As filed with the Securities and Exchange Commission on November 17, 1998
Registration No. 333-63003
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
Amendment No. 1 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
Praegitzer Industries, Inc.
(Exact name of registrant as specified in its
charter)
Oregon 3672 93-0790158
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification
incorporation) Code Number) Number)
1270 SE Monmouth Cut Off Road
Dallas, Oregon 97338
(503) 623-1000
(Address, including zip code, and telephone
number, including area code, of
registrant's principal executive offices)
--------------------
Scott D. Gilbert
Vice President and Treasurer
PRAEGITZER INDUSTRIES, INC.
1270 SE Monmouth Cut Off Road
Dallas, Oregon 97338
(503) 623-1000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------
Copies to:
Stephen E. Babson Edmund M. Kaufman
Robert J. Moorman Eric A. Webber
Stoel Rives LLP Irell & Manella LLP
900 SW Fifth Avenue, Suite 2600 333 South Hope Street, Suite 3300
Portland, Oregon 97204 Los Angeles, California 90071
(503) 224-3380 (213) 620-1555
--------------------
Approximate date of commencement of proposed
sale to the public: As soon as practicable after
this Registration Statement becomes effective.
--------------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
--------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=======================================================================================================================
Proposed Maximum
Title of Each Class of Amount to be Offering Price Proposed Aggregate Amount of
Securities to be Registered Registered (1) Per Security (2) Offering Price Registration Fee (3)
--------------------------- -------------- ----------------- ------------------ --------------------
<S> <C> <C> <C> <C>
% Convertible Subordinated $17,250,000 100% $17,250,000 $4,796
Notes due 2008
Common Stock (4) (4) (4) (4)
=======================================================================================================================
(1) Includes $2,250,000 principal amount of Notes that the Underwriters have an
option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act.
(3) $13,570 was paid on September 4, 1998 in connection with the registrant's
initial filing on Form S-1.
(4) There is also registered an indeterminate number of shares issuable upon
conversion of the Convertible Subordinated Notes, for which no separate
registration fee is payable pursuant to Rule 457(i) under the Securities
Act. The Registrant will not receive any additional proceeds from the
issuance of such shares.
</TABLE>
--------------------
The Registrants hereby amend this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrants shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 17, 1998
$15,000,000
[PRAEGITZER LOGO]
--------------------
% Convertible Subordinated Notes due December __, 2008
--------------------
Praegitzer Industries, Inc. ("Praegitzer" or the "Company") hereby offers
$15,000,000 aggregate principal amount of its ___% Convertible Subordinated
Notes due 2008 (the "Notes"), and an indeterminate number shares of its common
stock ("Common Stock") issuable upon conversion of the Notes (all such Common
Stock, the "Shares" and, together with the Notes, the "Securities"). The Notes
will mature on December ___, 2008. Interest on the Notes is payable
semi-annually in arrears on July 15 and January 15 of each year, commencing July
15, 1999. The Notes are convertible into shares of Common Stock at any time on
or before the close of business on the last trading day prior to maturity,
unless previously redeemed, at a conversion price of $____ per share, subject to
adjustment in certain events as described herein. See "Description of Notes --
Conversion Rights." The Common Stock is traded on the Nasdaq National Market
under the symbol "PGTZ." On November 16, 1998 the last reported sale price of
the Common Stock was $8.125 per share. See "Market Price of Common Stock." The
Company has applied to list the Shares on the Nasdaq National Market, subject
only to notice of issuance.
Until December __, 2001, the Notes are redeemable by the Company at the
redemption prices set forth herein plus accrued interest, but only if (i) it
redeems all of the Notes then outstanding, (ii) after the date of this offering
and prior to the redemption, the Company completes one or more public offerings
of its Common Stock generating at least $15 million in gross proceeds, and (iii)
the closing price of the Common Stock exceeds the percentages of the conversion
price set forth herein for at least 30 consecutive trading days ending on the
fifth trading day prior to the notice of redemption. On or after December __,
2001, the Notes are redeemable, in whole or from time to time in part, at the
option of the Company, at the redemption prices set forth herein plus accrued
interest. No sinking fund is provided for the Notes. In addition, following the
occurrence of a Designated Event (i.e., a Change of Control or Termination of
Trading (each as defined)), each holder has the right to cause the Company to
purchase the Notes at 100% of their principal amount together with accrued and
unpaid interest. See "Description of Notes."
The Notes are general unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior Debt (as
defined herein) of the Company and will be effectively subordinated to all
indebtedness and other liabilities of the Company's subsidiaries. As of
September 30, 1998, the Company had approximately $77.3 million of Senior Debt
outstanding, and the subsidiaries of the Company had approximately $3.9 million
of outstanding indebtedness (other than indebtedness to the Company). After
giving effect to the offering of the Notes and the application of net proceeds
therefrom, the Company, as of September 30, 1998, would have had approximately
$65.9 million of Senior Debt outstanding. The Indenture will not restrict the
Company or its subsidiaries from incurring Senior Debt or other indebtedness.
See "Description of Notes" for a more complete discussion of the Indenture's
provisions.
Prior to the offering, there has not been a public market for the Notes.
The Company has applied for approval to list the Notes on the Nasdaq Small Cap
Market.
See "Risk Factors" commencing on page 11 for certain information that
should be considered by prospective purchasers of the securities offered hereby.
--------------------
These securities have not been approved or disapproved by the Securities
and Exchange Commission or any state securities commission nor has the
Securities and Exchange Commission or any state securities commission
passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
<TABLE>
<CAPTION>
===============================================================================================
Underwriting Proceeds to
Price to Public(1) Discounts (2) Company(3)
<S> <C> <C> <C>
Per Note.............................. % % %
Total (4)............................. $ _________ $ _________ $ _________
===============================================================================================
(1) Plus accrued interest from December __, 1998.
(2) See "Underwriting" for information concerning indemnification of the
Underwriters by the Company and other matters.
(3) Before deducting expenses payable by the Company, estimated at $500,000.
(4) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional $2,250,000 principal amount of Notes at the Price to
Public, less the Underwriting Discount, solely to cover over-allotments, if
any. If the Underwriters exercise this option in full, the Price to Public,
Underwriting Discounts and Proceeds to Company will be $__________, $______
and $______, respectively. See "Underwriting." -------------------
</TABLE>
The Notes are being offered hereby by the Underwriters named herein,
subject to prior sale, when, as and if issued by the Company and delivered to
and accepted by the Underwriters and subject to certain prior conditions,
including the right of the Underwriters to reject any order in whole or in part.
It is expected that delivery of the Notes will be made in New York, New York in
book-entry form only through the facilities of The Depository Trust Company on
or about _______________, 1998.
--------------------
Advest, Inc. Black & Company, Inc.
The date of this Prospectus is , 1998
<PAGE>
SCHEMATIC CAPTURE
[Illustration of an electronic schematic diagram]
CIRCUIT DESIGN
[Illustration of a computer-generated circuit design]
Schematic capture involves the input of an electronic schematic diagram
into a high-performance computer workstation that generates a list of the
electronic components and interconnects required to design a printed circuit
board. Circuit design is accomplished using specialized computer aided design
software programs.
ENTEK(R) PROCESS LINE
[Photograph of two printed circuit board production lines]
ELECTROLESS NICKEL GOLD LINE
HIGH PERFORMANCE CIRCUITS
[Photograph of two printed circuit boards]
Praegitzer Industries, Inc. has the expertise and specialized engineering
processes to manufacture high-performance circuit boards with a broad range of
materials, processes and requirements including GETEK(R) (a fiberglass material
resistant to high temperatures), laser microvias, and buried capacitance. The
Company provides a wide assortment of alternative surface finishes, including
Entek(R), an organic surface protection, and electroless nickel immersion gold.
In connection with this offering, certain underwriters may engage in
passive market making transactions in the Notes on the Nasdaq Small Cap Market
in accordance with Rule 103 of Regulation M. See "Underwriting."
In connection with this offering, certain underwriters may engage in
passive market making transactions in the Common Stock on the Nasdaq National
Market in accordance with Rule 103 of Regulation M. See "Underwriting"
Certain persons participating in the offering may engage in transactions
that stabilize, maintain or otherwise affect the market price of the Common
Stock or Notes. Specifically, the Underwriters may over-allot in connection with
the offering and may bid for and purchase Common Stock or Notes in the open
market. For a description of these activities, see "Underwriting."
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all amendments
and exhibits thereto, the "Registration Statement"), under the Securities Act of
1933 (the "Securities Act"), with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company, and the securities offered hereby, reference is made to the
Registration Statement and the exhibits and the financial statements, notes and
schedules filed as a part thereof or incorporated by reference therein, which
may be inspected at the public reference facilities of the Commission, at the
addresses set forth below. Statements made in this Prospectus concerning the
contents of any documents referred to herein are not necessarily complete, and
in each instance are qualified in all respects by reference to the copy of such
document filed as an exhibit to the Registration Statement.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Commission. Reports,
proxy statements and other information filed by the Company can be inspected and
copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Judiciary Plaza, Washington, D.C. 20549, and at the following Regional Offices
of the Commission: Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and New York Regional Office, 7
World Trade Center, Suite 1300, New York, New York 10048. The Commission also
maintains a Web site (http://www.sec.gov) at which reports, proxy and
information statements and other information regarding the Company may be
accessed.
The Company will provide to the holders of the Notes annual reports
containing financial statements audited by the Company's independent auditors
and other reports determined by the Company or required by law. The Company will
also furnish annual reports on Form 10-K and quarterly reports on Form 10-Q
(except for exhibits) free of charge to holders of the Notes who so request in
writing to the Company.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Each
prospective investor is urged to read this Prospectus in its entirety. Except as
otherwise noted, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option.
The Company
The Company is a leader in providing electronics original equipment
manufacturers ("OEMs") and contract manufacturers with a full range of printed
circuit board ("PCB") and interconnect solutions, including schematic capture
and design, quick-turnaround, prototyping and pre-production, and large volume
production. The Company provides its solutions to four key electronics industry
segments (with corresponding percentages of Company revenue for the fiscal year
ended June 30, 1998): (i) data and telecommunications (31%), (ii) computers and
peripherals (36%), (iii) industrial and instrumentation (25%) and (iv) business
and consumer (8%). The Company's growth has been driven by sales to industry
leaders whose products require increasingly complex and technologically advanced
electronic interconnects. The Company's principal customers include Compaq,
Hewlett Packard, Intel, Dell, EMC, IEC Electronics, SCI, Solectron, Motorola,
Xylan and Xerox. The Company has obtained ISO 9002 certifications for five of
its manufacturing facilities and has received awards from a number of its
customers in recognition of its superior performance in meeting their PCB needs.
In fiscal 1998 the Company served more than 650 customers worldwide.
The 1997 worldwide PCB market was estimated at $29.7 billion by the
Institute for Interconnecting Packaging Electronic Circuits ("IPC"), of which
the U.S. market was $7.8 billion and was forecast to grow 6.5% annually through
2001. As electronics OEMs respond to competitive pressures, they place
ever-greater emphasis on faster product time-to-market and greater PCB
complexity in tight space tolerances, and face increasing pressure to shorten
the design-to-manufacture cycles. Additionally, as OEMs increasingly focus on
core competencies, non-core activities are contracted to independent specialty
vendors. As a result of these market forces, outsourcing of PCBs and electronic
interconnects has grown from 66% of total OEM requirements in 1991 to 93% in
1997.
Addressing these trends, Praegitzer in 1997 implemented its One-Stop
Shopping(TM) strategy to provide its customers with advanced technology and
integrated manufacturing capabilities for the entire cycle of PCB creation. In
the last three years, the Company has acquired production facilities in Redmond,
Washington; Fremont, California; and Huntsville, Alabama, and a 51% interest in
a production facility in Melaka, Malaysia. During this same period, Praegitzer
acquired or opened 11 design centers in the U.S. and one in Israel. The Company
has experienced 46.5% compound revenue growth during fiscal years 1995 through
1998, compared with a compound revenue growth rate for the U.S. PCB industry of
8.5%. Excluding revenue generated by acquired facilities, the Company's compound
revenue growth rate during the same period would have been 21.7%. During this
period the Company produced increasingly complex PCBs with higher density and
layer counts.
The Company's goal is to be the leading provider of electronic interconnect
one-stop design and manufacturing services, while continuing to increase its
technological and services advantages.
The address of the Company's principal executive offices is 1270 SE
Monmouth Cut Off Road, Dallas, Oregon 97338, and the Company's telephone number
is (503) 623-1000.
4
<PAGE>
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Prospectus contains statements that are forward-looking, such as statements
relating to plans for future activities. This forward-looking information is
subject to significant known and unknown risks, uncertainties and other factors
that could significantly affect actual results, performance or achievements of
the Company in the future and, accordingly, the actual results, performance or
achievements may materially differ from those expressed or implied in any
forward-looking statements made by the Company. These risks, uncertainties and
factors include, but are not limited to, those relating to business conditions
and growth in the electronics industry and general economies, both domestic and
international, lower than expected customer orders, competitive factors
(including increased competition, new product offerings by competitors and price
pressures), the availability of parts and supplies at reasonable prices,
technological difficulties and resource constraints encountered in developing
new products, and outstanding indebtedness. For a more specific and detailed
discussion of some of these risks, uncertainties and factors, see "Risk
Factors." The words "believe," "expect, "anticipate," "intend" and "plan" and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date the statement was made.
Risk Factors
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective purchasers of the Notes.
5
<PAGE>
The Offering
Issuer.................... Praegitzer Industries, Inc., an Oregon corporation
Securities Offered........ $15,000,000 aggregate principal amount ___%
Convertible Subordinated Notes, together with an
indeterminate number of shares of Common Stock
issuable upon conversion of the Notes.
Maturity.................. The Notes will mature on December ___, 2008, unless
earlier redeemed or converted.
Interest.................. Interest on the Notes at the rate of ____% per annum
is payable semi-annually in arrears on January 15
and July 15 of each year, commencing July 15, 1999.
Conversion at the
Option of the Holder...... The Notes are convertible into Common Stock at the
option of the holder at any time on or before the
close of business on the last trading day prior to
maturity, unless previously redeemed, at a
conversion price of $____ per share, subject to
adjustment in certain events. See "Description of
Notes -- Conversion."
Redemption at the
Option of the Company..... Until December __, 2001, the Company may, upon at
least 15 days notice, redeem the Notes then
outstanding at the redemption prices set forth
herein plus accrued interest, but only if (i) the
Company redeems all of the Notes then outstanding,
(ii) after the date of this offering and prior to
the redemption, the Company completes one or more
public offerings of its Common Stock generating at
least $15 million in gross proceeds, and (iii) the
closing price of the Common Stock exceeds the
percentages of the conversion price set forth herein
for at least 30 consecutive trading days ending on
the fifth trading day prior to the notice of
redemption. On or after December __, 2001, the
Company may, upon at least 15 days notice, redeem
the Notes, in whole or from time to time in part, at
the redemption prices set forth herein, together
with accrued and unpaid interest thereon. See
"Description of Notes -- Redemption."
Repurchase Upon
a Designated Event........ The Notes are required to be repurchased at 100% of
their principal amount together with accrued and
unpaid interest thereon, at the option of the
holder, upon the occurrence of a Designated Event
(i.e., a Change of Control or a Termination of
Trading (each as defined)). See "Risk Factors --
Limitations on Repurchase of Notes" and "Description
of Notes -- Repurchase at Option of Holders Upon a
Designated Event."
Subordination............. The Notes will be general unsecured obligations of
the Company, subordinated in right of payment to all
existing and future Senior Debt of the Company and
effectively subordinated to all existing and future
liabilities and obligations of the Company's
subsidiaries. As of September 30, 1998, the Company
had approximately $77.3 million of outstanding
indebtedness that would have
6
<PAGE>
constituted Senior Debt, and the indebtedness and
other liabilities of the Company's subsidiaries
(excluding intercompany liabilities and obligations
of a type not required to be reflected on the
balance sheet of such subsidiary in accordance with
generally accepted accounting principles ("GAAP"))
that would effectively have been senior to the Notes
were approximately $3.9 million. After giving effect
to planned debt repayments by the Company prior to
the offering and the application of the estimated
net proceeds to the Company of the offering, these
amounts will be approximately $65.9 million and $3.9
million, respectively. See "Risk Factors --
Subordination of Notes," "Use of Proceeds" and
"Description of Notes -- Subordination."
Use of Proceeds........... The Company will apply a significant portion of the
net proceeds of this offering to repay balances
under its existing agreements for Senior Debt. See
"Use of Proceeds."
Listing of the Shares..... The Common Stock is listed on the Nasdaq National
Market under the symbol "PGTZ." The Company has
applied to list the Shares on the Nasdaq National
Market, subject only to notice of issuance.
Listing of the Notes...... The Company has applied for approval to list the
Notes on the Nasdaq Small Cap Market.
7
<PAGE>
<TABLE>
<CAPTION>
Summary Company Consolidated Financial Data and Other Information
Three Months Ended
Year Ended June 30, September 30,
------------------------------------------- ------------------------
1996 1997 1998 1997 1998
----------- ------------ ----------- ---------- ----------
(in thousands, except growth rates, ratios and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenue................................................... $ 95,101 $ 147,947 $ 182,773 $ 42,595 $ 55,396
Cost of goods sold........................................ 72,941 122,013 148,487 34,563 46,202
----------- ------------ ----------- ---------- ----------
Gross profit.............................................. 22,160 25,934 34,286 8,032 9,194
Selling, general and administrative expenses.............. 8,896 19,188 23,456 5,803 7,012
Impairment and in-process technology
expense............................................... -- 11,650 -- -- --
----------- ------------ ----------- ---------- ----------
Income (loss) from operations............................. 13,264 (4,904) 10,830 2,229 2,182
Interest expense.......................................... 1,799 2,295 3,757 726 1,467
Other income ............................................. 302 568 224 98 208
----------- ------------ ----------- ---------- ----------
Income (loss) from continuing operations
before income taxes................................... 11,767 (6,631) 7,297 1,601 923
Provision for income taxes................................ 4,472(1) 1,670 2,215 494 330
----------- ------------ ----------- ---------- ----------
Income (loss) from continuing operations.................. $ 7,295(1) $ (8,301) $ 5,082 $ 1,107 $ 593
Income (loss) from discontinued operations ............... (379) -- -- -- --
----------- ------------ ----------- ---------- ----------
Net income (loss)......................................... $ 6,916(1) $ (8,301) $ 5,082 $ 1,107 $ 593
=========== ============ =========== ========== ==========
Net income (loss) per share - basic and diluted........... $ 0.76 $ (0.68) $ 0.40 $ 0.09 $ 0.05
=========== ============ =========== ========== ==========
Weighted average number of shares outstanding - diluted... 9,110 12,234 12,846 12,931 12,797
=========== ============ =========== ========== ==========
Other Data:
EBITDA (2)................................................ $ 18,175 $ 2,473 $ 19,733 $ 4,288 $ 5,475
Adjusted EBITDA (2)(3).................................... 18,175 14,123 19,733 4,288 5,475
Depreciation and amortization............................. 4,911 7,377 8,903 2,059 3,293
Capital expenditures...................................... 7,526 24,761 39,334 4,352 10,651
Net cash provided by operating activities................. 8,943 1,719 10,353 2,406 4,581
Net cash (used in) investing activities................... (11,905) (18,927) (54,844) (4,543) (5,835)
Net cash provided by financing activities................. 2,977 17,612 45,219 2,053 425
8
<PAGE>
Three Months Ended
Year Ended June 30, September 30,
------------------------------------------- ------------------------
1996 1997 1998 1997 1998
----------- ------------ ----------- ---------- ----------
(in thousands, except growth rates, ratios and per share data)
<S> <C> <C> <C> <C> <C>
Growth Rates:
Revenue................................................... 63.7% 55.6% 23.5% 44.6% 30.1%
Adjusted EBITDA (2)(3).................................... 157.7% (22.3)% 39.7% 87.2% 27.7%
Adjusted income from operations (3)....................... 296.3% (49.1)% 60.5% 23.6% (2.1)%
Margins (4):
Adjusted EBITDA (2)(3).................................... 19.1% 9.5% 10.8% 10.1% 9.9%
Adjusted Income (loss) from operations (3)................ 13.9% 4.6% 5.9% 5.2% 3.9%
Net income (loss)......................................... 7.3% (5.6)% 2.8% 2.6% 1.1%
Ratios:
Adjusted EBITDA to interest expense (2)(3)................ 10.1x 6.2x 5.3x 5.9x 3.7x
Earnings to fixed charges (5)............................. 6.7x -- 2.2x 2.3x 1.3x
Adjusted Earnings to fixed charges (3)(5)................. 6.7x 2.4x 2.2x 2.3x 1.3x
September 30, 1998
----------------------------
Balance Sheet Data: Actual As Adjusted (6)
------------ -------------
Working capital................................................................................. $ 20,439 $ 27,141
Inventories..................................................................................... 16,560 16,560
Total assets.................................................................................... 158,822 162,254
Short-term debt................................................................................. 8,889 4,518
Long-term obligations........................................................................... 72,271 65,271
Convertible Subordinated Notes.................................................................. -- 15,000
Shareholders' equity............................................................................ 44,970 44,773
- --------------
(1) The Company was an S corporation prior to April 1996 and accordingly was
not subject to federal and state income taxes prior to April 1996. For this
portion of 1996 income tax expense, net income and net income per share are
shown pro forma. Pro forma amounts reflect federal and state income taxes
as if the Company had been a C corporation based on the effective tax rates
that would have been in effect during these periods. See Note 11 to the
Company's Financial Statements.
