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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-27932
PRAEGITZER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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OREGON 93-0790158
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1270 SE MONMOUTH CUT-OFF ROAD
DALLAS, OREGON 97338-9532 (503) 623-9273
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (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
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Aggregate market value of Common Stock held by nonaffiliates of the
Registrant at September 18, 1996: $23,825,000. For purposes of this
calculation, officers and directors are considered affiliates.
Number of shares of Common Stock outstanding at September 18, 1996:
12,064,375.
DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K INTO
DOCUMENT WHICH INCORPORATED
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1996 Annual Report to Shareholders Parts II and IV
Proxy Statement for 1996 Annual Meeting of Shareholders Part III
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TABLE OF CONTENTS
Item of Form 10-K Page
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1 - Business. . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2 - Properties. . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 14
Item 4 - Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . . . . . . . . 15
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 5 - Market for the Registrant's Common
Equity and Related Stockholder Matters. . . . . . . . . . . 15
Item 6 - Selected Financial Data . . . . . . . . . . . . . . . . . . 15
Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 8 - Financial Statements and Supplementary Data . . . . . . . . 18
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . . . . . . 18
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 10 - Directors and Executive Officers of
the Registrant. . . . . . . . . . . . . . . . . . . . . . . 18
Item 11 - Executive Compensation. . . . . . . . . . . . . . . . . . . 18
Item 12 - Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . 18
Item 13 - Certain Relationships and Related
Transactions. . . . . . . . . . . . . . . . . . . . . . . . 19
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 19
SIGNATURES 22
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PART I
ITEM 1. BUSINESS
GENERAL
Praegitzer is a leader in the design, quick-turnaround, pre-production
and volume production of complex, rigid multilayer printed circuit boards.
Printed circuit boards perform critical functions in products in the data
communications and telecommunications, instrumentation and industrial
equipment, computers and peripherals and business systems and consumer
segments of the broad electronics market. The Company pursues long-term
relationships with rapidly growing OEM customers that are technology leaders
in their industry segments and whose product requirements generally drive the
advancement of electronic interconnect manufacturing technology. The
Company's principal customers include Compaq, DSC Communications,
Hewlett-Packard, Intel, Motorola, Solectron and Xerox. Praegitzer was
incorporated under Oregon law in 1981.
In November 1995 Praegitzer acquired Circuit Technology, Inc. ("CTI"), a
printed circuit board manufacturer with production facilities located in
Redmond, Washington. The acquisition was accomplished by a merger of CTI with
and into Praegitzer. In November 1995 Praegitzer also acquired Praegitzer
Design, Inc. ("PDI"), a provider of schematic capture and printed circuit
design services. The acquisition was accomplished by a merger of PDI with and
into Praegitzer. In April 1996 the Company acquired from Praegitzer Property
Group all of the real property and improvements on which the Company's Dallas
and White City, Oregon manufacturing facilities are located.
In addition, in August 1996 Praegitzer completed the acquisition of
Trend Circuits, Inc. ("Trend"), a printed circuit board manufacturer with
production facilities located in Fremont, California. The acquisition was
accomplished by a merger of Trend with and into Praegitzer. In 1996 the
Company has also acquired four new design centers located in Irving, Texas,
San Diego and San Jose, California, and Blue Bell, Pennsylvania.
FORWARD-LOOKING STATEMENTS
From time to time the Company may issue forward-looking statements that
involve a number of risks and uncertainties. The following factors are among the
factors that could cause actual results to differ materially from the forward-
looking statements: business conditions and growth in the electronics industry
and general economies, both domestic and international; lower than expected
customer orders, delays in receipt of orders or cancellation 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; changes in product mix and the mix between
product and service revenue; receipt of a significant portion of customer orders
and products shipments in the last month of each quarter; and product shipment
interruptions due to manufacturing problems. The forward-looking statements
should be considered in light of these factors.
INDUSTRY OVERVIEW
Printed circuit boards are the basic platforms used to interconnect the
integrated circuits and other essential components of electronic products and
consist of interconnected layers of etched copper patterns of electrical
circuitry that have been laminated to insulating material. According to The
Institute for
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Interconnecting and Packaging Electronic Circuits ("IPC"), the United States
printed circuit board market totaled approximately $7.1 billion in sales in
1995. Multilayer printed circuit boards, which consist of more than two layers,
accounted for approximately 70% of printed circuit board sales in 1995. The IPC
estimates sales of standard and high performance multilayer printed circuit
boards in the United States will increase at average annual rates of 9.6% and
24.3%, respectively, from 1994 through 1999.
The overall market for electronics 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 printed circuit
boards have increased to meet these requirements. Many of these increasingly
complex printed circuit boards are manufactured using a variety of complex
processes and equipment, further complicating the production process.
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.
To compete in the market for increasingly complex and technologically
advanced printed circuit boards and to meet shorter time-to-market and
time-to-volume requirements, printed circuit board manufacturers must make
substantial capital investments and develop greater manufacturing
specialization and expertise. These factors have resulted in two trends in
the printed circuit board industry. As capital requirements have increased,
the industry has consolidated. According to the IPC, the number of United
States printed circuit board manufacturers has decreased from over 2,500 in
1976 to less than 700 in 1995. In addition, OEMs have increased the
outsourcing of printed circuit board production to focus resources on their
core strengths and have relied on outside suppliers to overcome increasingly
complex manufacturing challenges. According to the IPC, the independent
manufacturers' portion of the total printed circuit board market increased to
85% in 1995 from 66% in 1991. This market, however, remains highly
fragmented. The IPC estimates that in 1994 the 18 largest independent
manufacturers accounted for less than 34% of total printed circuit board
sales by independent manufacturers.
DEFINITION OF PRODUCTS AND SERVICES
The design and manufacture of printed circuit boards progress in stages:
schematic capture and circuit design, quick-turnaround prototype,
pre-production and volume production.
SCHEMATIC CAPTURE AND CIRCUIT DESIGN. Schematic capture involves the input
of an electronic schematic diagram into a high-performance computer workstation
that generates a net list of the electronic components and interconnects
required to design a printed circuit board. Circuit design is accomplished using
specialized computer-aided design ("CAD") software programs. Computer-generated
data describe the locations of holes and conductors (the "layout") which, along
with manufacturing information, may be transmitted electronically from the
designer to the manufacturer.
QUICK-TURNAROUND PROTOTYPE. 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 pieces. 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.
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PRE-PRODUCTION. Pre-production or pilot runs involve the manufacture of
limited quantities of printed circuit boards 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.
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 product development and production requires substantially
different capabilities and as a result most printed circuit board suppliers
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 electronic interconnect suppliers that provide a
full range of services, including design consultation and quick-turnaround
manufacturing, together with low to high volume production capability.
THE PRAEGITZER APPROACH
The Company is a leader in the design, quick-turnaround, pre-production
and volume production of complex, rigid multilayer printed circuit boards.
The Company concentrates its marketing efforts on segments of the broad
electronics market characterized by high growth, rapid technological
advances, short product development cycles and accelerated time-to-market and
time-to-volume requirements and focuses on customers that require suppliers
with advanced design and manufacturing capabilities. In response to these
customers' broadening requirements, the Company has expanded its
quick-turnaround capabilities through the recent acquisition of CTI, a
quick-turnaround and low volume production facility. This strategic
acquisition completed the Company's repositioning as an integrated solutions
provider of electronic interconnect products and services for the rigid
printed circuit board market. The Company believes its strong relationships
with pre-production and volume production customers will assist its continued
expansion into the quick-turnaround market. The Company believes larger
manufacturers with the capability to supply a broad range of products with a
diverse mix of performance characteristics will capture additional market
share in the printed circuit board industry. The Company is one of a limited
number of independent manufacturers that offers a range of integrated
electronic interconnect solutions from schematic capture and circuit design
services through high volume production. By offering this broad range of
services, the Company can provide design and manufacturing solutions for its
customers while reducing time-to-market, time-to-volume and product
development costs.
BUSINESS STRATEGY
The Company's objective is to be the leading provider of electronic
interconnect solutions ranging from schematic capture and circuit design
through high volume production. The Company's strategy to achieve this
objective includes the following elements:
PROVIDE INTEGRATED ELECTRONIC INTERCONNECT SOLUTIONS. The Company seeks
to provide an integrated range of complex electronic interconnect solutions.
The Company believes its broad range of services adds
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significant value for its customers by shortening their product development
cycles, lowering their costs through reduced custom tooling and other
manufacturing expenses and providing concentrated expertise not otherwise
generally available from a single supplier. The Company believes that by
offering design services it gains early access to additional production sales
opportunities and that its relationships with volume production customers create
additional quick-turnaround and design sales opportunities.
PURSUE LONG-TERM RELATIONSHIPS WITH HIGH-GROWTH CUSTOMERS THAT NEED THE
COMPANY'S ADVANCED CAPABILITIES AND SERVICES. The Company concentrates its
marketing efforts on segments of the broad electronics market characterized
by high growth, rapid technological advances, short product development
cycles and accelerated time-to-market and time-to-volume requirements and
focuses on customers that require suppliers with advanced design and
manufacturing capabilities. The Company seeks to develop and expand long-term
relationships with high-growth OEMs and contract manufacturers of advanced
electronics products by communicating closely with these customers throughout
the design and production process. These relationships assist the Company in
meeting its customers' design and manufacturing requirements.
DEVELOP AND USE INDUSTRY LEADING PROCESS TECHNOLOGY. The Company seeks
to be a process technology leader in the electronic interconnect industry by
providing a broad range of high quality products cost-effectively and
achieving production yields among the highest in the industry. The Company
has contributed significantly to the development and implementation of
industry leading process technologies, such as liquid inner layer resist, and
has invested in precision drilling and advanced finishing technologies for
dense packaging designs. The Company believes its process capabilities
provide a competitive advantage in the manufacture of complex interconnect
solutions.
INVEST IN STATE-OF-THE-ART FACILITIES AND EQUIPMENT. Since July 1, 1987
the Company and CTI have invested approximately $59.5 million in modern
facilities and equipment, have made significant investments in production
processes and intend to continue to make such investments to meet long-term
market demands. Each of the Company's manufacturing facilities is ISO 9002
certified and Bellcore compliant. The Company has recently expanded its
Redmond facility, is expanding its White City facility and is adding
equipment in all manufacturing locations. The Company believes these
investments will result in increased capacity, operating efficiencies,
improved management control and more consistent product quality so it can
satisfy the demanding delivery, time-to-market and time-to-volume
requirements of its customers.
PURSUE ACQUISITION OPPORTUNITIES. The Company's growth strategy
includes expansion through acquisition of complementary businesses. The
Company believes that, by these acquisitions, it can capitalize on OEM
outsourcing and consolidation trends within the interconnect industry. The
Company has acquired two quick-turnaround production facilities and several
strategically located circuit design facilities. The Company, however, has no
understandings, commitments or agreements with respect to any acquisition,
and there is no assurance that the Company will complete any acquisition in
the future.
MARKETS AND MARKETING
The Company concentrates its marketing efforts on segments of the broad
electronics market characterized by high growth, rapid technological
advances, short product development cycles and accelerated time-to-market and
time-to-volume requirements and focuses on customers that require suppliers
with advanced design and manufacturing capabilities. In response to these
customers' broadening requirements, the Company has expanded its
quick-turnaround capabilities through the acquisition of CTI
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in November 1995 and Trend Circuits in August 1996, both quick-turnaround and
low volume production facilities. These strategic acquisitions completed the
Company's repositioning as an integrated solutions provider of electronic
interconnect products and services for the rigid printed circuit board
market. The Company believes its strong relationships with pre-production and
volume production customers will assist its continued expansion into the
quick-turnaround market. The Company believes larger manufacturers with the
capability to supply a broad range of products with a diverse mix of
performance characteristics will capture additional market share in the
printed circuit board industry. The Company is one of a limited number of
independent manufacturers that offers a range of integrated electronic
interconnect solutions from schematic capture and circuit design services
through high volume production. By offering this broad range of services, the
Company can provide design and manufacturing solutions for its customers
while reducing time-to-market, time-to-volume and product development costs.
The Company pursues long-term relationships with rapidly growing OEM
customers that are technology leaders in their industry segments. The
Company's customers include a diverse group of leading OEMs of data
communications and telecommunications equipment, instrumentation and
industrial equipment, computers and peripherals and business systems and
consumer electronics. These customers often use leading technologies, and
their product requirements generally drive the advancement of electronic
interconnect manufacturing technology. The Company also sells to leading
contract manufacturers and electronics distributors that provide access to a
large number of OEM customers.
The following table shows, for fiscal 1996, the Company's percentage of its
net sales for the principal end-user markets it serves.
Markets June 30, 1996
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Instrumentation/Industrial 35%
Data/Telecommunications 33%
Computers and Peripheral 22%
Business/Consumer 10%
Total Net Sales 100%
The Company markets its products primarily through direct sales
personnel located in Washington, Oregon, California, Texas, Minnesota,
Alabama, Florida and Massachusetts. The Company has expanded its direct sales
force from nine to approximately 25 personnel in 1996. Direct sales efforts
in the United States are supplemented by several independent sales
organizations, each located in a region with a large geographical territory
or large potential account base. 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.
Praegitzer is pursuing the international markets with the recent
executive appointments of two individuals to pursue business development
opportunities in Asia and Canada, and eventually to Europe and South America.
The Company is expanding its 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.
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CUSTOMERS
The following table sets forth in alphabetical order the Company's largest
customers during fiscal 1996:
DATA COMMUNICATIONS AND TELECOMMUNICATIONS
AT&T Motorola, Inc.
ADTRAN, Inc. NEC Corporation
Digidesign, Inc. Trimble Navigation, LTD.
DSC Communications, Inc. Xylan Corporation (1)
INSTRUMENTATION AND INDUSTRIAL
Acuson Corporation (1) Nellcor Puritan
Data I/O Corporation Bennet, Inc
Hewlett-Packard Spectra-Physics, Inc.
Imed Corporation
COMPUTERS AND PERIPHERALS
Compaq Intel Corporation
Hewlett-Packard
BUSINESS SYSTEMS AND CONSUMER ELECTRONICS
In Focus Systems, Inc. Xerox Corporation
CONTRACT MANUFACTURERS AND ELECTRONICS DISTRIBUTORS (2)
AMP Packaging Systems, Inc. Micron Technology, Inc.
Avnet, Inc. SCI Systems, Inc.
Comptronix Corporation Solectron Corporation
Marshall Industries, Inc.
(1) Includes sales of Company products sold through contract manufacturers or
electronics distributors.
(2) Because the Company serves some OEM customers through contract
manufacturers and electronics distributors, some sales indicated in this
segment are also included under sales in the other listed segments.
For fiscal 1996 and fiscal 1995, sales to Hewlett-Packard accounted for
approximately 12.7% and 16.4% of the Company's revenue, respectively, and sales
to Compaq accounted for approximately 10.0% and 12.5% of the Company's revenue,
respectively. For fiscal 1996 and fiscal 1995, the Company's ten largest
customers accounted for approximately 52.7% and 56.4% of the Company's revenue,
respectively.
MANUFACTURING AND ENGINEERING PROCESSES
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The Company believes its substantial capital investment and its
manufacturing expertise in a number of specialized areas have contributed to
its position as a leader in the production of complex, rigid multilayer
printed circuit boards. To meet its customers' high density requirements, the
Company can manufacture printed circuit boards with layer counts in excess of
24 layers, blind and buried vias, buried capacitance and designs using
materials as thin as .0015(2). The Company believes its capabilities in the
following areas are of special importance:
SCHEMATIC CAPTURE AND DESIGN SERVICES. The Company works closely with
its customers to maximize design for manufacturability (DFM) to achieve
cost savings. The Company creates state-of-the-art layouts using a broad
range of advanced electronic design automation tools that are compatible with
its customers' design systems.
MULTIPLE MANUFACTURING FACILITIES. The Company's three manufacturing
facilities achieve efficiencies by specializing in different types of
production runs. The Company can also shift production among facilities as
demand warrants. Multiple facilities also reduce the risk of production
delays.
CAD/CAM. Because the Company's state-of-the-art computer aided
manufacturing (CAM) system is uniform throughout its three manufacturing
facilities, it can reduce tooling and test fixture costs across the
manufacturing process since they are incurred only once for each part number,
rather than multiple times when a customer uses more than one supplier. The
Company can receive CAD data by electronic data transmission and can use its
communications system to distribute the data to a CAM system at any of the
Company's facilities. The Company's CAM workstations perform design rule
checks on the transmitted designs, incorporate any requested customer design
modifications and perform manufacturability enhancements that increase
printed circuit board quality.
ADVANCED FINISHING CAPABILITIES FOR DENSE PACKAGING DESIGNS. The
Company provides a wide assortment of alternative surface finishes, including
hot air solder leveling, electroless nickel immersion gold, palladium and
Entek-Registered Trademark-, to address the complex requirements for
attachment of high pin count interconnect devices such as ball grid array
(BGA), Micro-BGA, Flip Chip, tape automated bonding ("TAB") and fine pitch
surface mount technology (SMT).
LIQUID INNER LAYER RESIST. The Company has developed process expertise
to implement a low cost liquid inner layer resist technology that produces
high yields on fine geometries and tolerances, including line and space
widths as small as .002(2). The Company is one of the few manufacturers
worldwide that has successfully implemented this technology.
OTHER ADVANCED PROCESS CAPABILITIES. The Company's substantial
investment in modern facilities and state-of-the-art equipment permits the
high yield fabrication of dense multilayer printed circuit boards. The
Company uses advanced drilling and plating equipment to produce
technologically advanced products with extremely tight tolerance holes as
small as .006(2) in diameter to interconnect printed circuit layers,
including controlled depth holes for blind vias. The Company produces fine
line circuitry in Class 10,000 and Class 1,000 clean room environments. In
the past five years the Company has invested in automated optical inspection
and electrical test systems, including dual-sided simultaneous testers and
in-house fixturing processes, to verify the quality of these high density
designs. The Company uses specialty materials such as GETEK-Registered
Trademark-, cyanate ester and polyimide for high temperature, fast signal
speed and other high-performance requirements.
The Company employs total quality management (TQM) techniques at all
facilities. The Company's quality management systems at each of its
manufacturing facilities have been ISO 9002
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certified since 1994. This certification is based on successful
implementation of quality assurance requirements and includes ongoing
monitoring of the Company's business and periodic compliance audits conducted
by an independent quality assessor. The Company is also Bellcore compliant, a
requirement of many telecommunications OEMs.
The Company has received numerous awards recognizing its customer
service and manufacturing excellence, including the United States Senate
Productivity award in 1990. In 1994 the Company was recognized as the best in
its class for responsiveness in the Service Excellence Award contest
sponsored by Technology Forecasters, an independent market research firm, and
PRINTED CIRCUIT FABRICATION, an industry trade journal, and CTI was
recognized as the overall winner in this contest in the medium-sized company
category. In 1995 the Company received awards for technology, quality and
value in the Service Excellence Award contest. The Company also received
customer awards for supplier excellence from Comptronix Corporation, Sequent
Computer Systems, Inc., Trimble Navigation Limited, and Verilink Corporation
in 1995.
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. For example, at the
Company's request, a laminate supplier operates a warehouse near the
Company's Dallas facility to store laminates previously shipped by the
supplier from California. In addition, the Company works closely with certain
of its suppliers to improve the raw materials used in the production of
printed circuit boards. For example, the Company and Ciba-Geigy AG developed
a liquid inner layer resist system to achieve significant cost and yield
advantages, and the Company and LeaRonal, Inc. are developing chemical
strategies with respect to plating, finishing processes and solder masks. Raw
materials used in the Company's products consist primarily of inorganic
chemicals, copper foil, copper-clad epoxy/glass laminate, epoxy glass prepreg
and liquid and dry film resist.
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 cost of
various raw materials and supplies is determined in part by annual purchase
volumes. As a result of the acquisition of CTI, the Redmond facility in
particular has benefited from lower costs for certain materials and supplies
associated with the Company's higher purchase volume.
Although the Company uses a select group of suppliers, the materials
used to manufacture printed circuit boards generally are readily available
from multiple suppliers. The Company has established strategic alliances and
stocking arrangements with key suppliers to increase protection against
shortages. Although adequate amounts of raw materials have been available in
the past, there is no assurance that raw materials will continue to be
available in the future.
