999, the Company completed an offering of $11,500,000 principal amount of convertible subordinated notes ("Notes"). Interest on the Notes accrues at a rate of 9% and is payable semi-annually, commencing July 15, 1999. The Notes are convertible into shares of Common Stock at the conversion price of $8.325 per share. The holders have the option to convert the Notes any time on or before the close of business on the last trading day prior to maturity, unless previously redeemed. The Notes can be redeemed until December 29, 2001 if (i) the Company redeems all of the Notes then outstanding, (ii) there is completed one or more registered public offerings of common stock of the Company pursuant to which the aggregate price to the public of shares sold by the Company and/or the selling shareholders participating in such offering(s) equals or exceeds $15 million, and (iii) the closing price of the common stock exceeds the percentages of the conversion price set forth in the Indenture dated December 29, 1998, between the Company and U.S. Trust Company, N.A. (The "Indenture"), for at least 30 consecutive trading days ending on the fifth trading day prior to the notice of redemption. On or after December 29, 2001, the Company may redeem the Notes in whole or from time to time in part, at the redemption prices set forth in the Indenture, together with accrued and unpaid interest thereon. The Notes mature on December 29, 2008. 33 11. COMMITMENTS AND CONTINGENCIES Operating Leases Praegitzer leases buildings and equipment under operating lease agreements that expire at various times through 2005. The following table is a schedule of future minimum principal payments under capital leases and future minimum rentals under operating lease agreements at June 30, 1999: Year Ending June 30, --------------------------------------------- 2000 13,144,700 2001 11,999,015 2002 11,636,500 2003 10,477,100 2004 8,198,973 Thereafter 6,410,159 ------------- Total $ 61,866,447 ============= Several of Praegitzer's operating leases contain renewal options. Rent expense relating to the building and equipment leases totaled $10,241,223, $5,781,332, and $3,834,948, for the years ended June 30, 1999, 1998, and 1997 respectively. Litigation The Company is involved as a defendant in litigation in the ordinary course of business, the outcome of which can not be predicted with certainty. Management believes that any ultimate liability with respect to such litigation will not materially affect the financial position, results of operations or cash flows of the Company. 12. INCOME TAXES The following information reflects income taxes on the Company's earnings for the years ended June 30, 1999, 1998 and 1997. 34 1999 1998 1997 ----------------- ---------------- --------------- Current: Federal $ (1,817,180) $ 475,382 $ 1,126,752 State (627,654) (305,865) 68,732 ------------- ---------- ----------- (2,444,834) 169,517 1,195,484 Deferred: Federal (7,248,621) 1,976,712 425,676 State (1,204,048) 68,709 48,649 ------------- ---------- ----------- (8,452,669) 2,045,421 474,325 ------------- ---------- ----------- Tax (benefit) expense $ (10,897,503) $2,214,938 $ 1,669,809 ============= ========== =========== The income tax provision on earnings from continuing operations differs from the statutory federal income tax rate due to the following: Year Ended June 30, 1999 1998 1997 ------------------ ------------------ ----------------- Federal income taxes at the statutory rate $ (12,388,240) $ 2,480,870 $ (2,320,744) State income tax, net of federal benefit (1,821,800) 364,834 (265,228) Tax credits utilized (382,000) (1,097,843) (626,778) Goodwill 1,503,774 360,296 4,856,150 Foreign income 897,000 - - Change in valuation of deferred tax accounts 1,208,502 - - Other 85,261 106,781 26,409 ------------- ------------ ------------ $ (10,897,503) $ 2,214,938 $ 1,669,809 ============= ============ ============