(2) EBITDA represents income from operations before depreciation and
amortization. EBITDA is not a measurement determined under GAAP and does
not represent cash generated from operating activities in accordance with
GAAP. EBITDA should not be considered by the reader as an alternative to
net income as an indicator of financial performance or as an alternative to
cash flows as a measure of liquidity. In addition, the Company's definition
of EBITDA may not be identical to similarly entitled measures used by other
companies. The derivation of EBITDA and EBITDA, as adjusted, is set forth
in the following table.
Three Months Ended
Year Ended June 30, September 30,
------------------------------------ -----------------------
1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income (loss) from operations...................... $ 13,264 $ (4,904) $ 10,830 $ 2,229 $ 2,182
Depreciation and amortization...................... 4,911 7,377 8,903 2,059 3,293
---------- ---------- ---------- ---------- ----------
EBITDA............................................. 18,175 2,473 19,733 4,288 5,475
Impairment and in-process technology expense
(see footnote 3)............................... -- 11,650 -- -- --
---------- ---------- ---------- ---------- ----------
EBITDA, as adjusted................................ $ 18,175 $ 14,123 $ 19,733 $ 4,288 $ 5,475
========== ========== ========== ========== ==========
9
<PAGE>
(3) Adjusted earnings, adjusted EBITDA and adjusted income from operations
reflect the Company's earnings, EBITDA and income from operations,
respectively, adjusted to exclude an aggregate non-cash charge of $11.65
million representing the write-off of goodwill associated with the
acquisition of Circuit Technology, Inc. ("CTI") in fiscal 1996 and the
write-off of purchased research and development costs related to the
acquisition of Trend Circuits ("Trend") in fiscal 1997. Adjusted earnings,
adjusted EBITDA and adjusted income from operations are not measurements
determined under GAAP. Adjusted earnings, adjusted EBITDA and adjusted
income from operations should not be considered by the reader as
alternatives to net income, EBITDA and income from operations as indicators
of financial performance.
(4) Margins represent the indicated items expressed as a percentage of revenue.
(5) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before income taxes, plus fixed charges. "Fixed
charges" consist of interest on all indebtedness, amortization of deferred
debt financing costs and one-third of rental expense (the portion deemed
representative of the interest factor). Earnings were insufficient to cover
fixed charges for the year ended June 30, 1997 by $6.6 million. For each
period presented, the ratio of earnings to fixed charges plus preferred
dividends is identical to the corresponding ratio of earnings to fixed
charges.
(6) As adjusted to give effect to the issuance of the $15,000,000 principal
amount of Notes offered hereby, the receipt by the Company of the net
proceeds, and the application of the net proceeds as described under "Use
of Proceeds."
</TABLE>
10
<PAGE>
RISK FACTORS
Each prospective investor should carefully consider, in addition to the
other information contained in this Prospectus, the following information before
purchasing the Notes offered hereby.
Fluctuations in Operating Results
The Company's results of operations have fluctuated and may continue to
fluctuate from period to period, including on a quarterly basis. Variations in
design, quick-turnaround and pre-production and high volume production orders
and in the average number of layers per printed circuit board have significantly
affected both revenue and gross margins. Operating results may also be affected
by other factors, including the receipt and shipment of large orders, plant
utilization, manufacturing process yields, the timing of expenditures in
anticipation of future sales, raw material availability, the length of sales
cycles and economic conditions in the electronics industry. A significant
portion of the Company's operating expenses are fixed. Any inability to adjust
spending quickly enough to compensate for any revenue shortfall could magnify
the shortfall's adverse impact on the Company. Moreover, the Company's business
involves highly complex manufacturing processes that are subject to occasional
failure. Process failures have occurred in the past and have resulted in delays
in product shipments. There is no assurance that process failures will not occur
in the future, and the loss of revenue as the result of such failures could have
a material adverse effect on the Company. Results of operations in any period
should not be considered indicative of the results to be expected for any future
period. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Lack of Long-Term Sales Commitments
Several factors contribute to the volatility of the Company's results of
operations, including backlog and order management, product mix changes, order
cancellations and process failures. The Company's customers generally require
short delivery cycles, and a substantial portion of the Company's backlog is
typically scheduled for delivery within 60 days. The Company has no long-term
sales commitments other than a two-year contract with Intergraph Corporation
("Intergraph"). Quarterly sales and operating results therefore depend in large
part on the volume and timing of orders received during the quarter, which are
difficult to forecast. The level and timing of orders placed by the Company's
customers vary due to customer inventory management, changes in customer
manufacturing strategy, variation in demands for customer products and other
factors. In the case of orders for prototype and pre-production runs, the
Company's lead time may be reduced to as little as one day and, due to its
dependence on customer product launches and design changes, the Company's
operating results from its quick-turnaround business are subject to particular
volatility. The short lead times inherent in the Company's backlog also affect
its ability to plan production and inventory levels, which could lead to
fluctuation in operating results. In addition, a variety of conditions, both
those specific to individual customers and those
11
<PAGE>
generally affecting their industry segments, such as a general downturn in the
economic conditions in the United States and other regions of the world,
including Asia, may cause customers to cancel, reduce or delay orders that were
previously made or anticipated. Generally, customers may cancel, reduce or delay
purchase orders and commitments without penalty, except for payment for work and
materials expended through the cancellation date. Significant or numerous
cancellations, reductions or delays in orders by customers could have a material
adverse effect on the Company. See "Business -- Customers, Sales and Marketing."
Dependence on Electronics Industry
The Company's customers include OEMs and contract manufacturers of data
communications and telecommunications equipment, instrumentation and industrial
equipment, computers and peripherals, and business and consumer electronics.
These industry segments, as well as the electronics industry as a whole, are
subject to rapid technological change and product obsolescence. Because the
Company's products are highly specialized and are specified into an OEM's
product, discontinuation or modification of these products could have a material
adverse effect on the Company. The electronics industry is subject to economic
cycles and has experienced and is likely in the future to experience
recessionary periods. Pricing pressures, a general recession or any other event
leading to excess capacity or a downturn in the electronics industry likely
would result in intensified price competition, reduced gross margins and a
decrease in unit volume, which could have a material adverse effect on the
Company. See "Business -- Customers, Sales and Marketing."
Technological Change
Technological change in the PCB industry is rapid and continuous. The
manufacture of complex PCBs requires increasing technological and manufacturing
expertise. To satisfy customers' needs for increasingly complex products, the
Company must continue to develop improved manufacturing processes and invest in
new facilities and systems. New technologies and equipment may be required for
the Company to remain competitive, and the acquisition and implementation of
these technologies and equipment may require significant capital investment. In
addition, the printed circuit board industry may in the future encounter
competition from new technologies, including ceramic and deposited multichip
modules, that may reduce the number of printed circuit boards required in
electronic equipment or may render existing technology less competitive or
obsolete. There is no assurance that the Company will have adequate capital to
maintain technological adequacy, that the Company's future process development
efforts will be successful or that the emergence of new technologies, industry
standards or customer requirements will not render the Company's technology,
equipment or systems inadequate. See "Business-Manufacturing and Engineering
Processes."
12
<PAGE>
Uncertain Ability to Manage Growth; Risks Associated with Possible Acquisitions
The Company has recently experienced significant growth and expansion,
particularly in connection with the acquisitions of CTI, Trend, a 51% ownership
interest in Praegitzer Asia Sdn. Bhd. ("Praegitzer Asia"), the Huntsville PCB
facility of Intergraph and several design centers, which has placed, and its
expected to continue to place, significant demands on the Company's managerial,
technical, financial and other resources. The Company's growth strategy will
require increased personnel throughout the Company, expanded customer service
and support, expanded operational and financial systems and the implementation
of new control procedures. There is no assurance that the Company will be able
to attract qualified personnel, successfully manage expanded operations or
accomplish other measures necessary for its successful growth. As the Company
expands, it may from time to time experience constraints that will adversely
affect its ability to satisfy customer demands in a timely fashion. Failure to
manage growth effectively, including costs of integrating acquired facilities,
could have an adverse effect on the Company. Results may fluctuate as a result
of the acquisitions.
The Company intends to continue pursuing acquisitions. 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. Acquisitions would require
investment of operational and financial resources and could require integration
of dissimilar operations, assimilation of new employees, diversion of management
resources, increases in administrative costs and additional costs associated
with debt or equity financing. If attractive acquisition opportunities become
available, the Company intends to pursue them actively. There is no assurance
that the Company will complete any acquisition, that any future acquisition will
be successful or that a future acquisition will not materially and adversely
affect the Company. See "Use of Proceeds" and "Business -- Business Strategy."
Dependence on Key Personnel
The Company's future success will depend in part on the continued service
of certain key management, engineering and other personnel, including Robert
Praegitzer, the Company's Chief Executive Officer and Chairman of the Board, and
Matthew Bergeron, the Company's President and Chief Operating Officer, and the
Company's ability to attract and retain qualified managerial, engineering,
technical, sales and marketing personnel. Competition for these employees is
intense. There is no assurance that the Company can retain its existing key
personnel or that it can attract and retain sufficient numbers of qualified
employees in the future. The loss of key employees or the inability to hire or
retain qualified personnel in the future could have a material adverse effect on
the Company. See "Management."
13
<PAGE>
Customer Concentration
For fiscal 1998, sales to Hewlett-Packard and Victron/Xylan accounted for
approximately 8% and 6.1% of the Company's revenue, respectively, and the
Company's ten largest customers accounted for approximately 45% of the Company's
revenue. The Company expects a significant portion of its revenue will continue
to be concentrated in a small number of customers. The loss of, or significant
curtailment of purchases by, one or more of these customers could have a
material adverse effect on the Company. In addition, future consolidation in the
electronics industry could reduce the number of the Company's customers and
increase the possibility that the loss of, or significant curtailment of
purchases by, one or more of these customers could have a material adverse
effect on the Company. See "Business -- Customers; -- Sales and Marketing."
Competition
The PCB 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 PCBs. The Company's
competitors are primarily large domestic manufacturers, offshore manufacturers
located primarily in Asia, small or regional domestic manufacturers and captive
PCB operations of large OEMs such as IBM. The principal competitors of the
Company include Nanya, Compeq, Hadco and Viasystems. Some of the Company's
competitors are 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 PCB 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 PCB 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 PCBs, 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 have a material adverse
effect on the Company. See "Business -- Competition."
Availability and Cost of Materials
The Company has no fixed price contracts or arrangements for some of the
raw materials and supplies it purchases. Shortages of, and price increases for,
certain raw materials used by the Company have occurred in the past and may
occur in the future. As the use of proprietary materials increases, the
potential for shortages in supply also increases. Future shortages or price
fluctuations in raw materials could have a material adverse effect on the
Company. There is no assurance that the Company will be successful in mitigating
14
<PAGE>
these risks through contracts with its suppliers. Delays or interruptions in
obtaining raw materials would have a particularly pronounced effect on the
Company's quick-turnaround business because of the short lead times associated
with that business. See "Business --Manufacturing and Engineering Processes" and
"-- Materials and Supplies."
Environmental Matters
The Company uses certain materials in its manufacturing processes that are
classified as hazardous substances. Proper waste disposal and environmental
regulation are major considerations for PCB manufacturers because metals and
chemicals are used in the manufacturing process. If violations of environmental
laws occur, the Company could be liable for damages and for the costs of
remedial actions and could also be subject to revocation of permits necessary to
conduct its business. Any such revocation could require the Company to cease or
limit production at one or more of its facilities, which could have a material
adverse effect on the Company. The Company is also subject to laws relating to
the storage, use and disposal of chemicals, solid waste and hazardous materials,
as well as air quality regulations. As a generator of hazardous materials, the
Company is subject to financial exposure even if it fully complies with these
laws. Because of the nature and quantity of hazardous substances used in PCB
manufacturing, the Company could be required under environmental laws to conduct
investigation and remediation of past releases of hazardous substances.
Environmental laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with a violation.
See "Business -- Environmental Matters."
International Operations
In April 1998, the Company acquired a 51% interest in Praegitzer Asia, a
PCB manufacturer located in Malaysia. As a result, the Company's business is
subject to the risks generally associated with doing business abroad, such as
foreign governmental regulations, foreign consumer preferences, tariffs and
other trade barriers, political unrest, disruptions or delays in shipments and
changes in economic conditions in countries in which the Company manufactures or
sells its products. For example, the recent turmoil in Asian markets may
adversely affect the Company's ability to sell products produced by Praegitzer
Asia. Some of the Company's international sales are denominated in Malaysian
Ringgit. Consequently, a decrease in the value of the Malaysian currency in
relation to the U.S. dollar would have an adverse impact on the Company's
results of operations. Moreover, the Malaysian government has recently imposed
certain currency controls relating to the Ringgit, which may adversely impact
the Company's ability to transfer funds into and out of its Malaysian
subsidiary. These factors, among others, could influence the Company's ability
to sell its products in international markets, as well as its ability to
manufacture its products or procure certain materials. If any such factors were
to render the conduct of business in Malaysia undesirable or impractical, there
could be a material adverse effect on the Company. The Company's management has
limited experience in operating foreign manufacturing facilities,
15
<PAGE>
and there is no assurance that the Company will be able to operate the new
facility profitably.
Intellectual Property
The Company's success depends in part on its proprietary techniques and
manufacturing expertise, particularly in the area of complex multilayer PCBs.
The Company has no patents and relies principally on trade secret protection of
its intellectual property. There is no assurance that the Company will be able
to protect its trade secrets or that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets. In addition, litigation may be
necessary to protect the Company's trade secrets, to determine the validity and
scope of the proprietary rights of others or to defend against claims of patent
infringement. With one exception, the Company is not aware of any pending or
threatened claims that affect any of the Company's intellectual property rights.
The exception is a claim asserted by a former iron powder supplier to the
Company, which has claimed that the Company's use of iron powder purchased from
another source in certain copper recovery processes infringes on a patent held
by such former supplier. The Company believes that it has valid defenses to this
claim, and intends to defend against the claim vigorously. If any other
infringement claim is asserted against the Company, the Company may seek to
obtain a license of the other party's intellectual property rights. There is no
assurance that third parties will not assert infringement claims against the
Company in the future or that, in such circumstances, a license would be
available on reasonable terms or at all. Litigation with respect to patents or
other intellectual property matters could result in substantial costs and
diversion of management and other resources and could have a material adverse
effect on the Company.
Subordination of Notes
All obligations of the Company under the Notes are unsecured and rank
subordinate and junior in right of payment to all current and future Senior Debt
of the Company, the amount of which is unlimited.
The Company will use approximately $8.5 million of the proceeds from this
offering to pay off the entire balance under one of the Heller Agreements (as
defined herein) and approximately $3.1 million to pay off the entire balance
under the Finova Agreement (as defined herein). All obligations of the
securities described herein will be effectively subordinated to all outstanding
existing and future obligations of the Company and its subsidiaries. As of
September 30, 1998, on a pro forma basis after giving effect to the offering and
the application of the estimated net proceeds therefrom, the Company would have
had approximately $65.9 million of indebtedness outstanding, all of which
(except for the indebtedness relating to the Notes themselves) effectively would
have been senior to the securities described herein. The Company will have
nothing available for borrowing under its existing credit agreements upon
completion of this offering. The Company has entered into a letter of intent
(the "Letter of Intent") with another commercial bank to provide funds
16
<PAGE>
to replace funding under an existing credit agreement. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." All of the Company's existing credit
agreements provide for the acceleration of outstanding amounts under any such
agreement in the event of default. Such an acceleration might restrict the
ability of the Company to pay interest on the Notes.
Possible Redemption Prior to Stated Maturity
The Company may, at its option, on or after December __, 2001, redeem the
Notes in whole at any time or in part from time to time at the redemption prices
set forth herein plus accrued but unpaid interest to the date fixed for
redemption. The Company may redeem the Notes in whole before December __, 2001
at the redemption prices set forth herein if, after the date of this offering,
the Company completes one or more public offerings of the Common Stock
generating at least $15 million in gross proceeds and the closing price for the
Common Stock exceeds the percentages of the conversion price set forth herein
for at least 30 consecutive trading days ending on the fifth day prior to the
redemption notice. See "Description of the Notes -- Redemption."
Ability to Make Payments on the Notes
The Company will have significant interest expense under the Notes. As of
September 30, 1998, after giving effect to the offering and the application of
net proceeds therefrom, the Company would have approximately $65.9 million in
outstanding indebtedness on a consolidated basis, all of which (except for
indebtedness relating to the Notes themselves) effectively would have been
senior to the Notes described herein. The Company's ability to pay interest on
the Notes depends primarily on the cash and liquid investments of the Company
and on the profitability, financial condition, and capital expenditure and other
cash flow requirements of the Company. In addition, the Indenture does not
restrict the ability of the Company or its subsidiaries to incur additional
indebtedness, including indebtedness secured by their assets or properties, and
does not prohibit the Company or its subsidiaries from entering into credit
agreements or other financial arrangements that restrict such subsidiaries from
making payments to the Company. Although the Company expects that its operating
cash flow will be sufficient to cover its expenses including interest costs,
there is no assurance in this regard. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Limited Covenants; Absence of Sinking Fund
The covenants in the Indenture are limited. The Company is not required
under the Indenture to meet any financial tests that measure the Company's
working capital, interest coverage or net worth in order to comply with the
terms of the Indenture. As a result, the Indenture does not offer substantial
protection to holders of Notes in the event of a material adverse change in the
Company's financial condition or results of operations. Therefore, the
provisions of the Indenture should not be considered a significant factor in
evaluating
17
<PAGE>
whether the Company will be able to comply with its obligations under the Notes.
Further, the Notes do not have the benefit of any sinking fund payments by the
Company.
Risks Associated with Leverage
The Company operates with significant amounts of debt relative to its
equity. At September 30, 1998, the Company had outstanding $81.2 in principal
amount of indebtedness, and the Company has incurred prior to the offering and
intends to continue to incur bank debt in addition to the Notes. In fiscal 1997
and 1998, the Company's payments under long-term debt agreements were $16.4
million and $3.3 million, respectively. Following the expected application of
the estimated net proceeds to the Company of the offering and repayments of debt
after September 30, 1998 and prior to the offering, the Company will continue to
have at least $69.8 million in principal amount of indebtedness outstanding
including $4.5 million of short-term borrowings and current portion of long-term
debt.
Limitations on Repurchase of Notes
Upon a Designated Event, which includes a Change of Control and a
Termination of Trading (each as defined), each holder of Notes will have certain
rights, at the holder's option, to require the Company to repurchase all or a
portion of such holder's Notes. If a Designated Event occurs, there is no
assurance that the Company would have sufficient funds to pay the repurchase
price for all Notes tendered. In addition, the terms of the Company's existing
or future credit or other agreements relating to indebtedness (including Senior
Debt) may prohibit the Company from purchasing any Notes and may also provide
that a Designated Event, as well as certain other change-of-control events with
respect to the Company, would constitute an event of default thereunder. In the
event a Designated Event occurs when the Company is prohibited form purchasing
Notes, the Company could seek the consent of its lenders to the purchase of
Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain a consent or repay the borrowings,
the Company would be prohibited from purchasing Notes. In such case, the
Company's failure to purchase tendered Notes would be an Event of Default under
the Indenture, which may, in turn, constitute a further default under the terms
of other indebtedness that the Company has entered into or may enter into from
time to time. In these circumstances, the subordination provisions in the
Indenture would likely restrict payments to the holders of Notes. See
"Description of Notes -- Repurchase at Option of Holders Upon a Designated
Event."
No Prior or Existing Market; Liquidity; Volatility of Market Prices
There is no existing market for the Notes. The Company has applied for
approval to list the Notes on the Nasdaq Small Cap Market. There is no
assurance, however, that an active and liquid trading market for the Notes will
develop or that continued quotation of the Notes will be available on the Nasdaq
Small Cap Market. Future trading prices of the Notes
18
<PAGE>
will depend on many factors including, among other things, prevailing interest
rates, the operating results and financial condition of the Company, and the
market for similar securities. As a result of the Company's right to redeem the
Notes in certain circumstances, the market price of the Notes may be more
volatile than the market prices of debt securities that are not subject to
optional redemption. Accordingly, the Notes may trade at a discount from the
price that the investor paid to purchase the Notes.
Although the Underwriters have advised the Company that they intend to make
a market in the Notes, they are not obligated to do so and may discontinue
market-making at any time without notice. There is no assurance that an active
public market for the Notes will develop or be sustained after the offering or
that the market price of the Common Stock or the Notes will not decline. The
trading price of the Common Stock and Notes could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
announcements of technological innovations or new products by the Company or its
competitors, general conditions in the PCB industry, changes in earnings
estimates or recommendations by analysts, or other events or factors. In
addition, the public stock markets have experienced extreme price and trading
volume volatility in recent months. This volatility has significantly affected
the market prices of securities of high technology companies for reasons
frequently unrelated to the operating performances of the specific companies.
Those broad market fluctuations may adversely affect the market price of the
Common Stock and Notes. See "Underwriting."
Control by Principal Shareholder
Robert L. Praegitzer, Chairman of the Board and Chief Executive Officer of
the Company, beneficially owns approximately 64% of the outstanding Common
Stock. As a result, he will be able to control all matters requiring approval by
the shareholders of the Company, including the election of directors and the
amendment of the Company's articles of incorporation, without the cooperation of
any other shareholder. As a shareholder, Mr. Praegitzer is not prohibited from
acting in his own interest in respect of, among other things, the voting or
disposing of his shares of Common Stock.