COMPETITION
The printed circuit board industry is highly fragmented and
characterized by intense competition, which the Company believes will
increase. The Company competes principally in the market for complex, rigid
multilayer printed circuit boards. The Company's competitors include large
domestic manufacturers, offshore manufacturers located primarily in Asia,
small or regional domestic manufacturers and captive printed circuit board
operations of larger OEMs such as IBM. Some of the Company's competitors are
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substantially larger and have substantially greater manufacturing, financial
and marketing resources than the Company. During periods of recession in the
electronics industry, increasingly price sensitive customers may place less
value on the Company's competitive strengths, such as quick-turnaround
manufacturing and responsive customer service. In addition, OEMs with captive
printed circuit board manufacturing operations may seek open market orders to
fill excess capacity, which increases price competition. The Company may be
at a disadvantage in the lower technology segments of the printed circuit
board market when competing with manufacturers with lower cost structures,
particularly those with offshore facilities where labor and other costs may
be lower. Although capital requirements are a significant barrier to entry
for manufacturing technologically complex printed circuit boards, the basic
interconnect technology is generally not protected by patents or copyrights.
There is no assurance that the Company will be able to compete successfully
against present or future competitors or that competitive pressures faced by
the Company will not materially adversely affect the Company. The principal
independent competitors of the Company are based in the United States and
include Advanced Circuits, Inc., Hadco Corporation, Merix Corporation and
Zycon Corporation.
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 include 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. During periods of recession in the electronics industry, however,
the Company's competitive advantages in these areas may be less significant
to customers that may become more price sensitive. Many of the Company's
actual and potential competitors have financial, technological and marketing
resources significantly greater than those of the Company and may have
established relationships with customers or potential customers that afford
them a competitive advantage. There is no assurance that the Company will
continue to be able to compete effectively in its markets or that competitive
pressures will not materially adversely affect the Company.
BACKLOG
The Company's backlog at June 30, 1996 was approximately $16.3 million,
compared to a backlog of approximately $15.2 million at June 30, 1995. 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. For a variety of reasons, including
the timing of orders, 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, a significant portion of the Company's backlog
may be subject to cancellation without significant penalty.
ENVIRONMENTAL MATTERS
Printed circuit board manufacturing requires the use of metals and
chemicals. 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. The Company believes the waste
treatment systems at its facilities are in compliance with applicable
environmental laws in all material respects. There is no assurance, however,
9
<PAGE>
that violations will not occur in the future. The Company also 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. Environmental laws could become more stringent over time, and
the costs of compliance with more stringent laws could be substantial.
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.
EMPLOYEES
At June 30, 1996, the Company had 1,114 full-time employees, including
950 in manufacturing, 70 in engineering and design services, 35 in marketing
and sales, 19 in finance, accounting and information services and 40 in
administration. None of the Company's employees is 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.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, titles with Praegitzer Industries and
principal occupations and employment for the last five years of the executive
officers of Praegitzer Industries. The officers are appointed by the Board of
Directors and serve at its discretion.
10
<PAGE>
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert L. Praegitzer 64 President, Chief Executive Officer and Chairman of the Board
Matthew J. Bergeron 33 Senior Vice President, Chief Financial Officer and Director
Charles N. Hall 49 Senior Vice President and Director
Daniel J. Barnett 46 Senior Vice President and Director
Scott D. Gilbert 33 Vice President of Finance
Leslie J. Rowell 38 Vice President of Human Resources
Marty Filsinger 46 Vice President of Sales
Steven M. Smith 34 Vice President of Operations - Praegitzer Design Division
Walter E. Berry 50 Vice President of Operations - Dallas Division
Allen G. Broderick 35 Vice President of Business Operations - White City Division
Carleton Thompson 50 Vice President of Technical Operations - White City Division
Kenneth O. Stowers, Jr. 46 Vice President of Operations - Redmond Division
Robert J. Versiackas 47 Vice President of Operations - Fremont Division
Gregory F. Blount 43 Vice President of Corporate Quality
Eric M. Rogers 49 Vice President of Facilities and Environmental Resources
Sally Praegitzer 59 Secretary and Director
William L. Healey 51 Director
T. L. Stebbins 55 Director
</TABLE>
ROBERT L. PRAEGITZER founded the Company in 1981 and has been its
President, Chief Executive Officer and Chairman of the Board since that time.
He was also the founder and President of PDI, which merged into the Company
in 1995, and Praegitzer Property Group, the assets of which will be acquired
by the Company upon completion of this offering. Mr. Praegitzer is married to
Sally Praegitzer, a director and Secretary of the Company.
MATTHEW J. BERGERON joined the Company in 1990, overseeing finance,
administration and MIS. He became Senior Vice President in 1993 and a
director in November 1995. Prior to joining the Company, Mr. Bergeron was an
accountant at Johnson & Shute P.S., a public accounting firm. Mr. Bergeron is
a certified public accountant.
11
<PAGE>
ROBERT G. BALDRIDGE joined the Company as Senior Vice President and a
director in November 1995 in connection with the merger of CTI into the
Company. Prior to the merger, Mr. Baldridge was a co-president of CTI, which
he co-founded in 1984.
CHARLES N. HALL joined the Company as Senior Vice President and a
director in November 1995 in connection with the merger of CTI into the
Company. Prior to the merger, Mr. Hall was a co-president of CTI, which he
co-founded in 1984.
DANIEL J. BARNETT joined the Company as Senior Vice President and a
director in August 1996 in connection with the merger of Trend into the
Company. Prior to the merger, Mr. Barnett was the president of Trend.
SCOTT D. GILBERT joined the Company in August 1990 as Controller. In
November 1995 Mr. Gilbert was appointed Vice President of Finance.
LESLIE J. ROWELL joined the Company in 1981 and served as a plating
supervisor and later as materials manager. In 1994 Mr. Rowell was appointed
Human Resources Manager, and in November 1995 he was appointed Vice President
of Human Resources.
MARTY FILSINGER joined the Company in 1982 and served as national sales
manager. In November 1995 he was appointed Vice President of Sales.
STEVEN M. SMITH served as operations manager of PDI since June 1988.
Upon the merger of PDI into the Company in November 1995, Mr. Smith was
appointed Vice President of Operations - Praegitzer Design Division.
WALTER E. BERRY joined the Company in January 1989 and served as
operations manager of the Dallas facility until May 1993, when he was
appointed director of strategic planning and technology, a position he held
until January 1995, when Mr. Berry was reappointed operations manager of the
Dallas facility. In November 1995, Mr. Berry was appointed Vice President of
Operations - Dallas Division.
ALLEN G. BRODERICK joined the Company in January 1990 as operations
co-manager of the White City facility and was appointed Vice President of
Business Operations - White City Division in November 1995.
CARLETON THOMPSON joined the Company in January 1990 as operations
co-manager of the White City facility and was appointed Vice President of
Technical Operations - White City Division in November 1995.
KENNETH O. STOWERS, JR. joined CTI in March 1993 as operations manager
and, upon the merger of CTI into the Company in November 1995, was appointed
Vice President Operations - Redmond Division. From 1989 to March 1993 Mr.
Stowers was technical director and regional sales manager of Multiline
Technology, a printed circuit board equipment manufacturer.
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.
GREGORY F. BLOUNT joined the Company in 1986 as corporate quality
manager and was appointed Vice President of Corporate Quality in November
1995.
12
<PAGE>
ERIC M. ROGERS joined the Company in 1983 as facilities manager of the
Dallas facility and was appointed Vice President of Facilities and
Environmental Resources in November 1995.
SALLY PRAEGITZER has served as a director since November 1995. Ms.
Praegitzer has served as Secretary of the Company since 1981. Ms. Praegitzer
is married to Robert L. Praegitzer, the President, Chief Executive Officer
and Chairman of the Board of the Company.
WILLIAM L. HEALEY is the President, Chief Executive Officer and Director
of Smartflex Systems, Incorporated, a manufacturer of printed circuit boards.
and was appointed to the Board of Directors of the Company in May 1996.
T.L. STEBBINS is the Managing Director of Adams, Harkness & Hill, an
investment banking firm, and was appointed to the Board of Directors of the
Company in May 1996.
ITEM 2. PROPERTIES
The Company owns or leases approximately 301,200 square feet of
administrative, design, production, storage, and shipping space in eight
facilities. Of this space, 209,000 square feet are dedicated to manufacturing.
The Company's facilities are as follows:
<TABLE>
<CAPTION>
LOCATION OWNERSHIP STATUS SQUARE FEET
-------- ---------------- -----------
<S> <C> <C>
Dallas, Oregon Owned 130,000
Dallas, Oregon Leased 15,000
White City, Oregon Owned 64,000
Redmond, Washington Leased 42,500
Redmond, Washington Leased 2,500
Beaverton, Oregon Leased 3,100
San Jose, California Leased 7,700
Irving, Texas Leased 400
San Diego, California Leased 1,000
Fremont, California Leased 35,000
</TABLE>
___________
The Dallas manufacturing facility specializes in medium to high volume
production of complex, rigid multilayer printed circuit boards. The White
City facility specializes in medium volume production of complex, rigid
multilayer printed circuit boards. The larger Redmond facility and the
Fremont facility specialize in quick-turnaround prototype and low volume
production. The smaller Redmond facility and the Beaverton, San Diego, San
Jose and Irving facilities specialize in schematic capture and circuit design
services.
13
<PAGE>
The Dallas warehouse facility is subject to a month-to-month lease
with total monthly lease costs of approximately $6,000. The Redmond
facility is subject to two leases with total current monthly lease costs
of approximately $39,000. Each lease expires in 2000, with an option to
renew for an additional five-year period. The Fremont facility is
subject to a monthly lease cost of approximately $30,000 which expires
in 2002. The lease for the Beaverton facility provides for total current
monthly lease costs of approximately $2,300 and expires in 2000. The
lease for the San Jose facility provides for total current monthly lease
costs of $5,400 and expires in 1998, with a five-year renewal option.
A $5 million expansion program is underway to increase the
production capacity of the White City and Redmond facilities. The
expansion programs at White City and Redmond are expected to increase
production capacity by approximately 50% at both facilities. The Redmond
and White City expansion programs are expected to be completed by the
end of 1996.
ITEM 3. LEGAL PROCEEDINGS
On April 6, 1993, Karl J. Tadsen, a former employee, filed a
complaint in the Circuit Court of the State of Oregon for the County of
Jackson against the Company for employment discrimination and wrongful
discharge that resulted in a verdict against the Company in the amount
of approximately $423,450. The Company appealed the verdict to the
Oregon Court of Appeals and its appeal was denied. The Company appealed
the verdict to the Oregon Supreme Court, which has accepted the case for
review. The entire verdict amount was expensed in fiscal 1994.
On August 10, 1994, Virtual Vision, Inc., a former customer, filed
an adversary proceeding in the United States Bankruptcy Court for the
Western District of Washington against the Company and another creditor,
D. Blech & Company Incorporated ("Blech"), each of which held a security
interest in the customer's accounts receivable, inventory and equipment,
to determine the extent, validity and priority of each party's security
interest. On October 19, 1994 the court entered a default judgment in
favor of the Company. Blech appealed the decision to the United States
District Court for the Western District of Washington, which reversed
the bankruptcy court's denial of a motion to vacate the default
judgment. The Company intends to appeal this decision. If the district
court's decision is upheld, a trial will be held on the merits, and the
Company could be found liable to Blech for up to approximately $500,000,
which represents the amount received by the Company as the result of its
security interest.
On July 21, 1996, Pacific Communication Sciences, Inc. filed a
claim in the San Diego County, California Superior Court against the
Company on account of a written guaranty of indebtedness owing by
Carillon Corporation in the amount of $500,740 plus interest and
attorney fees. The Company believes the claim is without merit and
intends to vigorously defend against the claim.
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, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
14
<PAGE>
The Company's Common Stock commenced trading on the Nasdaq National
Market on April 4, 1996 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 1996 High Low
Fourth quarter (beginning April 4, 1996) $16.00 $8.125
Fiscal 1997
First quarter (through September 18, 1996) $11.625 $8.125
Based on a broker search performed by Allen Nelson and Company,
Inc., there were approximately 2,200 shareholders as of September 20,
1996.
Since incorporation and through April 4, 1996, the Company was
treated for state and federal income tax purposes as an S corporation.
As a result, the Company's earnings from inception through April 4, 1996
were taxed directly to the Company shareholders rather than to the
Company. In fiscal 1996 the Company paid cash dividends to its
shareholders in the aggregate amount of $5.2 million, most of which was
for the payment of the shareholders' income tax liabilities. No
dividends have been paid since April 4, 1996.
The Company expects to retain any earnings to finance the expansion
and development of its business and has no plans to pay cash 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.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of Praegitzer
Industries. This historical data should be read in conjunction with the
Financial Statements and the related notes thereto in Item 8 and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Item 7.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------------------------------------------
(in thousands, except per share data)
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue. . . . . . . . . . . . . . $33,748 $50,447 $51,757 $58,096 $95,101
Cost of goods sold . . . . . . . . 29,140 40,332 46,244 48,343 72,941
------- ------- ------- ------- -------
Gross profit . . . . . . . . . . . 4,608 10,115 5,513 9,753 22,160
Selling, general and
administrative expense . . . . . 4,018 5,116 6,082 6,406 8,896
------- ------- ------- ------- -------
Income (loss) from operations. . . 590 4,999 (569) 3,347 3,264
Interest expense . . . . . . . . . 1,356 1,444 1,217 1,563 1,799
15
<PAGE>
Other income (expense) . . . . . . (1,452) 60 (353) 92 302
------- ------- ------- ------- -------
Income (loss) from continuing
operations . . . . . . . . . . . (2,218) 3,615 (2,139) 1,876 11,767
Income (loss) from discontinued
operations . . . . . . . . . . . (1,389) (289) (3,081) -- (612)
------- ------- ------- -------
Net income (loss). . . . . . . . . $(3,607) $3,326 $(5,220) $1,876 $9,710
------- ------- ------- ------- -------
------- ------- ------- ------- -------
PRO FORMA NET INCOME (LOSS)
DATA:
Pro forma provision (benefit)
for income taxes . . . . . . . . $(1,443) $1,178 $(2,101) $691 $9,710
------- ------- ------- ------- -------
Pro forma net income
(loss) (1) . . . . . . . . . . . $(2,164) $2,148 $(3,119) $1,185 $6,916
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Pro forma net income from
continuing operations per
share (1). . . . . . . . . . . . $0.13 $0.76
------- -------
------- -------
Weighted average shares
outstanding. . . . . . . . . . . 8,824 9,110
<CAPTION>
JUNE 30,
-------------------------------------------------------------------
(IN THOUSANDS)
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficiency) $(2,092) $(154) $(5,999) $(1,897) $10,743
Total assets 32,228 38,977 29,051 30,352 52,836
Notes payable and
current portion of
long-term obligations 8,075 8,870 9,750 6,097 871
Long-term
obligations, net of
current portion 10,645 10,603 7,496 10,188 7,695
Redeemable Common Stock -- -- -- -- --
16
<PAGE>
Shareholders' equity 8,265 11,472 4,118 5,699 34,641
</TABLE>
- --------------------
(1) The Company was an S corporation and accordingly was not subject to
federal and state income taxes during the periods indicated. Pro forma
net income reflects 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. See Notes 1 and 13 of Notes to
Financial Statements of Praegitzer.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference to the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of the Company's 1996 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to the
Company's 1996 Annual Report to Stockholders as listed in Item 14 of Part IV of
this Report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
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 Stockholders filed or to be filed not later than 120 days
after the end of the fiscal year covered by this Report 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 "Compliance with Section 16(a) of the Exchange Act" in the
Company's definitive Proxy Statement for its 1996 Annual Meeting of Stockholders
filed or to be filed not later than 120 days after the end of the fiscal year
covered by this Report and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under
"Executive Compensation" in the Company's definitive Proxy Statement for its
1996 Annual Meeting of Stockholders filed or to be filed not later than 120 days
after the end of the fiscal year covered by this Report 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 Company's definitive Proxy Statement for its 1996 Annual Meeting of
Stockholders filed or to be filed not later than 120 days after the end of the
fiscal year covered by this Report and is incorporated herein by reference.
18
<PAGE>
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 Company's definitive Proxy Statement for its Annual Meeting
of Stockholders filed or to be filed not later than 120 days after the end of
the fiscal year covered by this Report and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. INDEX TO FINANCIAL STATEMENTS
1996 Annual Report
To Stockholders
-------------------
Independent Auditors' Report 16
Balance Sheets as of June 30, 1996 and 1995 17
Statements of Income for the years ended
June 30, 1996, June 30, 1995 and
June 30, 1994 18
Statements of Cash Flows for the years ended
June 30, 1996, June 30, 1995 and
June 30, 1994 19
Statements of Shareholders' Equity for the
years ended June 30,1996, June 30,
1995 and June 30, 1994 20
Notes to Financial Statements 21
(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
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
NUMBER
- ------
3(i) Restated Articles of Incorporation (Incorporated by reference to
Exhibit 3(i) of the Company's Registration Statement on Form S-1,
Registration No. 333-01228)
3(i)(a) Form of Second Amended and Restated Articles of Incorporation
(Incorporated by reference to Exhibit 3(i)(a) of the Company's
Registration Statement on Form S-1, Registration No. 333-01228)
3(ii) Bylaws (Incorporated by reference to Exhibit 3(ii) of the Company's
Registration Statement on Form S-1)
19
<PAGE>
4.1 See Article II of Exhibit 3(i)(a) and Articles II and V of Exhibit
3(ii)
10.1 1995 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1
of the Company's Registration Statement on Form S-1, Registration No.
333-01228)
10.2 Form of Incentive Stock Option Agreement (Incorporated by reference to
Exhibit 10.2 of the Company's Registration Statement on Form S-1,
Registration No. 333-01228)
10.3 Form of Nonstatutory Stock Option Agreement (Incorporated by reference
to Exhibit 10.3 of the Company's Registration Statement on Form S-1,
Registration No. 333-01228)
10.4 Borrowing Agreement between the Registrant and Seattle-First National
Bank dated November 17, 1995 (Incorporated by reference to Exhibit
10.4 of the Company's Registration Statement on Form S-1, Registration
No. 333-01228)
10.5 Loan Agreement between the Registrant and the State of Oregon
Department of Energy ("DOE") dated April 13, 1988 (Incorporated by
reference to Exhibit 10.6 of the Company's Registration Statement on
Form S-1, Registration No. 333-01228)
10.6 Loan Agreement between the Registrant and DOE dated December 3, 1991
(Incorporated by reference to Exhibit 10.7 of the Company's
Registration Statement on Form S-1, Registration No. 333-01228)
10.7 Promissory Note from the Registrant to Heller Financial, Inc.
("Heller") dated October 27, 1995 (Incorporated by reference to
Exhibit 10.8 of the Company's Registration Statement of Form S-1,
Registration No. 333-01228)
10.8 Promissory Note from the Registrant to Heller dated November 30, 1995
(Incorporated by reference to Exhibit 10.9 of the Company's
Registration Statement on Form S-1, Registration No. 333-01228)
10.9 Lease Agreement between CTI and Seapointe Development, Inc. dated
April 1989 and amendments thereto (Incorporated by reference to
Exhibit 10.13 of the Company's Registration Statement on Form S-1,
Registration No. 333-01228)
10.10 Lease between CTI and Redmond Quadrant Associates, LP dated June 15,
1995 (Incorporated by reference to Exhibit 10.14 of the Company's
Registration Statement on Form S-1, Registration No. 333-01228)
10.11 Borrowing Agreement between the Registrant and Key Bank dated April
12, 1996
10.12 Lease between PDI and Amberjack, Ltd. dated July 13, 1994 and
amendment thereto (Incorporated by reference to Exhibit 10.15 of the
Company's Registration Statement on Form S-1, Registration No. 333-
01228)
10.13 Form of Property Transfer Agreement between the Registrant and Robert
Praegitzer dated December 19, 1995 (Incorporated by reference to
Exhibit 10.16 of the Company's Registration Statement on Form S-1,
Registration No. 333-01228)
10.14 Form of Tax Indemnification Agreement (Incorporated by reference to
Exhibit 10.17 of the Company's Registration Statement on Form S-1,
Registration No. 333-01228)
10.15 Merger Agreement between the Registrant and CTI dated November 17,
1995 (Incorporated by reference to Exhibit 10.18 of the Company's
Registration Statement on Form S-1, Registration No. 333-01228)
10.16 Merger Agreement between the Registrant and PDI dated November 14,
1995 (Incorporated by reference to Exhibit 10.19 of the Company's
Registration Statement on Form S-1, Registration No. 333-01228)
10.17 Merger Agreement between the Registrant and Trend dated August 16,
1996 (Incorporated by reference to Exhibit 2.1 of the Company's Form
8-K dated August 28, 1996)
10.18 Employment Agreement between the Registrant and Robert L. Praegitzer
dated November 17, 1995 (Incorporated by reference to Exhibit 10.20 of
the Company's Registration Statement on Form S-1, Registration No.