The significant items comprising the Company's net deferred tax asset (liability) are as follows: 35 Year Ended June 30, 1999 1998 ---------------- ----------------- Reserves and other liabilities $ 623,659 $ 217,527 Other 796,915 321,733 Plant closure expenses 5,733,000 - Benefit of NOL carryforward 3,980,010 - Property, plant, and equipment (6,410,515) (4,262,566) ----------- ----------- $ 4,723,069 $(3,723,306) =========== =========== Net deferred tax assets and liabilities are included in the following balance sheet accounts at June 30, 1999 and 1998: Year Ended June 30, 1999 1998 ---------------- ----------------- Current deferred asset $ 7,009,871 $ 474,175 Deferred tax liability (2,286,802) (4,197,481) ------------ ------------ Net deferred tax asset (liability) $ 4,723,069 $ (3,723,306) ============ ============ As of June 30, 1999, the Company has available respective federal and state net operating loss carryovers of $16,289,079. The total combined tax benefit of the federal and state net operating loss carryover is approximately $6,352,000. The federal net operating loss carryforward will expire during the year ending June 30, 2019. The state carryforward periods vary by statute. No valuation allowance has been applied against the Company's deferred tax asset as the Company considers it more likely than not that the deferred tax asset will be utilized. 13. MAJOR CUSTOMERS For the years ended June 30, 1999 and 1998, the Company had no customers that represented more than 10% of total revenue. For the year ended June 30, 1997, the Company recognized 12% of total revenue from one customer. 14. EMPLOYEE BENEFIT PLAN The Company has a 401(k) plan which covers all employees and permits discretionary contributions by the participants. The Company has contributed $578,215, $318,938, and $132,588 to the plan for the years ended June 30, 1999, 1998 and 1997. 15. STOCK INCENTIVE PLAN AND STOCK WARRANTS Under the Company's Stock Incentive Plan, the Board of Directors may grant incentive and non-qualified options, stock bonuses, restricted stock, stock appreciation rights, and cash bonus rights to employees and directors to purchase up to 2,700,000 shares of common stock. The Stock Incentive Plan shall continue in effect until all shares available for issuance have been issued. However, the Board of Directors can suspend or terminate the 36 Stock Incentive Plan at any time except with respect to options and shares subject to restrictions then outstanding under the Stock Incentive Plan. Under the Stock Incentive Plan, the option price is equal to fair market value at the grant date. Options currently expire no later than ten years from the grant date and generally vest after four years. The following table summarizes the stock option activity under the Company's option plan: Weighted average Number exercise of shares price - -------------------------------------------------------------------------------- Options outstanding at June 30, 1996 667,000 9.56 Granted 499,563 9.84 Canceled (68,800) 9.51 Exercised (12,000) 9.50 ----------- Options outstanding at June 30, 1997 1,085,763 9.80 Granted 383,457 10.75 Canceled (222,318) 9.95 Exercised (17,382) 9.57 ----------- Options outstanding at June 30, 1998 1,229,520 $ 10.03 Granted 565,750 6.40 Canceled (180,709) 10.98 Exercised - - ----------- Options outstanding at June 30, 1999 1,614,561 $ 8.70 =========== Options exercisable at: June 30, 1997 130,357 $ 9.69 June 30, 1998 310,744 $ 9.65 June 30, 1999 581,924 $ 9.52 The range of exercise prices for options outstanding at June 30, 1999 and 1998 was $4.969-$13.50. Options available for grant at June 30, 1999 totaled 1,056,057. The Company has elected to account for its stock based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees; however, as required by SFAS No. 123, Accounting for Stock-Based Compensation, the Company has computed for pro forma disclosure purposes the value of options granted during the years ended June 30, 1999, 1998 and 1997 using the Black-Scholes option pricing model. The weighted-average assumptions used for stock option grants in 1999, 1998 and 1997 were a risk free interest rate of 5.78%, 5.48% and 6.44%, respectively, no expected dividend yield, an expected life of 4.5 years, 4.8 years and 6 years, respectively, and an expected volatility of 67%, 55% and 44%, respectively. The weighted-average estimated fair value of employee stock options granted during the years ended June 30, 1999, 1998 and 1997 was $5.06, $5.49 and $5.13 per share, respectively. 37 If the Company had accounted for the plan in accordance with SFAS No. 123, the Company's net income and pro forma net income per share would have been reported as follows: 1999 1998 1997 Net income (loss) as reported $ (25,539,429) $ 5,081,749 $ (8,300,507) Pro forma net income (loss) $ (26,323,075) $ 4,386,882 $ (8,992,908) Pro forma diluted net income (loss) per share $ (2.03) $ 0.34 $ (0.74) Diluted net income (loss) per share as reported $ (1.97) $ 0.40 $ (0.68)