Shares Eligible for Future Sale
Sales of a substantial number of shares of the Common Stock in the public
market following this offering, or the prospect of such sales, could adversely
affect the market price of the Common Stock and the Company's ability to raise
capital in the future in the equity markets. At September 30, 1998, there were
12,807,442 shares of Common Stock outstanding. Of these shares, approximately
5.8 million shares were eligible for immediate resale without restriction under
the Securities Act of 1933, as amended (the "Securities Act"). There were
approximately 7.0 million shares eligible for immediate resale subject to the
limitations of Rule 144. As of September 30, 1998, options to purchase 1,406,520
shares of Common Stock had been granted under the Company's 1995 Stock Incentive
Plan (the "Stock Incentive Plan"). The Company has filed a registration
statement on Form S-8
19
<PAGE>
under the Securities Act covering shares of Common Stock reserved for issuance
under the Stock Incentive Plan. This registration statement is effective.
Subject to the satisfaction of applicable exercisability periods and Rule 144
volume limitations applicable to affiliates, shares of Common Stock issued upon
exercise of outstanding options granted pursuant to the Stock Incentive Plan
will be available for immediate resale in the open market.
Potential Issuance of Preferred Stock; Anti-Takeover Effect of Oregon Law
The Company is authorized to issue up to 500,000 shares of Preferred Stock,
and the Board of Directors may fix the preferences, limitations and relative
rights of those shares without any vote or action by the shareholders. The
potential issuance of Preferred Stock, certain provisions of Oregon law and the
concentrated ownership of the Company could make it more difficult for a party
to gain control of the Company. See "Description of Capital Stock."
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes are estimated to
be approximately $13.9 million (approximately $16.3 million if the Underwriters'
over-allotment option is exercised in full).
The Company intends to use approximately $8.5 million of the net proceeds
to repay the entire balance under one of the Heller Agreements and approximately
$3.1 million to repay the entire balance under the Finova Agreement. Interest
accrues on outstanding balances under the Heller Agreement to be repaid at LIBOR
plus 2.75% (8.5% per annum at September 30, 1998) and under the Finova Agreement
at 9.9% per annum. The outstanding balance under the Heller Agreement that will
be repaid is payable in full by February 1, 2005. The outstanding balance under
the Finova Agreement is payable in full by September 1, 1999. Any remaining
proceeds will be used for working capital and other general corporate purposes,
including the possible acquisition of businesses or products which the Company
believes will enhance its business. Although the Company actively seeks and
evaluates possible acquisition opportunities, the Company has no agreements,
commitments, understandings or arrangements with respect to any acquisition.
Proceeds not immediately required for the purposes set forth above will be
invested principally in U.S. government securities, short-term certificates of
deposit, money market funds or other investment grade interest-bearing
investments.
DIVIDEND POLICY
The Company has not declared any cash dividends in the past two fiscal
years. The Company expects to retain any earnings to finance the expansion and
development of its business and has no plans to declare cash dividends. 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. Certain of the
Company's credit agreements restrict the Company's ability to pay dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
21
<PAGE>
MARKET PRICE OF COMMON STOCK
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "PGTZ." The following table sets forth, for the periods indicated, the
high and low closing sale prices for the Common Stock, as reported by the Nasdaq
National Market.
Fiscal 1997 High Low
---- ---
First Quarter............................................ $ 14.00 $ 8.125
Second Quarter........................................... 12.00 9.250
Third Quarter............................................ 12.375 8.625
Fourth Quarter........................................... 11.375 8.50
Fiscal 1998
First Quarter............................................ $ 14.938 $ 10.50
Second Quarter........................................... 15.00 9.25
Third Quarter............................................ 11.125 8.50
Fourth Quarter........................................... 9.438 5.469
Fiscal 1999
First Quarter............................................ $ 9.00 $ 5.50
Second Quarter (through November 16, 1998)............... 9.50 6.375
As of October 15, 1998 there were approximately 1,435 holders of record of
the Company's Common Stock. The Company believes the number of beneficial owners
is substantially greater than the number of record holders because a large
portion of the Company's outstanding Common Stock is held of record in broker
"street names" for the benefit of individual investors. A recent reported sale
price of the Common Stock on the Nasdaq National Market is set forth on the
cover page of this Prospectus.
22
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of September 30, 1998 and as adjusted to give effect to the
issuance by the Company of the $15,000,000 principal amount of Notes offered
hereby and the application by the Company of the net proceeds therefrom as
described under "Use of Proceeds."
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------
Actual As Adjusted
-------------- --------------
(Dollars in thousands)
<S> <C> <C>
Short-term debt................................................. $ 8,889 $ 4,518
Long-term obligations, net of current portion................... 72,271 65,271
Convertible Subordinated Notes.................................. -- 15,000
Shareholders' equity:
Preferred stock, 500,000 shares authorized, no
shares issued and outstanding.......................... -- --
Common Stock, 50,000,000 shares authorized,
12,807,442 shares issued and outstanding............... 42,653 42,653
Retained earnings.......................................... 2,317 2,120 (1)
-------------- --------------
Total shareholders' equity............................. 44,970 44,773
-------------- --------------
Total capitalization.............................. $ 126,130 $ 129,562
============== ==============
- --------------
(1) Reflects payment of prepayment penalties.
</TABLE>
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA AND OTHER INFORMATION
The following statement of income data for the years ended June 30, 1996,
1997 and 1998 and actual balance sheet data at June 30, 1997 and 1998 have been
derived from the Company's consolidated financial statements included elsewhere
in this Prospectus, which have been audited by Deloitte & Touche LLP,
independent auditors, as indicated in their report included elsewhere in this
Prospectus. The financial data given below as of and for the three months ended
September 30, 1997 and 1998 have been derived from unaudited consolidated
financial statements included elsewhere in this Prospectus and, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of results for the unaudited interim
periods. Results for the three months ended September 30, 1998 are not
necessarily indicative of results that can be expected for the full fiscal year.
Such information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of the Company, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
----------------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- --------- --------- --------- --------- ---------
(in thousands, except percentages, ratios and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenue.............................. $ 51,757 $ 58,096 $ 95,101 $ 147,947 $ 182,773 $ 42,595 $ 55,396
Cost of goods sold................... 46,244 48,343 72,941 122,013 148,487 34,563 46,202
-------- -------- --------- --------- --------- --------- ---------
Gross profit......................... 5,513 9,753 22,160 25,934 34,286 8,032 9,194
Selling, general and administrative
expenses.......................... 6,082 6,406 8,896 19,188 23,456 5,803 7,012
Impairment and in-process technology
expense........................... -- -- -- 11,650 -- -- --
-------- -------- --------- --------- --------- --------- ---------
Income (loss) from operations........ (569) 3,347 13,264 (4,904) 10,830 2,229 2,182
Interest expense..................... 1,217 1,563 1,799 2,295 3,757 726 1,467
Other income (expense)............... (353) 92 302 568 224 98 208
-------- -------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes.... (2,139) 1,876 11,767 (6,631) 7,297 1,601 923
Provision (benefit) for income taxes (919) (1) 691 (1) 4,472 (1) 1,670 2,215 494 330
-------- -------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations........................ (1,220) (1) 1,185 (1) 7,295 (1) (8,301) 5,082 1,107 593
Income (loss) from discontinued
operations ....................... (1,899) (1) (379) -- -- -- --
-------- -------- --------- --------- --------- --------- ---------
Net income (loss).................... $ (3,119) (1) $ 1,185 (1) $ 6,916 (1) $ (8,301) $ 5,082 $ 1,107 $ 593
======== ======== ========= ========= ========= ========= =========
Net income (loss) per share - basic
and diluted....................... $ 0.13 (1) $ 0.76 (1) $ (0.68) $ 0.40 $ 0.09 $ 0.05
======== ========= ========= ========= ========= =========
Weighted average number of shares
outstanding - diluted............. 8,824 9,110 12,234 12,846 12,931 12,797
======== ========= ========= ========= ========= =========
Other Data:
EBITDA (2)........................... $ 3,145 $ 7,052 $ 18,175 $ 2,473 $ 19,733 $ 4,288 $ 5,475
Adjusted EBITDA (2)(3)............... 3,145 7,052 18,175 14,123 19,733 4,288 5,475
Depreciation and amortization........ 3,714 3,705 4,911 7,377 8,903 2,059 3,293
Capital expenditures................. 3,951 3,663 7,526 24,761 39,334 4,352 10,651
Net cash provided by operating
activities........................ 2,057 5,004 8,943 1,719 10,353 2,406 4,581
24
<PAGE>
Three Months Ended
Year Ended June 30, September 30,
----------------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- --------- --------- --------- --------- ---------
(in thousands, except percentages, ratios and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in)
investing activities.............. 3,421 (3,816) (11,905) (18,927) (54,844) (4,543) (5,835)
-------- -------- --------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities.............. (5,477) (1,189) 2,977 17,612 45,219 2,053 425
-------- -------- --------- --------- --------- --------- ---------
Growth Rates:
Revenue.............................. 2.6% 12.2% 63.7% 55.6% 23.5% 44.6% 30.1%
Adjusted EBITDA (2)(3)............... (65.9)% 124.2% 157.7% (22.3)% 39.7% 87.2% 27.7%
Adjusted income from operations (3).. (111.4)% NA 296.3% (49.1)% 60.5% 23.6% (2.1)%
-------- -------- --------- --------- --------- --------- ---------
Margins (4):
Adjusted EBITDA (2)(3)............... 6.1% 12.1% 19.1% 9.5% 10.8% 10.1% 9.9%
Adjusted income (loss) from
operations (3)....................... (1.1)% 5.8% 13.9% 4.6% 5.9% 5.2% 3.9%
Net income (loss).................... (6.0)% 2.0% 7.3% (5.6)% 2.8% 2.6% 1.1%
Ratios:
Adjusted EBITDA to interest
expense (2)(3)(5)................. 2.6x 4.5x 10.1x 6.2x 5.3x 5.9x 3.7x
Earnings, to fixed charges (6)....... -- 2.0x 6.7x -- 2.2x 2.3x 1.3x
Adjusted earnings to fixed
charges (3)(6).................... -- 2.0x 6.7x 2.4x 2.2x 2.3x 1.3x
June 30,
--------------------------------------------------------- September 30,
Balance Sheet Data: 1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- -------------
Working capital...................... $ (5,999) $ (1,897) $ 10,743 $ 17,031 $ 19,297 $ 20,439
Inventories.......................... 3,449 4,002 6,212 8,534 16,491 16,560
Total assets......................... 29,051 30,352 52,836 87,286 151,494 158,822
Short-term debt...................... 2,068 1,302 871 3,565 6,394 8,889
Long-term obligations................ 7,496 10,188 7,695 29,785 73,413 72,271
Shareholders' equity................. 4,118 5,699 34,641 37,641 43,980 44,970
- --------------
(1) The Company was an S corporation prior to April 1996 and accordingly was
not subject to federal and state income taxes prior to April 1996. For this
portion of 1996 income tax expense, net income and net income per share are
shown pro forma. Pro forma amounts reflect federal and state income taxes
as if the Company had been a C corporation based on the effective tax rates
that would have been in effect during these periods. See Note 11 to the
Company's Financial Statements.
(2) EBITDA represents income from operations before depreciation and
amortization. EBITDA is not a measurement determined under GAAP and does
not represent cash generated from operating activities in accordance with
GAAP. EBITDA should not be considered by the reader as an alternative to
net income as an indicator of financial performance or as an alternative to
cash flows as a measure of liquidity. In addition, the Company's definition
of EBITDA may not be identical to similarly entitled measures used by other
companies. The derivation of EBITDA and EBITDA, as adjusted, is set forth
in the following table.
25
<PAGE>
Three Months
Ended
Year Ended June 30, September 30,
--------------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- --------- --------- --------- --------- ---------
Income (loss) from operations... $ (569) $ 3,347 $ 13,264 $ (4,904) $ 10,830 $ 2,229 $ 2,182
Depreciation and amortization... 3,714 3,705 4,911 7,377 8,903 2,059 3,293
-------- -------- --------- --------- --------- --------- ---------
EBITDA.......................... 3,145 7,052 18,175 2,473 19,733 4,288 5,475
Impairment and in-process
technology expense
(see footnote 3)............. -- -- -- 11,650 -- --
-------- -------- --------- --------- --------- --------- ---------
EBITDA, as adjusted............. $ 3,145 $ 7,052 $ 18,175 $ 14,123 $ 19,733 $ 4,288 $ 5,475
======== ======== ========= ========= ========= ========= =========
(3) Adjusted earnings, adjusted EBITDA and adjusted income from operations
reflect the Company's earnings, EBITDA and income from operations,
respectively, adjusted to exclude an aggregate non-cash charge of $11.65
million representing the write-off of goodwill associated with the CTI
acquisition in fiscal 1996 and the write-off of purchased research and
development costs related to the acquisition of Trend in fiscal 1997.
Adjusted earnings, adjusted EBITDA and adjusted income from operations are
not measurements determined under GAAP. Adjusted earnings, adjusted EBITDA
and adjusted income from operations should not be considered by the reader
as alternatives to net income, EBITDA and income from operations as
indicators of financial performance.
(4) Margins represent the indicated items expressed as a percentage of revenue.
(5) EBITDA was insufficient to cover interest expense for the year ended June
30, 1994.
(6) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before taxes, plus fixed charges. "Fixed
charges" consist of interest on all indebtedness, amortization of deferred
debt financing costs and one-third of rental expense (the portion deemed
representative of the interest factor). Earnings were insufficient to cover
fixed charges for the years ended June 30, 1994 and June 30, 1997 by $2.1
million and $6.6 million, respectively. For each period presented, the
ratio of earnings to fixed charges plus preferred dividends is identical to
the corresponding ratio of earnings to fixed charges.
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is a leading provider of a full range of PCB and interconnect
solutions, including schematic capture and design, quick-turnaround, prototyping
and pre-production, and large volume production to electronics OEMs and contract
manufacturers. The Company provides its solutions to four key electronics
industry segments (with corresponding percentages of Company revenue for fiscal
1998): (i) data and telecommunications (31%), (ii) computers and peripherals
(36%), (iii) industrial and instrumentation (25%) and (iv) business and consumer
(8%).
In 1997 the Company implemented its One-Stop Shopping(TM) strategy to
provide its customers with advanced technology and integrated manufacturing
capabilities for the entire cycle of PCB creation. As part of that
implementation the Company has made a number of strategic acquisitions. In
November 1995 the Company acquired CTI (now its Redmond facility) to increase
its prototype production capability. In August 1996 the Company acquired Trend
(now its Fremont facility) to increase its quick-turnaround capability. In March
1998 the Company acquired its Huntsville facility to increase its pre-production
capability. In the last three years, Praegitzer also acquired or opened 12
design centers in the United States (11) and in Israel (1). The Company believes
that, with its facilities and recent technological expansion, it is one of the
world's leading PCB design and manufacturing companies.
The Company has experienced 46.5% compound revenue growth in fiscal years
1995 through 1998, compared with a U.S. PCB industry compound revenue growth
rate of 8.5% over the same period. The Company attributes this growth, in part,
to its One-Stop Shopping(TM) strategy, which is intended to provide the full
spectrum of PCB services, from initial design, schematic capture and layout to
prototype fabrication and full-volume production. By providing extensive design
services, the Company has been able to attract additional quick-turnaround and
high volume production business.
The Company derives pricing for its products and services from a series of
matrices. In volume and quick-turnaround production, bare board pricing
generally depends on order size, board complexity (e.g., density and layer
count), technology and special processes involved (e.g., microvias, buried vias
and blind vias), and required turnaround time. The design division generally
charges based on an hourly rate. The Company invoices its customers at the time
the product is shipped. Pursuant to the Company's standard payment terms,
invoices are due within 30 days after receipt. The Company typically offers a
discount of up to 1.0% on payments made within 10 days of invoicing.
For the three months ended September 30, 1998, the PCB industry generally
experienced a decline in demand which caused pricing and margin pressure on the
remaining
27
<PAGE>
projects on which the industry was competing. In this environment of shrinking
demand, excluding revenue generated by acquired facilities Praegitzer was able
to achieve revenue growth of over 20% compared to the same period in the prior
year.
An additional important impact on the Company was the unprofitable results
of its recently acquired facilities in Huntsville and Malaysia, which
experienced slower-than-expected increases in demand. The Company nonetheless
reported net income of $593,000 for this period.
Results of Operations
The following table sets forth certain financial data for the Company for
the periods indicated as a percentage of revenue.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
-------------------------------------- ----------------------
1996 1997 1998 1997 1998
---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 76.7 82.5 81.2 81.1 83.4
---------- -------- --------- --------- ---------
Gross profit 23.3 17.5 18.8 18.9 16.6
Selling, general and administrative expense 9.3 13.0 12.8 13.6 12.7
Impairment and in-process technology expense -- 7.9 -- -- --
---------- -------- --------- --------- ---------
Income (loss) from operations 14.0 (3.4) 6.0 5.3 3.9
Interest expense 1.9 1.6 2.1 1.7 2.6
Other income 0.3 0.4 0.1 0.2 0.4
---------- -------- --------- --------- ---------
Income (loss) from continuing operations 12.4 (4.6) 4.0 3.8 1.7
Provision for income taxes 4.7 (1) 1.1 1.2 1.2 0.6
---------- -------- --------- --------- ---------
Net income (loss) from continuing operations 7.7% (1) (5.7)% 2.8% 2.6% 1.1%
========== ======== ========= ========= =========
- --------------
(1) Provision for income taxes and net income from continuing operations are
pro forma for the year ended June 30, 1996. The Company was an S
corporation and accordingly was not subject to federal and state income
taxes for the year ended June 30, 1996. See Note 11 to the Company's
Financial Statements.
</TABLE>
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Revenue. Revenue for the three months ended September 30, 1998 increased
30.1% to $55.4 million from $42.6 million for the three months ended September
30, 1997. The increase in revenue resulted primarily from increased volume
production and quick-turnaround and prototype fabrication sales, the acquisition
of the Malaysia facility in April 1998 and the Huntsville facility in March 1998
and improved capacity utilization company-wide.
Cost of Goods Sold. Cost of goods sold includes direct labor, materials and
manufacturing overhead costs. The cost of goods sold for the three months ended
28
<PAGE>
September 30, 1998 was $46.2 million, or 83.4% of revenue, compared to $34.6
million, or 81.1% of revenue for the three months ended September 30, 1997. This
increase was due primarily to increased costs at the Malaysia and Huntsville
facilities and pressures related to diminishing market demand and increased
offshore competition.
Gross Profit. Gross profit for the three months ended September 30, 1998
increased 14.4% to $9.2 million from $8.0 million for the three months ended
September 30, 1997. Gross margin decreased to 16.6% for the three months ended
September 30, 1998 compared to 18.9% for the three months ended September 30,
1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 1998 increased
$1.2 million, or 20.8%, to $7.0 million from $5.8 million for the three months
ended September 30, 1997. The increase in expenses was due to the increased
personnel and fixed costs associated with the acquisitions of the Malaysia and
Huntsville facilities, as well as the Company's investment in its expanded
design division and corporate sales force. As a percentage of revenue, selling,
general and administrative expenses decreased to 12.7% for the three months
ended September 30, 1998 from 13.6% for the three months ended September 30,
1997 due to greater efficiencies due to higher sales volume.
Income from Operations. Operating income for the three months ended
September 30, 1998 decreased $46,000 to $2.18 million, or 3.9% of revenue,
compared to $2.23 million for the three months ended September 30, 1997. This
decrease resulted from increased expenses associated with acquisitions and
facility expansions, and lower margins due to weaker demand and increased
competition.
Interest Expense. Interest expense for the three months ended September 30,
1998 increased $741,000, or 102.1%, to $1.5 million, or 2.6% of revenue, from
$726,000 in the prior year. The increase was primarily the result of increased
borrowings required to finance the acquisition of the Huntsville facility,
equipment purchases and working capital needs.
Income Taxes. Income taxes for the three months ended September 30, 1998
were $330,000 compared to an income tax provision of $494,000 for the three
months ended September 30, 1997. The effective tax rate for the three month
periods ended September 30, 1998 and 1997 were 35.7% and 30.8%, respectively.
Net Income. Net income for the three months ended September 30, 1998 was
$593,000, a decrease of $514,000 from net income of $1.1 million for the three
months ended September 30, 1997. This decrease was primarily due to higher costs
associated with acquisitions and expansions as well as lower margins resulting
from weaker customer demand and increased offshore competition.
29
<PAGE>
Year Ended June 30, 1998 ("fiscal 1998") Compared to Year Ended June 30, 1997
("fiscal 1997")
Revenue. Revenue for fiscal 1998 increased 23.5% to $182.8 million from
$147.9 million for fiscal 1997. The Company's three primary products and
services, (i) volume production, (ii) quick-turnaround, prototype and
pre-production, and (iii) design, accounted for 72.0%, 21.1%, and 6.9% of
revenues, respectively, in fiscal 1998 compared to 79.5%, 14.8%, and 5.7%,
respectively, in fiscal 1997. The Company's increased revenue from design
through pre-production is the result of the Company's increasing emphasis on its
One-Stop Shopping(TM) strategy.