333-01228)
20
<PAGE>
10.19 Employment Agreement between the Registrant and Robert G. Baldridge
dated November 17, 1995 (Incorporated by reference to Exhibit 10.21 of
the Company's Registration Statement on Form S-1, Registration No.
333-01228)
10.20 Employment Agreement between the Registrant and Charles N. Hall dated
November 17, 1995 (Incorporated by reference to Exhibit 10.22 of the
Company's Registration Statement on Form S-1, Registration No. 333-
01228)
10.21 Employment Agreement between the Registrant and Daniel J. Barnett
dated August 26, 1996
13 Annual Report to Shareholders
16.1 Letter on Changes in Certifying Accountant (Incorporated by reference
to Exhibit 16.1 of the Company's Registration Statement on Form S-1,
Registration No. 333-01228)
23.1 Consent of Deloitte & Touche LLP
24.1 Power of Attorney (see page 22)
27 Financial Data Schedule (Electronic Filing)
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1996.
21
<PAGE>
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
Chairman of the Board, President,
Chief Executive Officer
Dated: September 25, 1996
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below appoints Matthew J. Bergeron as his true and lawful attorney-in-fact and
agent, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
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
- --------- ----- ----
______________________ Chairman of the Board, September 25, 1996
Robert L. Praegitzer President, Chief
Executive Officer
________________________ Senior Vice President, September 25, 1996
Matthew J. Bergeron Chief Financial Officer
and Director
________________________ Senior Vice President September 25, 1996
Charles N. Hall Director
________________________ Senior Vice President September 25, 1996
Robert G. Baldridge Director
22
<PAGE>
________________________ Senior Vice President September 25, 1996
Daniel J. Barnett Director
________________________ Director September 25, 1996
T.L. Stebbins
________________________ Director September 25, 1996
William Healey
23
<PAGE>
CREDIT FACILITY AND SECURITY AGREEMENT
ACCOUNTS RECEIVABLE AND INVENTORY
On this 12th day of April, 1996, Borrower and Bank (as hereinafter
defined), in consideration of the premises, and the covenants and agreements
contained herein, hereby mutually agree as follows:
1. DEFINITIONS
"ACCOUNT" means (a) any account, and (b) any right to payment for Goods sold or
leased or for services rendered which is not evidenced by an Instrument or
Chattel Paper, whether or not it has been earned by performance.
"ACCOUNT DEBTOR" means the Person who is obligated on an Account Receivable.
"ACCOUNT RECEIVABLE" means:
(a) any account receivable, Account, Chattel Paper, Contract Right,
General Intangible, Document, or Instrument owned, acquired, or
received by a Person;
(b) any other indebtedness owed to or receivable owned, acquired, or
received by a Person of whatever kind and however evidenced; and
(c) any right, title, and interest in a Person's Goods which were
sold, leased, or furnished by that Person and gave rise to either
(a) or (b) above, or both of them. This includes, without
limitation:
(1) any rights of stoppage in transit of a Person's sold,
leased, or furnished Goods;
(2) any rights to reclaim a Person's sold, leased, or furnished
Goods; and
(3) any rights a Person has in such sold, leased, or furnished
Goods that have been returned to or repossessed by that
Person.
"ADVANCE(S)" means Revolving Credit Advances and Term Loan Advances.
"AFFILIATE" means any company that controls, is controlled by, or is under
common control with the Borrower.
"AGREEMENT" means this Credit Facility and Security Agreement between Borrower
and Bank, and includes any partial or total amendment, renewal, restatement,
extension, or substitution of or for such Agreement.
"BANK" means KEY BANK OF WASHINGTON, whose principal office is located at 700
5th Avenue, 48th Floor, Seattle, Washington 98104.
-1-
<PAGE>
"BORROWER" means PRAEGITZER INDUSTRIES, a corporation incorporated under the
laws of the State of Oregon.
"BORROWER'S CERTIFICATE" means a certificate, substantially in the form of
attached Exhibit A.
"BORROWER'S LOCATION" means the location of:
(a) Borrower's place of business, if there is only one such place of
business; or
(b) if there is more than one place of business, the place (1) from
which Borrower manages the main part of its business operations,
and (2) where persons dealing with Borrower would normally look
for credit information.
"BORROWING BASE" means an amount not in excess of the sum of the following:
(a) Eighty percent (80%) of the amount due and owing on Qualified
Accounts Receivable, plus
(b) Fifty percent (50%) of the cost or market value (whichever is
lower) of Borrower's Qualified Inventory, up to a maximum of
$1,500,000, less
(c) Reserves for Letters of Credit.
"CASH COLLATERAL ACCOUNT" means a commercial Deposit Account designated "cash
collateral account" and maintained by Borrower with Bank, without liability
by Bank to pay interest thereon, from which account Bank shall have the
exclusive right to withdraw funds until all Obligations are paid, performed,
satisfied, enforced, and observed in full.
"CAPITAL DISTRIBUTIONS" means any payment made, liability incurred, or other
consideration (other than any stock dividend or stock split or similar
distribution payable only in capital stock of Borrower) given for the
purchase, acquisition, redemption, or retirement of any capital stock of
Borrower or as a dividend, return of capital, or other distribution of any
kind on any of Borrower's capital stock outstanding at any time.
"CASH SECURITY" means all cash, Instruments, Deposit Accounts, and other cash
equivalents, whether matured or unmatured, whether collected or in the
process of collection, upon which Borrower presently has or may hereafter
have any claim, that are presently or may hereafter be existing or maintained
with, issued by, drawn upon, or in the possession of Bank.
"CHATTEL PAPER" means (a) any chattel paper, and (b) any writing or writings
which evidence both a monetary obligation and a security interest in or a
lease of specific Goods. If a transaction is evidenced both by such an
agreement for security or a lease and by an Instrument or a series of
Instruments, the group of writings taken together constitutes Chattel Paper.
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<PAGE>
"COLLATERAL" means:
(a) all of Borrower's Accounts Receivable, whether now owned or hereafter
acquired or received by Borrower;
(b) all of Borrower's Inventory, whether now owned or hereafter acquired
by Borrower;
(c) all funds on deposit in the Cash Collateral Account;
(d) all of Borrower's Cash Security; and
(e) all of the Proceeds, products, profits, and rents of Borrower's
Accounts Receivable, Inventory, Cash Security, and Cash Collateral
Account.
"CONTRACT RIGHT" means (a) any contract right, and (b) any right to payment
under a contract not yet earned by performance and not evidenced by an
Instrument or Chattel Paper.
"CONTRACT YEAR" means the twelve (12) month period which commences on each
anniversary of the execution of this Agreement.
"DEPOSIT ACCOUNT" means (a) any deposit account, and (b) any demand, time,
savings, passbook, or a similar account maintained with a bank, savings and
loan association, credit union, or similar organization, other than an
account evidenced by a certificate of deposit.
"DOCUMENT" means (a) any document, (b) any document of title, including a bill
of lading, dock warrant, dock receipt, warehouse receipt or order for the
delivery of Goods, and any other document which in the regular course of
business or financing is treated as adequately evidencing that the Person in
possession of it is entitled to receive, hold, and dispose of the document
and the Goods it covers, and (c) any receipt covering Goods stored under a
statute requiring a bond against withdrawal or a license for the issuance of
receipts in the nature of warehouse receipts even though issued by a Person
who is the owner of the Goods and is not a warehouseman.
"ENVIRONMENTAL LAW" means any federal, state, or local statute, law,
ordinance, code, rule, regulation, order or decree regulating, relating to,
or imposing liability upon a Person in connection with the use, release or
disposal of any hazardous, toxic or dangerous substance, waste or material.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended
from time to time.
"ERISA AFFILIATE" means each Person (whether or not incorporated) which
together with Borrower or any Affiliate would be treated as a single employer
under ERISA.
"EVENT OF DEFAULT" means the occurrence of any of the events set forth in
Section 9 of this Agreement.
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<PAGE>
"FINANCIAL IMPAIRMENT" means the distressed economic condition of a Person
manifested by any one or more of the following events:
(a) adjudicated bankruptcy or insolvency or death or discontinuation of
the business of the Person;
(b) the Person ceases, is unable, or admits in writing its inability, to
make timely payment upon the Person's debts, obligations, or
liabilities as they mature or come due;
(c) assignment by the Person for the benefit of creditors;
(d) voluntary institution by the Person or consent granted by the Person to
the involuntary institution [whether by petition, complaint,
application, default, answer (including, without limitation, an answer
or any other permissible or required responsive pleading admitting (1)
the jurisdiction of the forum or (2) any material allegations of the
petition, complaint, application, or other writing to which such answer
serves as a responsive pleading thereto), or otherwise] of any
bankruptcy, insolvency, reorganization, arrangement, readjustment of
debt, dissolution, liquidation, receivership, trusteeship, or similar
proceeding pursuant to or purporting to be pursuant to any bankruptcy,
insolvency, reorganization, arrangement, readjustment of debt,
dissolution, liquidation, receivership, trusteeship, or similar law of
any jurisdiction;
(e) voluntary application by the Person for or consent granted by the
Person to the involuntary appointment of any receiver, trustee, or
similar officer (1) for the Person or (2) of or for all or any
substantial part of the Person's property;
(f) entry, without the Person's application, approval, or consent, of any
order that is not dismissed, stayed, or discharged within thirty (30)
days from its entry, which is pursuant to or purporting to be pursuant
to any bankruptcy, insolvency, reorganization, arrangement, readjustment
of debt, dissolution, liquidation, receivership, trusteeship or similar
law of any jurisdiction (1) approving an involuntary petition seeking an
arrangement of the Person's creditors, (2) approving an involuntary
petition seeking reorganization of the Person, or (3) appointing any
receiver, trustee, or similar officer (i) for the Person, or (ii) of or
for all or any substantial part of the Person's property;
(g) any judgment, writ, warrant of attachment, execution, or similar process
is issued or levied against all or any substantial part of the Person's
property and such judgment, writ, warrant of attachment, execution, or
similar process is not released, vacated, or fully bonded within thirty
(30) days after its issue or levy.
"FOREIGN ACCOUNT RECEIVABLE" means any Account Receivable which arises out of
contracts with or orders from an Account Debtor which is not a resident of the
United States.
"GENERAL INTANGIBLE" means (a) any general intangible, and (b) any personal
property (including things in action) other than Goods, Accounts, Contract
Rights, Chattel Paper, Documents, Instruments, and money.
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<PAGE>
"GOODS" means (a) any goods, and (b) all things which are movable at the time
the security interest granted Bank under this Agreement attaches or which are
fixtures but does not include money, Instruments, Documents, Accounts, Chattel
Paper, General Intangibles, and Contract Rights.
"GOVERNMENT ACCOUNT RECEIVABLE" means any Account Receivable which arises out of
contracts with or orders from the United States or any of its departments
agencies, or instrumentalities.
"INSTRUMENT" means:
(a) any instrument;
(b) any negotiable or nonnegotiable instrument (including, without
limitation, drafts, checks, acceptances, certificates of deposit,
and notes);
(c) any security; and
(d) any other writing which:
(1) evidences a right to the payment of money,
(2) is not itself a security agreement or lease, and
(3) is of a type which in the ordinary course of business is
transferred by delivery with any necessary endorsement or
assignment.
"INTEREST PERIOD" means, with respect to any Libor Rate Loan, the period
commencing on the date such Loan is made, continued, or converted and ending
on the last day of such period as selected by the Borrower pursuant to the
provisions below and, thereafter, each subsequent period commencing on the
last day of the immediately preceding Interest Period and ending on the last
day of such period as selected by the Borrower pursuant to the provisions
below. The duration of each Interest Period for any Libor Rate Loan shall be
1 month, 2 months, or 3 months, in each case as the Borrower may select upon
notice, as set forth in Section 2.1(b), provided that:
(i) whenever the last day of any Interest Period would otherwise occur on
a day other than a Business Day, the last day of such Interest Period
shall occur on the next succeeding Business Day, provided that if such
extension of time would cause the last day of such Interest period for
a Libor Rate Loan to occur in the next following calendar month, the
last day of such Interest Period shall occur on the next preceding
Business Day;
(ii) if the Borrower fails to so select the duration of any Interest
Period, the duration of such Interest Period shall be three (3)
months; and
(iii) the Borrower may not select any Interest Period for any Libor Rate
Loan which ends after the next principal installment payment date on
said Libor Rate Loan.
-5-
<PAGE>
"LIBOR RATE" means, for any Interest Period for any Libor Rate Loan, an
interest rate per annum (rounded upwards to the next higher whole multiple of
1/16% if such rate is not such a multiple) equal at all times during such
Interest Period to the quotient of (a) the rate per annum (rounded upwards to
the next higher whole multiple of 1/16% if such rate is not such a multiple)
at which deposits in United States dollars are offered at 11:00 a.m.
(London, England time) (or as soon thereafter as is reasonably practicable)
by prime banks in the London interbank eurodollar market two Business Days
prior to the first day of such Interest Period in an amount and maturity of
such Libor Rate Loan, divided by (b) a number equal to 1.00 minus the
aggregate (without duplication) of the rates (expressed as a decimal
fraction) of the Libor Reserve Requirements current on the date two Business
Days prior to the first day of such Interest Period.
"LIBOR RATE LOAN" means any Advance that bears interest with reference to the
Libor Rate.
"LIBOR RESERVE REQUIREMENTS" means, for any Interest Period for any Libor
Rate Loan, the maximum reserves (whether basic, supplemental, marginal,
emergency, or otherwise) prescribed by the Board of Governors of the Federal
Reserve System (or any successor) with respect to liabilities or assets
consisting of or including "Eurocurrency liabilities" (as defined in
Regulation D of the Board of Governors of the Federal Reserve System) having
a term equal to such Interest Period.
"INVENTORY" means:
(a) any inventory;
(b) all Goods that are raw materials;
(c) all Goods that are work in process;
(d) all Goods that are materials used or consumed in the ordinary course
of a Person's business;
(e) all Goods that are, in the ordinary course of a Person's business, held
for sale or lease or furnished or to be furnished under contracts of
service; and
(f) all substitutes and replacements for, and parts, accessories,
additions, attachments, or accessions to (a) to (e) above.
"LETTER OF CREDIT" means any outstanding letter of credit issued by Bank on
the account of Borrower.
"LOAN ACCOUNT" means an account maintained by Bank on its books, which will
evidence all Advances, accrued interest thereon, other amounts due Bank with
respect to such Advances, and all payments thereof by Borrower.
"MULTIEMPLOYER PLAN" means a plan described in ERISA which covers employees
of the Borrower, any Affiliate, or any ERISA Affiliate.
-6-
<PAGE>
"OBLIGATIONS" means any of the following obligations, whether direct or
indirect, absolute or contingent, secured or unsecured, matured or unmatured,
originally contracted with Bank or another Person and now owing to or
hereafter acquired in any manner partially or totally by Bank or in which
Bank may have acquired a participation, contracted by Borrower alone or
jointly or severally with another Person:
(a) any and all indebtedness, obligations, liabilities, contracts,
indentures, agreements, warranties, covenants, guaranties,
representations, provisions, terms, and conditions of whatever kind,
now existing or hereafter arising, and however evidenced, that are now
or hereafter owed, incurred, or executed by Borrower to, in favor of,
or with Bank (including, without limitation, those as are set forth or
contained in, referred to, evidenced by, or executed with reference to
this Agreement, the Loan Account, any promissory notes, letter of
credit agreements, advance agreements, indemnity agreements,
guaranties, lines of credit, mortgage deeds, security agreements,
assignments, pledge agreements, hypothecation agreements, Instruments,
and acceptance financing agreements), and including any partial or
total extension, restatement, renewal, amendment, and substitution
thereof or therefor;
(b) any and all claims of whatever kind of Bank against Borrower, now
existing or hereafter arising including, without limitation, any
arising out of or in any way connected with warranties made by Borrower
to Bank in connection with any Instrument deposited with or purchased
by Bank;
(c) any and all of Bank's Related Expenses.
"ORGANIZATION" means a corporation, government or government subdivision or
agency, business trust, estate, trust, limited liability company,
partnership, association, two or more Persons having a joint or common
interest, and any other legal or commercial entity.
"PBGC" means the Pension Benefit Guaranty Corporation established pursuant to
Title IV of ERISA.
"PERMITTED LIENS" means those liens described on Schedule "A" hereto.
"PERSON" means an individual or an Organization.
"PLAN" means any plan (other than a Multiemployer Plan) defined in ERISA in
which the Borrower or any Affiliate is, or has been at any time during the
preceding two (2) years, an "employer" or a "substantial employer" as such
terms are defined in ERISA.
"PRIME RATE" means that interest rate established from time to time by Bank
as Bank's Prime Rate, whether or not publicly announced; the Prime Rate may
not be the lowest interest rate charged by Bank for commercial or other
extensions of credit.
"PRIME RATE LOAN" means any Advance that bears interest with reference to the
Prime Rate.
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<PAGE>
"PROCEEDS" means (a) any proceeds, and (b) whatever is received upon the
sale, exchange, collection, or other disposition of Collateral or Proceeds,
whether cash or non-cash. Cash Proceeds includes, without limitation,
moneys, checks, and Deposit Accounts. Proceeds includes, without limitation,
any Account arising when the right to payment is earned under a Contract
Right, any insurance payable by reason of loss or damage to the Collateral,
and any return or unearned premium upon any cancellation of insurance.
Except as expressly authorized in this Agreement, Bank's right to Proceeds
specifically set forth herein or indicated in any financing statement shall
never constitute an express or implied authorization on the part of Bank to
Borrower's sale, exchange, collection, or other disposition of any or all of
the Collateral.
"PROHIBITED TRANSACTION" means any prohibited transaction as that term is
defined for purposes of ERISA.
"QUALIFIED ACCOUNT RECEIVABLE" means an Account Receivable of Borrower which,
at all times until it is collected in full, continuously meets the following
requirements:
(a) is not subject to any claim for credit, allowance, or adjustment by
the Account Debtor or any set off or counter claim;
(b) arose in the ordinary course of Borrower's business from the
performance (fully completed) of services or bona fide sale of Goods
which have been shipped to the Account Debtor, and not more than ninety
(90) days have elapsed since the performance (fully completed) of
services or the sale of Goods for or to the Account Debtor;
(c) is not subject to an assignment, pledge, claim, mortgage, lien, or
security interest of any type except that granted to or in favor of
Bank;
(d) Bank has not determined that the Account Receivable is unsatisfactory
in any respect;
(e) is not an Account Receivable due from any Affiliate, shareholder or
employee of Borrower;
(f) is not a Foreign Account Receivable; and
(g) is not evidenced by a promissory note or any other negotiable
instrument;
(h) is not an Account Receivable owed to Borrower by an Account Debtor
which has failed to pay more than 25% of its currently outstanding
Accounts Receivable within ninety (90) days of service or sale of
goods.
"QUALIFIED INVENTORY" means all Inventory EXCEPT Inventory which is:
(a) located outside the United States;
(b) in the possession of a bailee or a third party;
(c) damaged, defective, or obsolete;
(d) held by Borrower or a third party on consignment; or
(e) Bank has determined that the Inventory is unsatisfactory in any
respect.
-8-
<PAGE>
"RELATED EXPENSES" means any and all costs, liabilities, and expenses
(including, without limitation, losses, damages, penalties, claims, actions,
reasonable attorney's fees, legal expenses, judgments, suits, and
disbursements) incurred by, imposed upon, or asserted against, Bank in any
attempt by Bank:
(a) to obtain, preserve, perfect, or enforce any security interest
evidenced by (i) this Agreement, or (ii) any other pledge agreement,
mortgage deed, hypothecation agreement, guaranty, security agreement,
assignment, or security instrument executed or given by Borrower to or
in favor of Bank;
(b) to obtain payment, performance, and observance of any and all of the
Obligations;
(c) to maintain, insure, audit, collect, preserve, repossess, and dispose
of any of the Collateral, including, without limitation, costs and
expenses for appraisals, assessments, and audits of Borrower or the
Collateral; or
(d) incidental or related to (a) through (c) above, including, without
limitation, interest thereupon from the date incurred, imposed, or
asserted until paid at the rate payable as set forth in Section 2 of
this Agreement, but in no event greater than the highest rate permitted
by law.