The effects of applying SFAS No. 123 for providing pro forma disclosures for the years ended June 30, 1999, 1998 and 1997 are not likely to be representative of the effects on reported net income and earnings per share for future years since options vest over several years and additional awards are made each year. The Company has an Employee Stock Purchase Plan ("ESPP"). Under the ESPP employees may purchase shares of the Company's common stock at 85% of fair market value at specific, predetermined dates. There are 200,000 authorized to be issued under the ESPP. During fiscal year 1999, the board of Directors issued to the President of the Company 100,000 shares of restricted common stock in exchange for a non-interest bearing note due 2006. The stock was sold for $5.2035 per share, a discount of 25% from market. The shares are restricted to prevent its sale or transfer for two years. The President also has a right to put the stock back to the Company for $4.20 per share at the end of seven years. Deferred compensation of $173,400 was recognized and is being amortized over the two-year restriction period. In connection with the acquisition of Circuit Technology. Inc. ("CTI") in November 1996, Praegitzer issued stock warrants to purchase 46,333 shares of common stock to the former shareholders of CTI. The warrants can be exercised at $12 per share and expire in 2006. At June 30, 1999, no shares had been purchased under the stock warrants. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of long-term debt has been estimated by discounting projected future cash flows, using current rate at which similar loans would be made to borrowers with similar credit ratings and for the same maturities. Current maturities of long-term debt were included and capital lease obligations were excluded. The fair value of the Company's long-term debt is estimated to be $79,627,422, or 101.0% of the carrying value of $78,871,365 at June 30, 1999 and $77,182,424, or 100.1% of the carrying value of $77,067,931 at June 30, 1998. The fair value of the Key Bank interest rate swap is estimated to be the settlement amount. The Company could settle the swap at a loss of $32,000 and $23,000 at June 30, 1999 and 1998, respectively. 38 17. SUBSEQUENT EVENT Subsequent to June 30, 1999, Company entered into a Deferral Loan and Lease Modification Agreement dated October 12, 1999 with its equipment lenders and lessors (the "Modification Agreement"). Pursuant to the Modification Agreement (i) the Company's capital equipment lessors revised the Company's lease payment schedules and (ii) each lender either (a) made a loan to the Company (each a "Deferral Loan"), the proceeds of which were used to pay amounts owing under the Company's existing loan obligations and to prepay future payments owing under those obligations through February 2000 or (b) deferred certain payments on its existing obligations through February 2000 (the aggregate of such Deferral Loans, deferred payments and revised lease payments collectively, the "Deferred Amount"). In January 2000, the Company will pay an aggregate fee to the lenders and lessors equal to two percent of the Deferred Amount ($201,207). Each lender and lessor also has the option of receiving (i) an additional fee equal to three percent of its portion of Deferred Amount (a maximum aggregate amount of ($301,810) or (ii) the right to convert all or a portion of its share of the Deferred Amount into the Company's common stock at $5.77 per share. The amount that may be converted decreases over the term of the loan or lease and conversion is subject to certain other restrictions. Under the terms of the Modification Agreement, the lenders and lessors each waived the Company's prior defaults under its existing loan and/or lease agreements. 