Revenue growth in fiscal 1998 was the result of several factors, including
gains in market share due to industry consolidation, increased capacity,
improved technological capabilities and strategic advantages offered by the
Company's One-Stop Shopping(TM) strategy. The balance of the increase in revenue
was the result of several acquisitions in fiscal 1998, including the acquisition
of the Huntsville facility in March 1998, and the acquisitions of two design
centers, which added $3.2 million and $3.6 million to revenue during fiscal
1998, respectively.
Volume production revenue increased 17.4% to $103.6 million in fiscal 1998
from $88.1 million in fiscal 1997. The increase in volume production business
can be attributed to additional capacity, new customers, increased sales to
existing customers, and new technology offerings. Significant new volume
customers in fiscal 1998 included SMTC/Dell, EMC, Celestica, RadiSys, and
Teradyne, among others. Existing customers with increased sales in 1998 included
Xerox, Motorola, SCI and PSC.
Quick-turnaround, prototype and pre-production revenue increased 26.0% to
$65.3 million in fiscal 1998 from $51.9 million in fiscal 1997. These increases
in revenue can be attributed to increased prototype production generated by the
Company's design division, the addition of the Huntsville facility and enhanced
technological capabilities.
Design revenue increased 76.3% to $13.9 million in fiscal 1998 compared to
$7.9 million in fiscal 1997. The revenue increase can be primarily attributed to
two design acquisitions that added $3.6 million of revenue in fiscal 1998. The
balance of revenue growth can be attributed to higher average bill rates, more
designers and other factors, including increased business from existing and new
customers such as Intel, NEC, Bay Networks and 3Com.
Cost of Goods Sold. The cost of goods sold for fiscal 1998 was $148.5
million, or 81.2% of revenue, compared to $122.0 million, or 82.5% of revenue,
for fiscal 1997. This decrease was primarily due to lower materials costs and
labor costs as a percentage of revenues, achieved through supplier price
concessions, lower scrap rates, improved yields, higher employee productivity
and improved process efficiencies.
30
<PAGE>
Gross Profit. Gross profit for fiscal 1998 increased 32.2% to $34.3 million
from $25.9 million for fiscal 1997. Gross margin increased to 18.8% for fiscal
1998 compared to 17.5% for fiscal 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 1998 increased $4.3 million, or 22.2%, to
$23.5 million from $19.2 million for fiscal 1997. The increase in expenses was
due to increased personnel and fixed costs associated with the expansion of the
design division and corporate sales force. As a percentage of revenue, selling,
general and administrative expenses decreased to 12.8% for fiscal 1998 from
13.0% for fiscal 1997.
Income (Loss) from Operations. Operating income for fiscal 1998 increased
$15.7 million to $10.8 million, or 6.0% of total revenues, compared to an
operating loss of $4.9 million for fiscal 1997. The gains in operating income
were driven by improvements in gross margin and the benefit from the elimination
of the $11.7 million nonrecurring expense related to impairment and in-process
technology for fiscal 1997. Excluding this write-off, income from operations was
$6.7 million, or 4.6% of revenue, for fiscal 1997. The increase in income from
operations in fiscal 1998, excluding the one-time write-off from fiscal 1997,
was primarily the result of increased efficiency in the Company's expanded
manufacturing facilities.
Interest Expense. Interest expense for fiscal 1998 increased $1.5 million,
or 63.7%, to $3.8 million from $2.3 million for fiscal 1997. The increase was
primarily the result of increased borrowings required to finance the Intergraph
acquisition and equipment purchases.
Income Taxes. Income taxes for fiscal 1998 were $2.2 million compared to an
income tax provision of $1.7 million for fiscal 1997. The effective tax rate in
fiscal 1998 was 30.4%. During fiscal 1997, the Company had a tax expense on a
pre-tax book loss primarily due to the add-backs of a goodwill and an in-process
technology write-off, neither of which were tax deductible. Federal and state
research and experimental tax credits, however, partially offset the effect of
these add-backs. Absent the add-back of the goodwill and in-process technology
write-offs, the Company's effective tax rate for fiscal 1997 would have been
29.4%.
Net Income. As a result of the factors described above, including the
write-off of $11.7 million non-recovery expenses related to impairment and
in-process technology expense, net income for fiscal 1998 of $5.1 million
represents an increase of $13.4 million compared to the net loss of $8.3 million
for fiscal 1997.
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996 ("fiscal 1996")
Revenue. Revenue for fiscal year 1997 increased 55.6% to $147.9 million
from $52.8 million for fiscal 1996. The increase resulted primarily from the
Company's acquisitions in fiscal 1997, including the acquisition of Trend, now
the Company's Fremont
31
<PAGE>
division, which increased revenue by $26.8 million. Revenue contribution from
the design division increased $5.5 million for fiscal 1997, due in part to the
acquisition of six strategically located design centers in fiscal 1997, which
increased revenue by $1.9 million. The increase was also due to improved sales
resulting from the efforts of the Company's expanded sales force, as well as
increased capacity in the Company's White City and Dallas, Oregon facilities.
Cost of Goods Sold. The cost of goods sold for fiscal 1997 was $122.0
million, or 82.5% of revenue, compared to $72.9 million, or 76.7% of revenue,
for fiscal 1996. This increase was primarily due to capacity constraints in
inner layer production at the Dallas facility caused by a transition to new
technologies. The transition period, which extended into the third quarter,
resulted in increased scrap rates, decreased throughput and forced outsourcing
of some processes for the division. In addition, the Company had expansions at
its Redmond and White City facilities to increase capacity.
Gross Profit. Gross profit for fiscal 1997 increased 17.0% to $25.9 million
from $22.2 million for fiscal 1996. Gross margin decreased to 17.5% for fiscal
1997 compared to 23.3% for fiscal 1996.
Selling, General and Administrative Expense. Selling, general and
administrative expense for fiscal 1997 increased $10.3 million, or 115.7%, to
$19.2 million from $8.9 million for fiscal 1996. The increase was primarily a
result of increased personnel and fixed costs required to support higher levels
of sales and the overall growth of the Company. The Company also experienced
higher than expected integration costs related to the acquisitions of Trend, CTI
and several design centers. In addition, goodwill amortization increased by $1.1
million during fiscal 1997 as a result of the Trend acquisition. As a percentage
of revenue, selling, general and administrative expenses increased to 13.0% for
fiscal 1997 from 9.3% for fiscal 1996.
Impairment and In-Process Technology Expense. In the first quarter of
fiscal 1997, the Company took a one-time write-off of $11.7 million of certain
goodwill associated with the CTI acquisition and purchased research and
development costs related to the acquisition of Trend. This write-off is defined
as impairment and in-process technology.
Income (Loss) from Operations. Net loss from operations for fiscal 1997 was
$4.9 million compared to operating income of $13.3 million for fiscal 1996. The
decrease, primarily the result of a one-time write-off of goodwill and purchased
research and development costs, was adversely affected by capacity constraints
and higher scrap rates arising from transitions to new technologies, and
decreased utilization of capacity at expanded facilities. Excluding this
write-off, income from operations was $6.7 million, or 4.6% of revenue, for
fiscal 1997.
Interest Expense. Interest expense for fiscal 1997 increased $496,000, or
27.6%, to $2.3 million from $1.8 million for fiscal 1996. The increase was the
result of increased
32
<PAGE>
borrowings required to finance the acquisition of Trend, increased working
capital needs and capital expenditures.
Income Taxes. Although the Company had a pre-tax book loss, the Company had
a tax expense of $1.7 million in fiscal 1997, due to the add-back of goodwill
and the write-off of in-process technology which are not tax deductible. Federal
and state research and experimental tax credits, however, partially offset the
effect of these add-backs. Absent these nonrecurring items, the Company's
effective tax rate would have been 29.4% in fiscal 1997 compared to a pro forma
effective tax rate of 36.0% in fiscal 1996.
Net Income (Loss). Net loss for fiscal 1997 was $8.3 million, compared to
pro forma net income of $6.9 million for fiscal 1996. This loss resulted
primarily from a one-time write-off of goodwill and purchased research and
development costs associated with the Trend and CTI acquisitions, as well as
higher sales costs.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations and capital
expenditures with cash from operations and debt financing, as well as an initial
public offering in April 1996. Net cash provided by operating activities was
$10.4 million, $1.7 million and $8.9 million for fiscal 1998, 1997 and 1996,
respectively. As of September 30, 1998, the Company had $305,000 in cash and
cash equivalents and working capital of approximately $20.4 million.
Capital expenditures were $39.3 million, $24.8 million and $7.5 million for
fiscal 1998, 1997 and 1996, respectively. These capital expenditures were
primarily for manufacturing equipment and plant expansions and modernization.
Although the Company has no commitments in material amounts, it expects capital
expenditures for fiscal 1999 to be between 8% to 12% of revenue.
The Company increased its bank line of credit under the Key Agreement (as
defined herein) to $40.0 million at June 30, 1998 from $15.0 million at June 30,
1997. At September 30, 1998 borrowings of $40.0 million were outstanding and
there were no amounts available for borrowing based on eligible accounts
receivable and inventory. Amounts outstanding under the line of credit bear
interest at the bank's prime rate (8.5% per annum at September 30, 1998). Under
the line of credit, the Company must maintain certain financial ratios and other
covenants. The line of credit also requires that the Company issue at least $25
million in subordinated debt or equity prior to January 1, 1999, grant KeyBank a
deed of trust on the Company's Dallas facility, and reduce its outstanding
balance under the line of credit by $9 million prior to January 1, 1999.
In October 1998, the Company entered into separate equipment leases with
the CIT Group/Equipment Financing, Inc. ("CIT") and Copelco Capital, Inc.
("Copelco"). In connection with these equipment leases, the Company sold certain
equipment to CIT and
33
<PAGE>
Copelco for an aggregate of approximately $8.3 million. The Company used the
proceeds of the equipment sales to reduce its outstanding liabilities.
The Company is negotiating with KeyBank to reduce the new subordinated debt
or equity requirement and to reduce the paydown requirement. Moreover, the
Company has entered into the Letter of Intent with another commercial bank to
provide funds to replace the funding provided by the Key Agreement. The Letter
of Intent provides for a $65 million secured credit facility (the "Proposed
Credit Facility"), consisting of a $40 million revolving credit line, a $15
million term loan and a $10 million capital expenditure facility. Borrowings
available under the Proposed Credit Facility would be restricted to certain
percentages of eligible accounts receivable, eligible inventory, the appraised
value of eligible used fixed assets, the appraised fair market value of real
estate and the appraised value of new and used acquired fixed assets. Under the
terms of the Letter of Intent, amounts outstanding under the Proposed Credit
Facility would bear interest at (i) the Base Rate (as defined therein) plus up
to 0.50% or (ii) LIBOR plus up to 2.75%. The Letter of Intent provides that
certain financial ratios and other covenants would be required to be maintained
under the Proposed Credit Facility. The Letter of Intent contemplates the
Proposed Credit Facility would mature five years following closing of the
financing. Based on these negotiations, the Company believes an amount between
$4.0 million and $14.0 million will be available for additional borrowing under
the Proposed Credit Facility. The closing of the Proposed Credit Facility is
conditioned on completion of this offering. The Company believes the Letter of
Intent will lead to a credit arrangement with the new lender, but the Letter of
Intent is subject to the lender's due diligence and final credit review and the
negotiation and execution of definitive documentation, and thus does not
represent a final commitment to lend by the lender. The completion of this
offering is conditioned upon either closing the Proposed Credit Facility or
completing an amendment to the Key Agreement, each on terms satisfactory to the
Company and the Underwriters.
In fiscal 1998, the Company borrowed $15.2 million from Heller Financial,
Inc., secured by real property and miscellaneous equipment at the Company's
Huntsville facilities.
The Company is in compliance with all the terms of each of its revolving
credit agreement with Key Bank National Association (the "Key Agreement"), its
multiple secured term loans with Heller Financial, Inc. (the "Heller
Agreements") and its term loan with Finova Capital Corporation (the "Finova
Agreement"), and no events of default exist under any of these agreements. The
Company has received waivers and going-forward covenant modifications with
respect to each of the Key Agreement, the Heller Agreements and the Finova
Agreement relating to certain technical defaults and events of default that
arose as a result of noncompliance with certain financial covenants in the
Heller Agreements and the Finova Agreement. The Company has made all payments on
all indebtedness related to these agreements.
In connection with the credit arrangements contemplated by the Letter of
Intent, the Company will pay commitment and other fees of between $400,000 and
$600,000 in the
34
<PAGE>
aggregate, which will be amortized over the five-year period of the facility. In
addition, in connection with the contemplated termination of the Key Agreement
and the repayment of the Finova Agreement and the Heller Agreement, the Company
will pay aggregate prepayment penalties of approximately $197,000, which will be
a charge against income in the period in which they are paid.
The Company believes existing cash and cash equivalents and funds generated
from operations and equipment financings as well as proceeds from this offering
will be sufficient to fund its operations for the next 12 months. See "Use of
Proceeds."
The Company intends to use approximately $8.5 million of the net proceeds
from this offering to pay off the outstanding balance under one of the Heller
Agreements and approximately $3.1 million and to pay off the outstanding balance
under the Finova Agreement.
Recent Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for disclosure about operating segments in annual financial statements
and selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The new standards become effective for the Company's fiscal
year ending June 30, 1999. Adoption of this statement may result in additional
disclosures but will have no material impact on the Company's results of
operations or financial position.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new statement will require recognition
of all derivatives as either assets or liabilities on the balance sheet at fair
value. The new statement becomes effective for the first quarter of the fiscal
year ending June 30, 2000. Management has not completed an evaluation of the
effects this standard will have on the Company's financial position or results
of operations.
Year 2000 Compliance
Certain computer hardware and software use two-digit data fields to store
and recognize years, assuming the first two digits of the year are "19" (e.g.,
the number "98" is recognized as "1998"). This and certain similar protocols
give rise to possible problems related to the recognition of dates in years
after 1999--so-called "Year 2000" issues. The Company continues to assess and
address the business risks associated with Year 2000 issues. Some of the
Company's systems include hardware and packaged software recently purchased from
vendors who have represented that these systems are Year 2000 compliant.
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<PAGE>
Other hardware and software used by the Company has been identified by the
Company as not being Year 2000 compliant. The Company expects that Year 2000
upgrades to the software used in its manufacturing systems and replacement
components for certain older hardware used in these systems will soon be
available from vendors. The cost of these upgrades and replacements is not
expected to be material.
The Company relies on a number of vendors and suppliers, including banks,
telecommunication providers, and other providers of goods and services. The
inability of these third parties to conduct their business for a significant
period of time due to the Year 2000 issue could have a material adverse impact
on the Company's operations. The Company has not determined whether all of its
vendors and suppliers are Year 2000 compliant. The Company's reliance on single
vendor source suppliers, however, is minimal, and the Company seeks to limit
sole source supply relationships. The Company is continuing to assess potential
Year 2000 issues and is developing contingency plans. At this time, the Company
believes costs incurred in responding to other parties' Year 2000 computer
system deficiencies, together with the cost of any required modifications to the
Company's systems, will not have a material impact on the Company's results of
operations or financial condition. This analysis may be modified as the
Company's assessment of potential Year 2000 issues progresses.
36
<PAGE>
BUSINESS
The Company is a leader in providing OEMs and contract manufacturers with a
full range of PCB and interconnect solutions, including schematic capture and
design, quick-turnaround, prototyping and pre-production, and large volume
production. The Company provides its solutions to four key electronics industry
segments (with corresponding percentages of Company revenue for the fiscal year
ended June 30, 1998): (i) data and telecommunications (31%), (ii) computers and
peripherals (36%), (iii) industrial and instrumentation (25%) and (iv) business
and consumer (8%). The Company's growth has been driven by sales to industry
leaders whose products require increasingly complex and technologically advanced
electronic interconnects. The Company's principal customers include Compaq,
Hewlett Packard, Intel, Dell, EMC, IEC Electronics, SCI, Solectron, Motorola,
Xylan and Xerox. The Company has obtained ISO 9002 certifications for five of
its manufacturing facilities and has received awards from a number of its
customers in recognition of its superior performance in meeting their PCB needs.
In fiscal 1998 the Company served more than 650 customers worldwide.
The 1997 worldwide PCB market was estimated at $29.7 billion by the
Institute for Interconnecting Packaging Electronic Circuits ("IPC"), of which
the U.S. market was $7.8 billion and was forecast to grow 6.5% annually through
2001. As electronics OEMs respond to competitive pressures, they place
ever-greater emphasis on faster product time-to-market and greater PCB
complexity in tight space tolerances, and face increasing pressure to shorten
the design-to-manufacture cycles. Additionally, as OEMs increasingly focus on
core competencies, non-core activities are contracted to independent specialty
vendors. As a result of these market forces, outsourcing of PCBs and electronic
interconnects has grown from 66% of total OEM requirements in 1991 to 93% in
1997.
Addressing these trends, Praegitzer in 1997 implemented its One-Stop
Shopping(TM) strategy to provide its customers with advanced technology and
integrated manufacturing capabilities for the entire cycle of PCB creation. In
the last three years, the Company has acquired production facilities in Redmond,
Washington; Fremont, California; and Huntsville, Alabama, and a 51% interest in
a production facility in Melaka, Malaysia. During this same period, Praegitzer
acquired or opened 11 design centers in the U.S. and one in Israel. The Company
has experienced 46.5% compound revenue growth during fiscal years 1995 through
1998, compared with a compound revenue growth rate for the U.S. PCB industry of
8.5%. Excluding revenue generated by acquired facilities, the Company's compound
revenue growth rate during the same period would have been 21.7%. During this
period the Company produced increasingly complex PCBs with higher density and
layer counts.
The Company's goal is to be the leading provider of electronic interconnect
one-stop design and manufacturing services, while continuing to increase its
technological and services advantages.
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<PAGE>
Industry Overview
PCBs, consisting of interconnected layers of etched copper patterns of
electrical circuitry that have been laminated to insulating material, are the
basic platforms used to interconnect the integrated circuits and other essential
components of electronic products. The Company primarily focuses on the
multilayer PCB market, which accounted for approximately 76.1% and 73.3% of U.S.
PCB sales in 1997 and 1996, respectively.
The overall market for electronic products has grown steadily over the past
20 years as end users increasingly seek products with attractive
price/performance characteristics and as technological advances have created new
markets. To compete in the broader electronics market, OEMs require product
components with increased functionality at lower cost per function. The
interconnect densities, signal speeds and layer counts of PCBs have increased to
meet these requirements. Many of these increasingly complex PCBs are
manufactured using a variety of complex processes and equipment, further
complicating the production process. Furthermore, competitive pressures and
rapid technological change have shortened product life cycles. As a result,
time-to-market and time-to-volume have become increasingly important competitive
factors.
To compete in the market for increasingly complex and technologically
advanced PCBs and to meet shorter time-to-market and time-to-volume
requirements, PCB manufacturers must make substantial capital investments and
develop greater manufacturing specialization and expertise. These factors have
resulted in two trends in the PCB industry. First, as capital requirements have
increased, the industry has consolidated. According to IPC, the number of United
States PCB manufacturers has decreased from over 2,500 in 1976 to fewer than 700
in 1996. Second, OEMs have increased the outsourcing of PCB production to focus
resources on their core strengths and have relied on outside suppliers to
overcome increasingly complex manufacturing challenges. According to IPC, the
independent manufacturers' portion of the total PCB market increased to 93% in
1997 from 66% in 1991. IPC estimates that in 1997 the nine largest independent
manufacturers accounted for about 32% of total PCB sales in the United States by
independent manufacturers.
PCB Design and Production Process
The creation of PCBs progresses in stages: (1) initial design and
simulation, (2) schematic capture and circuit design, (3) quick-turnaround,
prototype and pre-production, and (4) volume production.
38
<PAGE>
[GRAPHIC SHOWING PCB CREATION PROCESS]
1. INITIAL DESIGN. Initial design is performed by the OEMs and encompasses the
process of idea formation, conceptual analysis, engineering design (including
specifications and features), functional simulation and simulation of the
processed layout of a PCB.
2. SIMULATION. Simulation of proposed locations of holes and conductors (the
"layout") provides information regarding potential layout problems to the
initial design engineer and creates revised design guidelines for the schematic
capture and circuit design technicians. Due to the increasing number of
high-speed devices being used on PCBs, physical layout guidelines must be
tailored to each particular design to resolve problems regarding circuit timing,
signal-integrity and electromagnetic interference ("EMI"). These problems, if
not resolved in up-front board layout design, can result in low manufacturing
yields and inconsistent product performance that can increase time and cost to
market for OEMs. Up-front simulation by knowledgeable professionals using
computer aided design ("CAD") simulation tools is required to model and resolve
problematic issues prior to manufacturing.
3. SCHEMATIC CAPTURE AND CIRCUIT DESIGN. Schematic capture involves the input of
an electronic schematic diagram into a high-performance computer workstation
that generates a list of the electronic components and interconnects required to
design a PCB. Circuit design is accomplished using specialized CAD software
programs. Computer-generated data describe the layout which, along with
manufacturing information, may be transmitted electronically from the designer
to the manufacturer. When transmitting data to its internal manufacturing
organizations, the Company typically uses specialized computer aided
manufacturing ("CAM") software prior to sending the data to ensure design for
manufacturability ("DFM") and to help speed the quick-turnaround process.
Historically, circuit design was the step in the PCB production process least
likely to be outsourced by OEMs. As PCB related design-for-manufacture
challenges become more complex, however, more OEMs are relying on outside
resources for these services.
4. QUICK-TURNAROUND, PROTOTYPE AND PRE-PRODUCTION. Quick-turnaround
is characterized by shorter than standard lead time requirements, typically one
to 10 days, and involves producing a small quantity, usually fewer than 50 PCBs.