"REPORTABLE EVENT" means any reportable event as that term is defined for
purposes of ERISA.
"REVOLVING CREDIT ADVANCE" means an Advance made by Bank to Borrower subject
to the provisions, terms and conditions of Section 2(a)(i).
"SUBORDINATED DEBT" means Indebtedness of a Person which is subordinated, in
a manner satisfactory to the Bank, to all indebtedness owing to the Bank.
"SUBSIDIARY" shall mean any Person of which more than fifty percent (50%) of
(i) the voting stock entitling the holders thereof to elect a majority of the
Board of Directors, manager, or trustees thereof, or (ii) the interest in the
capital or profits of such Person, which at the time is owned or controlled,
directly or indirectly, by the Borrower or one or more other Affiliate.
"TANGIBLE NET WORTH" means the total assets of Borrower less the sum of
Borrower's (i) total liabilities plus (ii) the aggregate amount of all
intangible assets, and Accounts Receivable due from any Affiliate,
shareholder or employee of Borrower.
"TERMINATION DATE" means April 12, 1998, or such earlier date on which the
commitment of the Bank to make Advances pursuant to Section 2(a) hereof shall
have been terminated pursuant to Section 9 of this Agreement.
The foregoing definitions shall be applicable to the singulars and plurals of
the foregoing defined terms.
-9-
<PAGE>
2. STATEMENT OF TERMS
(a) (i) REVOLVING CREDIT. Bank will, subject to the terms and conditions
of this Agreement, up to and including the Termination Date, make
Revolving Credit Advances to or for the account of Borrower up to
but not exceeding an aggregate unpaid principal amount outstanding
at any one time on Revolving Credit Advances equal to the LESSER
of (a) the line of credit approved for Borrower, which is
currently Ten Million Dollars ($l0,000,000.00) or (b) the
Borrowing Base. Issued and outstanding Letters of Credit shall
not exceed Two Million Five Hundred Thousand Dollars
($2,500,000.00). The Borrower may borrow, repay and reborrow such
maximum amount of credit. The dollar amounts of the line of
credit and the Borrowing Base, and any one or more of the
percentages of the Borrowing Base, may be changed by Bank at any
time upon written notice to Borrower, to be effective on the day
such notice is mailed to Borrower. The Bank shall debit to the
Loan Account the amount of each Revolving Credit Advance made
under this Agreement and all interest, other compensation, or
other fees payable on all Revolving Credit Advances and shall
credit to the Loan Account each payment of (a) principal and
interest on account of each Revolving Credit Advance and (b)
other amounts payable under this Agreement by the appropriate
entries. The Loan Account shall constitute prima facie evidence
of all Revolving Credit Advances made by Bank pursuant to this
Agreement. In the event of any discrepancy between the records
of Bank and Borrower with regard to the Loan Account, the records
of Bank shall prevail unless the Borrower notifies Bank of an
error within five (5) business days after having discovered any
such error or unless Borrower and Bank mutually agree with regard
to an appropriate change in such records. Borrower shall execute
and deliver to Bank a master promissory note, substantially in the
form of attached Exhibit B, to evidence all Revolving Credit
Advances under this Agreement. The Bank's loan pursuant to this
Section 2(a) shall be evidenced by a properly executed master
promissory note in the form of Exhibit B ("Master Promissory
Note") with all blanks appropriately filled in.
(ii) INTEREST RATES AND PAYMENT OF INTEREST. As compensation for the
Revolving Credit Advances made by Bank, Borrower undertakes and
agrees to pay to Bank interest on (A) the Prime Rate Loans on the
earlier of (i) the date such Prime Rate Loan is converted to a
Libor Rate Loan, (ii) the first day of each calendar quarter,
(iii) the date of any prepayment, or (iii) the Termination Date,
and (B) the Libor Rate Loans on the earlier of (i) the date such
Libor Rate Loan is converted to a Prime Rate Loan, (ii) the last
day of the applicable Interest Period of such Libor Rate Loan, or
(iii) the Termination Date. The Revolving
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<PAGE>
Credit Advances shall bear interest upon the average daily balance in
Borrowers Loan Account during the preceding quarter at an annual
rate with respect to each Revolving Credit Advance (to be elected
by Borrower) equal to either the Libor Rate plus 1 3/4% or the
Prime Rate.
(iii) Borrower shall repay to the Bank on the Termination Date the net
balance in the Borrower's Loan Account.
(b) (i) ADVANCES. Advances shall be made pursuant to
Borrower's written, telegraphic, or telephonic request
therefor (a "Request for a Advance"), given by Borrower to
Bank (upon three Business Days notice for a Libor Rate Loan)
stating the date of the proposed borrowing, the amount of
Bank's Advance, whether it will be a Prime Rate Loan, or Libor
Rate Loan, the applicable Interest Period, if any, and the
total amount to be borrowed. Each written Request for a
Advance shall be signed by an authorized person of Borrower
and accompanied by a Borrower's Certificate, and each
telephonic request for a Advance shall be made, and confirmed
in writing thereafter, by such an authorized person and
accompanied by a Borrower's Certificate. No Request for a
Advance shall become effective until actually received by
Bank. Each Libor Rate Loan shall not be in an amount less
than $500,000, and increments of $100,000 for any amount above
$500,000.
(ii) CHANGE IN INTEREST RATES. The interest rate elected by the Borrower
under this Section 2(b) shall, as to each Advance, remain in effect
until changed by the Borrower by written notice to Bank on or
prior to the date of change or, in the case of Prime Rate Loans until
changed by the terms thereof, provided however, (a) that a change to
the Libor Rate, or the election of a Libor Rate Loan, can be effected
only upon three (3) Business Days' notice (with notice to be received
by Bank not later than 11:00 a.m. Portland, Oregon time on such day),
and (b) when the rate of interest is the Libor Rate it may be changed
to a Prime Rate Loan before the end of the applicable Interest Period
subject, however, to payment of any applicable additional amount
required by Section 2(b)(v) hereof (but without requiring prepayment
of the effected borrowing);
(iii) LIMITATIONS IN INTEREST RATE SELECTIONS. The Borrower may not
elect the Libor Rate if U.S. dollar deposits are not available to any
Bank in the London Eurodollar Interbank Market for the period and in
the amount requested by the Borrower;
(iv) SPECIAL PROVISIONS FOR LIBOR RATE LOANS AND TAXES. If the making or
maintaining of a Libor Rate Loan becomes illegal for Bank as a
result of any change in an applicable law, governmental regulation,
guideline or order or the interpretation thereof by an authority
charged with the
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<PAGE>
administration thereof, then upon notice thereof by
Bank, the Borrower (a) shall not cause a new Libor Rate Loan
to be made or elect another Libor Rate Interest Period for an
outstanding Libor Rate Loan for so long as the making of a
Libor Rate Loan by Bank remains illegal, and (b) shall prepay,
or select another interest rate for, any then outstanding
Libor Rate Loans and pay any applicable additional amount
required by Section 2(b)(vi) but without giving effect to any
notice requirements, in each case when and to the extent
required by such change.
(v) INCREASED COSTS. With respect to Libor Rate Loans,
if the effect of any change occurring after the date
of this Agreement in an applicable law, governmental
regulation, guideline or order or the interpretation or
application of any thereof by any authority charged
with the administration thereof is to increase the actual cost
to Bank of making or maintaining such Libor Rate Loans
(assuming for such purpose that each such borrowing is funded
by Bank from sources referred to in the definition of the
interest rate applicable to such borrowing) such as, but not
limited to, any reserve, special deposit or similar
requirements against assets held by, or deposits in or for the
account of, or loans by, or any other acquisition of funds for
loans by Bank, or to reduce the amount of any payment of
principal or of interest, in respect of any Libor Rate Loan,
received by Bank (including any reduction for withholding
taxes), the Borrower will, after demand by Bank, pay to Bank
such additional amounts as will compensate Bank for such
additional cost or reduction, such payments to be made on the
next date when interest is payable to Bank pursuant to such
borrowings. The Borrower shall have the option, upon being
notified by Bank pursuant to this Section, to change the
interest rate on the affected borrowings pursuant to Section
2(b)(vi) but without giving effect to the notice requirements
provided therein or make any prepayments permitted under this
Agreement and, in each case, with payment of any additional
applicable amount required by Section 2(b)(vi).
If either (i) any law, rule, or regulation now or
hereafter in effect, and whether or not presently applicable
to Bank, or (ii) the compliance with any guideline or request
from any central bank or other governmental authority (whether
or not having the force of law), affects or would affect the
amount of capital required or expected to be maintained by
Bank or any corporation controlling Bank and Bank determines
that the amount of such capital is increased by or based upon
the existence of the Advances (or commitment to make the
Advances) and other extensions of credit (or commitments to
extend credit) of similar type, then, upon demand by Bank, the
Borrower shall pay to Bank from time to time as specified by
Bank additional amounts sufficient to compensate Bank in the
light of such circumstances, to the extent that Bank
reasonably
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<PAGE>
determines such increase in capital to be allocable to the
existence of Bank's Advances (or commitment to make the
Advances). A certificate of Bank submitted to the Borrower as
to such amounts shall be conclusive and binding for all
purposes, absent manifest error. Upon notice from the
Borrower to Bank within five (5) Business Days after Bank
notifies the Borrower of any such additional costs pursuant to
this Section, the Borrower may either (A) prepay in full all
Advances of any types so affected then outstanding, together
with interest accrued thereon to the date of such prepayment,
or (B) convert all Advances of any types so affected then
outstanding into Advances of any other type not so affected
upon not less than four (4) Business Days' notice to Bank. If
any such prepayment or conversion of any Libor Rate Loan
occurs on any day other than the list day of the applicable
Interest Period for such Advance, the Borrower also shall pay
to Bank such additional amounts sufficient to indemnify Bank
against any loss, cost, or expense incurred by Bank as a
result of such prepayment or conversion, including, without
limitation, any loss (including loss of anticipated profits),
cost, or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by Bank to
fund any such Loan, and a certificate as to the amount of any
such loss, cost, or expense submitted by Bank to the Borrower
shall be conclusive and binding for all purposes, absent
manifest error.
(vi) INDEMNIFICATION. If the Borrower makes any payment
of principal with respect to any Libor Rate Loan on any other
date than the last day of an Interest Period applicable
thereto (whether pursuant to Sections 2(a), 2(b), 6, 7, 9
hereof, or otherwise), or if the Borrower fails to borrow any
Libor Rate Loan after notice has been given to Bank in
accordance with Section 2(b) or if the Borrower fails to make
any payment of principal or interest in respect of a Libor
Rate Loan or when due, the Borrower shall reimburse Bank on
demand for any resulting loss or expense incurred by Bank,
including without limitation any loss incurred in obtaining,
liquidating or employing deposits from third parties, whether
or not Bank shall have funded or committed to fund such Loan.
A statement as to the amount of such loss or expense, prepared
in good faith and in reasonable detail by Bank and submitted
by Bank to the Borrower, shall be conclusive and binding for
all purposes absent manifest error in computation. Calculation
of all amounts payable to Bank under this Section shall be
made as though Bank shall have actually funded or committed to
fund its relevant Libor Rate Loan through the transfer of such
deposit from an offshore office of Bank to a domestic office
of Bank in the United States of America; provided, however,
that Bank may fund any Libor Rate Loan in any manner it sees
fit and the foregoing assumption shall be utilized only for
the purpose of calculation of amounts payable under this
Section.
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<PAGE>
(vii) CONTRIBUTION AND CONVERSION OF LOANS. In the
event that the Borrower shall fail to give timely notice of
its election to convert or continue any Advance as provided
above, or in the event that any such conversion or
continuation shall be prohibited by the terms of this
Agreement, such Advance (unless repaid) shall automatically be
deemed to be refinanced with a Prime Rate Loan at the end of
the Interest Period then in effect with respect to such
Advance. For purposes of this Section, notice received by
Bank after 11:00 a.m. on a Banking Day shall be deemed to be
received on the immediately succeeding Banking Day.
(viii) COMPUTATION OF INTEREST. Interest under this
Agreement shall be calculated on the basis of a year of 360
days, for the actual number of days (including the first day
but excluding the last day) elapsed. For any Prime Rate Loan,
the rate will increase or decrease on the day of, and by an
amount equal to, each increase or decrease in the Prime Rate.
The rate charged to Borrower under this Agreement shall change
when and as the Prime Rate is changed. In no event shall the
compensation received by Bank pursuant to this Agreement in
any Contract Year (or portion thereof if this Agreement is
terminated during a Contract Year) be less than Minimum
Compensation. In such event, Bank shall be entitled to debit
the Loan Account for the difference between such actual
compensation and the Minimum Compensation.
(ix) DEFAULT INTEREST RATE. After maturity (whether by
acceleration or otherwise), the unpaid principal and accrued
interest on any Advance shall bear interest at a rate per
annum equal to two percent (2%) in excess of the interest rate
prior to default. Prior to maturity, if any payment of
interest is not paid when due, Borrower shall pay a late fee
of an amount equal to Five Hundred Dollars ($500).
Notwithstanding the Bank's remedies as set forth in Section 10
hereof, prior to maturity hereof, upon the occurrence of any
Event of Default under this Agreement and until such Event of
Default is cured by Borrower, at Bank's option and upon
written notice to Borrower, the unpaid principal and accrued
interest on any Advance shall bear interest at a rate per
annum equal to two percent (2%) in excess of the interest rate
prior to default.
(c) (i) In order to compensate Bank for its service in
preparing and reviewing this Credit Facility and Security
Agreement, the Master Promissory Note, the Note and the
documentation relating thereto, Borrower shall pay to Bank on
the date hereof a documentation/administration fee of $4,750.
(ii) Borrower agrees to pay Bank a closing fee equal to $12,500, payable on
the date of execution of this Agreement.
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(iii) Borrower agrees to pay Bank a facility fee of Ten Thousand Dollars
($10,000) annually, paid in quarterly installments of Two
Thousand Five Hundred Dollars ($2,500) on the last day of each
March, July, September and December.
(iv) Borrower agrees to pay to Bank a letter of credit fee
of one and three-quarters percent (1-3/4%) per annum of the
amount of any issued and outstanding standby Letters of
Credit, payable at issuance.
(d) If (1) there shall be introduced or changed any
treaty, statute, regulation, or other law, or there shall be
any change in the interpretation or administration thereof, or
there shall be made any request from any central bank or other
lawful governmental authority, which introduction, change, or
compliance shall (a) impose, modify, or deem applicable any
reserve or special deposit requirements against assets held by
or deposits in or loans by Bank or (b) subject Bank to any
tax, duty, fee, deduction, or withholding or (c) change the
basis of taxation of the overall net income (otherwise than by
a change in taxation of the overall net income of Bank) or (d)
impose, modify, or deem applicable any capital adequacy or
similar requirement (including, without limitation, any
request or requirement which affects the manner in which Bank
allocates capital resources to its commitments generally or
those under this Agreement) and (2) in Bank's sole opinion any
such event (A) reduces the amount of any payment to be made to
Bank under this Agreement or (B) reduces the rate of return on
the capital of Bank that is reasonably allocable to Bank's
commitments under this Agreement to a level below that which
Bank would have achieved but for that event, then, upon Bank's
demand, Borrower shall pay Bank from time to time such
additional amounts as will compensate Bank for and indemnify
it against such increased costs or reduced payment or reduced
rate of return. Each demand shall be accompanied by a
certificate setting forth the amount to be paid and the
computations used in determining the amount, which certificate
shall be presumed to be correct as to the matters set forth
therein in the absence of manifest error. In determining any
such amount, Bank may use any reasonable averaging and
attribution methods.
3. SECURITY INTEREST IN COLLATERAL
In consideration of and as security for the full and complete payment,
performance, and observance of all Obligations, Borrower does hereby (a)
grant to Bank a security interest in the Collateral, whether now owned or
hereafter acquired or received by Borrower, and (b) assign to Bank all of its
right, title, and interest (including, without limitation, all rights to
payment) arising under or with respect to all of Borrower's Accounts
Receivable, whether now owned or hereafter acquired or received by Borrower,
but not including any duty, obligation, or liability of Borrower with respect
thereto.
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4. WARRANTIES
Borrower represents and warrants to Bank (which representations and warranties
shall survive the execution of this Agreement and all Advances) that:
(a) Borrower is a duly organized and existing corporation
under the laws of the state of its incorporation and is duly
qualified and in good standing in every state in which it is
doing business;
(b) The execution, delivery, and performance hereof are within
Borrower's corporate powers, have been duly authorized, and
are not in contravention of law or the terms of Borrower's
charter, by-laws, or regulations or of any indenture,
agreement, or undertaking to which Borrower is a party or by
which it is bound;
(c) This Agreement and the other documents executed pursuant
hereto have been duly executed and are valid and binding
obligations of Borrower fully enforceable in accordance with
their respective terms, subject to bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to
the rights of creditors generally and subject to the
availability of equitable remedies and the application of
equitable principles.
(d) Except for any security interest granted to or in
favor of Bank and Permitted Liens, Borrower is, and
as to Collateral to be acquired after the date hereof
will be, the owner of the Collateral free from any claim,
lien, encumbrance, or security interest of any type,
and Borrower agrees that it will defend the Collateral against
all claims and demands of all Persons at any time claiming the
same or any interest therein;
(e) The office where Borrower keeps all of its records
pertaining to its Accounts and Contract Rights is located at:
1270 S.E. Monmouth Cut-Off Road, Dallas, Oregon 97338-9532;
(f) Subject to any limitation stated herein or in connection
herewith, all information furnished to Bank concerning
Borrower or the Collateral is, or will be at the time such
information is furnished, accurate and correct in all material
respects and complete insofar as is necessary to give Bank
true and accurate knowledge of the subject matter;
(g) Borrower is the lawful owner of and has full and
unqualified right to transfer a security interest in all of
the Collateral to Bank. Such Collateral is not and will not,
so long as Borrower has any Obligations to Bank, be subject to
any adverse financing statement, encumbrance, claim, lien, or
security interest of any type except any granted to or in
favor of Bank;
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(h) Each Qualified Account Receivable included with the
aggregate amount of Qualified Accounts Receivable set forth on
each Borrower's Certificate now or hereafter furnished to Bank
shall meet, as of the date stated thereon, all eligibility
requirements specified in the Section 1 definition of
Qualified Account Receivable;
(i) There is no pending or threatened action, suit or
proceeding affecting either Borrower or any of its Affiliates
before any court or other governmental authority or any
arbitrator which may materially adversely affect the condition
or operations, financial or otherwise, of Borrower or the
ability of Borrower to perform its obligations under this
Agreement;
(j) The Borrower and each of its Affiliates is in compliance
with all Environmental Laws and all applicable federal, state,
and local health and safety and other laws, regulations,
ordinances or rules, except to the extent that any
noncompliance will not, in the aggregate, have a materially
adverse effect on the Borrower and its Affiliates or the
ability of the Borrower to fulfill its obligations under this
Agreement or any of the notes delivered pursuant hereto;
(k) The financial statements of Borrower dated June 30, 1995
and December 31, 1995, copies of which have been delivered to
Bank, fairly present the financial condition of such Persons
as at the respective dates thereof and their results of
operations for the fiscal periods ended on the respective
dates thereof, all in accordance with generally accepted
accounting principles consistently applied, subject, in the
case of unaudited financial statements, to normal recurring
year-end adjustments, and since the respective dates of such
financial statements, there has been no material adverse
change in Borrower's condition or operations;
(l) Borrower has filed, or caused to be filed, all federal,
state, local and foreign tax returns required to be filed by
it, and has paid, or caused to be paid, all taxes as are shown
on such returns, or on any assessment received by it, to the
extent that such taxes have become due, except as otherwise
contested in good faith. Borrower has set aside proper
amounts on its books, determined in accordance with generally
accepted accounting principles, for the payment of all taxes
for the years that have not been audited by the respective tax
authorities and for taxes being contested by it.