18. QUARTERLY FINANCIAL DATA (Unaudited) In the opinion of management, this unaudited quarterly financial summary includes all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position, the results of operations, and the cash flows of the Company for the periods represented, with the exception of the one-time charges reported in the quarters ended June 30, 1999 and March 31, 1999, see further discussion in Note 7 (in thousands, except per share amounts): September 30, December 31, March 31, June 30, 1998 1998 1999 1999 Net sales $ 55,396 $ 55,293 $ 56,706 $ 50,270 Gross profit 9,194 9,817 8,307 (825) Income (loss) from operations 2,182 2,712 (8,369) (28,895) Income (loss) before taxes 923 1,971 (9,266) (30,065) Net income (loss) 593 1,232 (8,281) (19,083) Net income (loss) per share, basic and diluted 0.05 0.10 (0.64) (1.48) September 30, December 31, March 31, June 30, 1997 1997 1998 1998 Net sales $ 42,595 $ 46,032 $ 44,713 $ 49,433 Gross profit 8,032 10,034 8,773 7,447 Income from operations 2,229 4,019 3,379 1,203 Income (loss) before taxes 1,601 3,379 2,545 (228) Net income (loss) 1,107 2,269 1,732 (26) Net income per share, basic and diluted 0.09 0.18 0.14 0.00
39 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the directors of the Company is included under "Election of Directors" in the Company's definitive Proxy Statement for its Annual Meeting of Shareholders filed or to be filed not later than 120 days after the end of the fiscal year covered by this Report (the "1999" Proxy Statement) and is incorporated herein by reference. For information concerning the executive officers of the Company, see "Executive Officers of the Registrant" under Part I of this report. Information with respect to Section 16(a) of the Securities Exchange Act is included under "Section 16(a) Beneficial Ownership Reporting Compliance" in the 1999 Proxy Statement. Item 11. EXECUTIVE COMPENSATION Information with respect to executive compensation is included under "Executive Compensation" in the 1999 Proxy Statement and is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to security ownership of certain beneficial owners and management is included under "Voting Securities and Principal Shareholders" in the 1999 Proxy Statement and is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to certain relationships and related transactions with management is included under "Certain Relationships and Related Transactions" in the 1999 Proxy Statement and is incorporated herein by reference. 40 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)1. Financial Statements: The following consolidated financial statements are included in Item 8: Independent Auditors' Report Consolidated Balance Sheets as of June 30, 1999 and 1998 Consolidated Statements of Operations for the years ended June 30, 1999, June 30, 1998 and June 30, 1997 Consolidated Statements of Cash Flows for the years ended June 30, 1999, June 30, 1998 and June 30, 1997 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1999, June 30, 1998 and June 30, 1997 Notes to Consolidated Financial Statements (a)2. Financial Statement Schedules: All schedules have been omitted since they are either not required or the information is otherwise included. (a)3. Exhibits: Exhibit Number Description - ------ ----------- 3(i) Second Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3(i)) of the Company's Annual Report on Form 10-K for the year ended June 30, 1998 (the "1998 Form 10-K")) 3(ii) Bylaws (Incorporated by reference to Exhibit 3(ii) of the Company's Registration Statement on Form S-1, Registration No. 333-01228 (the "Form S-1")) 4.1 See Article II of Exhibit 3(i) and Articles II and V of Exhibit 3(ii) 4.2 Form of Indenture dated December 29, 1998 between Praegitzer Industries, Inc. and U.S. Trust Company, N.A. as the Indenture Trustee (Incorporated by reference to Exhibit 4.2 of the Company's Registration Statement on Form S-1, Registration No. 333-63003) 10.1* 1995 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Form S-1) 10.2 Form of Incentive Stock Option Agreement (Incorporated by reference to Exhibit 10.2 of the Form S-1) 10.3 Form of Nonstatutory Stock Option Agreement (Incorporated by reference to Exhibit 10.3 of the Form S-1) 10.4 1996 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.17 of the Company's Annual Report on Form 10-K for the Year Ending June 30, 1997 (the "1997 Form 10-K")) 10.5 Borrowing Agreement between the Company and Heller Financial dated August 22, 1996 (Incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for Quarter Ending September 30, 1996 (the "September 30, 1996 Form 10-Q")) 10.6 Swap Agreement between the Company and Key Bank dated December 10, 1996 (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for Quarter Ending December 31, 1996) 41 10.7 Borrowing Agreement between the