Prototype evaluation is critical to product development and frequently requires
several iterations to finalize the design. Because time is critical, most
prototypes are manufactured on a quick-turnaround basis. Consequently, high
quality and timely delivery generally are the most important competitive factors
for the quick-turnaround market. Pre-production runs involve the
39
<PAGE>
manufacture of limited quantities of PCBs during the transition from prototype
to volume production. Pre-production may require quick-turnaround delivery
because of overall time-to-market pressures and shorter product life cycles or
as a temporary solution in the event of volume production delay. Accordingly,
high quality and timely delivery continue to be the factors most important to
the OEM or contract manufacturer, although price is also a significant factor.
Many OEMs take advantage of a PCB manufacturer's quick-turnaround capability,
even when circuit design or volume production is done in-house or by other PCB
manufacturers. PCB manufacturers use quick-turnaround capabilities to build
relationships with OEMs, thereby developing additional OEM design and volume
production business.
5. VOLUME PRODUCTION. Volume production is characterized by longer lead times
and increased emphasis on lower cost as the product moves to full-scale
commercial production. At this stage of production, price, quality, on-time
delivery and process capability are the factors most important to the OEM or
contract manufacturer. As product life cycles grow shorter, the ability to meet
shorter lead time requirements becomes an increasingly significant competitive
factor.
Each stage of the PCB creation process requires substantially different
capabilities and as a result most companies specialize in only one stage.
Consequently, OEMs and contract manufacturers typically use different suppliers
at each stage, which requires costly and time-consuming duplicative tooling and
pre-production engineering. Accordingly, many OEMs and contract manufacturers
are establishing strategic relationships with fewer suppliers such as the
Company that provide a full range of services.
The Praegitzer Approach
The Company provides a full range of PCB and electronic interconnect
solutions that meet the growing technological demands of electronics OEMs and
contract manufacturers. The Company's One Stop Shopping(TM) strategy was
conceived to provide OEM customers with integrated PCB services, including
design services, quick-turnaround, prototyping, pre-production and volume
production. By integrating these processes the Company addresses its customers'
need to minimize time-to-market and time-to-manufacture at a lower cost of
manufacturing. The Company seeks to expand its supplier relationships with
electronics OEMs because these customers have the greatest incentive to fully
exploit the advantages provided by the Company's integrated design and
fabrication of complex PCBs. By working with high-end customers, the Company can
influence the design of customers' PCBs, optimize performance, minimize
production costs and shorten development and production time.
40
<PAGE>
[GRAPHIC SHOWING PROCESS OF PCB CREATION THROUGH THE COMPANY'S VARIOUS
FACILITIES]
For fiscal 1998 and 1997, respectively, the Company derived 7% and 6% of its
revenue from design, 21% and 15% of its revenue from quick-turnaround, prototype
and pre-production, and 72% and 79% of its revenue from volume production of
PCBs.
Strategy
Leverage One-Stop Shopping(TM) Capabilities. In response to customer
requirements, in 1997 the Company implemented its One-Stop Shopping(TM)
strategy, which provides customers with integrated design to manufacturing
services. By offering this complete range of services, the Company can provide
integrated design and manufacturing solutions while reducing time-to-market,
time-to-volume and product development costs. The Company believes its strong
relationships with pre-production and volume production customers will assist
its continued expansion into the design and quick-turnaround markets.
Enhance and Maintain Technological Leadership Position. The Company's
significant capital investments in technology, facilities and equipment over the
past two years have positioned the Company among the leading designers and
manufacturers of PCBs in the U.S. As a result of these initiatives, the Company
is able to design and produce complex, high layer, high density PCBs rapidly and
efficiently. The Company intends to maintain its technological advantage in the
future.
Increase Long-Term Relationships with Leading Electronics Manufacturers.
The Company pursues long-term relationships with rapidly growing OEMs, as well
as their contract manufacturers, that are technology leaders in their industry
segments and whose product requirements generally drive the advancement of
electronic interconnect manufacturing technology. These relationships enable the
Company to work closely with its customers to continually improve its products
and develop new technologies and allow it to remain a leader in the PCB
industry.
41
<PAGE>
Expand Geographically. The Company has design and manufacturing locations
throughout the United States as well as selected locations abroad. The Company's
strategic location of U.S. production facilities near OEMs allows the Company to
be close to its customer base, thereby facilitating communications and reducing
delivery times. Physical proximity to customers is particularly important for
design and quick-turnaround facilities. Accordingly, the Company seeks to locate
its production facilities in the U.S. strategically near OEMs.
Markets
The Company concentrates on the broad electronics market, which is
characterized by high growth, rapid technological advances, short product
development cycles and accelerated time-to-market and time-to-volume
requirements. In response to this market's broadening requirements, the Company
implemented its One-Stop Shopping(TM) strategy and expanded its design,
quick-turnaround and production volume capabilities.
The Company's principal customers are electronics OEMs and contract
manufacturers in four vertical markets--(i) computers and peripherals, (ii) data
communications and telecommunications, (iii) instrumentation and industrial, and
(iv) business and consumer.
Computers and Peripherals. The computer and peripheral market accounted for
approximately $65.8 million, or 36%, of the Company's 1998 revenue. The most
significant component of growth in this market is unit sales of computers. Since
fiscal 1996, Company sales to this sector have increased at a compound annual
rate of 77%. Future drivers of growth in this area include (i) growth in the
personal computer (PC) market, (ii) emerging global markets and (iii) rapid
advancement of technology.
Data Communications and Telecommunications. The data communications and
telecommunications market accounted for approximately $56.7 million, or 31%, of
the Company's fiscal 1998 revenue. Products incorporating the Company's PCBs
include portable communication devices such as cellular telephones, microwave
relays, telecommunications and telephone switching equipment, and mobile radios.
Since fiscal 1996, Company sales to this sector have increased at a compound
annual rate of 34%. Future drivers of growth in this area include (i) heavy
demand expected for portable communication devices, (ii) infrastructure
build-out in the telecommunications industry, and (iii) rapid pace of new
product introductions.
Instrumentation and Industrial. The instrumentation and industrial market
accounted for approximately $45.7 million, or 25%, of the Company's 1998
revenue. Products incorporating the Company's circuit boards include machine and
process controls, sensors, test and measurement equipment and medical
instruments. Since fiscal 1996, Company sales to this sector have increased at a
compound annual rate of 17%. Future drivers of growth in this area include (i)
increasing capital expenditures by OEMs, (ii) improvements in
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<PAGE>
technology, (iii) increasing research and development budgets, and (iv) emerging
global healthcare markets.
Business and Consumer. The business and consumer market accounted for
approximately $14.6 million, or 8%, of the Company's 1998 revenue. Products
incorporating the Company's circuit boards include copy machines, inventory
tracking systems and cash registers. Since fiscal 1996, Company sales to this
sector have increased at a compound annual rate of 24%. Future drivers of growth
in this area include (i) increasing demand for complex consumer electronics and
(ii) continued investment by companies in modern business systems.
Manufacturing and Engineering Processes and Quality Assurance
The Company believes its substantial capital investment and manufacturing
expertise in a number of specialized areas have contributed to its position as a
leader in the production of complex, rigid multilayer PCBs. The Company's
One-Stop Shopping(TM) strategy, incorporating design, quick-turnaround and
prototyping, and volume production requires periodic upgrades of the Company's
capabilities and resources.
The Company believes that its design capabilities are facilitated by tools
focused on DFM and CAM systems. These systems take full advantage of the
Company's materials technologies, including the ability to use materials as thin
as .0015 inches, alternative surface finishes, electroless nickel/immersion
gold, selective gold plate and Entek(R) (an organic surface protection). The
Company also uses specialty materials such as GETEK(R), OHMEGA-PLY(R), cyanate
ester and polyimide for high temperature, fast signal speed and other
high-performance requirements.
The Company's substantial investment in six modern prototyping and volume
production facilities and state-of-the-art equipment permits high-yield
fabrication of complex PCBs. The Company can produce PCBs with more than 20
layers incorporating blind vias, buried vias, laser microvias and buried
resistors and capacitance. Most vias (holes drilled in the PCBs to facilitate
electronic interconnects) are made with computer-controlled drills, with
tolerances as small as .004 inches.
The performance of a PCB is highly sensitive to quality standards. In
recognition of the need for quality, the Company has obtained ISO 9002
certifications for five of its manufacturing facilities and is obtaining ISO
9002 certification for its Huntsville facility and ISO 9001 certification for
all of its design centers. Certain of the Company's manufacturing facilities
also are Bellcore compliant. The Company's fine-line circuitry is produced
within the Company's Class 10,000 clean room environment, and completed PCBs are
subject to rigorous automated optical inspection, dual-side simultaneous
testing, flying probe technology and a variety of customized test fixtures that
have been designed and produced by the Company.
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Customers
The following table sets forth in alphabetical order a selection of the
Company's customers who purchased at least $1 million of products sold by the
Company in fiscal 1998.*
Data Communications and Telecommunications
- --------------------------------------------------------------------------------
ADTRAN NEC
DSC Communications Verilink
Motorola Xylan
- --------------------------------------------------------------------------------
Instrumentation and Industrial
- --------------------------------------------------------------------------------
Hewlett-Packard PSC/Spectra-Physics
RadiSys Teradyne
- --------------------------------------------------------------------------------
Computers and Peripherals
- --------------------------------------------------------------------------------
Compaq Intel
Dell Silicon Graphics
EMC IBM
- --------------------------------------------------------------------------------
Business Systems and Consumer Electronics
- --------------------------------------------------------------------------------
In Focus Systems Xerox
- --------------------------------------------------------------------------------
Contract Manufacturers
- --------------------------------------------------------------------------------
Benchmark Electronics SMT Centre
IEC Electronics Solectron
SCI Systems Victron
- --------------------------------------------------------------------------------
* The Company serves OEM customers directly as well as through contract
manufacturers and electronics distributors. Some sales indicated in the
Contract Manufacturers segment are also included under sales in the other
listed segments.
- --------------------------------------------------------------------------------
For fiscal 1998, the Company's ten largest customers accounted for
approximately 45% of the Company's revenue. During fiscal 1998 the Company
served more than 650 customers worldwide.
Sales and Marketing
The Company's sales organization emphasizes the Company's One-Stop
Shopping(TM) solution. The Company has sales personnel located in Washington,
Oregon, California, Texas, Minnesota, Alabama, Florida, New Hampshire,
Massachusetts, Illinois, Pennsylvania,
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North Carolina, Canada, Japan, Malaysia, Singapore and Israel, locations that
are in close proximity to many of the Company's existing and potential
customers. The Company's sales organization consists of a senior vice president
of sales and marketing, a vice president of customer service, four regional
managers and 30 account executives. Each division of the Company also has an
experienced inside sales and customer service organization to support its
outside sales personnel and to promote customer relationships.
The Company engages in a number of marketing activities to enhance
awareness of its broad range of products and services. In addition to paid
advertisements and promotional items, the marketing efforts include business and
technical editorials for industry publications, participation in trade shows and
industry conferences, customer newsletters and satisfaction surveys as well as
scheduled press releases.
Materials and Supplies
The Company orders certain materials and supplies based on purchase orders
received and seeks to minimize its inventory of other materials that are not
identified for use in filling specific orders. Although the Company uses a
select group of suppliers, the materials necessary to manufacture PCBs are
generally available from multiple suppliers.
To enhance its relationships with suppliers, in 1991 the Company
implemented a "STAR Supplier" program to improve key supplier performance by
measuring product quality, on-time delivery, technological support, sales
support and other criteria. The Company believes it has realized significant
benefits from the program, including lower costs of materials.
The Company has established strategic relationships and stocking programs
with certain key vendors and negotiated price discounts based on the volume of
the Company's purchases. For example, certain laminate suppliers operate
warehouses near the Company and are beginning to work directly from the
Company's materials requirement projections to better meet the Company's needs.
The Company also uses suppliers' technical support and engineering capabilities.
For example, several proprietary chemistry and equipment vendors have provided
personnel to work full-time within the Company's facilities.
Management Information Systems
The Company uses its management information systems to shorten turnaround
times for customer orders, increase output, improve inventory management, and
reduce costs by allowing the Company to more efficiently manage and control the
PCB production process. The Company has developed information systems that
integrate key management data to facilitate operations under its One-Stop
Shopping(TM) strategy. The Company uses both internally developed and third
party software, with applications for manufacturing and shop floor control, DFM
analysis, quality assurance, CAD/CAM, human resources, and finance and
accounting.
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<PAGE>
In fiscal 1999, the Company anticipates completing Phase I of a rapid
multiphase rollout of the SAP R/3 enterprise resource planning software solution
("Phase I"). Costs associated with Phase I are estimated to be approximately
$3.5 million in fiscal 1999. Phase I will integrate the Company's financial and
accounting systems as well as provide manufacturing, sales order entry and
materials management for the Fremont facility and all the design centers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance."
The Company anticipates utilizing the SAP R/3 system to shorten turnaround
times for customer orders, increase output, improve inventory management and
reduce costs by eliminating duplication of work and reducing errors in ordering
of parts. The fully installed system will consist of a material resources
planning module, a shop floor control module, an inventory control and parts
tracing module and a general accounting module.
Competition
The PCB industry is highly fragmented and characterized by intense
competition, which the Company believes will increase. The Company's competitors
include large domestic manufacturers, offshore manufacturers located primarily
in Asia, small or regional domestic manufacturers and captive PCB operations of
larger OEMs. The principal competitors of the Company include Nanya (Taiwan),
Compeq (Taiwan and North America), Hadco (North America and Malaysia) and
Viasystems (North America and Europe).
The Company believes the primary competitive factors in the market for
complex, rigid multilayer printed circuit boards are product quality,
responsiveness to customers, on-time delivery, lead time, volume production
capabilities, advanced manufacturing technology, engineering skills and price.
The Company believes its primary competitive strengths stem from its One-Stop
Shopping(TM) strategy, including its ability to provide technologically advanced
manufacturing services, respond to customers reliably and effectively and
deliver finished products on a quick-turnaround through high volume basis while
maintaining superior product quality. See "Risk Factors -- Competition."
Backlog
The Company's backlog at September 30, 1998 was approximately $29.8
million, compared to a backlog of approximately $20.8 million at September 30,
1997. The Company includes in its backlog all purchase orders scheduled for
delivery within the next 12 months, although the majority of the backlog
typically is scheduled for delivery within 60 days. There are no orders in the
Company's backlog that it does not reasonably expect to have filled by June 30,
1999. For a variety of reasons, including timing of orders and shipments,
delivery intervals, customer and product mix and the possibility of customer
changes in delivery schedules, backlog as of any particular date may not be a
reliable measure of sales for any succeeding period. Cancellation charges
generally vary depending
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<PAGE>
upon the time of cancellation and, therefore, the Company's backlog may be
subject to cancellation without significant penalty to the customer.
Environmental Matters
The Company is subject to environmental laws relating to the storage, use
and disposal of chemicals, solid waste and other hazardous materials, as well as
air quality regulations. Water used in the manufacturing process must be treated
to remove metal particles and other contaminates before it can be discharged
into the municipal sanitary sewer system. The Company operates and maintains
effluent water treatment systems and uses approved laboratory testing procedures
at its manufacturing facilities. The Company operates these systems under
effluent discharge permits issued by a number of governmental authorities. These
permits must be renewed periodically and are subject to revocation in the event
of violations of environmental laws. See "Risk Factors -- Environmental
Matters."
The Company believes its activities and facilities are in compliance with
applicable environmental laws in all material respects. The Company eliminated
all ozone depleting compounds from its manufacturing processes in December 1993.
In 1993 the Company was also recognized by the United Nations as an
environmentally conscious manufacturer. In 1994 the Environmental Protection
Agency recognized the Company for its participation in the 33/50 Program, a
voluntary initiative aimed at reducing emissions and disposals of toxic
substances.
Insurance
The Company maintains insurance against property damage (including business
interruption) and against product liability claims in amounts that the Company
believes to be adequate. There is no assurance that such coverages will continue
to be available in the amounts desired or on terms acceptable to the Company, or
that these coverages will be adequate for losses or liabilities actually
incurred. Any uninsured or underinsured loss suffered by, or claim brought
against, the Company, or any claim or product recall that results in significant
cost to or adverse publicity against the Company, could have a material adverse
effect on the Company.
Employees
At September 30, 1998, the Company had approximately 2,200 employees. 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.
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Properties
The Company's principal properties are as follows:
Ownership Square
Location Purpose Status Feet
- -------- ------- --------- ------
Dallas, Oregon Volume production Owned 130,000
White City, Oregon Volume production Owned 105,000
Redmond, Washington Pre-production and Leased 48,000
prototype
Fremont, California Quick-turnaround Leased 30,000
Huntsville, Alabama Pre-production and Owned (1) 98,000
prototype
Melaka, Malaysia Volume production Leased 120,000
- --------------
(1) The property is currently under a long-term lease pursuant to which the
Company pays nominal rent and has the right to acquire fee-simple ownership
by payment of nominal consideration.
The Dallas and White City manufacturing facilities specialize in medium to
high volume production of complex, rigid multilayer PCBs. The Fremont facility
specializes in quick-turnaround prototype production, and the Redmond and
Huntsville facilities specialize in prototype pre-production of complex, rigid
multilayer PCBs. The Malaysian facility specializes in medium to high volume
production of lower technology rigid PCBs. The Company also has 12 design
centers worldwide, 11 in the U.S. and one in Israel.
The Redmond facility is subject to two leases with total current monthly
lease costs of approximately $44,000. One lease expires in 2000 and the other
lease expires in 2002. Both leases contain 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 Melaka, Malaysia facility is
subject to a lease with a current monthly lease cost of approximately $24,000
(based on the Malaysian Ringgit exchange rate (as fixed by the Malaysian
government) on November 2, 1998). This lease expires in 2002, with an option to
renew for an additional three-year period.
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MANAGEMENT
Directors, Executive Officers and Certain Key Employees
The following table sets forth, as of September 30, 1998, the directors,
executive officers and certain key employees of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert L. Praegitzer.................... 67 Chief Executive Officer and Chairman of the
Board
Matthew J. Bergeron..................... 35 President, Chief Operating Officer and
Director
William J. Thale........................ 39 Corporate Vice President and Chief Financial
Officer
Robert J. Versiackas.................... 49 Senior Vice President of Operations
James M. Buchanan....................... 51 Senior Vice President of Sales and Marketing
Gregory L. Lucas........................ 53 Senior Vice President of Technology
Daniel J. Barnett....................... 48 Director
Theodore L. Stebbins.................... 57 Director
Merrill A. McPeak....................... 62 Director
Gordon B. Kuenster...................... 65 Director
</TABLE>
Robert L. Praegitzer founded the Company in 1981 and has been its Chief
Executive Officer and Chairman of the Board since that time and was the
President since that time until January 1998. He was also the founder and
President of Praegitzer Design, Inc. which merged into the Company in 1995, and
Praegitzer Property Group, the assets of which were acquired by the Company in
1996.
Matthew J. Bergeron joined the Company in 1990 as Chief Financial Officer.
He became Senior Vice President in 1993, a director in November 1995, the
Executive Vice President and Chief Operating Officer in April 1997 and President
and Chief Operating Officer in January 1998. Prior to joining the Company, Mr.
Bergeron was an accountant at Johnson & Shute P.S., a public accounting firm.
William J. Thale joined the Company in 1990 and served as controller in
both the Assembled Products Division, an operation discontinued in 1994, and
Praegitzer Design, a division of the Company. Mr. Thale became Vice President
and Chief Financial Officer in April 1997. Mr. Thale is a certified public
accountant.
Robert J. Versiackas joined Trend in 1990 as Vice President of Operations
and upon the merger of Trend into the Company in August 1996 was appointed Vice
President of Operations - Fremont Division. In February 1997 Mr. Versiackas
became Senior Vice President of Operations.
49
<PAGE>
James M. Buchanan joined the Company as Senior Vice President of Sales and
Marketing in April 1998. Prior to joining the Company, Mr. Buchanan served as
Vice President of Sales for Zycon Corporation from 1984 until January 1997, Vice
President of Sales for Hadco Corporation from January 1997 until August 1997 and
Senior Vice President of Sales for Continental Circuits from August 1997 until
April 1998.
Gregory L. Lucas joined the Company in June 1997 as Senior Vice President
of Technology. Prior to joining the Company, Mr. Lucas had been Vice President
of Technology for Zycon Corporation since 1991. Mr. Lucas holds several patents
primarily in the field of buried passive components.
Daniel J. Barnett joined the Company as a director in August 1996 in
connection with the merger of Trend into the Company. He served as Vice
President of Sales of the Company from August 1996 to May 1998. Prior to the
merger, Mr. Barnett had been the president of Trend since 1992.
Theodore L. Stebbins is a Managing Director of Adams, Harkness & Hill, an
investment banking firm, and was appointed to the Board of Directors of the
Company in May 1996.
Merrill A. McPeak joined the Company as a director in April 1997. He is a
retired general in the United States Air Force. General McPeak served as Chief
of Staff of the U.S. Air Force from October 1990 until October 1994. General
McPeak is the Chairman of the Board of ECC International. He also serves on the
boards of Tektronix Inc., Thrustmaster Incorporated, Trans World Airlines and
Western Power and Equipment.