(m) Borrower has received consideration which is the
reasonable equivalent value of the obligations and liabilities
that the Borrower has incurred to Bank. The Borrower is not
insolvent as defined in any applicable state or federal
statute, nor will the Borrower be rendered insolvent by the
execution and delivery of this Agreement or the notes
delivered to Bank pursuant hereto. The Borrower
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does not intend to, nor does it believe that it
will, incur debts beyond its ability to pay them as
they mature;
(n) Neither the Borrower nor any Affiliate is in default in
the performance, observance, or fulfillment of any of the
obligations, convents, or conditions contained in any
agreement or instrument to which it is a party, which default
materially adversely affects the business, properties, assets,
or financial condition of the Borrower or such Affiliates;
(o) No Reportable Event or Prohibited Transaction has occurred
and is continuing with respect to any Plan, and the Borrower
has incurred no "accumulated funding deficiency" (as that term
is defined by ERISA) since the effective date of ERISA;
(p) Borrower has places of business or maintains its Inventory
at the following locations: 1270 S.E. Monmouth Cut-Off Road,
Dallas, Oregon 97338-9532; 7800 Pacific Avenue, White City,
Oregon 97503; 12226 134th Court N.E., Redmond, Washington 98502;
(q) Borrower is not a party to any agreement or other
instrument or subject to any other restriction which
materially and adversely affects or could reasonably be
expected to materially and adversely affect its business,
properties, assets, operations or condition, financial or
otherwise, and Borrower is not in default in the performance,
observance or fulfillment of any of the obligations, covenants
or conditions contained in any agreement or instrument to
which it is a party, which default could adversely affect its
business, properties, assets or financial condition.
5. COVENANTS
Borrower undertakes, covenants, and agrees that, until the full and complete
payment, performance, and observance of all Obligations, Borrower:
(a) shall deliver to Bank within twenty (20) days after
the close of each month, a statement of condition and
statement of cash flows of Borrower for such period, certified
as complete and correct by a duly authorized officer of
Borrower, as well as a certificate showing Borrower's
compliance with all financial covenants herein;
(b) shall deliver to Bank within forty-five (45) days after
the end of each fiscal quarter, a certificate showing
Borrower's compliance with all financial covenants herein;-
(c) shall deliver to Bank, not later than ninety (90)
days after the end of each fiscal year of Borrower, financial
statements of Borrower covering such fiscal year
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and containing an unqualified opinion by a certified
public accountant acceptable to Bank;
(d) shall deliver to Bank, not later than twenty (20) days
after the end of each calendar month, in form and substance
acceptable to Bank (1) reports designated as "Aging Report of
Accounts Receivable" and "Aging Report of Accounts Payable",
each substantiated by detailed supporting schedules and (2) a
schedule of Borrower's Inventory showing the cost or market
value thereof, whichever is lower, and (3) a current
"Borrower's Certificate" in the form of Exhibit "A" attached
hereto;
(e) shall promptly provide Bank with prior written
notification of:
(1) any change in any location where Borrower's Inventory is
maintained, and any new locations where Borrower's
Inventory is to be maintained,
(2) any change in the location of the office where Borrower's
records pertaining to its Accounts and Contract Rights are
kept,
(3) the location of any new places of business and the changing
or closing of any of its existing places of business,
(4) any change in Borrower's name, and
(5) any change in Borrower's Location;
(f) shall promptly notify, and shall cause each Affiliate to
promptly notify, the Bank in writing of (a) any future event
which, if it had existed on the date of this Agreement, would
have required qualification of the representations and
warranties set forth in Article 4 hereof and (b) any material
adverse change in the condition, business, or prospects,
financial or otherwise, of the Borrower or such Affiliate;
(g) shall promptly and in any event within ten (10) days after
the occurrence of a Reportable Event with respect to a Plan,
provide to Bank a copy of any materials required to be filed
with the PBGC with respect to such Reportable Event or those
that would have been required to be filed if the thirty (30)
day notice requirement to the PBGC had not been waived;
(h) shall promptly upon receipt, and in no event more than
three (3) days after receipt, of a notice by the Borrower or
any Affiliate, ERISA Affiliate, or any administrator of any
Plan or Multiemployer Plan that the PBGC has instituted
proceedings to terminate such Plan or to appoint a trustee to
administer such Plan, provide to Bank a copy of such notice;
(i) shall not permit its aggregate Obligations to Bank
pursuant to Paragraph 2(a) hereof at any time to exceed the
lesser of (1) the Borrowing Base or (2) Borrower's currently
approved line of credit;
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(j) shall, at the end of each month, at any other times when
Borrower desires Bank to increase the amount of available
borrowings under this facility after Bank's receipt of a
Borrower's Certificate, and at any other times required by
Bank, deliver to Bank a Borrower's Certificate fully completed
as to all figures and information called for therein and
certified as complete and correct by a duly authorized officer
of Borrower;
(k) shall promptly pay and discharge when due, all taxes,
assessments, and governmental charges of every kind and nature
that have been lawfully levied, assessed, or imposed upon
Borrower, its properties including the use thereof, or any of
the Obligations, which, if unpaid, would become liens against
its assets including, without limitation, all sums due and
owing to any taxing authority for income and other taxes
withheld from the wages and salaries of its employees, except
to the extent Borrower is reasonably contesting in good faith
any such tax, assessment, or charge with an adequate reserve
provided therefor;
(l) shall at all reasonable times allow Bank by or through any
of its officers, agents, employees, attorneys, or accountants
to (1) examine, inspect, and make extracts from Borrower's
books and other records, including, without limitation, the
tax returns of Borrower and any of Borrower's Affiliates, (2)
arrange for verification of Borrower's Accounts Receivable,
under reasonable procedures, directly with Account Debtors or
by other methods, and (3) examine and inspect Borrower's
Inventory wherever located;
(m) shall promptly furnish to Bank upon request (1) additional
statements and information with respect to the Collateral, and
all writings and information relating to or evidencing any of
Borrower's Accounts Receivable (including, without limitation,
computer printouts or typewritten reports listing the mailing
addresses of all present Account Debtors), and (2) any other
writings and information as Bank may request;
(n) shall upon request of Bank promptly take such action and
promptly make, execute, and deliver all such additional and
further items, assurances, and instruments as Bank may
require, including, without limitation, financing statements,
so as to completely vest in and ensure to Bank its rights
hereunder and in or to the Collateral. If certificates of
title are issued or outstanding with respect to any of
Borrower's Inventory, Borrower will cause the interest of Bank
to be properly noted thereon at Borrower's expense;
(o) hereby authorizes Bank or Bank's designated agent (but
without obligation by Bank to do so) to incur Related Expenses
(whether prior to, upon, or subsequent to any Event of
Default), and Borrower shall promptly repay, reimburse, and
indemnify Bank for any and all Related Expenses. Bank may, at
its option, debit Related Expenses directly to the Loan
Account;
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(p) shall, if any of Borrower's Accounts Receivable arise out of contracts
with or orders from the United States or any of its departments,
agencies, or instrumentalities, immediately notify Bank in writing
of same and shall execute any writing or take any action required by
Bank with reference to the Federal Assignment of Claims Act;
(q) shall not, without the prior written consent of Bank,
borrow any money or, directly or indirectly, create,
incur, assume, guarantee, or otherwise become or remain
liable with respect to any indebtedness for borrowed money
or advances other than (1) Borrower's Obligations, (2) any
indebtedness of Borrower existing on the date hereof and
not required by Bank to be prepaid as a condition to
execution of this Agreement, (3) Subordinated Debt, and
(4) equipment leases as provided under section 5.(z);
(r) except as otherwise provided herein, shall not, without
the prior written consent of Bank, loan any money to or
guarantee or assume any obligation of any other Person, or
purchase (1) any evidence of indebtedness or securities
(including stock) other than direct obligations of the United
States of America or any agency thereof, banker's
acceptances, and certificates of deposit issued by any
commercial bank in the United States of America, or (2)
the business or substantially all of the property of any
other Person other than Borrower's Subsidiaries, or
hereafter make prepayments or advances to others, provided
Borrower may make loans or advances to others not
exceeding Two Hundred Fifty Thousand Dollars ($250,000) at
any one time outstanding, and Borrower may endorse checks,
drafts, and similar instruments for deposit or collection in
the ordinary course of business; provided, however, that so
long as Borrower is otherwise in full compliance with all
convenants contained in this Agreement, Borrower may make
deposits for equipment, inventory and other items in the
ordinary course of its business without restriction, and may
acquire businesses or assets of businesses if the purchase
price does not exceed Three Million Dollars ($3,000,000) in
value, without restriction;
(s) shall keep its Equipment in good working order and repair
without wasting or destroying such Equipment, and shall not
without the prior written consent of Bank: sell, lease,
transfer, assign, encumber, or otherwise dispose of
Equipment having an aggregate book value in excess of one
million dollars ($1,000,000) during any fiscal year of
Borrower, or make any attempt to do so;
(t) shall not, without the prior written consent of Bank,
mortgage, pledge, grant a security interest, or otherwise
voluntarily place or permit to be placed any lien upon any
assets of the Borrower except any security interest granted to
or in favor of Bank;
(u) except as otherwise provided herein, shall not, without the prior
written consent of Bank, (1) merge or consolidate with or into, or
enter into any merger
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agreement with any other Person, or (2) lease, sell, or
transfer all or substantially all its property, assets, and
business, including the stock of any Subsidiary, to any other
Person;
(v) shall not, without the prior written consent of Bank,
acquire any other Person, except if on a proforma basis
including the acquisition costs, the Borrower remains in full
compliance with the Agreement;
(w) shall not, without the prior written consent of Bank, make
any change in any location where Borrower's Inventory is
maintained or any change in the location of the office where
Borrower's records pertaining to its Accounts and Contract
Rights are kept;
(x) shall not use any Collateral in violation of any
applicable statute, ordinance, or regulation;
(y) shall not permit the ratio of its current assets to its
current liabilities (including full accrual for all taxes) to
be less than 1.1 to 1.0.
(z) shall not permit the amount of all rental and lease
payments and installment equipment payments of the Borrower
for any current or future period of twelve (12) consecutive
months for real or personal property to be at any time in
excess of $5,000,000.
(aa) shall not permit the aggregate of its Tangible Net
Worth to be at any time less than the sum of (a)
$18,000,000.00 plus (b) fifty percent (50%) of the positive
net income of the Borrower on a cumulative basis beginning
with its quarter ending March 31, 1996;
(bb) shall not permit the ratio of the sum of its earnings
before interest and taxes (before any extraordinary gains or
losses) to its interest expense, calculated at the same point
in time, to be at any time leis than 3.0 to 1.0, measured on a
rolling four (4) quarter basis.
(cc) shall not permit the ratio of its total liabilities
less Subordinated Debt to the sum of its earnings before
interest, taxes, depreciation and amortization (before any
extraordinary gains or losses) calculated at the same point in
time, to be at any time more than 3.5 to 1.0, measured on a
rolling four (4) quarter basis;
(dd) shall not permit the ratio of the sum of its earnings
before interest, taxes, depreciation, amortization and lease
payments (before any extraordinary gains or losses) to the sum
of its interest, taxes, lease payments, current maturities and
net capital spending, calculated at the same point in time, to
be at any time, less than 1.1 to 1.0, measured on a rolling
four (4) quarter basis.
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6. COLLECTIONS AND RECEIPT OF PROCEEDS
(a) Upon the occurrence of any Event of Default, after
written notification thereof to Borrower, Bank, or Bank's
designated agent, shall have the right and power (as
Borrower's hereby constituted and appointed attorney-in-fact),
which, being coupled with an interest, shall remain
irrevocable until all Obligations are fully and completely
paid, performed, and observed, at any time to:
(1) notify the Account Debtors on any or all of Borrower's
Accounts Receivable of the Bank's security interest in and
assignment of those Accounts Receivable upon which the
respective Account Debtors are liable, and to request from
such Account Debtors, in Bank's name or in Borrower's name,
information concerning the Accounts Receivable and amounts
owing thereon,
(2) notify purchasers of any or all of Borrower's Inventory of Bank's
security interest therein, and to request from such Persons, at
any time, in Bank's name or in Borrower's name, information
concerning Borrower's Inventory and the amounts owing thereon
by such purchasers,
(3) notify and require the Account Debtors on any or all of Borrower's
Accounts Receivable to make payment upon such Accounts
Receivable directly to Bank,
(4) notify and require purchasers of Borrower's Inventory to make
payment of their indebtedness directly to Bank,
(5) receive, retain, acquire, take, endorse, assign, deliver,
accept, and deposit, in Bank's name of Borrower's name, any
and all of Borrower's cash, Instruments, Chattel Paper, Documents,
Proceeds of Accounts Receivable, Proceeds of Inventory,
collections of Accounts Receivable, and any other writings
relating to any of the Collateral theretofore collected,
received or retained by Borrower pursuant to Subsection 5(b)
below or thereafter collected, received, or retained by Borrower,
(6) exercise any and all of the rights granted Bank in
Subsections 5(c) and 5(d) below, and
(7) take such other action with respect to any or all of
the Collateral, in such manner and at such times, as Bank may
deem advisable, including, without limitation, the following:
collection, legal proceedings, compromises, settlements,
adjustments, extensions, postponements, exchanges, releases,
and sales.
(b) Except as otherwise provided in Subsections 5(a), 5(c), or 5(d),
Borrower is authorized (1) to collect and enforce, by all lawful means,
all of Borrower's Accounts Receivable, and (2) to receive and retain,
by all lawful means, any and all Proceeds of all of Borrower's Accounts
Receivable and Inventory. Borrower shall hold, as trustee upon an
express trust for Bank as beneficiary
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thereof, all such lawful collections of Accounts
Receivable and all such lawful Proceeds of Accounts
Receivable and Inventory received by Borrower. Any costs,
liabilities, or expenses incurred by Borrower in the
collection or enforcement of such Accounts Receivable, and in
the receipt of Proceeds of Accounts Receivable and Inventory
shall be borne solely by Borrower. Borrower as trustee shall
not commingle such collections of Accounts Receivable and such
Proceeds of Accounts Receivable and Inventory with any other
property not held in trust for Bank; any property held or
commingled with such collections of Accounts Receivable and
such Proceeds of Accounts Receivable and Inventory is hereby
conclusively established between Borrower and Bank to be
collections of Accounts Receivable and Proceeds of Accounts
Receivable and Inventory.
(c) With respect to Borrower's Instruments, Documents, and Chattel Paper
upon the occurrence of an Event of Default:
(1) Upon Bank's written request, Borrower shall
immediately deliver or cause to be delivered to Bank all of
Borrower's Instruments, Chattel Paper, and Documents,
appropriately endorsed either, at Bank's option, (i) to Bank's
order, without limitation or qualification, or (ii) for
deposit in the Accounts Receivable collection Account. Bank,
or Bank's designated agent, is hereby constituted and
appointed Borrower's attorney-in-fact with authority and power
to so endorse any and all Instruments, Documents, and Chattel
Paper upon Borrower's failure to do so. Such authority and
power, being coupled with an interest, shall be (i)
irrevocable until all Obligations are paid, performed, and
observed in full, (ii) exercisable by Bank at any time and
without any request upon Borrower by Bank to so endorse, and
(iii) exercisable in Bank's name or Borrower's name;
(2) Borrower hereby waives presentment, demand, notice of
dishonor, protest, notice of protest, and any and all other
similar notices with respect thereto, regardless of the form
of any endorsement thereof;
(3) Bank shall not be bound or obligated to take any action to
preserve any rights therein against any prior parties thereto.
(d) Upon Bank's written request after the occurrence of a Event of
Default, the lawful collection and enforcement of all of Borrower's
Accounts Receivable and the lawful receipt and retention by Borrower
of all Proceeds of all of Borrower's Accounts Receivable and
Inventory shall be as Bank's agent. All such collections and
Proceeds shall be remitted daily by Borrower to Bank in the
form in which they are received by Borrower, either by mailing
or by delivering such collections and Proceeds to Bank,
appropriately endorsed for deposit in the Accounts Receivable
Collections Account. Bank may, in its sole discretion, at any
time and from time to time following the occurrence of an
Event of Default, apply all or any portion of the collected
balance in the
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Accounts Receivable Collections Account (allowing two (2) days
for collection and clearance of remittances) as a credit
against Borrower's outstanding obligations. If any remittance
shall be dishonored, or if, upon final payment, any claim with
respect thereto shall be made against Bank on its warranties
of collection, Bank may charge the amount of such item against
the Accounts Receivable Collections Account or any other
Deposit Account maintained by Borrower with Bank, and, in any
event, retain same and Borrower's interest therein as
additional security for the Obligations. Bank may, in its
sole discretion, at any time and from time to time, release
funds from the Accounts Receivable Collections Account to
Borrower for use in Borrower's business. The balance in the
Accounts Receivable Collections Account may be withdrawn by
Borrower upon termination of the Security Agreement in
accordance with Subsection 9(d). At Bank's written request,
Borrower will cause all remittances representing all
corrections and all Proceeds of Borrower's Accounts Receivable
and Inventory to be mailed to a lock box in Cincinnati, Ohio,
to which Bank shall have access for the processing of such
items in accordance with the provisions, terms, and conditions
of Bank's customary lock box agreement.
7. INSURANCE AND USE OF INVENTORY
(a) Until any Event of Default:
(1) Borrower may retain possession of and use its Inventory in any
lawful manner not inconsistent with this Agreement or with the
terms, conditions, or provisions of any policy of insurance
thereon.
(2) Borrower may sell or lease its Inventory in the ordinary course of
business; provided, however, that a sale or lease in the ordinary
course of business does not include a transfer in partial or total
satisfaction of a debt, except for transfers in satisfaction of
partial or total purchase money prepayments by a buyer in the
ordinary course of Borrower's business. Until any Event of
Default, Borrower may also use and consume any raw materials or
supplies, the use and consumption of which are necessary in order
to carry on Borrower's business.
(b) Borrower shall obtain, and at all times maintain, insurance upon its
Inventory in such form, written by such companies, in such amounts,
for such period, and against such risks as may be acceptable to
Bank, with provisions satisfactory to Bank for payment of all losses
thereunder to Bank and Borrower as their interests may appear (loss
payable endorsement in favor of Bank), and, if required by Bank,
Borrower will deposit the policies with Bank. Any such policies of
insurance shall provide for no less than ten (10) days prior written
cancellation notice to Bank. Any sums received by Bank in payment
of insurance losses, returns, or unearned premiums under the
policies may, at the option of Bank, be applied upon any Obligation
whether or not the same is then due and payable, or may be delivered
to Borrower for the purpose of replacing,
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repairing, or restoring its Inventory. Borrower hereby assigns to
Bank any return or unearned premium which may be due upon
cancellation of any such policies for any reason and directs the
insurers to pay Bank any amount so due. Bank or Bank's designated
agent is hereby constituted and appointed Borrower's
attorney-in-fact to (either in the name of Borrower or in the name
of the Bank), make adjustments of all insurance losses, sign all
applications, receipts, releases, and other papers necessary for the
collection of any such loss, and any return or unearned premium,
execute proof of loss, make settlements, and endorse and collect all
Instruments payable to Borrower or issued in connection therewith.
Notwithstanding any action by Bank hereunder, any and all risk of
loss or damage to Borrower's Inventory to the extent of any and all
deficiencies in the effective insurance coverage thereof is hereby
expressly assumed by Borrower.
8. EVENTS OF DEFAULT
The occurrence of any one or more of the following shall constitute an Event of
Default under this Agreement:
(a) Failure of Borrower to promptly pay, perform, or observe when due,
whether upon demand, at maturity, by acceleration, or otherwise, any
of the Obligations and such failure remains unremedied for ten (10)
days after the Bank shall have given written notice thereof to the
Borrower;
(b) Failure of Borrower to promptly pay, perform, or observe when due
whether upon demand, at maturity, by acceleration, or otherwise, or
any event which either results in or would result in (but for waiver
by the holder(s) or trustee(s) thereof) the acceleration of the
maturity of, any or all of the indebtedness, obligations,
liabilities, contracts, indentures, and agreements greater than One
Hundred Thousand Dollars ($100,000) (including, without limitation,
any and all warranties, covenants, guaranties, provisions, terms,
and conditions set forth or contained therein) of whatever kind and
however evidenced, owed, incurred, or executed by Borrower, to, in
favor of, or with any and all other Persons, and including any
partial or total extension, renewal, amendment, restatement, and
substitution thereof or therefor;
(c) Any warranty, representation, or statement made or furnished to Bank
in connection with this Agreement or any other writing evidencing or
given as security for any of the Obligations by or on behalf of the
Borrower proves to have been false in any material respect when
made, furnished, or at any time thereafter;
(d) Sale, lease, transfer, assignment, encumbrance, or other disposition
of any of the Collateral, without Bank's prior written authorization
therefor, including any attempt to accomplish the foregoing;
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(e) Any tax lien greater than Fifty Thousand Dollars ($50,000) shall
have been filed against Borrower or any of its property by any
federal, state, or municipal authority other than ad valorem real
property taxes and personal property taxes assessed annually
pursuant to applicable law but only until such time as said taxes
become due and payable;
(f) If any of the following events occur: (a) any Plan incurs any
"accumulated funding deficiency" (as such term is defined in ERISA)
whether waived or not, (b) the Borrower or any Affiliate engages in
any Prohibited Transaction, (c) any Plan is terminated, (d) a
trustee is appointed by an appropriate United States district court
to administer any Plan, or (e) the PBGC institutes proceedings to
terminate any Plan or to appoint a trustee to administer any Plan;
(g) Financial Impairment of Borrower;
(h) Financial Impairment of any endorser, guarantor, or surety upon or
for any of the Obligations.