Company and Heller Financial dated May 30, 1997 (Incorporated by reference to Exhibit 10.8 of the 1997 Form 10-K) 10.8 Borrowing Agreement between the Company and Heller Financial dated December 29, 1997 (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the Quarter Ending December 31, 1997 (the "December 31, 1997 Form 10-Q")) 10.9 Borrowing Agreement between the Company and Heller Financial dated December 29, 1997 (Incorporated by reference to Exhibit 10.2 of the December 31, 1997 Form 10-Q) 10.10 Borrowing Agreement between the Company and Heller Financial dated March 27, 1998 (Incorporated by reference to Exhibit 10.1 of the March 31, 1998 Form 10-Q (the "March 31, 1998 Form 10-Q")) 10.11 Borrowing Agreement between the Company and Heller Financial dated March 31, 1998 10.12 Lease Agreement between CTI and Seapointe Development, Inc. dated April 1989 and amendments thereto (Incorporated by reference to Exhibit 10.13 of the Form S-1) 10.13 Lease between CTI and Redmond Quadrant Associates, LP dated June 15, 1995 (Incorporated by reference to Exhibit 10.14 of Form S-1) 10.14* Employment Agreement between the Company and Robert L. Praegitzer dated November 17, 1995 (Incorporated by reference to Exhibit 10.20 of the Form S-1) 10.15* Employment Agreement between the Company and Robert J. Versiackas dated August 26, 1996 (Incorporated by reference to the 1998 Form 10-K) 10.16* Offer Letter between the Company and James M. Buchanan dated March 24, 1998 (Incorporated by reference to the 1998 Form 10-K) 10.17 Stock Purchase Agreement between the Company and Matthew J. Bergeron dated December 22, 1998 (Incorporated by reference to Exhibit 10 of the December 31, 1998 Form 10-Q) 10.18 Amended and Restated Credit Agreement among the Company, the lenders named therein, KeyBank National Association and Heller Financial, Inc. dated April 8, 1999 (Incorporated by reference to Exhibit 10 of the March 31, 1999 Form 10-Q) 21.1 Subsidiaries of the Company 23.1 Consent of Deloitte & Touche LLP 27.1 Financial Data Schedule (Electronic Filing) - ------------------------------------------------------ * Represents a management contract or compensatory plan or arrangement. (b) Reports on Form 8-K During the three month period ended June 30, 1999, there were no reports on Form 8-K filed. 42 SIGNATURES Pursuant to the requirements of Sections 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. PRAEGITZER INDUSTRIES, INC. By: ROBERT L. PRAEGITZER ----------------------------------- Robert L. Praegitzer Chairman of the Board and Chief Executive Officer Dated: October 13, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date ROBERT L. PRAEGITZER - ---------------------------------- Chairman and October 13, 1999 Robert L. Praegitzer Chief Executive Officer MATTHEW J. BERGERON - --------------------------------- President, Chief Operating Officer, October 13, 1999 Matthew J. Bergeron Chief Financial Officer and Director DANIEL J. BARNETT - --------------------------------- Director October 13, 1999 Daniel J. Barnett THEODORE L. STEBBINS - --------------------------------- Director October 13, 1999 Theodore L. Stebbins MERRILL A. McPEAK - --------------------------------- Director October 13, 1999 Merrill A. McPeak GORDON B. KUENSTER - --------------------------------- Director October 13, 1999 Gordon B. Kuenster
43 EX-21.1 2 LIST OF SUBSIDIARIES LIST OF SUBSIDIARIES Jurisdiction of Name Incorporation - ---- --------------- Praegitzer International, LLC Oregon Praegitzer Asia Sdn Bhd Malaysia Praegitzer International (H.K.) Limited Hong Kong Praegitzer Industries (B.V.I.) Inc. British Virgin Islands EX-23.1 3 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statement Nos. 333-0753, 333-07535, 333-09319, and 333-80233 on Form S-8 and Registration Statement No. 333-24633 on Form S-3 of Praegitzer Industries, Inc. of our report dated October 13, 1999, included in this Form 10-K of Praegitzer Industries, Inc. for the year ended June 30, 1999. DELOITTE & TOUCHE LLP Portland, Oregon October 13, 1999 EX-27 4 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JUN-30-1999 JUL-1-1998 JUN-30-1999 570 0 30,695 (1,050) 16,652 62,056 107,334 (35,325) 143,897 43,262 67,326 0 0 43,886 (24,535) 143,897 217,665 217,665 191,172 191,172 58,863 0 5,848 (36,437) (10,898) (25,539) 0 0 0 (25,539) (1.97) (1.97)
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