Gordon B. Kuenster is Chief Executive Officer of Seattle Sight Systems,
Incorporated, which he founded in 1996 and which manufactures
application-specific high resolution computer displays. Mr. Kuenster was founder
and Chief Executive Officer of Virtual Vision, Incorporated from 1991 to 1994
and Virtual Image Displays, Incorporated from 1994 to 1996. He was Chairman and
Chief Executive Officer of Advanced Technology Labs, Inc., Chief Executive
Officer of Neopath, Inc., Group Vice President and Member of the Board of
Directors of Squibb Pharmaceuticals, Inc., General Manager of Eldec Power Supply
Division, Vice President of Engineering for Pacific Electrodynamics and
Engineering Manager of Boeing Aerospace.
Committees of the Board of Directors
The Company has an Audit Committee comprised of Messrs. McPeak, Stebbins
and Kuenster. The Audit Committee will, among other things, make recommendations
to the Board of Directors with respect to the engagement of the Company's
independent certified public accountants and the review of the scope and effect
of the audit engagement. The Company has a Compensation Committee of its Board
of Directors, comprised of Messrs. Kuenster, McPeak and Stebbins. The
Compensation Committee will, among other
50
<PAGE>
things, make recommendations to the Board of Directors with respect to the
compensation of the executive officers of the Company.
Executive Compensation
The following table discloses the compensation awarded by the Company, for
the three fiscal years ended June 30, 1996, 1997 and 1998, to the Chief
Executive Officer and the four other most highly compensated executive officers
whose annual compensation exceeded $100,000 (together, the "Named Executives").
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
-------------------------------------------------------------------------
Long Term
Compensation
------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options(#) Compensation (1)
- -------------------------------- ---- --------- -------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Robert L. Praegitzer, 1998 $ 300,000 0 0 $ 9,640
Chairman and Chief 1997 274,999 0 125,000 9,640
Executive Officer 1996 195,972 0 0 29,684
Matthew J. Bergeron, 1998 199,423 0 25,000 4,983
President and 1997 149,999 0 25,000 4,983
Chief Operating Officer 1996 134,084 $ 15,000 50,000 0
Robert J. Versiackas, 1998 199,892 0 58,957 0
Senior Vice President of 1997 141,731 0 16,043 0
Operations 1996 -- -- -- --
Daniel J. Barnett (2), 1998 189,904 0 0 0
Senior Vice President of 1997 162,500 0 50,000 0
Sales 1996 -- -- -- --
Gregory L. Lucas 1998 181,442 0 25,000 0
Senior Vice President of 1997 7,115 (3) 0 50,000 0
Technology 1996 -- -- -- --
- --------------
(1) Consists of automobile allowances.
(2) Mr. Barnett terminated his employment with the Company on May 29, 1998. Mr.
Barnett continues to serve as a director of the Company.
(3) Mr. Lucas commenced employment with the Company on June 16, 1997.
</TABLE>
51
<PAGE>
The following table discloses information concerning options granted in
fiscal 1998 to the Named Executives.
<TABLE>
<CAPTION>
Option Grants in Fiscal Year Ended June 30, 1998
Individual Grants Potential Realizable
- --------------------------------------------------------------------------------------------- Value at Assumed
Number of Percent of Annual Rate of Stock
Securities Total Options Price Appreciation
Underlying Granted to Exercise for Option Term ($)(1)
Options Granted Employees in Price Expiration -------------------------
Name (#) Fiscal Year (%) ($/Sh) Date 5% 10%
- -------------------- --------------- ---------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Praegitzer 0 -- -- -- -- --
Matthew J. Bergeron 25,000 (2) 6.5 13.00 7/18/07 204,388 517,964
Robert J. Versiackas 33,957 (2) 8.9 13.00 7/18/07 277,618 703,541
25,000 (3) 6.5 9.38 4/01/08 147,396 373,532
Daniel J. Barnett(4) 0 -- -- -- -- --
Gregory L. Lucas 25,000 (3) 6.5 9.38 4/01/08 147,396 373,532
- --------------
(1) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the options immediately prior to their
expiration, assuming the Company's Common Stock appreciates at the
compounded rates specified over the term of the options. These numbers do
not take into account provisions of options providing for termination of
the option following termination of employment or nontransferability of the
options and do not make any provision for taxes associated with exercise.
Because actual gains will depend upon, among other things, future
performance of the Common Stock, there can be no assurance that the amounts
reflected in this table will be achieved.
(2) These options became exercisable on July 18, 1998.
(3) These options become exercisable on April 1, 1999.
(4) Mr. Barnett terminated his employment with the Company on May 29, 1998. Mr.
Barnett continues to serve as a director of the Company.
</TABLE>
52
<PAGE>
The following table sets forth information concerning the number of options
owned by the Named Executives and the value of any in-the-money unexercised
options as of June 30, 1998. No options were exercised by the Named Executives
during fiscal 1998 and no options are in-the-money:
<TABLE>
<CAPTION>
Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
June 30, 1998 June 30, 1998(1)
--------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert L. Praegitzer 31,250 93,750 $0 $0
Matthew J. Bergeron 31,249 68,751 $0 $0
Robert J. Versiackas 4,010 70,990 $0 $0
Daniel J. Barnett 0 0 -- --
Gregory L. Lucas 12,500 62,500 $0 $0
- --------------
(1) Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year-end
market value of the Common Stock. An option is "in-the-money" if the fiscal
year-end fair market value of the Common Stock exceeds the option exercise
price. The last sale price (the fair market value) of the Common Stock on
June 30, 1998 was $5.75 per share.
</TABLE>
Employment Arrangements
In November 1995 the Company entered into an employment agreement with
Robert L. Praegitzer, providing an annual base salary of $250,000 with increases
over time, and eligibility for bonuses and other company benefits. Mr.
Praegitzer's employment agreement is of an indefinite duration.
In August 1996 the Company entered into an employment agreement with Robert
J. Versiackas providing for an annual base salary of $130,000 with eligibility
for bonuses and other Company benefits. If at the end of each quarter during the
first two years of this Agreement the total salary and bonus paid to Mr.
Versiackas is less than an annualized rate of $165,000, the Company is required
to pay Mr. Versiackas an amount equal to the difference. The agreement may be
terminated at any time by the Company for cause, or by Mr. Versiackas upon a
material breach by the Company. Upon termination, Mr. Versiackas is entitled to
all payments customary under Company policies. Upon termination by the Company
without cause, or termination by Mr. Versiackas for cause, Mr. Versiackas, is
also entitled to his base compensation for the lesser of (i) one year, and (ii)
the time remaining until the expiration of two years after the date of the
agreement. After an initial term ending August 26, 1998, the agreement with Mr.
Versiackas may be terminated by either party with or without cause upon 30 days
written notice (or, in the case of termination by the Company, with payment of
60 days of base compensation in lieu of 30 days notice).
53
<PAGE>
Mr. Versiackas has also entered into an agreement with the Company
restricting his ability to compete with the Company until two years after
termination of his employment and prohibiting disclosure of confidential
information and solicitation of the Company's customers or employees.
In March 1998, the Company entered into an agreement with James M. Buchanan
providing for an annual base salary of $185,000 with eligibility for bonuses and
other Company benefits. The agreement provides that Mr. Buchanan's stock options
will become fully exercisable upon a change of control of the Company. In
addition, if Mr. Buchanan's employment is terminated other than for cause within
18 months of such a change of control, he will be entitled to receive his full
base salary, insurance coverage and car allowance for 18 months following
termination. If Mr. Buchanan is terminated other than for causes related to
criminal activity or ethical misconduct during his first 12 months of
employment, he will be entitled to receive his base salary for two years
following termination.
Compensation of Directors
Directors who are not officers of the Company are reimbursed for reasonable
out-of-pocket expenses incurred in attending meetings. In addition, each
individual who becomes a nonemployee director of the Company receives a
non-statutory option to purchase 10,000 shares of Common Stock when the
individual becomes a director, and each nonemployee director of the Company is
automatically granted an annual non-discretionary, non-statutory option to
purchase 5,000 shares of Common Stock upon re-election.
CERTAIN TRANSACTIONS
The Company leases its Dallas warehouse facility from Robert L. Praegitzer,
a director, officer, and principal shareholder in the Company, on a
month-to-month basis at a monthly rate of $7,930. Lease payments totaled $95,150
for the 12-month period ended September 30, 1998. The lease rates for the
warehouse facility were determined by Mr. Praegitzer, who was the sole
shareholder of the Company at the time of determination. The Board of Directors
of the Company unanimously concluded that these rates were comparable to rates
that could have been obtained from an independent party. The Company believes
that these payments reflect the fair market rental value of the warehouse.
In April 1996, the Company and Robert Praegitzer entered into a Tax
Indemnification Agreement with respect to the status of Company's, CTI's and
Praegitzer Design, Inc.'s ("PDI") as S corporations. Pursuant to that agreement,
the Company is obligated to indemnify Mr. Praegitzer for certain federal or
state income tax liability (including penalties and interest) he may incur or
any increased taxable income resulting from a final determination of any
adjustment with respect to the Company's, CTI's or PDI's income or deductions
for certain periods prior to the termination of the Company's S corporation
status (the "Termination Date"). In addition, the Company is obligated to
indemnify Mr. Praegitzer for any federal and state income taxes he must pay as a
result of receiving the
54
<PAGE>
indemnification payment. If there is a final determination that the Company, CTI
or PDI was not an S corporation for certain periods prior to the S corporation
Termination Date, Mr. Praegitzer is obligated to pay the Company any federal and
state income tax refund actually received by him as a result of that
determination. The agreement requires the shareholders, including Mr.
Praegitzer, to file a refund claim if requested to do so by the Company. In
addition, in connection with the CTI transaction, Mr. Praegitzer received
certain rights with respect to the registration of his shares of the Company's
common stock under the Securities Act.
In August 1996 the Company acquired Trend by means of a merger of Trend
with and into the Company (the "Merger"). In the Merger, each outstanding share
of Trend was converted into (i) 277.085 shares of Company's common stock and
(ii) the right to receive a cash payment of $1,385.43. On completion of the
Merger, the shareholders of Trend held a total of 1,000,000 shares of
Praegitzer, or approximately 8.5% of the outstanding Praegitzer Common Stock,
and received a total of $5,000,000 cash. Daniel J. Barnett, a director of the
Company and the former president of Trend and a former senior vice president of
the Company, and his spouse received 185,370 shares of the Company's common
stock and a cash payment of $926,853. Robert Versiackas, now a senior vice
president of the Company, and his spouse received 160,432 shares of the
Company's common stock and a cash payment of $802,163.
55
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information at September 30, 1998, based on
information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the owner of more than 5% of the outstanding shares of Common
Stock, (ii) each director, (iii) each Named Executive and (iv) all executive
officers and directors as a group.
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address of Beneficial Percent of
Beneficial Ownership Ownership (1) Class
- --------------------------------------- ------------- ----------------
<S> <C> <C>
Robert L. Praegitzer 8,181,875 (2) 63.9%
1270 S.E. Monmouth Cut Off Road
Dallas, Oregon 97338
Matthew J. Bergeron 51,050 (3) *
Daniel J. Barnett 142,370 1.1%
Robert J. Versiackas 176,942 (4) 1.4%
Gregory L. Lucas 12,500 (5) *
Theodore L. Stebbins 13,333 (6) *
Merrill A. McPeak 8,666 (7) *
Gordon B. Kuenster 0 (8) -
All directors and executive 8,622,951 (8) 67.3%
officers as a group (11 persons)
- --------------
* Less than 1%
(1) Shares that the person has the right to acquire within 60 days after
September 30, 1998 are deemed to be outstanding in calculating the
percentage ownership of the person or group but are not deemed to be
outstanding as to any other person or group.
(2) Includes options to purchase 62,500 shares of Common Stock that are
exercisable within 60 days after September 30, 1998 and excludes options to
purchase 62,500 shares of Common Stock not exercisable within 60 days after
September 30, 1998.
(3) Includes options to purchase 43,750 shares of Common Stock that are
exercisable within 60 days after September 30, 1998 and excludes options to
purchase 56,250 shares of Common Stock not exercisable within 60 days after
September 30, 1998.
(4) Includes options to purchase 16,510 shares of Common Stock that are
exercisable within 60 days after September 30, 1998 and excludes options to
purchase 58,490 shares of Common Stock not exercisable within 60 days after
September 30, 1998.
(5) Includes options to purchase 12,500 shares of Common Stock that are
exercisable within 60 days after September 30, 1998, and excludes options
to purchase 62,500 shares of Common Stock not exercisable within 60 days
after September 30, 1998.
56
<PAGE>
(6) Includes options to purchase 13,333 shares of Common Stock that are
exercisable within 60 days after September 30, 1998, and excludes options
to purchase 6,667 shares of Common Stock not exercisable within 60 days
after September 30, 1998.
(7) Includes options to purchase 6,666 shares of Common Stock that are
exercisable within 60 days after September 30, 1998, and excludes options
to purchase 13,334 shares of Common Stock not exercisable within 60 days
after September 30, 1998.
(8) Excludes options to purchase 10,000 shares of Common Stock not exercisable
within 60 days after September 30, 1998.
(9) Includes options to purchase 175,509 shares of Common Stock that are
exercisable within 60 days after September 30, 1998. Excludes options to
purchase 429,491 shares of Common Stock not exercisable within 60 days
after September 30, 1998.
</TABLE>
57
<PAGE>
DESCRIPTION OF NOTES
The Notes will be issued under an indenture to be dated as of December __,
1998 (the "Indenture") between the Company and U.S. Trust Company, N.A., as
trustee (the "Trustee"), a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The terms of the
Notes will include those stated in the Indenture and those made a part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"TIA"), as in effect on the date of the Indenture. The Notes will be subject to
all such terms, and holders of the Notes are referred to the Indenture and the
TIA for a statement of such terms. The following is a summary of important terms
of the Notes and does not purport to be complete. Reference should be made to
all provisions of the Indenture, including the definitions therein of certain
terms and all terms made a part of the Indenture by reference to the TIA.
Certain definitions of terms used in the following summary are set forth under
"-- Certain Definitions" below. As used in this section, the "Company" means
Praegitzer Industries, Inc., but not any of its Subsidiaries, unless the context
requires otherwise.
General
The Notes will be general unsecured subordinated obligations of the
Company, will mature on December __, 2008 (the "Maturity Date"), and will be
limited to an aggregate principal amount of $15,000,000 ($17,250,000 if the
Underwriters' over-allotment option is exercised). The Notes will be issued in
denominations of $50 and integral multiples of $50 in fully registered form. The
Notes are exchangeable and transfers thereof will be registrable without charge
therefor, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge in connection therewith.
The Notes will accrue interest at a rate of __% per annum from December __,
1998, or from the most recent interest payment date to which interest has been
paid or duly provided for, and accrued and unpaid interest will be payable
semi-annually in arrears on July 15 and January 15 of each year, commencing July
15, 1999. Interest will be paid to the person in whose name a Note is registered
at the close of business on the January 1 or July 1 immediately preceding the
relevant interest payment date (other than with respect to a Note or portion
thereof called for redemption on a redemption date, or repurchased in connection
with a Designated Event on a repurchase date, during the period from a record
date to (but excluding) the next succeeding interest payment date (in which case
accrued interest shall be payable (unless such Note or portion thereof is
converted) to the holder of the Note or portion thereof redeemed or
repurchased)). Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable at
the office or agency of the Company maintained for such purpose or, at the
option of the Company, payment of interest may be made by check mailed to the
holders of the Notes at their respective addresses set forth in the register of
holders of Notes. Until otherwise designated
58
<PAGE>
by the Company, the Company's office or agency maintained for such purpose will
be the principal corporate trust office of the Trustee.
The Indenture does not contain any financial covenants or restrictions on
the payment of dividends or the issuance or repurchase of securities of the
Company. The Indenture contains no covenants or other provisions to afford
protection to holders of the Notes in the event of a highly leveraged
transaction or a change in control of the Company except to the extent of the
right to require the Company to repurchase Notes upon a Designated Event (as
defined below). See "-- Repurchase at Option of Holders upon a Designated
Event."
Conversion
The holders of Notes will be entitled at any time on or before the close of
business on the last trading day prior to the Maturity Date of the Notes,
subject to prior redemption or repurchase, to convert any Notes or portions
thereof (in denominations of $50 or multiples thereof) into Common Stock of the
Company, at the conversion price of $____ per share of Common Stock, subject to
adjustment as described below (the "Conversion Price"). Except as described
below, no adjustment will be made on conversion of any Notes for interest
accrued thereon or for dividends on any Common Stock issued. If Notes not called
for redemption are converted after a record date for the payment of interest and
prior to the next succeeding interest payment date, such Notes must be
accompanied by funds equal to the interest payable on such succeeding interest
payment date on the principal amount so converted. The Company is not required
to issue fractional shares of Common Stock upon conversion of Notes and, in lieu
thereof, will pay a cash adjustment based upon the market price of the Common
Stock on the last trading day prior to the date of conversion. In the case of
Notes called for redemption, conversion rights will expire at the close of
business on the trading day preceding the date fixed for redemption, unless the
Company defaults in payment of the redemption price, in which case the
conversion right will terminate at the close of business on the date such
default is cured. In the event any holder exercises its right to require the
Company to repurchase Notes upon a Designated Event, such holder's conversion
right will terminate on the close of business on the Designated Event Offer
Termination Date (as defined) unless the Company defaults in the payment due
upon repurchase or the holder elects to withdraw the submission of election to
repurchase. See "-- Repurchase at Option of Holders Upon a Designated Event."
The right of conversion attaching to any Note may be exercised by the
holder by delivering the Note at the specified office of a conversion agent,
accompanied by a duly signed and completed notice of conversion, together with
any funds that may be required as described in the preceding paragraph. Such
notice of conversion can be obtained from the Trustee. Beneficial owners of
interests in a Global Note (as defined) may exercise their right of conversion
by delivering to The Depository Trust Company ("DTC") the appropriate
instruction form for conversion pursuant to DTC's conversion program. The
conversion date shall be the date on which the Note, the duly signed and
completed notice of conversion, and any funds that may be required as described
in the preceding paragraph shall have been so
59
<PAGE>
delivered. A holder delivering a Note for conversion will not be required to pay
any taxes or duties payable in respect of the issue or delivery of Common Stock
on conversion, but will be required to pay any tax or duty which may be payable
in respect of any transfer involved in the issue or delivery of the Common Stock
in a name other than the holder of the Note. Certificates representing shares of
Common Stock will not be issued or delivered unless all taxes and duties, if
any, payable by the holder have been paid.
The Conversion Price is subject to adjustment (under formulae set forth in
the Indenture) in certain events, including: (i) the issuance of Common Stock as
a dividend or distribution on Common Stock; (ii) certain subdivisions and
combinations of the Common Stock; (iii) the issuance to all or substantially all
holders of Common Stock of certain rights or warrants to purchase Common Stock;
(iv) the dividend or other distribution to all holders of Common Stock of shares
of capital stock of the Company (other than Common Stock) or evidences of
indebtedness of the Company or assets (including securities, but excluding those
rights, warrants, dividends and distributions referred to above or paid
exclusively in cash); (v) dividends or other distributions consisting
exclusively of cash (excluding any cash portion of distributions referred to in
clause (iv)) to all holders of Common Stock to the extent such distributions,
combined together with (A) all such all-cash distributions made within the
preceding 12 months in respect of which no adjustment has been made plus (B) any
cash and the fair market value of other consideration payable in respect of any
tender offers by the Company or any of its Subsidiaries for Common Stock
concluded within the preceding 12 months in respect of which no adjustment has
been made, exceeds 10% of the Company's market capitalization (being the product
of the then current market price of the Common Stock times the number of shares
of Common Stock then outstanding) on the record date for such distribution; (vi)
the purchase of Common Stock pursuant to a tender offer made by the Company or
any of its subsidiaries to the extent that the aggregate consideration, together
with (X) any cash and the fair market value of any other consideration payable
in any other tender offer expiring within 12 months preceding such tender offer
in respect of which no adjustment has been made plus (Y) the aggregate amount of
any such all-cash distributions referred to in clause (v) above to all holders
of Common Stock within the 12 months preceding the expiration of such tender
offer in respect of which no adjustments have been made, exceeds 10% of the
Company's market capitalization on the expiration of such tender offer; and
(vii) the issuance of Common Stock or securities convertible into, or
exchangeable for, Common Stock at a price per share (or having a conversion or
exchange price per share) that is less than the then Current Market Price (as
defined) (but excluding issuances (A) pursuant to any bona fide plan for the
benefit of employees, directors or consultants of the Company or any Subsidiary
in effect on the date of the Indenture or thereafter, (B) to acquire all or any
portion of a business in an arm's-length transaction between the Company and an
unaffiliated third party fees including, if applicable, issuances upon exercise
of options or warrants assumed in connection with such an acquisition, (C) in a
bona fide public offering pursuant to a firm commitment underwriting (or similar
type of offering made pursuant to Rule 144A and/or Regulation S under the
Securities Act) or sales at the market pursuant to a continuous offering stock
program, (D) pursuant to the exercise of warrants, rights (including, without
limitation, earnout rights) or options, or upon the conversion of
60
<PAGE>
convertible securities, which are issued and outstanding on the date of the
Indenture, or which may be issued in the future at fair value and with an
exercise price or conversion price at least equal to the Current Market Price
(as defined) at the time of issuance of such warrant, right, option or
convertible security, and (E) pursuant to a dividend reinvestment plan or other
plan hereafter adopted for the reinvestment of dividends or interest provided
that such Common Stock is issued at a price at least equal to 95% of the Current
Market Price (as defined) at the time of such issuance).