If there shall occur any Event of Default set forth in (a) through (g) above,
Bank, by written notice to Borrower, may (1) declare the unpaid principal of and
accrued interest on all Obligations to be immediately due and payable and (2)
immediately terminate Bank's commitment to make further Advances under this
Agreement, whereupon Obligations shall become and be forthwith due and payable,
and such commitment shall be terminated, without any further notice,
presentment, or demand of any kind, all of which are hereby expressly waived by
Borrower. If there shall occur any Event of Default set forth in (h) above, all
Obligations shall automatically become and be immediately due and payable, and
Bank's commitment to make further advances shall automatically be terminated,
without notice, presentment, or demand of any kind, all of which are hereby
expressly waived by Borrower.
9. RIGHTS AND REMEDIES UPON EVENT OF DEFAULT
Upon the occurrence of any such Event of Default and at all times thereafter,
Bank shall have the rights and remedies of a secured party under the Oregon
Uniform Commercial Code in addition to the rights and remedies of a secured
party provided elsewhere within this Agreement or in any other writing executed
by Borrower. Bank may require Borrower to assemble the Collateral and make it
available to Bank at a reasonably convenient place to be designated by Bank.
Unless the Collateral is perishable, threatens to decline speedily in value, or
is of a type customarily sold on a recognized market, Bank will give Borrower
reasonable notice of the time and place of any public sale of the Collateral or
of the time after which any private sale or other intended disposition thereof
is to be made. The requirement of reasonable notice shall be met if such notice
is mailed (deposited for delivery, postage prepaid, by U.S. mail) to either, at
Bank's option (1) Borrower's Location set forth in Subsection 12(c) of this
Agreement (as modified by any change therein which Borrower has supplied in
writing to
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Bank), or (2) Borrower's address at which Bank customarily communicates with
Borrower, at least ten (10) days before the time of the public sale or the time
after which any private sale or other intended disposition thereof is to be
made. At any such public or private sale, Bank may purchase the Collateral.
After deduction for Bank's Related Expenses, the residue of any such sale or
other disposition shall be applied in satisfaction of the Obligations in such
order of preference as Bank may determine. Any excess, to the extent permitted
by law, shall be paid to Borrower, and Borrower shall remain liable for any
deficiency.
In addition, upon the occurrence of any such Event of Default and at any time
thereafter, Bank shall have the right to obtain new appraisals of Borrower or
the Collateral, the cost of which shall be paid by Borrower.
10. CONDITIONS PRECEDENT TO FUTURE ADVANCES
The obligation of Bank to make any Advance to Borrower after the date of this
Agreement shall be subject to the conditions precedent that on or before the
date of such Advance:
(a) Borrower shall have paid all fees, costs, expenses, and taxes then
payable by Borrower pursuant to Section 2(c) of this Agreement;
(b) The representations and warranties contained in Section 4 of this
Agreement and in each document instrument, agreement, and
certificate delivered to Bank by Borrower pursuant to this Agreement
shall be true and correct on and as of such date as if made on and
as of such date; no Event of Default or event or condition that,
with the serving of notice or the lapse of time or both, would
constitute an Event of Default shall have occurred and be continuing
or would result from the making of such Advance; and Bank shall have
received, if requested by Bank, a certificate of the chief executive
officer or the chief financial officer of Borrower, dated as of the
date of such Advance, to such effect (in the absence of Bank's
request for such a certificate, Borrower's borrowing of the Advance
shall itself constitute a representation to Bank to such effect);
(c) The making of such Advance shall not contravene any law, rule or
regulation applicable to Bank;
(d) Not later than 2:00 p.m., Portland time, on such date, Bank shall
have received, in writing or by telephone to be promptly confirmed
in writing, a request by Borrower to Bank for an Advance in the,
requested amount, and a Borrower's Certificate;
(e) Borrower shall have delivered to Bank an opinion of counsel
substantially in the form attached hereto as Exhibit "C".
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<PAGE>
(f) Bank shall have received such other approvals, opinions, appraisals,
or documents as it may reasonably request.
(g) The Borrower shall have completed its Initial Public Offering with
minimum net proceeds to the Borrower of $17,000,000.00.
11. GENERAL
(a) If any provision, term, or portion, of this Agreement, (including,
without limitation, (1) any indebtedness, obligation, liability,
contract, agreement, indenture, warranty, covenant, guaranty,
representation, or condition of this Agreement made, assumed, or
entered into, (2) any act of action taken under this Agreement, or
(3) any application of this Agreement) is for any reason held to be
illegal or invalid, such illegality or invalidity shall not affect
any other such provision, term, or portion of this Agreement, each
of which shall be construed and enforced as if such illegal or
invalid provision, term, or portion were not contained in this
Agreement. Any illegality or invalidity of any application of this
Agreement shall not affect any legal and valid application of this
Agreement, and each provision, term, and portion of this Agreement
shall be deemed to be effective, operative, made, entered into, or
taken in the manner and to the full extent permitted by law.
(b) Bank shall not be deemed to have waived any of Bank's rights of this
Agreement or under any other agreement, instrument, or document
executed by Borrower, unless such waiver be in writing and signed by
Bank. No delay or omission on part of Bank in exercising any right
shall operate as a waiver of such right or any other right. A
waiver on any one occasion shall not be construed as a bar to or
waiver of any right or remedy on any future occasion. All Bank's
rights and remedies, whether evidenced by this Agreement or by any
other agreement, instrument, or document shall be cumulative and may
be exercised singularly or concurrently. Any written demands,
written requests, or written notices to Borrower that Bank may elect
to give shall be effective when deposited for delivery, postage
prepaid, by U.S. mail, and addressed either, at Bank's option, to
(1) Borrower's Location set forth in Subsection 11(c) of this
Agreement (as modified by any change therein which Borrower has
supplied in writing to Bank) or, (2) Borrower's address at which
Bank customarily communicates with Borrower. If at any time or
times, by assignment or otherwise, Bank transfers any of the
Obligations or any part of the Collateral to another person, such
transfer shall carry with it Bank's powers and rights under this
Agreement with respect to the Obligation or Collateral so
transferred and the transferee shall have said powers and rights,
whether or not they are specifically referred to in the transfer.
To the extent that Bank retains any other of the Obligations or any
part of the Collateral, Bank will continue to have the rights and
powers with respect to the Obligations and the Collateral as set
forth in this Agreement.
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<PAGE>
(C) All written notices, requests, or other communications herein
provided for must be addressed:
to Borrower as follows:
Praegitzer Industries, Inc.
1270 S.E. Monmouth Cut-Off Road
Dallas, Oregon 97338-9532
Attn.: Scott D. Gilbert
to the Bank as follows:
Key Bank of Washington
700 5th Avenue, 48th Floor
Seattle, Washington 98104
Attn: John Brock
or at such other address as either party may designate to the other
in writing. Such communication will be effective (i) if by telex,
when such telex is transmitted and the appropriate answer back is
received, (ii) if given by mail, seventy-two (72) hours after such
communication is deposited in the U.S. mail certified mail return
receipt requested, or (iii) if given by other means, when delivered
at the address specified in this Section 11(c).
(d) The laws of the State of Oregon shall govern the construction of
this Agreement (including without limitation, any terms not
specifically defined in this Agreement that may be so specifically
defined pursuant to Uniform Commercial Code as implemented in the
State of Oregon, and including any amendments thereof or any
substitution therefor) and the rights and duties of Borrower and
Bank. This agreement shall be binding upon and inure to the benefit
of Borrower and Bank and their respective successors and assigns.
The rights and powers given in this Agreement to the Bank are in
addition to those otherwise created or existing in the same
Collateral by virtue of other agreements or writings.
(e) Borrower may terminate this Agreement by giving Bank not less than
ten (10) days prior written notice of termination and by paying,
performing, and observing in full all Obligations hereof on or
before such termination date. Notwithstanding the termination of the
line of credit hereunder, this Agreement and the security interest
in the Collateral shall continue in full force and effect after such
termination until all Obligations of Borrower to Bank have been
paid, performed, and observed in full.
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<PAGE>
(f) In this Agreement unless the context otherwise requires, words in
the singular number include the plural, and in the plural number
include the singular.
(g) Borrower hereby releases Bank from and agrees to indemnify and hold
harmless Bank, and its officers, agents, and employees for any and
all claims of Borrower or any other Person for damage or loss caused
by any act or acts under this Agreement or in furtherance of this
Agreement whether by omission or commission, and whether based upon
any error of judgment or mistake of law or fact (except willful
misconduct) on the part of Bank, or its officers, agents, and
employees.
(h) Bank has the right, in addition to all other rights and remedies
available to it, to set off at any time the unpaid balance of the
Loan Account and any other Obligations against any indebtedness or
obligations owing Borrower by Bank including, without limitation,
all Cash Security.
(i) This Agreement is assignable by Bank upon notice to Borrower and
shall be binding on Bank's respective successors, assigns, and
nominees;
(j) This Agreement and any promissory notes or other writing executed
and delivered by any Person to Bank in connection herewith integrate
all the terms and conditions mentioned herein or incidental hereto
and supersede all oral representations and negotiations and prior
writings with respect to the subject matter hereof.
12. JURY TRIAL WAIVER
BORROWER AND BANK EACH WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING
ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, BETWEEN BANK AND
BORROWER ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO ANY
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT OR THE
NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH OR THE TRANSACTIONS RELATED THERETO, THIS WAIVER SHALL NOT
IN ANY WAY AFFECT, WAIVE, LIMIT, AMEND OR MODIFY BANK'S ABILITY TO PURSUE
REMEDIES PURSUANT TO ANY CONFESSION OF JUDGMENT OR COGNOVIT PROVISION CONTAINED
IN ANY NOTE OR OTHER INSTRUMENT DOCUMENT OR AGREEMENT BETWEEN BANK AND BORROWER.
Under Oregon law, most agreements, promises and commitments made by a bank
after October 3, 1989 concerning loans or other credit extensions which are not
for personal, family or household purpose or secured solely by the borrower's
residence must be in writing, express consideration and be signed by the bank to
be enforceable.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
BORROWER: PRAEGITZER INDUSTRIES, INC.
By:/s/
-------------------------------
Title: Senior Vice President
----------------------------
And:
------------------------------
Title:
----------------------------
BANK: KEY BANK OF WASHINGTON
By: /s/
-------------------------------
Title: Vice President
----------------------------
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<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into as of August 26, 1996 by and between
PRAEGITZER INDUSTRIES, INC., an Oregon corporation ("Praegitzer") and DANIEL J.
BARNETT ("Barnett").
RECITALS
A. Barnett is an officer and shareholder of Trend Circuits, Inc., a
California corporation ("Trend"), and has expertise and experience in the
fabrication, assembly, and marketing of circuit boards and the business carried
on by Trend and has developed certain products, technologies, and strategies for
the benefit of Trend.
B. Pursuant to a Merger Agreement dated as of August 19, 1996, Praegitzer
and Trend agreed to merge, with Praegitzer as the surviving corporation (the
"Merger").
C. Praegitzer wishes to continue the services of Barnett, and Barnett is
willing to serve Praegitzer, on the terms and conditions set forth herein.
AGREEMENT
ARTICLE 1. EMPLOYMENT
1.1 TERM. Praegitzer agrees to employ Barnett as Senior Vice President,
and Barnett agrees to serve as Senior Vice President, for a term of at least two
years starting on the closing date of the Merger and continuing thereafter
unless terminated in accordance with the termination provisions of Article 10.
1.2 DUTIES. Barnett accepts employment with Praegitzer on the terms and
conditions set forth in this Agreement, and agrees to devote his full time and
attention (reasonable periods of illness excepted) to the performance of his
duties under this Agreement. Barnett shall perform the specific duties and
shall exercise the specific authority assigned to him from time to time by the
Board of Directors, Chief Executive Officer, or President of Praegitzer,
which shall be consistent with duties generally assigned to senior executives of
Praegitzer. In performing his duties, Barnett shall be subject to the direction
and control of the Chief Executive Officer and President of Praegitzer. Barnett
further agrees that in all aspects of his employment, he shall comply with the
reasonable instructions, policies, and rules of Praegitzer established from time
to time, and shall perform his duties faithfully, intelligently, to the best of
his ability, and in the best interest of Praegitzer. Barnett's devotion of
reasonable periods of time to personal purposes, outside business activities, or
charitable
PAGE 1 - EMPLOYMENT AGREEMENT (DANIEL J. BARNETT)
<PAGE>
activities shall not be deemed a breach of this Agreement, if such purposes or
activities do not violate the Noncompetition Agreement between Praegitzer and
Barnett of even date or materially interfere with the services he is required to
render to or on behalf of Praegitzer.
1.3 DIRECTORSHIP. If elected by the shareholders of Praegitzer, Barnett
shall serve as a director of Praegitzer. Barnett shall be paid compensation for
his services as a director in an amount equal to that paid other directors who
are also employed by Praegitzer.
ARTICLE 2. COMPENSATION
2.1 BASE COMPENSATION; BONUS. In consideration of all services to be
rendered by Barnett to Praegitzer, Praegitzer shall pay to Barnett base
compensation of $150,000 per year, payable in accordance with the salary payment
policy of Praegitzer. As further compensation, Praegitzer shall pay a bonus to
Barnett in accordance with Praegitzer's standard policies. If at the end of
each quarter during the first two years of this Agreement the total salary and
bonus paid to Barnett by Praegitzer is less than an annualized rate of $200,000,
Praegitzer shall pay Barnett an amount equal to the difference. Praegitzer may
also pay Barnett bonuses at such times and in such amounts as the Board of
Directors of Praegitzer determines in its sole discretion; provided, however,
that after the second year, this Agreement shall not be construed to require the
Board of Directors of Praegitzer to pay any bonus to Barnett.
2.2 OTHER BENEFITS. Base compensation and bonuses paid to Barnett shall
be in addition to any contribution made by Praegitzer for the benefit of Barnett
to any qualified retirement plan maintained by Praegitzer for the benefit of its
employees. Praegitzer shall provide to Barnett and Barnett's family the same
benefits that Praegitzer provides to other executive employees and their
families, subject to Barnett's satisfaction of the eligibility conditions for
such benefits.
2.3 STOCK OPTIONS. Effective with the execution of this Agreement,
Barnett shall be granted options to acquire 18,537 shares of the common stock of
Praegitzer at the last sale price per share reported on the Nasdaq National
Market System on the day this Agreement is executed (or if such day is not a
trading day, on the next preceding trading day), and otherwise on the terms that
stock options are granted to employees of Praegitzer generally pursuant to the
Praegitzer Stock Incentive Plan. The options will be Incentive Stock Options to
the extent possible.
ARTICLE 3. EXPENSES
Barnett shall be entitled to reimbursement from Praegitzer for reasonable
expenses necessarily incurred by him in performing his duties under this
Agreement, on presentation of vouchers indicating in reasonable detail the
amount and business purpose of each such expense and on compliance with the
other requirements of Praegitzer's expense reimbursement policy.
PAGE 2 - EMPLOYMENT AGREEMENT (DANIEL J. BARNETT)
<PAGE>
ARTICLE 4. VACATION; ILLNESS
4.1 VACATION. Subject to the approval of time by the Board of Directors of
Praegitzer, Barnett shall be entitled to one or more vacations totaling 30
working days in each calendar year. Any unused vacation time shall be carried
over to future years.
4.2 ILLNESS. Subject to Section 10.1(b)(2), Barnett shall receive full
compensation for any period of illness or incapacity during the term of this
Agreement.
ARTICLE 5. FACILITIES AND PERSONNEL
Barnett shall be given a private office, secretarial services, and other
facilities, supplies, and services needed to perform his duties under this
Agreement.
ARTICLE 6. RELOCATION
Praegitzer may not require Barnett to relocate his residence from the San
Jose, California area without his consent. However, Praegitzer may require
Barnett to travel to Praegitzer's headquarters in Dallas, Oregon or elsewhere at
reasonable times and as reasonably required to perform his duties under this
Agreement.
ARTICLE 7. NONCOMPETITION
Barnett shall enter into a Noncompetition Agreement with Praegitzer, dated
as of the date of this Agreement, and perform his obligations and covenants
thereunder.
ARTICLE 8. PATENTS AND PATENT APPLICATIONS
All patents or patent applications now held in Barnett's name, or that may
be granted or made during the term of this Agreement, are hereby acknowledged
and declared by Barnett to be held in trust for the sole use and benefit of
Praegitzer, and Barnett shall not be entitled to transfer, convey, assign,
encumber, or otherwise dispose of any such proprietary rights without
Praegitzer's prior written consent. Barnett shall execute and deliver to
Praegitzer on request any transfer documents needed to show Praegitzer's
ownership of proprietary rights developed by Barnett either before or during the
term of this Agreement for the use and benefit of Trend and Praegitzer.
ARTICLE 9. REPRESENTATION AND WARRANTY OF BARNETT
Barnett represents and warrants to Praegitzer that there is no employment
contract or any other contractual obligation to which he is subject that
prevents him from entering into this Agreement or from performing fully his
duties under this Agreement.
PAGE 3 - EMPLOYMENT AGREEMENT (DANIEL J. BARNETT)
<PAGE>
ARTICLE 10. TERMINATION OF EMPLOYMENT
10.1 CAUSES FOR TERMINATION OF EMPLOYMENT. Praegitzer's employment of
Barnett may be terminated as follows:
(a) After two years from the date of this Agreement, either
Praegitzer or Barnett may terminate the employment of Barnett for any reason and
without cause by giving 30 days' prior written notice to the other, provided,
however, that Praegitzer may pay to Barnett 60 days' base compensation in lieu
of giving such notice.
(b) Praegitzer shall have the right to terminate Barnett's employment
at any time, without notice and without payment of compensation in lieu of
notice, under any of the following conditions:
(i) For cause, including, but not limited to, (i) any form of
dishonesty, criminal conduct, unethical business practice, or conduct involving
moral turpitude connected with Barnett's employment or that otherwise reflects
adversely on Praegitzer's reputation or operations in a material way; (ii)
unauthorized expenditure of Praegitzer's funds or misappropriation of
Praegitzer's assets; (iii) conviction of any felony; (iv) Barnett's refusal to
comply with Praegitzer's reasonable instructions, policies, or rules after
written notice of such noncompliance; (v) continued neglect or willful
misconduct by Barnett with respect to his duties and obligations under this
Agreement, or continued or repeated absence from employment during usual working
hours; (vi) any material breach, which breach continues after notice and a
reasonable opportunity to cure, of Barnett's obligations under this Agreement or
the Noncompetition Agreement; or (vii) habitual use of alcohol or drugs.
(ii) Barnett has suffered a disability as a result of illness,
accident, or other cause and is unable to perform a substantial portion of his
usual duties of employment for a total (consecutive or cumulative) of 180 days
in any twelve-month period after the date the disability commenced.
(c) Barnett shall have the right to terminate his employment with
Praegitzer for any material breach of Praegitzer's obligations under this
Agreement, which breach continues after notice and a reasonable opportunity to
cure.
10.2 DEATH. This Agreement and Barnett's employment with Praegitzer shall
terminate automatically on Barnett's death.
10.3 EFFECT OF TERMINATION; SEVERANCE PAY. On termination of employment,
Barnett (or Barnett's estate in the event of Barnett's death) shall receive
Barnett's base compensation prorated through the effective date of termination
of employment, plus any other compensation due under this Article 10, and any
other payments, including, but not limited to, earned vacation pay, to which
Barnett is entitled under Praegitzer's policies. If this Agreement is
PAGE 4 - EMPLOYMENT AGREEMENT (DANIEL J. BARNETT)
<PAGE>
terminated in the first two years of its term by Praegitzer without cause, as
defined in Section 10.1(b)(i), or by Barnett pursuant to Section 10.1(c),
Praegitzer shall pay to Barnett, in addition to any other sums due hereunder
through the date of such termination, severance pay equal to Barnett's base
compensation hereunder for the lesser of (i) one year, or (ii) the time
remaining until the expiration of two years after the date of this Agreement.