In the case of (i) any reclassification or change of the Common Stock or
(ii) a consolidation, merger or combination involving the Company or a sale or
conveyance to another corporation of the property and assets of the Company as
an entirety or substantially as an entirety, in each case as a result of which
holders of Common Stock shall be entitled to receive stock, other securities,
other property or assets (including cash) with respect to or in exchange for
such Common Stock, the holders of the Notes then outstanding will be entitled
thereafter to convert such Notes into the kind and amount of shares of stock,
other securities or other property or assets, which they would have owned or
been entitled to receive upon such reclassification, change, consolidation,
merger, combination, sale or conveyance had such Notes been converted into
Common Stock immediately prior to such reclassification, change, consolidation,
merger, combination, sale or conveyance (assuming, in a case in which the
Company's stockholders may exercise rights of election, that a holder of Notes
would not have exercised any rights of election as to the stock, other
securities or other property or assets receivable in connection therewith and
received per share the kind and amount received per share by a plurality of
non-electing shares). Certain of the foregoing events may also constitute or
result in a Designated Event requiring the Company to offer to repurchase the
Notes. See "-- Repurchase at Option of Holders Upon a Designated Event."
In the event of a taxable distribution to holders of Common Stock (or other
transaction) that results in any adjustment of the Conversion Price, the holders
of Notes may, in certain circumstances, be deemed to have received a
distribution subject to United States income tax as a dividend; in certain other
circumstances, the absence of such an adjustment may result in a taxable
dividend to the holders of Common Stock. See "Certain United States Federal
Income Tax Consequences."
The Company from time to time may, to the extent permitted by law, reduce
the Conversion Price of the Notes by any amount for any period of at least 20
days, in which case the Company shall give at least 15 days' notice of such
decrease, if the Board of Directors has made a determination that such decrease
would be in the best interests of the Company, which determination shall be
conclusive. The Company may, at its option, make such reductions in the
Conversion Price, in addition to those set forth above, as the Board of
Directors deems advisable to avoid or diminish any income tax to holders of
Common Stock resulting from any dividend or distribution of stock (or rights to
acquire stock) or from any event treated as such for income tax purposes. See
"Certain United States Federal Income Tax Consequences."
61
<PAGE>
No adjustment in the Conversion Price will be required unless such
adjustment would require a change of at least 1% of the Conversion Price then in
effect; provided that any adjustment that would otherwise be required to be made
shall be carried forward and taken into account in any subsequent adjustment.
Except as stated above, the Conversion Price will not be adjusted for the
issuance of Common Stock or any securities convertible into or exchangeable for
Common Stock or carrying the right to purchase any of the foregoing.
Redemption
Subject to the limitations on redemption prior to December __, 2001
(described below), the Notes may be redeemed at the option of the Company, in
whole or from time to time in part, on not less than 15 nor more than 30 days'
prior written notice to the holders thereof by first class mail, at the
following redemption prices (expressed as percentages of principal amount) if
redeemed during the 12-month period beginning December __ of each year
indicated, plus accrued and unpaid interest to the date fixed for redemption:
REDEMPTION
YEAR PRICE
1999.................................................. 110%
2000.................................................. 108%
2001.................................................. 106%
2002.................................................. 105%
2003.................................................. 103%
2004.................................................. 101%
2005.................................................. 100%
2006.................................................. 100%
2007.................................................. 100%
2008.................................................. 100%
Notwithstanding the foregoing, the Company may redeem the Notes prior to
December __, 2001 only if (i) it redeems all of the Notes then outstanding, (ii)
after the date of this offering and prior to the redemption, the Company
completes one or more registered public offerings of its Common Stock generating
at least $15 million in gross proceeds, and (iii) the closing price of the
Common Stock on the principal stock exchange or market on which the Common Stock
is then quoted or admitted to trading equals or exceeds the following percentage
of the then-effective Conversion Price for at least 30 consecutive trading days
ending on the fifth trading day prior to the date the notice of redemption is
first mailed to the holders of the Notes:
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REDEMPTION PERCENTAGE OF
NOTICE DATE CONVERSION PRICE
Before December __, 1999...................................... 117%
On or after December __, 1999 but before December __, 2000.... 137%
On or after December __, 2000 but before December __, 2001.... 163%
If less than all the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed or, if the Notes are not so listed, on a pro rata basis by lot
or by any other method that the Trustee considers fair and appropriate. The
Trustee may select for redemption a portion of the principal of any Note that
has a denomination larger than $50. Notes and portions thereof will be redeemed
in the amount of $50 or integral multiples of $50. The Trustee will make the
selection from Notes outstanding and not previously called for redemption;
provided that if a portion of a holder's Notes are selected for partial
redemption and such holder converts a portion of such Notes, such converted
portion shall be deemed to be taken from the portion selected for redemption.
Provisions of the Indenture that apply to the Notes called for redemption
also apply to portions of the Notes called for redemption. If any Note is to be
redeemed in part, the notice of redemption will state the portion of the
principal amount to be redeemed. Upon surrender of a Note that is redeemed in
part only, the Company will execute and the Trustee will authenticate and
deliver to the holder a new Note equal in principal amount to the unredeemed
portion of the Note surrendered.
On and after the redemption date, unless the Company shall default in the
payment of the redemption price, interest will cease to accrue on the principal
amount of the Notes or portions thereof called for redemption and for which
funds have been set apart for payment. In the case of Notes or portions thereof
redeemed on a redemption date which is also a regularly scheduled interest
payment date, the interest payment due on such date shall be paid to the person
in whose name the Note is registered at the close of business on the relevant
record date.
The Notes are not entitled to any sinking fund.
Repurchase at Option of Holders upon a Designated Event
Upon the occurrence of a Designated Event, each holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $50 or
an integral multiple thereof) of such holder's Notes pursuant to the offer
described below (the "Designated Event Offer") at an offer price in cash equal
to 100% of the aggregate principal amount thereof plus accrued and unpaid
interest thereon to the date of purchase (the "Designated Event Payment").
Within 20 days following any Designated Event, the Company will mail a notice to
each holder describing the transaction or transactions that constitute the
Designated Event
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and offering to repurchase Notes pursuant to the procedures required by the
Indenture and described in such notice.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Designated Event. Rule 13e-4 under the
Exchange Act requires, among other things, the dissemination of certain
information to security holders in the event of an issuer tender offer and may
apply in the event that the repurchase option becomes available to holders of
the Notes. The Company will comply with this rule to the extent applicable at
that time.
On the date specified for termination of the Designated Event Offer, the
Company will, to the extent lawful, (1) accept for payment all Notes or portions
thereof properly tendered pursuant to the Designated Event Offer, (2) deposit
with the paying agent an amount equal to the Designated Event Payment in respect
of all Notes or portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustee the Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of Notes or portions thereof
being purchased by the Company. On the date specified for payment of the
Designated Event Payment (the "Designated Event Payment Date"), the paying agent
will promptly mail to each holder of Notes so accepted the Designated Event
Payment for such Notes, and the Trustee will promptly authenticate and mail (or
cause to be transferred by book entry) to each holder a new Note equal in
principal amount to any unpurchased portion of the Notes surrendered, if any;
provided that each such new Note will be in a principal amount of $50 or an
integral multiple thereof.
The foregoing provisions would not necessarily afford holders of the Notes
protection in the event of highly leveraged or other transactions involving the
Company that may adversely affect holders.
The right to require the Company to repurchase Notes as a result of a
Designated Event could have the effect of delaying, deferring or preventing a
Change of Control or other attempts to acquire control of the Company unless
arrangements have been made to enable the Company to repurchase all the Notes at
the Designated Event Payment Date. Consequently, this right may render more
difficult or discourage a merger, consolidation or tender offer (even if such
transaction is supported by the Company's Board of Directors or is favorable to
the stockholders), the assumption of control by a holder of a large block of the
Company's shares and the removal of incumbent management.
Except as described above with respect to a Designated Event, the Indenture
does not contain provisions that permit the holders of the Notes to require that
the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring. Subject to the limitation on mergers
and consolidations described below, the Company, its management or its
Subsidiaries could in the future enter into certain transactions, including
refinancings, certain recapitalizations, acquisitions, the sale of all or
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substantially all of its assets, the liquidation of the Company or similar
transactions, that would not constitute a Designated Event under the Indenture,
but that would increase the amount of Senior Debt (or any other indebtedness)
outstanding at such time or substantially reduce or eliminate the Company's
assets.
The terms of the Company's existing or future credit or other agreements
relating to indebtedness (including Senior Debt) may prohibit the Company from
purchasing any Notes and may also provide that a Designated Event, as well as
certain other change-of-control events with respect to the Company, would
constitute an event of default thereunder. In the event a Designated Event
occurs at a time when the Company is prohibited from purchasing Notes, the
Company could seek the consent of its then-existing lenders to the purchase of
Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company would remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture, which may, in turn, constitute a further default
under the terms of other indebtedness that the Company has entered into or may
enter into from time to time. In such circumstances, the subordination
provisions in the Indenture would likely restrict payments to the holders of
Notes.
A "Designated Event" will be deemed to have occurred upon a Change of
Control or a Termination of Trading.
A "Change of Control" will be deemed to have occurred when: (i) any person
has become an Acquiring Person, (ii) the Company consolidates with or merges
into any other corporation, or conveys, transfers, or leases all or
substantially all of its assets to any person, or any other corporation merges
into the Company, and, in the case of any such transaction, the outstanding
Common Stock of the Company is changed or exchanged as a result, unless the
stockholders of the Company immediately before such transaction own, directly or
indirectly immediately following such transaction, at least a majority of the
combined voting power of the outstanding voting securities of the corporation
resulting from such transaction in substantially the same proportion as their
ownership of the Voting Stock immediately before such transaction, or (iii) any
time the Continuing Directors do not constitute a majority of the Board of
Directors of the Company (or, if applicable, a successor corporation to the
Company).
The definition of Change of Control includes a phrase relating to the
lease, transfer or conveyance of "all or substantially all" of the assets of the
Company. Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of Notes to require
the Company to repurchase such Notes as a result of a lease, transfer or
conveyance of less than all of the assets of the Company to another person or
group may be uncertain.
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"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
A "Termination of Trading" will be deemed to have occurred if the Common
Stock (or other common stock into which the Notes are then convertible) is
neither listed for trading on a United States national securities exchange nor
approved for trading on an established automated over-the-counter trading market
in the United States; provided, however, that a "Termination of Trading" shall
not be deemed to occur on account of an involuntary de-listing of such
securities by any such exchange or over-the-counter trading market if, within 45
days following such involuntary de-listing, such securities are again listed or
approved for trading on any such exchange or over-the-counter trading market on
which the securities are eligible for listing or trading.
Merger and Consolidation
The Indenture will provide that the Company may not, in a single
transaction or a series of related transactions, consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions to, another
corporation, person or entity as an entirety or substantially as an entirety
unless either (a)(i) the Company shall be the surviving or continuing
corporation or (ii) the entity or person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or person
which acquires by sale, assignment, transfer, lease, conveyance or other
disposition the properties and assets of the Company substantially as an
entirety (x) is a corporation organized and validly existing under the laws of
the United States, any State thereof or the District of Columbia and (y) assumes
the due and punctual payment of the principal of, and premium, if any, and
interest on all the Notes and the performance of every covenant of the Company
under the Notes and the Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (b) immediately after such transaction
no Default or Event of Default exists; and (c) the Company or such person shall
have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that such transaction and the supplemental indenture
comply with the Indenture and that all conditions precedent in the Indenture
relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Subsidiaries of the
Company, the capital stock of which constitutes all or substantially all of the
properties and assets of the Company, shall be deemed to be the transfer of all
or substantially all of the properties and assets of the Company.
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Upon any such consolidation, merger, sale, assignment, conveyance, lease,
transfer or other disposition in accordance with the foregoing, the successor
person formed by such consolidation or into which the Company is merged or to
which such sale, assignment, conveyance, lease, transfer or other disposition is
made will succeed to, and be substituted for, and may exercise every right and
power of, the Company under the Indenture with the same effect as if such
successor had been named as the Company therein, and thereafter (except in the
case of a sale, assignment, transfer, lease, conveyance or other disposition)
the predecessor corporation will be relieved of all further obligations and
covenants under the Indenture and the Notes.
Subordination
The payment of principal of, premium, if any, and interest on the Notes
will be subordinated in right of payment, as set forth in the Indenture, to the
prior payment in full in cash or other payment satisfactory to the Senior Debt
of all Senior Debt, whether outstanding on the date of the Indenture or
thereafter incurred. Upon any distribution to creditors of the Company in a
liquidation or dissolution of the Company or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Company or its
property, an assignment for the benefit of creditors or any marshaling of the
Company's assets and liabilities, the holders of Senior Debt will be entitled to
receive payment in full in cash or other payment satisfactory to the Senior Debt
of all Senior Debt of all obligations in respect of such Senior Debt before the
holders of Notes will be entitled to receive any payment with respect to the
Notes.
In the event of any acceleration of the Notes because of an Event of
Default, the holders of any Senior Debt then outstanding will be entitled to
payment in full in cash or other payment satisfactory to the holders of such
Senior Debt of all obligations in respect of such Senior Debt before the holders
of the Notes are entitled to receive any payment or distribution in respect
thereof. If payment of the Notes is accelerated because of an Event of Default,
the Company or the Trustee shall promptly notify the holders of Senior Debt or
the trustee(s) for such Senior Debt of the acceleration. The Company may not pay
the Notes until five business days after such holders or trustee(s) of Senior
Debt receive notice of such acceleration and, thereafter, may pay the Notes only
if the subordination provisions of the Indenture otherwise permit payment at
that time.
The Company also may not make any payment upon or in respect of the Notes
if (i) a default in the payment of the principal of, premium, if any, interest,
rent or other obligations in respect of Senior Debt occurs and is continuing
beyond any applicable period of grace or (ii) a default, other than a payment
default, occurs and is continuing with respect to Designated Senior Debt that
permits holders of the Designated Senior Debt as to which such default relates
to accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Company or other person permitted to give
such notice under the Indenture. Payments on the Notes may and shall be resumed
(a) in the case of a payment default, upon the date on which such default is
cured or waived or ceases to
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exist and (b) in case of a nonpayment default, the earlier of the date on which
such nonpayment default is cured or waived or ceases to exist or 179 days after
the date on which the applicable Payment Blockage Notice is received if the
maturity of the Senior Debt has not been accelerated. No new period of payment
blockage may be commenced unless and until 365 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent
Payment Blockage Notice.
By reason of the subordination provisions described above, in the event of
the Company's liquidation or insolvency, holders of Senior Debt may receive
more, ratably, and holders of the Notes may receive less, ratably, than the
other creditors of the Company. Such subordination will not prevent the
occurrences of any Event of Default under the Indenture.
The Notes are obligations exclusively of the Company. However, to the
extent the operations of the Company are conducted through one or more
Subsidiaries, the cash flow and the consequent ability of the Company to service
its debt, including the Notes, are dependent upon the earnings of such
Subsidiaries and the distribution of those earnings to, or upon loans or other
payments of funds by those Subsidiaries to, the Company. The payment of
dividends and the making of loans and advances to the Company by its
Subsidiaries may be subject to statutory or contractual restrictions, are
dependent upon the earnings of those Subsidiaries and are subject to various
business considerations.
Any right of the Company to receive assets of any of its Subsidiaries upon
their liquidation or reorganization (and the consequent right of the holders of
the Notes to participate in those assets) will be effectively subordinated to
the claims of that Subsidiary's creditors (including trade creditors), except to
the extent that the Company is itself recognized as a creditor of such
Subsidiary, in which case the claims of the Company would still be subordinate
to any security interests in the assets of such Subsidiary and any indebtedness
of such Subsidiary senior to that held by the Company.
As of September 30, 1998, the Company had approximately $77.3 million of
outstanding indebtedness that would have constituted Senior Debt, and the
indebtedness and other liabilities of the Company's subsidiaries (excluding
intercompany liabilities and obligations of a type not required to be reflected
on the balance sheet of such subsidiary in accordance with GAAP) that would
effectively have been senior to the Notes were approximately $3.9 million. After
giving effect to planned debt repayments by the Company prior to the Offering
and the application of the estimated net proceeds to the Company of the
Offering, such amounts will be approximately $65.9 million and $3.9 million,
respectively. The Indenture will not limit the amount of additional
indebtedness, including Senior Debt, that the Company can create, incur, assume
or guarantee, nor will the Indenture limit the amount of indebtedness and other
liabilities that any Subsidiary can create, incur, assume or guarantee.
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In the event that, notwithstanding the foregoing, the Trustee or any holder
of Notes receives any payment or distribution of assets of the Company of any
kind in contravention of any of the terms of the Indenture, whether in cash,
property or securities, including, without limitation by way of set-off or
otherwise, in respect of the Notes before all Senior Debt is paid in full in
cash or other payment satisfactory to the holders of Senior Debt, then such
payment or distribution will be held by the recipient in trust for the benefit
of holders of Senior Debt, and will be immediately paid over or delivered to the
holders of Senior Debt or their representative or representatives to the extent
necessary to make payment in full in cash or other payment satisfactory to such
holders of all Senior Debt remaining unpaid, after giving effect to any
concurrent payment or distribution, or provision therefor, to or for the holders
of Senior Debt.
Events of Default and Remedies
An Event of Default is defined in the Indenture as being (i) default in
payment of the principal of, or premium, if any, on the Notes, whether or not
such payment is prohibited by the subordination provisions of the Indenture;
(ii) default for 30 days in payment of any installment of interest on the Notes,
whether or not such payment is prohibited by the subordination provisions of the
Indenture; (iii) default by the Company for 60 days after notice in the
observance or performance of any other covenants in the Indenture; (iv) default
in the payment of the Designated Event Payment in respect of the Notes on the
date therefor, whether or not such payment is prohibited by the subordination
provisions of the Indenture; (v) failure to provide timely notice of a
Designated Event; (vi) failure of the Company or any Material Subsidiary to make
any payment at maturity, including any applicable grace period, in respect of
indebtedness for borrowed money of, or guaranteed or assumed by, the Company or
any Material Subsidiary, which payment is in an amount in excess of $1,000,000,
and continuance of such failure for 30 days after notice; (vii) default by the
Company or any Material Subsidiary with respect to any such indebtedness, which
default results in the acceleration of any such indebtedness of an amount in
excess of $1,000,000 without such indebtedness having been paid or discharged or
such acceleration having been cured, waived, rescinded or annulled for 30 days
after notice; or (viii) certain events involving bankruptcy, insolvency or
reorganization of the Company or any Material Subsidiary.
If an Event of Default (other than an Event of Default specified in clause
(viii) above with respect to the Company) occurs and is continuing, then and in
every such case the Trustee, by written notice to the Company, or the holders of
not less than 25% in aggregate principal amount of the then outstanding Notes,
by written notice to the Company and the Trustee, may declare the unpaid
principal of, premium, if any, and accrued and unpaid interest on all the Notes
then outstanding to be due and payable. Upon such declaration, such principal
amount, premium, if any, and accrued and unpaid interest will become immediately
due and payable, notwithstanding anything contained in the Indenture or the
Notes to the contrary, but subject to the provisions limiting payment described
in "-- Subordination." If any Event of Default specified in clause (viii) above
occurs with
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respect to the Company, all unpaid principal of, and premium, if any, and
accrued and unpaid interest on the Notes then outstanding will automatically
become due and payable, subject to the provisions described in "--
Subordination," without any declaration or other act on the part of the Trustee
or any holder of Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to the provisions of the Indenture relating
to the duties of the Trustee, the Trustee is under no obligation to exercise any
of its rights or powers under the Indenture at the request, order or direction
of any of the holders, unless such holders have offered to the Trustee a
security or an indemnity satisfactory to it against any cost, expense or
liability. Subject to all provisions of the Indenture and applicable law, the
holders of a majority in aggregate principal amount of the then outstanding
Notes have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. If a Default or Event of Default occurs and is
continuing and is known to the Trustee, the Indenture requires the Trustee to
mail a notice of Default or Event of Default to each holder within 60 days of
the occurrence of such Default or Event of Default, provided, however, that the
Trustee may withhold from the holders notice of any continuing Default or Event
of Default (except a Default or Event of Default in the payment of principal of,
premium, if any or interest on the Notes) if it determines in good faith that
withholding notice is in their interest. The holders of a majority in aggregate
principal amount of the Notes then outstanding by notice to the Trustee may
rescind any acceleration of the Notes and its consequences if all existing
Events of Default (other than the nonpayment of principal of, premium, if any,
and interest on the Notes that has become due solely by virtue of such
acceleration) have been cured or waived and if the rescission would not conflict
with any judgment or decree of any court of competent jurisdiction. No such
rescission shall affect any subsequent Default or Event of Default or impair any
right consequent thereto.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to any
date on which the Company is prohibited from redeeming the Notes by reason of
any willful action (or inaction) taken (or not taken) by or on behalf of the
Company with the intention of avoiding the prohibition on redemption of the
Notes prior to such date, then the premium specified in the Indenture shall also
become immediately due and payable to the extent permitted by law upon the
acceleration of the Notes.