ARTICLE 11. MISCELLANEOUS PROVISIONS
11.1 BINDING EFFECT. This Agreement shall be binding on and inure to the
benefit of the parties and their heirs, personal representatives, successors,
and assigns.
11.2 ASSIGNMENT. Barnett shall not assign any rights or delegate any
duties under this Agreement.
11.3 AMENDMENT, WAIVER, ETC. The terms of this Agreement may be amended or
waived only by an instrument in writing signed by the party against which
enforcement of such amendment or waiver is sought. Any waiver of any term of
this Agreement or any breach hereof shall not operate as a waiver of any
other such term, condition or breach, and no failure to enforce any provision
hereof shall operate as a waiver of such provision or of any other provision
hereof.
11.4 HEADINGS. The headings are for convenience only and will not control
or affect the meaning or construction of the provisions of this Agreement.
11.5 JURISDICTION; GOVERNING LAW. The construction and performance of this
Agreement will be governed by the laws of the State of Oregon (except for the
choice of law provisions thereof).
11.6 NOTICES. Any notice, demand or request required or permitted to be
given under this Agreement (i) shall be in writing; (ii) shall be delivered
personally, including by means of facsimile or courier, or mailed by registered
or certified mail, postage prepaid and return receipt requested; (iii) shall be
deemed given on the date of personal delivery or on the date set forth on the
return receipt; and (iv) shall be delivered or mailed to the addresses or
facsimile numbers set forth below or to such other address as any party may from
time to time direct:
PAGE 5 - EMPLOYMENT AGREEMENT (DANIEL J. BARNETT)
<PAGE>
PRAEGITZER: Praegitzer Industries, Inc.
1270 S.E. Monmouth Cut-Off Road
Dallas, OR 97338-9532
Phone: 503-623-9273
Fax: 503-623-3403
Attn: Mr. Robert L. Praegitzer
President, Chief Executive Officer, and Chairman
Copies to: Stoel Rives LLP
Standard Insurance Center
900 S.W. Fifth Avenue, Suite 2300
Portland, OR 97204-1268
Phone: 503-224-3380
Fax: 503-220-2480
Attn: Stephen E. Babson
BARNETT: Daniel J. Barnett
20677 Rome Drive
San Jose, CA 95120
11.7 ATTORNEYS' FEES. If suit or action is filed by any party to enforce
the provisions of this Agreement, or otherwise with respect to the subject
matter of this Agreement, the substantially prevailing party shall be entitled
to recover reasonable attorneys' fees as fixed by the court and, if any appeal
is taken, reasonable attorneys' fees as fixed by the appellate court.
11.8 ENTIRE AGREEMENT. This Agreement and the Noncompetition Agreement
embody the entire agreement and understanding of the parties regarding Barnett's
employment with Praegitzer and supersede any and all prior agreements,
arrangements, and understandings relating to the matter.
11.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original but all of which together
will constitute a single instrument.
PAGE 6 - EMPLOYMENT AGREEMENT (DANIEL J. BARNETT)
<PAGE>
11.10 SEVERABILITY. If any provision of this Agreement shall be invalid or
unenforceable in any respect for any reason, the validity and enforceability of
any such provision in any other respect and of the remaining provisions of this
Agreement shall not be in any way impaired.
PRAEGITZER INDUSTRIES, INC.
By:
----------------------------- -----------------------------
Matthew J. Bergeron DANIEL J. BARNETT
Senior Vice President and
Chief Financial Officer
PAGE 7 - EMPLOYMENT AGREEMENT (DANIEL J. BARNETT)
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Praegitzer was formed in July 1981 to manufacture rigid multilayer printed
circuit boards at its Dallas, Oregon facility. In 1983, the Company entered the
assembly contract manufacturing business (the Assembly Operations). In 1987, a
fire destroyed the entire Dallas facility. Much of the fiscal years ended June
30, 1988 and 1989 were spent building a new facility, installing state-of-the-
art equipment and formulating upgraded processes for operations. An affiliate of
the Company formed Praegitzer Design, Inc. (PDI) in 1988 to provide circuit
design services. In January 1990, the Company acquired its White City, Oregon,
facility. The White City facility specializes in medium-volume production of
complex, rigid multilayer printed circuit boards. The acquisition of the White
City facility was a cost-effective means for the Company to expand production
and diversify and increase its customer base. In fiscal 1994, the Company sold
the Assembly Operations. This sale was prompted by the perception by the
Company's growing base of contract assembly customers that the Company was a
competitor and the Company's desire to concentrate on its core competencies of
printed circuit board design and fabrication. In November 1995, PDI merged with
and into the Company.
To provide its customers with fully integrated electronic interconnect
solutions, the Company acquired Circuit Technology, Inc. (CTI), a printed
circuit board manufacturer in Redmond, Washington, in November 1995 for
approximately $16 million, including assumption of liabilities. The Redmond
facility specializes in quick-turnaround prototype and low- volume production.
The acquisition was accomplished by a merger of CTI with and into Praegitzer,
and was accounted for under the purchasing accounting method.
In April 1996, the Company acquired from Praegitzer Property Group, in
exchange for approximately 1,370,000 shares of Company Common Stock, all of the
real property and improvements on which the Company's Dallas and White City,
Oregon, manufacturing facilities are located and assumed related indebtedness.
In August 1996, the Company completed the acquisition of Trend Circuits,
Inc., a printed circuit board manufacturer located in Fremont, California, for
one million shares of Common Stock of the Company and $5 million in cash. In
addition, the Company assumed approximately $11 million in debt. The cash
obligations of the Company were funded by draws under its bank line of credit.
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,
1996 1995 1994
Revenue 100.0% 100.0% 100.0%
Cost of goods sold 76.7 83.2 89.3
Gross profit 23.3 16.8 10.7
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Selling, general and administrative expense 9.3 11.0 11.8
Income (loss) from operations 14.0 5.8 (1.1)
Interest expense 1.9 2.7 2.3
Other income (expense) 0.3 0.1 (0.7)
Income (loss) from continuing operations 12.4 3.2 (4.1)
Pro forma provision (benefit) for income taxes 4.7 1.2 (1.8)
Pro forma net income (loss) from
continuing operations 7.7% 2.0% (2.3)%
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
Revenue for the fiscal year ended June 30, 1996 was $95.1 million, an
increase of $37.0 million or 63.7% from the fiscal year ended June 30, 1995. The
increase resulted primarily from a net increase of $21.9 million or 38.0% in
unit volume sales of the Company's products to contract manufacturers and
telecommunications and instrumentation OEMs and, secondarily, approximately
$15.1 million of this increase was due to the acquisition of CTI in November
1995.
Gross profit for the fiscal year ended June 30, 1996 was $22.2 million or
23.3% of revenue, compared to $9.8 million or 16.8% of revenue for the fiscal
year ended June 30, 1995. Cost of goods sold includes direct labor, materials
and manufacturing overhead costs. The increase in gross margin was primarily the
result of improved capacity utilization, changes in product mix, which resulted
in increased sales of higher-priced printed circuit boards with a higher average
layer count and higher gross margin, and greater yields at the Company's
manufacturing facilities.
Selling, general and administrative expense consists of salaries, incentive
compensation and benefits for sales, marketing and administrative personnel,
advertising and promotional expenses, professional fees and commissions paid to
independent sales representatives. Selling, general and administrative expense
for the fiscal year ended June 30, 1996 was $8.9 million or 9.3% of revenue, an
increase of $2.5 million or 38.9% from the fiscal year ended June 30, 1995,
primarily as a result of increased personnel and fixed costs required to support
higher levels of sales and the acquisition of CTI. Selling, general and
administrative expense decreased as a percentage of revenue from 11.0% to 9.3%,
primarily as a result of operating efficiencies achieved by spreading fixed
costs over a larger revenue base.
Interest expense for the fiscal year ended June 30, 1996 was $1.8 million, an
increase of $236,000 or 15.1% from the fiscal year ended June 30, 1995. The
increase was the result of increased borrowing costs and increased borrowings
required to finance the acquisition of CTI and increased sales.
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
Revenue for fiscal 1995 was $58.1 million, an increase of $6.3 million or
12.2% from fiscal 1994. The increase resulted primarily from a net increase of
$4.3 million or 8.3% in unit volume sales of the Company's products to
telecommunications and instrumentation OEMs that was offset in part by a
decrease of 39.9% in sales to computer OEMs, and, secondarily, to changes in
product sales mix, which resulted in an increase of $1.9 million or 3.5% in
sales of higher-priced printed circuit boards with a higher average layer count.
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Gross profit for fiscal 1995 was $9.8 million or 16.8% of revenue, compared
to $5.5 million or 10.7% of revenue for fiscal 1994. The increase in gross
margin was primarily the result of operating efficiencies, improved capacity
utilization, changes in product mix which resulted in increased sales of higher-
priced printed circuit boards with a higher average layer count and higher gross
margin, and greater yields at the Company's manufacturing facilities.
Selling, general and administrative expense for fiscal 1995 was $6.4 million
or 11.0% of revenue, an increase of $324,000 or 5.3% from fiscal 1994, primarily
as a result of increased employee benefits costs and consultant fees. Selling,
general and administrative expense decreased as a percentage of revenue from
11.8% to 11.0%, primarily as a result of spreading fixed costs over a larger
revenue base.
Interest expense for fiscal 1995 was $1.6 million, an increase of $346,000 or
28.4% from fiscal 1994. The increase was primarily the result of increased
borrowing costs, including increases in the prime interest rate.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and capital
expenditures with cash from operations and debt financing. Net cash provided by
operating activities for the fiscal year ended June 30, 1996 was $8.9 million,
compared to net cash provided by operating activities of $5.0 million and $2.1
million for fiscal 1995 and 1994, respectively. As of June 30, 1996, the Company
had $39,000 in cash and cash equivalents and working capital of approximately
$10.7 million.
In April 1996, the Company received net proceeds from its initial public
offering of $19,340,000. The proceeds were used to pay off the outstanding line
of credit balance at that time as well as other existing indebtedness and
accrued S corporation dividends. Also during April 1996, the Company established
a new $10.0 million line of credit, under which $985,000 was outstanding at June
30, 1996 and $9.0 million was available for borrowings based on eligible
accounts receivable and inventory. Amounts outstanding under the line of credit
bear interest at an annual rate equal to the 8.25%. At June 30, 1996, the
Company was in compliance with all loan covenants. The Company also has a $10.0
million equipment line of credit which was not utilized and all of which was
available for equipment purchases as of June 30, 1996.
Capital expenditures were $7.5 million for the fiscal year ended June 30,
1996, and $3.7 million and $4.0 million in fiscal 1995 and 1994, respectively.
These capital expenditures were primarily for the purchase of manufacturing
equipment and plant modernization. Although the Company has no commitments in
material amounts, it expects capital expenditures for the next 12 months to
range from $8 million to $12 million for facilities expansion and equipment.
The Company intends to pursue acquisitions as part of its growth strategy.
Although the Company has no understandings, commitments or agreements with
respect to any acquisition, the Company anticipates that one or more potential
acquisition opportunities may become available in the future. The Company
believes its existing cash and cash equivalents, credit facilities and cash from
operations, will be sufficient to fund its operations for at least the next 12
months.
INDEPENDENT AUDITORS' REPORT
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The Board of Directors and Shareholders
Praegitzer Industries, Inc.
We have audited the accompanying balance sheets of Praegitzer Industries,
Inc. as of June 30, 1996 and 1995, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended June 30, 1996. 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 financial statements present fairly, in all material
respects, the financial position of Praegitzer Industries, Inc. as of June 30,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles.
Portland, Oregon
August 16, 1996
BALANCE SHEETS
Praegitzer Industries, Inc.
<TABLE>
<CAPTION>
June 30,
1996 1995
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 38,687 $ 23,060
Receivables, net of allowance for doubtful accounts
of $265,000 and $150,000 at June 30, 1996
and 1995, respectively 13,073,861 7,262,151
Due from related parties (Note 12) -- 381,807
Due from shareholder (Note 12) -- 347,852
Inventories (Note 4) 6,211,755 4,002,394
Prepaid expenses 206,129 84,932
Current deferred tax asset (Note 13) 394,000 --
Total current assets 19,924,432 12,102,196
Property, Plant, and Equipment, Net (Note 5) 24,795,705 17,130,246
Restricted Cash (Note 6) 305,956 303,625
</TABLE>
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<TABLE>
<S> <C> <C>
Other Assets (Note 7) 7,809,968 815,856
Total $ 52,836,061 $ 30,351,923
LIABILITIES AND EQUITY
Current Liabilities:
Bank overdraft $ 530,817 $ 969,087
Notes payable (Note 8) -- 4,794,672
Taxes payable 943,000 --
Accounts payable 5,157,913 5,891,228
Accrued payroll and related benefits 1,623,439 991,395
Other current liabilities 55,045 50,633
Current portion of long-term obligations 870,874 1,301,842
Total current liabilities 9,181,088 13,998,857
Long-Term Obligations, Net of current portion (Notes 9 and 10) 7,694,590 10,187,726
Deferred Tax Liability (Note 13) 896,000 --
Contingencies and Commitments (Note 16) 423,450 423,450
Deferred Gain, Net of current portion -- 43,271
Shareholders' Equity:
Preferred stock; 500,000 shares authorized, no shares
issued and outstanding -- --
Common stock, 50,000,000 shares authorized and
11,061,875 shares issued and outstanding at
June 30, 1996 and 8,086,875 at June 30, 1995 29,932,049 4,308,916
Retained earnings 4,708,884 1,389,703
Total shareholders' equity 34,640,933 5,698,619
Total $ 52,836,061 $ 30,351,923
</TABLE>
See notes to financial statements.
STATEMENTS OF OPERATIONS
Praegitzer Industries, Inc..
<TABLE>
<CAPTION>
Years Ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Revenue $ 95,101,170 $ 58,096,178 $ 51,757,135
Cost of goods sold 72,941,213 48,343,022 46,244,144
Gross profit 22,159,957 9,753,156 5,512,991
Selling, general, and administration expense 8,283,048 6,405,667 6,082,006
Amortization of goodwill 612,500 -- --
Income (loss) from operations 13,264,409 3,347,489 (569,015)
Interest expense 1,798,914 1,562,790 1,217,002
Other income (expense) 301,642 91,689 (353,110)
Income (loss) from continuing operations
before income taxes 11,767,137 1,876,388 (2,139,127)
Provision for income taxes 1,445,000 -- --
Income from continuing operations 10,322,137 1,876,388 (2,139,127)
Discontinued operations (Note 3):
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Loss on disposal of assembly division,
including provision of $5,065,199 in 1994
for operating losses during phase-out period (612,000) -- (3,081,159)
Net income (loss) $ 9,710,137 $ 1,876,388 $ (5,220,286)
Pro forma net income (loss) data (Note 13) (Unaudited):
Income (loss) from continuing operations
before income taxes, as reported $ 11,767,137 $ 1,876,388 $ (2,139,127)
Pro forma (provision) benefit for income taxes (4,472,000) (690,865) 919,463
Discontinued operations, as reported (612,000) -- (3,081,159)
Pro forma tax benefit of discontinued operations 233,000 -- 1,181,933
Pro forma net income (loss) $ 6,916,137 $ 1,185,523 $ (3,118,890)
Pro forma net income per share (Note 19)
(Unaudited) from:
Continuing operations $ 0.80 $ 0.13
Discontinued operations (0.04) --
$ 0.76 $ 0.13
Pro forma weighted average shares outstanding
(Note 19) (Unaudited) 9,110,233 8,823,717
</TABLE>
See notes to financial statements.
STATEMENTS OF CASH FLOWS
Praegitzer Industries, Inc.
<TABLE>
<CAPTION>
Years Ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 9,710,137 $ 1,876,388 $ (5,220,286)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 4,911,279 3,704,780 3,714,157
Gain on sale of fixed assets (111,730) (177,844) (57,300)
Gain on disposal of assembly division assets -- -- (1,984,040)
Deferred taxes 502,000 -- --
Provision for doubtful accounts 292,354 64,518 53,932
Recognition of deferred gain (43,271) (18,547) --
Loss on discontinued operations 612,000 -- --
Changes in operating assets and liabilities:
Receivables (3,361,233) (1,132,447) 2,048,049
Inventory (688,624) 76,265 3,605,243
Other current assets (89,664) (20,892) 29,144
Accounts payable (2,684,743) 446,285 (343,774)
Income taxes payable 943,000 -- --
Accrued payroll and related benefits 288,645 252,468 (224,516)
Other current liabilities (1,336,809) (67,269) 435,920
Net cash provided by operating activities 8,943,341 5,003,705 2,056,529
Cash flows from investing activities:
Additions to property, plant, and equipment (7,525,631) (3,663,114) (3,951,359)
Proceeds from sale of assembly division assets -- -- 6,864,443
Additions to other assets -- (372,897) --
Proceeds from sale of property, plant, and equipment 217,955 371,821 372,970
Acquisition of Circuit Technology, Inc. (2,000,000) -- --
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Net (additions to) reductions in amounts due from
related parties and shareholders (2,594,714) (138,050) 120,533
Deposits refunded -- -- 154,403
Change in restricted cash (2,331) (13,946) (139,679)
Net cash provided by (used in) investing activities (11,904,721) (3,816,186) 3,421,311
Cash flows from financing activities:
Net additions to (reductions in) short-term borrowings (5,199,771) (2,887,768) 251,867
Borrowing of long-term debt 3,880,409 4,496,890 2,000,000
Payments on long-term debt (7,713,451) (2,401,743) (4,022,783)
Proceeds from initial public offering, net of expenses 19,340,185 -- --
Capital contributions -- 497,153 2,197,306
Dividends paid (6,783,635) (793,095) (4,330,772)
Payments on capital leases (108,460) (169,576) (1,267,184)
Increase (decrease) in bank overdrafts (438,270) 69,595 (305,819)
Net cash provided by (used in) financing activities 2,977,007 (1,188,544) (5,477,385)
Increase (decrease) in cash and cash equivalents 15,627 (1,025) 455
Cash and cash equivalents at beginning of year 23,060 24,085 23,630
Cash and cash equivalents at end of year $ 38,687 $ 23,060 $ 24,085
Supplemental disclosure of cash flow information-
Cash paid during the year for interest $ 1,789,375 $ 1,553,460 $ 1,179,881
</TABLE>
Noncash investing and financing activities:
During the year ended June 30, 1994, the Company acquired $811,591 of
property, plant, and equipment under capital leases related to the assembly
division.
During the year ended June 30, 1994, the Company recorded a deferred gain of
$92,727 for equipment which was sold and subsequently leased back.
During the year ended June 30, 1994, the Company distributed $194,953 of
property to a related party in exchange for a note receivable.
During the year ended June 30, 1996, the Company used $526,720 of operating
lease deposits toward the purchase of equipment.
During the year ended June 30, 1996, the Company distributed dividends of
$468,087 to a shareholder by reducing amounts due from shareholder.
See notes to financial statements.
STATEMENTS OF SHAREHOLDERS' EQUITY
Praegitzer Industries, Inc.
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC. TOTAL
COMMON STOCK
RETAINED
NUMBER EARNINGS
OF SHARES AMOUNT (DEFICIT)
<S> <C> <C> <C> <C>
Balances, July 1, 1993
as previously reported 6,717,000 $ 2,074,037 $ 4,887,213 $ 6,961,250
Effect of Praegitzer Property Group merger
(Note 2) 1,369,875 4,510,675 -- 4,510,675
Balances, July 1, 1993, as restated 8,086,875 6,584,712 4,887,213 11,471,925
Net earnings June 30, 1994 -- 68,158 (5,288,444) (5,220,286)
Contributions -- 2,197,306 -- 2,197,306
Dividends -- (4,330,772) -- (4,330,772)
Balances, June 30, 1994 8,086,875 4,519,404 (401,231) 4,118,173
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Net earnings June 30, 1995 -- (705,390) 2,581,778 1,876,388
Contributions -- 497,153 -- 497,153
Dividends -- (2,251) (790,844) (793,095)
Balances, June 30, 1995 8,086,875 4,308,916 1,389,703 5,698,619
Acquisition of Circuit Technology, Inc. 700,000 7,143,714 -- 7,143,714
Net earnings June 30, 1996 -- (392,679) 10,102,816 9,710,137
Initial public offering, net of expenses 2,275,000 19,340,185 -- 19,340,185
Dividends -- (468,087) (6,783,635) (7,251,722)
Balances, June 30, 1996 11,061,875 $ 29,932,049 $ 4,708,884 $ 34,640,933
</TABLE>
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1996
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 manufacture and sale of electronic circuit boards.
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. Actual results could differ from those estimates.
DISCONTINUED OPERATIONS-- In July 1993, the Company adopted a plan for the
disposition of its assembly division (see Note 3).
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,
including nonrestricted certificates of deposit, purchased with an original
maturity of three months or less.
PROPERTY AND EQUIPMENT-- Depreciation of property and equipment is provided
on the straight-line method based on the estimated useful lives of the
individual assets, primarily 5 to 10 years for equipment and 31 years for
buildings. The Company records the assets and the related obligations of capital
leases at amounts based upon the cash purchase price of the assets involved at
the beginning of the lease term. Depreciation and amortization expense also
includes amortization of equipment recorded under capital leases provided on the
basis of the estimated useful lives of the individual assets, primarily 5 years,
on the straight-line method.
LOAN FEES-- Other assets include loan fees incurred by the Company. These
fees are being amortized straight-line 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 eight
years. Management reviews, on an ongoing basis, the continuing appropriateness
of the remaining amortizable life and the net realizable value of the
unamortized balance.
INCOME TAXES-- The Company elected to be taxed under the S corporation
provisions of the Internal Revenue Code through the effective date of the
initial public offering by Praegitzer of common stock (the Offering). Under
those provisions, the Company did not pay federal or state corporate income
taxes on its taxable income. Instead, the shareholders were liable for federal
and state income taxes on the Company's taxable income.
Actual and pro forma income taxes have been provided for under Statement of
Financial Accounting Standards (FASB) No. 109, Accounting for Income Taxes.
Under this method, deferred tax assets and liabilities are recognized based on
differences between financial statement and tax basis of assets and liabilities
using presently enacted tax rates.
S CORPORATION DIVIDENDS-- Historically, the Company has paid dividends to its
shareholders in amounts which approximate the federal and state income taxes
that are due as a result of the Company electing to be taxed as an S corporation
as discussed above. In connection with the Offering, the Company distributed to
its former shareholders substantially all of the undistributed cumulative income
that had been taxed or was taxable to its former shareholders. This dividend was
paid from the proceeds of the Offering.
COMMON STOCK-- In November 1995, in anticipation of its Offering, the Board
of Directors declared a
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650,294-for-1 stock split of its common stock. All per share information in the
accompanying financial statements has been retroactively adjusted to reflect
this stock split.
2. ACQUISITIONS
On November 15, 1995, Praegitzer acquired Circuit Technology, Inc. (CTI), a
circuit board manufacturing company. The acquisition was accomplished by a
merger of CTI with and into Praegitzer. The purchase price included $2,000,000
of cash and 700,000 shares of Praegitzer's common stock which was valued at
$10.21 per share.
The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the operating results of CTI have been included in
the Company's combined financial statements since the date of acquisition. The
estimated fair market value of assets and liabilities acquired was approximately
$8,000,000 and $7,300,000, respectively. The excess of the aggregate purchase
price over the fair market value of net assets acquired of $8,400,000 was
recognized as goodwill and is being amortized over eight years.
The following unaudited pro forma results of operations assume the
acquisition occurred on July 1, 1994:
YEAR ENDED JUNE 30,
1996 1995
Revenue $ 103,755,000 $ 76,157,000
Net income 6,851,000 1,167,000
Net income per share 0.71 0.12
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the CTI acquisition been
consummated as of July 1, 1994, nor is it necessarily indicative of future
operating results.
In November 1995, Praegitzer Design, Inc. (PDI) merged with and into
Praegitzer. As the entities were commonly controlled, the transaction was
accounted for in a manner similar to a pooling of interests. The impact on the
financial statements was insignificant.
In April 1996, Praegitzer acquired all the assets and the related liabilities
of Praegitzer Property Group (PPG) for net consideration of $12,120,000.
Praegitzer issued 1,369,875 shares of its common stock to the sole proprietor of
PPG. As the entities are commonly controlled, the transaction was accounted for
in a manner similar to a pooling of interests. The impact of accounting for the
transaction on the financial statements was insignificant.
On August 16, 1996, Praegitzer 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 will be accounted for under the purchase method of
accounting and, accordingly, the operating results of Trend will be included in
the Company's financial statements after the date of acquisition. The excess of
the aggregate purchase price over the fair market value of the net assets
acquired will be recognized as goodwill and will be amortized over eight years.
3. DISCONTINUED OPERATIONS
On July 1, 1993, the Company adopted a formal plan to sell its assembly
contract manufacturing division. On April 25, 1994, the sale of substantially
all of the assets of the assembly division was completed. The assets sold
consisted primarily of inventory, property, plant and equipment. The selling
price was $7,084,661, resulting in a gain of $1,984,040. The $3,081,159 net loss
from discontinued operations for the year ended June 30, 1994 represents the
$1,984,040 gain on the disposal of assembly division inventory, property, plant
and equipment and a $5,065,199 loss incurred in 1994 on the assembly division
operations. In connection with the assembly division sale, the Company agreed
not to solicit any of the assembly division customers or employees for periods
of five and two years, respectively.
At June 30, 1994, the remaining assets of the assembly division were accounts
receivable of $530,000 and inventory of $630,060, both of which are stated at
net realizable value. These assets were disposed of in 1995 at no gain or loss.
During 1996, the Company paid $612,000 in settlement of a prior contingency
related to the assembly division. This amount was recorded as a loss from
discontinued operations.
The results of operations for the assembly division have been presented as
discontinued operations in the accompanying financial statements. The assets of
the assembly division sold in April 1994 consisted of the following:
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Inventories $ 484,661
Equipment, at cost 6,179,835
Less accumulated depreciation (3,826,305)
Total equipment, net 2,353,530
Building, at cost 1,801,530
Less accumulated depreciation (209,701)
Total building, net 1,591,829
Land, at cost 450,383
Total $ 4,880,403
Revenue for the assembly division for the year ended June 30, 1994 was
$15,927,588.
4. INVENTORIES
Inventories consist of the following:
1996 1995
Raw materials and supplies $ 1,824,463 $ 936,087
Work-in-process 4,387,292 3,066,307
Total inventories $ 6,211,755 $ 4,002,394
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
USEFUL LIFE JUNE 30,
<S> <C> <C> <C>
Land -- $ 489,729 $ 489,729
Buildings and leasehold improvements 10 to 31 10,752,978 9,276,851
Equipment 3 to 10 34,393,561 27,446,118
Office furniture and fixtures 5 to 7 537,190 532,759
Deposits on equipment -- 743,078 57,782
46,916,536 37,803,239
Less accumulated depreciation and amortization (22,120,831) (20,672,993)
Property and equipment $ 24,795,705 $ 17,130,246
</TABLE>
At June 30, 1996 and 1995, the company had equipment of $347,208 and zero,
respectively, financed with capital leases. The total accumulated amortization
at June 30, 1996 and 1995 was $31,568 and zero, respectively.
6. RESTRICTED CASH
Restricted cash at June 30, 1996 and 1995 consists of a $150,000 certificate
of deposit maintained as collateral for a note payable and $155,956 and
$153,625, respectively, reserved for payment of medical insurance claims that
may arise subsequent to termination of the Company's current insurance contract.
The Company has renewed the insurance contract through June 30, 1998.
7. OTHER ASSETS
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Equipment lease deposits $ -- $ 526,720
Loan fees, net of accumulated amortization of $20,088 and $97,953
at June 30, 1996 and 1995, respectively 22,468 289,136
Goodwill, net of accumulated amortization of $612,500
at June 30, 1996 7,787,500 --
Total other assets $ 7,809,968 $815,856
8. NOTES PAYABLE
1996 1995
Note payable to Finova Capital Corporation under a
$14,800,000 line of credit, paid April 1996 $ -- $ 4,794,672
</TABLE>
9. LONG-TERM NOTES PAYABLE
<PAGE>
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Page 11
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<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Note payable to Finova Capital Corporation, paid April 1996 $ -- $ 3,990,827
Mortgage payable to SeaFirst Mortgage Corporation, 8% at June 30, 1996,
rate varies based on six-month certificates of deposit plus 2.75%, payable
in monthly installments of $26,813 including interest, collateralized by
plant facilities 3,054,815 3,091,567
Note payable to MetLife Capital Corporation, 7.67% at June 30, 1996,
interest rate varies at 30-day commercial paper rate plus 2.35%, payable
in monthly installments of $7,622 including interest, collateralized by a
$150,000 certificate of deposit and a deed of trust on PPG facilities
located in White City, Oregon 943,783 960,621
Notes payable to Heller Financial, Inc., 10.10% at June 30, 1996,
interest rate varies at highest defined rate announced by The First
National Bank of Chicago plus 1.85%, due in monthly installments of
$47,207 plus interest, collateralized by machinery and equipment and
personally guaranteed by a shareholder 1,333,374 --
Note payable to First Security Bank of Idaho, paid April 1996 -- 881,367
Notes payable to Oregon Department of Energy, 7.4% to 9.95%, due in
monthly installments of $22,489 including interest, unpaid principal and
interest due June 1, 1998 through January 1, 2007, collateralized by
equipment and a second deed of trust on PPG land and facilities located
in Dallas, Oregon and personally guaranteed by a shareholder 1,936,902 2,035,145
Note payable to U.S. National Bank of Oregon, paid November 1995 -- 500,000
Note payable, 9.00%, due in semi-annual installments of $6,090 including
interest, collateralized by equipment 20,541 30,041
Note payable to PacifiCorp, 7.06%-8.25% at June 30, 1996 83,611 --
Line of credit of $10,000,000 payable to Key Bank, 8.25% at June 30, 1996,
collateralized by inventory and accounts receivable, expires April 12, 1998 984,592 --
Subtotal 8,357,618 11,489,568
Less current portion (767,227) (1,301,842)
Total long-term notes payable $ 7,590,391 $ 10,187,726
</TABLE>
The Company's loan agreements with Heller Financial, Inc. and Key Bank
contain covenants pertaining to maintenance of tangible net worth and
maintenance of certain financial ratios. The Company was not in violation of any
covenants at June 30, 1996.
Maturities on the notes payable as of June 30, 1996 were as follows:
YEAR ENDING JUNE 30,
1997 $ 767,227
1998 2,232,098
1999 1,301,408
2000 215,076
2001 230,178
Thereafter 3,611,631
Total $ 8,357,618
10. OBLIGATIONS UNDER CAPITAL LEASES
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Leases payable, 10.4% to 12.75% imputed interest, due in monthly
installments ranging from $705 to $6,517 including interest $ 207,846 $ --
Less current portion 103,647 --
Total $ 104,199 $ --
</TABLE>
11. OPERATING LEASES
Praegitzer leases equipment under operating lease agreements which expire at
various times. Future minimum rentals at June 30, 1996 under these agreements
are as follows:
<PAGE>
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Page 12
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YEAR ENDING JUNE 30,
1997 $ 1,521,704
1998 1,300,968
1999 916,669
2000 551,417
2001 261,550
Total $ 4,552,308
Several of Praegitzer's operating leases contain renewal options.
Rent expense relating to the equipment leases totaled $796,642, $1,072,481,
and $880,824 for the years ended June 30, 1996, 1995, and 1994, respectively.
12. RELATED-PARTY TRANSACTIONS
The amounts due from shareholder of $347,852 at June 30, 1995 represents
demand notes receivable due from Robert L. Praegitzer, a shareholder, bearing
interest at 8%. All amounts due have been repaid.
Praegitzer has sold printed circuit boards to Carillon Corporation, an Oregon
corporation in which Robert L. Praegitzer is a 50% shareholder. Prior to
August 17, 1994, Robert L. Praegitzer was the sole shareholder of Carillon
Corporation. Sales to Carillon Corporation which related to the assembly
division were $981,630 for the year ended June 30, 1994. Sales to Carillon
Corporation for the years ended June 30, 1996 and 1995 were insignificant.
The amounts due from Carillon Corporation of $313,407 at June 30, 1995
represents the excess of advances made by Praegitzer over repayments made by
Carillon Corporation. All amounts due have been repaid.
At June 30, 1995, the accompanying balance sheet includes $68,400 due from
Virtual Image Displays, Inc., a corporation in which Praegitzer has a 50%
ownership interest. Sales to Virtual Image Displays, Inc. for the years ended
June 30, 1996 and 1995 were insignificant.
During the year ended June 30, 1996, the Company had notes payable to
shareholders of $3,337,960. The notes payable represented the undistributed
cumulative income that had been taxed or was taxable to the previous
shareholders of PDI and CTI, who are now shareholders of Praegitzer. The notes
payable were repaid in April 1996.
13. INCOME TAXES
The following information reflects income taxes on the Company's earnings
from the date of the Offering to June 30, 1996. At the date of the Offering, the
Company terminated its S corporation election and is now taxed as a C
corporation.
Current:
Federal $ 891,000
State 52,000
943,000
Deferred:
Federal 466,000
State 36,000
502,000
$ 1,445,000
The income tax provision on earnings from continuing operations subsequent to
the date of the Offering which are subject to income taxes differs from the
statutory federal income tax rate due to the following:
Federal income taxes at the statutory rate $ 1,402,000
State income taxes, net of federal benefit 67,000
State tax credits (23,000)
Other (1,000)
$ 1,445,000
The significant items comprising the Company's net deferred tax liability
are disclosed below with the pro forma information. The following unaudited
information reflects pro forma income taxes as if the Company's earnings from
<PAGE>
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continuing operations had been subject to federal and state income taxes as a C
corporation for all periods presented:
YEAR ENDED JUNE 30,
1996 1995 1994
Current:
Federal $ 4,278,000 $ 946,858 $ (680,279)
State 742,000 -- 134,338
5,020,000 946,858 (545,941)
Deferred:
Federal (595,000) (299,874) (35,240)
State 47,000 43,881 (338,282)
(548,000) (255,993) (373,522)
$ 4,472,000 $ 690,865 $ (919,463)
The pro forma income tax provision on earnings from continuing operations
subject to income taxes differs from the statutory federal income tax rate due
to the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995 1994
<S> <C> <C> <C>
Federal income taxes at the statutory rate $ 4,118,000 $ 637,972 $ (727,303)
State income taxes, net of federal benefit 323,000 81,811 (93,266)
State tax credits (171,000) (39,084) (112,189)
Other 202,000 10,166 13,295
$ 4,472,000 $ 690,865 $ (919,463)
</TABLE>
Pro forma income taxes related to discontinued operations differs from the
statutory rate primarily due to state income taxes, net of federal benefit.
The pro forma tax effect of significant items comprising the Company's net
deferred tax liability are as follows:
YEAR ENDED JUNE 30,
1996 1995
Allowance for doubtful accounts $ 117,000 $ 57,540
Accrued expenses 376,000 18,745
State income taxes - credits 117,000 151,273
State NOL -- 100,154
Property, plant, and equipment (1,112,000) (1,377,876)
$ (502,000) $ (1,050,164)
Net deferred tax assets and liabilities are included in the following balance
sheet accounts at June 30, 1996:
Current deferred tax asset $ 394,000
Deferred tax liability (896,000)
Net deferred tax liability $ (502,000)
14. MAJOR CUSTOMERS
During the years ended June 30, 1996, 1995, and 1994, the Company recognized
23%, 29%, and 46% of total revenue, respectively, from two customers.
15. EMPLOYEE BENEFIT PLAN
In April 1990, Praegitzer instituted a 401(k) plan which covers all employees
and permits discretionary contributions by the participants. The Company has
contributed approximately $251,188 to the plan for the year ended June 30, 1996.
The Company had not contributed to the plan on behalf of the employees prior to
June 30, 1995.
16. CONTINGENCIES AND COMMITMENTS
<PAGE>
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During the year ended June 30, 1994, a former employee brought suit against
Praegitzer for wrongful discharge which resulted in a jury verdict against the
Company totaling $423,450. Praegitzer has appealed the verdict and judgment.
Management believes that the jury verdict was excessive; however, due to the
uncertainty involved in the appeal process, the entire judgment has been
accrued.
The Company is involved as a defendant in litigation in the ordinary course
of business, the outcome of which cannot be predicted with certainty. Management
believes that any ultimate liability with respect to such litigation will not
materially affect the financial position or results of operations of the
Company.
17. STOCK INCENTIVE PLAN AND STOCK WARRANTS
Praegitzer's Board of Directors and shareholders adopted and approved the
1995 Stock Incentive Plan (the Stock Incentive Plan) on December 19, 1995. Under
the 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 1,500,000
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 Stock Incentive Plan at any time except
with respect to options and shares subject to restrictions then outstanding
under the Stock Incentive Plan. Options to purchase a total of 667,000 shares of
common stock with an exercise price of $9.50 - $12.00 per share have been
granted and are outstanding. None of such options have been exercised. Such
options generally vest at the rate of 25% per year and expire ten years from
date of grant.
In connection of the acquisition of CTI (see Note 2), 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, 1996, no shares had been purchased under the stock warrants.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, receivables, payables, accrued
liabilities, and short-term borrowings approximates fair value because of the
short-term maturity of these instruments.
The fair value of long-term debt has been estimated by discounting projected
future cash flows, using a 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
$8,400,289, or 100.5% of the carrying value of $8,357,617 at June 30, 1996.
19. PRO FORMA EARNINGS PER SHARE (UNAUDITED)
Pro forma net income per share is based on the weighted average number of
shares of common stock outstanding and dilutive common equivalent shares from
stock options (using the treasury stock method). The shares outstanding for all
periods give effect to the stock split described in Note 1 as well as the
following pro forma adjustments:
YEAR ENDED JUNE 30,
1996 1995
Average outstanding shares 7,161,872 6,717,000
Common stock equivalents - net 40,024 --
Shares deemed issued for S corporation dividend 538,462 736,842
Shares issued for merger of PPG 1,369,875 1,369,875
Pro forma average shares 9,110,233 8,823,717
Common and common equivalent shares issued during the 12-month period prior
to the proposed offering have been included in the calculation using the
treasury stock method as if they were outstanding for all periods presented.
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
In the opinion of management, this unaudited quarter 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 of cash flows of the Company for the periods represented (in
thousands, except per share amounts):
<PAGE>
- --------------------------------------------------------------------------------
Page 15
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
<S> <C> <C> <C> <C>
Net sales $ 17,951 $ 22,618 $ 25,778 $ 28,754
Gross profit 3,954 4,966 5,977 7,263
Increase from operations 2,540 2,839 3,717 4,168
Income before taxes 2,103 2,445 2,602 4,005
Pro forma net income 1,262 1,480 1,653 2,521
Pro forma earnings per share 0.14 0.16 0.22 0.23
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
<S> <C> <C> <C> <C>
Net sales $ 14,291 $ 14,324 $ 13,399 $ 16,082
Gross profit 2,306 2,180 2,069 3,198
Increase from operations 645 521 638 1,543
Income before taxes 336 137 290 1,113
Pro forma net income 217 82 183 703
Pro forma earnings per share 0.02 0.01 0.02 0.08
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Nos. 333-07533, 333-07535, and 333-9319 of Praegitzer Industries, Inc. on
Form S-8 of our report dated August 16, 1996, incorporated by reference in
this Annual Report on Form 10-K of Praegitzer Industries, Inc. for the year
ended June 30, 1996.
DELOITTE & TOUCHE LLP
Portland, Oregon
September 27, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 39
<SECURITIES> 0
<RECEIVABLES> 13,339
<ALLOWANCES> 265
<INVENTORY> 6,212
<CURRENT-ASSETS> 19,924
<PP&E> 46,917
<DEPRECIATION> 22,121
<TOTAL-ASSETS> 52,836
<CURRENT-LIABILITIES> 9,181
<BONDS> 0
0
0
<COMMON> 29,932
<OTHER-SE> 4,709
<TOTAL-LIABILITY-AND-EQUITY> 52,836
<SALES> 95,101
<TOTAL-REVENUES> 95,101
<CGS> 72,941
<TOTAL-COSTS> 72,941
<OTHER-EXPENSES> 8,896
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,799
<INCOME-PRETAX> 11,767
<INCOME-TAX> 4,472
<INCOME-CONTINUING> 7,295
<DISCONTINUED> 379
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,916
<EPS-PRIMARY> .76
<EPS-DILUTED> .76
</TABLE>