The holders of a majority in aggregate principal amount of the Notes then
outstanding may, on behalf of the holders of all the Notes, waive any past
Default or Event of Default under the Indenture and its consequences, except
Default in the payment of principal of, premium, if any, or interest on the
Notes (other than the non-payment of principal of,
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premium, if any, and interest on the Notes that has become due solely by virtue
of an acceleration that has been duly rescinded as provided above) or in respect
of a covenant or provision of the Indenture that cannot be modified or amended
without the consent of all holders of Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
Book-entry; Delivery and Form
The Notes will be issued in the form of one or more global notes (the
"Global Note") deposited with, or on behalf of, DTC and registered in the name
of Cede & Co. as DTC's nominees, or will remain in the custody of the Trustee
pursuant to a FAST Balance Certificate Agreement between DTC and the Trustee.
Owners of beneficial interests in the Notes represented by the Global Note will
hold such interests pursuant to the procedures and practices of DTC and must
exercise any rights in respect of their interests (including any right to
convert or require repurchase of their interests) in accordance with those
procedures and practices. Such beneficial owners will not be holders for
purposes of the Indenture, and will not be entitled to any rights under the
Global Note or the Indenture, with respect to the Global Note, and the Company
and the Trustee, and any of their respective agents, may treat DTC as the sole
holder and owner of the Global Note for all purposes under the Indenture.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC holds securities for its participants
and facilitates the clearance and settlement of securities transactions, such as
transfers and pledges, in deposited securities through electronic computerized
book-entry changes in participants' accounts, thereby eliminating the need for
physical movement of securities certificates. Direct participants include
securities brokers and dealers, banks, trust companies, clearing corporations,
and certain other organizations. DTC is owned by a number of its direct
participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as securities brokers and
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a direct participant, either directly or indirectly. The rules
applicable to DTC and its participants are on file with the Commission.
Unless and until they are exchanged in whole or in part for certificated
Notes in definitive form as set forth below, the Global Note may not be
transferred except as a whole
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by DTC to a nominee of DTC, or by a nominee of DTC to DTC or another nominee of
DTC.
The Notes represented by the Global Note will not be exchangeable for
certificated Notes, provided that if DTC is at any time unwilling, unable or
ineligible to continue as depositary and a successor depositary is not appointed
by the Company within 90 days, the Company will issue individual Notes in
definitive form in exchange for the Global Note. In addition, the Company may at
any time in its sole discretion determine not to have a Global Note, and, in
such event, will issue individual Notes in definitive form in exchange for the
Global Note previously representing all such Notes. In either instance, an owner
of a beneficial interest in a Global Note will be entitled to physical delivery
of Notes in definitive form equal in principal amount to such beneficial
interest and to have such Notes registered in its name. Individual Notes so
issued in definitive form will be issued in denominations of $50 and any larger
amount that is an integral multiple of $50 and will be issued in registered form
only, without coupons.
The laws of some states require that certain persons take physical delivery
in definite form of securities that they own and that security interests in
negotiable instruments can only be perfected by delivery of certificates
representing the instruments. Consequently, the ability to transfer Notes
evidenced by the Global Note will be limited to such extent.
Payments of principal of and interest on the Notes will be made by the
Company through the Trustee to DTC or its nominee, as the case may be, as the
registered owner of the Global Note. Neither the Company nor the Trustee will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the Global Note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests. The Company expects that DTC, upon receipt of
any payment of principal or interest in respect of the Global Note, will credit
the accounts of the related participants with payment in amounts proportionate
to their respective holdings in principal amount of beneficial interest in the
Global Note as shown on the records of DTC. The Company also expects that
payments by participants to owners of beneficial interests in the Global Note
will be covered by standing customer instructions and customary practices, as is
now the case with securities held for the accounts of customers in bearer form
or registered in "street name," and will be the responsibility of such
participants.
So long as the Notes are represented by a Global Note, DTC or its nominee
will be the only entity that can exercise a right to repayment pursuant to the
holder's option to elect repayment of its Notes or the right of conversion of
the Notes. Notice by participants or by owners of beneficial interests in a
Global Note held through such participants of the exercise of the option to
elect repayment, or the right of conversion, of beneficial interests in Notes
represented by the Global Note must be transmitted to DTC in accordance with its
procedures on a form required by DTC and provided to participants. In order to
ensure that DTC's nominee will timely exercise a right to repayment, or the
right of conversion, with
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respect to a particular Note, the beneficial owner of such Notes must instruct
the broker or other participant through which it holds an interest in such Notes
to notify DTC of its desire to exercise a right to repayment, or the right of
conversion. Different firms have different cut-off times for accepting
instructions from their customers and, accordingly, each beneficial owner should
consult the broker or other participant through which it holds an interest in a
Note in order to ascertain the cut-off time by which such an instruction must be
given in order for timely notice to be delivered to DTC. The Company will not be
liable for any delay in delivery of such notice to DTC.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable. The
Company will have no responsibility for the performance by DTC or its
participants of their respective obligations as described hereunder or under the
rules and procedures governing their respective operations.
Neither the Company nor the Trustee shall be liable for any delay by DTC or
any participant or indirect participant in DTC in identifying the beneficial
owners of the Notes, and the Company and the Trustee may conclusively rely on,
and shall be protected in relying on, instructions from DTC for all purposes
(including with respect to the registration and delivery, and the respective
principal amounts, of the Notes to be issued).
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the holders of at
least a majority in principal amount of the Notes then outstanding (including
consents obtained in connection with a tender offer or exchange offer for
Notes), and any existing default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the holders of a
majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder): (a) reduce the
principal amount of Notes whose holders must consent to an amendment, supplement
or waiver, (b) reduce the principal of or change the fixed maturity of any Note
or, other than as set forth in the next paragraph, alter the provisions with
respect to the redemption of the Notes, (c) reduce the rate of or change the
time for payment of interest on any Notes, (d) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (e) make any Note payable
in money other than that stated in the Indenture and the Notes, (f) make any
change in the provisions of the Indenture relating to waivers of past Defaults
or the rights of holders of Notes to receive payments of principal of, premium,
if any, or interest on the Notes, (g) waive a redemption payment with respect to
any Note, (h)
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except as permitted by the Indenture, increase the Conversion Price or, other
than as set forth in the next paragraph, modify the provisions of the Indenture
relating to conversion of the Notes in a manner adverse to the holders thereof
or (i) make any change to the abilities of holders of Notes to enforce their
rights under the Indenture or the provisions of clause (a) through (i) hereof.
In addition, any amendment to the provisions of Article 11 of the Indenture
(which relate to subordination) will require the consent of the holders of at
least 75% in aggregate principal amount of the Notes then outstanding if such
amendment would adversely affect the rights of holders of Notes.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to (a) cure any ambiguity, defect or inconsistency or make any other changes in
the provisions of the Indenture which the Company and the Trustee may deem
necessary or desirable, provided such amendment does not materially and
adversely affect the Notes, (b) provide for uncertificated Notes in addition to
or in place of certificated Notes, (c) provide for the assumption of the
Company's obligations to holders of Notes in the circumstances required under
the Indenture as described under "-- Merger and Consolidation," (d) provide for
conversion rights of holders of Notes in certain events such as a consolidation,
merger or sale of all or substantially all of the assets of the Company, (e)
reduce the Conversion Price, (f) make any change that would provide any
additional rights or benefits to the holders of Notes or that does not adversely
affect the legal rights under the Indenture of any such holder, or (g) comply
with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the TIA.
Satisfaction and Discharge
The Company may discharge its obligations under the Indenture while Notes
remain outstanding if (i) all outstanding Notes will become due and payable at
their scheduled maturity within one year or (ii) all outstanding Notes are
scheduled for redemption within one year, and, in either case, the Company has
(a) deposited with the Trustee an amount sufficient to pay and discharge all
outstanding Notes on the date of their scheduled maturity or the scheduled date
of redemption and (b) paid all other sums then payable by the Company under the
Indenture.
Governing Law
The Indenture will provide that the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law.
Transfer and Exchange
A holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a holder, among other things, to
furnish appropriate
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endorsements and transfer documents and the Company may require a holder to pay
any taxes and fees required by law or permitted by the Indenture. The Company is
not required to transfer or exchange any Note selected for redemption or
repurchase. Also, the Company is not required to transfer or exchange any Note
for a period of 15 days before a selection of Notes to be redeemed.
The registered holder of a Note will be treated as the owner of it for all
purposes.
The Trustee
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. In case an Event of Default shall occur (and shall not
be cured) and holders of the Notes have notified the Trustee, the Trustee will
be required to exercise its powers with the degree of care and skill of a
prudent person in the conduct of such person's own affairs. Subject to such
provisions, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request of any of the holders of Notes, unless
they shall have offered to the Trustee security and indemnity satisfactory to
it.
The Indenture and the TIA will contain certain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received in respect of
any such claim as security or otherwise. Subject to the TIA, the Trustee will be
permitted to engage in other transactions, provided, however, that if it
acquires any conflicting interest (as described in the TIA), it must eliminate
such conflict or resign.
Certain Definitions
"Acquiring Person" means any person (as defined in Section 13(d)(3) of the
Exchange Act) who or which, together with all affiliates and associates (each as
defined in Rule 12b-2 under the Exchange Act), becomes the beneficial owner (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act and as further defined
below) of shares of Common Stock or other voting securities of the Company
having more than 50% of the total voting power of the Voting Stock of the
Company; provided, however, that an Acquiring Person shall not include (i) the
Company, (ii) any Subsidiary of the Company, (iii) any Permitted Holder, (iv) an
underwriter engaged in a firm commitment underwriting in connection with a
public offering of the Voting Stock of the Company or (v) any current or future
employee or director benefit plan of the Company or any Subsidiary of the
Company or any entity holding Common Stock of the Company for or pursuant to the
terms of any such plan. For purposes hereof, a person shall not be deemed to be
the beneficial owner of (A) any securities tendered pursuant to a tender or
exchange offer made by or on behalf of such person or any of such person's
affiliates until such tendered securities are accepted for purchase or exchange
thereunder, or (B) any securities if such beneficial ownership (1) arises solely
as a result of a revocable proxy delivered in response to a proxy or consent
solicitation made pursuant to the applicable
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rules and regulations under the Exchange Act, and (2) is not also then
reportable on Schedule 13D (or any successor schedule) under the Exchange Act.
"Capital Stock" of any person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such person, but excluding any debt
securities convertible into such equity.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Debt" means any particular Senior Debt if the instrument
creating or evidencing the same or the assumption or guarantee thereof (or
related agreements or documents to which the Company is a party) expressly
provides that such Indebtedness shall be "Designated Senior Debt" for purposes
of the Indenture (provided that such instrument, agreement or other document may
place limitations and conditions on the right of such Senior Debt to exercise
the rights of Designated Senior Debt).
"Event of Default" has the meaning set forth under "-- Events of Default
and Remedies" herein.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect from time to time.
"Indebtedness" means, with respect to any person, all obligations, whether
or not contingent, of such person (i) (a) for borrowed money (including, but not
limited to, any indebtedness secured by a security interest, mortgage or other
lien on the assets of the Company that is (1) given to secure all or part of the
purchase price of property subject thereto, whether given to the vendor of such
property or to another, or (2) existing on property at the time of acquisition
thereof), (b) evidenced by a note, debenture, bond or other written instrument,
(c) under a lease required to be capitalized on the balance sheet of the lessee
under GAAP or under any lease or related document (including a purchase
agreement) that provides that the Company is contractually obligated to purchase
or cause a third party to purchase and thereby guarantee a minimum residual
value of the lease property to the lessor and the obligations of the Company
under such lease or related document to purchase or to cause a third party to
purchase such leased property, (d) in respect of letters of credit, bank
guarantees or bankers' acceptances (including reimbursement obligations with
respect to any of the foregoing), (e) with respect to Indebtedness secured by a
mortgage, pledge, lien, encumbrance, charge or adverse claim affecting title or
resulting in an encumbrance to which the property or assets of such person are
subject, whether or not the obligation secured thereby shall have been assumed
by or shall otherwise be such person's
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legal liability, (f) in respect of the balance of deferred and unpaid purchase
price of any property or assets, (g) under interest rate or currency swap
agreements, cap, floor and collar agreements, spot and forward contracts and
similar agreements and arrangements; (ii) with respect to any obligation of
others of the type described in the preceding clause (i) or under clause (iii)
below assumed by or guaranteed in any manner by such person or in effect
guaranteed by such person through an agreement to purchase (including, without
limitation, "take or pay" and similar arrangements), contingent or otherwise
(and the obligations of such person under any such assumptions, guarantees or
other such arrangements); and (iii) any and all deferrals, renewals, extensions,
refinancings and refundings of, or amendments, modifications or supplements to,
any of the foregoing.
"Issue Date" means the date on which the Notes are first issued and
authenticated under the Indenture.
"Material Subsidiary" means any Subsidiary of the Company which at the date
of determination is a "significant subsidiary" as defined in Rule 1-02(w) of
Regulation S-X under the Securities Act and the Exchange Act.
"Maturity Date" means December __, 2008.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Holders" means Robert L. Praegitzer and his estates, spouses,
ancestors and lineal descendants (and spouses thereof), the legal
representatives of any of the foregoing, and the trustee of any bona fide trust
of which one or more of the foregoing are the sole beneficiaries or the
grantors, or any person of which any of the foregoing, individually or
collectively, beneficially own (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act) voting securities representing at least a majority of the total
voting power of all classes of Capital Stock of such person (exclusive of any
matters as to which class voting rights exist).
"Person" means any individual, corporation, partnership, joint venture,
trust, estate, unincorporated organization, limited liability company or
government or any agency or political subdivision thereof.
"Senior Debt" means the principal of, premium, if any, and interest on,
rent under, and any other amounts payable on or in or in respect of any
Indebtedness of the Company (including, without limitation, any Obligations in
respect of such Indebtedness and, in the case of Designated Senior Debt, any
interest accruing after the filing of a petition by or against the Company under
any bankruptcy law, whether or not allowed as a claim after such filing in any
proceeding under such bankruptcy law), whether outstanding on the date of the
Indenture or thereafter created, incurred, assumed, guaranteed or in effect
guaranteed by the
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Company (including all deferrals, renewals, extensions or refundings of, or
amendments, modifications or supplements to the foregoing); provided, however,
that Senior Debt does not include (v) Indebtedness evidenced by the Notes, (w)
any liability for federal, state, local or other taxes owed or owing by the
Company, (x) Indebtedness of the Company to any Subsidiary of the Company except
to the extent such Indebtedness is of a type described in clause (ii) of the
definition of Indebtedness, (y) trade payables of the Company for goods,
services or materials purchased in the ordinary course of business (other than,
to the extent they may otherwise constitute such trade payables, any obligations
of the type described in clause (ii) of the definition of Indebtedness), and (z)
any particular Indebtedness in which the instrument creating or evidencing the
same expressly provides that such Indebtedness shall not be senior in right of
payment to, or is pari passu with, or is subordinated or junior to, the Notes.
"Subsidiary" means, with respect to any person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of equity capital entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
person or one or more of the other Subsidiaries of that person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such person or a Subsidiary of such person or (b)
the only general partners of which are such person or of one or more
Subsidiaries of such person (or any combination thereof).
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock and 500,000 shares of Preferred Stock.
Common Stock
As of September 30, 1998, 12,807,442 shares of Common were outstanding.
Holders of Common Stock are entitled to receive dividends as may from time to
time be declared by the Board of Directors of the Company out of funds legally
available therefor. See "Dividend Policy." Holders of Common Stock are entitled
to one vote per share on all matters on which the holders of Common Stock are
entitled to vote and do not have any cumulative voting rights. Holders of Common
Stock have no preemptive, conversion, redemption or sinking fund rights. In the
event of a liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to share equally and ratably in the assets of the
Company, if any, remaining after the payment of all liabilities of the Company
and the liquidation preference of any outstanding class or series of Preferred
Stock. The outstanding shares of Common Stock are, and the shares of Common
Stock issued upon conversion of the Notes, if any, will be, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
are subject to any series of Preferred Stock that the Company may issue in the
future, as described below. The Company's Second Amended and Restated Articles
of Incorporation limit the personal liability of a director to the Company or
its shareholders for monetary damages for conduct as a director, except such
limitation does not apply to (i) any breach of the director's duty of loyalty to
the Company or its shareholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) any
unlawful distribution or (iv) any transaction from which the director derived an
improper personal benefit.
Preferred Stock
The Board of Directors has the authority to issue Preferred Stock in one or
more series and to fix the number of shares constituting any such series and the
preferences, limitations and relative rights, including dividend rights,
dividend rate, voting rights, terms of redemption, redemption price or prices,
conversion rights and liquidation preferences of the shares constituting any
series, without any further vote or action by the shareholders of the Company.
The issuance of Preferred Stock by the Board of Directors could adversely affect
the rights of holders of Common Stock.
The potential issuance of Preferred Stock may have the effect of delaying
or preventing a change in control of the Company, may discourage bids for the
Common Stock at a premium over the market price of the Common Stock and may
adversely affect the market price of, and the voting and other rights of the
holders of, Common Stock. There are no shares of Preferred Stock outstanding.
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Registration Rights
Certain holders of Common Stock are entitled to certain rights with respect
to the registration of these shares under the Securities Act. Under the terms of
agreements between the Company and these holders, if the Company proposes to
register any of its securities under the Securities Act for its own account or
for the account of other security holders, the holders are entitled to notice of
such registration and to include in such registration any shares of Common Stock
they own, subject to cutback limitations that may be imposed by the underwriter
of any underwritten public offering of the Common Stock. No holder of Common
Stock with these registration rights will participate in this offering.
Oregon Control Share and Business Combination Statutes
The Company is subject to the Oregon Control Share Act (the "Control Share
Act"). The Control Share Act generally provides that a person (the "Acquiror")
who acquires voting stock of an Oregon corporation in a transaction (other than
a transaction in which voting shares are acquired from the issuing public
corporation) that results in the Acquiror holding more than 20%, 331/3% or 50%
of the total voting power of the corporation (a "Control Share Acquisition")
cannot vote the shares it acquires in the Control Share Acquisition ("control
shares") unless voting rights are accorded to the control shares by (i) a
majority of each voting group entitled to vote and (ii) the holders of a
majority of the outstanding voting shares, excluding the control shares held by
the Acquiror and shares held by the Company's officers and inside directors. The
term "Acquiror" is broadly defined to include persons acting as a group.
The Acquiror may, but is not required to, submit to the Company a statement
setting forth certain information about the Acquiror and its plans with respect
to the Company. The statement may also request that the Company call a special
meeting of shareholders to determine whether voting rights will be accorded to
the control shares. If the Acquiror does not request a special meeting of
shareholders, the issue of voting rights of control shares will be considered at
the next annual or special meeting of shareholders. If the Acquiror's control
shares are accorded voting rights and represent a majority or more of all voting
power, shareholders who do not vote in favor of voting rights for the control
shares will have the right to receive the appraised "fair value" of their
shares, which may not be less than the highest price paid per share by the
Acquiror for the control shares.
The Company is also subject to certain provisions of the Oregon Business
Corporation Act that govern business combinations between corporations and
interested shareholders (the "Business Combination Act"). The Business
Combination Act generally provides that if a person or entity acquires 15% or
more of the outstanding voting stock of an Oregon corporation (an "Interested
Shareholder"), the corporation and the Interested Shareholder, or any affiliated
entity of the Interested Shareholder, may not engage in certain business
combination transactions for three years following the date the person became an
Interested Shareholder. Business combination transactions for this purpose
include (a) a merger or plan
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of share exchange, (b) any sale, lease, mortgage or other disposition of 10% or
more of the assets of the corporation and (c) certain transactions that result
in the issuance or transfer of capital stock of the corporation to the
Interested Shareholder. These restrictions do not apply if (i) the Interested
Shareholder, as a result of the transaction in which such person became an
Interested Shareholder, owns at least 85% of the outstanding voting stock of the
corporation (disregarding shares owned by directors who are also officers and
certain employee benefit plans), (ii) the board of directors approves the
business combination or the transaction that resulted in the shareholder
becoming an Interested Shareholder before the Interested Shareholder acquires
15% or more of the corporation's voting stock or (iii) the board of directors
and the holders of at least two-thirds of the outstanding voting stock of the
corporation (disregarding shares owned by the Interested Shareholder) approve
the business combination after the Interested Shareholder acquires 15% or more
of the corporation's voting stock.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C., Ridgefield Park, New Jersey.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following statements represent a general summary of certain U.S.
federal income tax consequences attributable to the conversion option of the
Notes. Moreover, the discussion deals only with Notes that are held as capital
assets and not held as part of a hedging transaction or a "straddle," nor with
special situations, such as those of dealers in securities, financial
institutions, life insurance companies, persons who mark-to-market their
securities, holders whose "functional currency" is not the U.S. dollar, holders
that own or are deemed to own 10 percent or more of the capital or profits
interest in the Company, or holders that are not "United States persons," as
defined in section 7701(a)(30) of the Internal Revenue Code of 1986, as amended
(the "Code"). In addition, the discussion does not describe any tax consequences
arising under the tax laws of any state, locality or foreign jurisdiction.
Furthermore, the discussion below is based upon the provisions of the Code and
regulations, rulings, and judicial decisions thereunder as of the date hereof,
and these authorities may be repealed, revoked or modified so as to result in
federal income tax consequences different from those discussed below. The
discussion below does not cover all possible tax consequences of purchase,
ownership or disposition of the Notes, and it is not intended as tax advice.
Prospective investors should contact their own tax advisers for specific advice
relative to their particular circumstances.
A holder of a Note will not recognize any income, gain or loss upon
conversion of a Note into Common Stock except to the extent Common Stock is
received in lieu of accrued interest or to the extent cash is received in lieu
of fractional shares of Common Stock. Except to the extent Common Stock is
received in lieu of accrued interest, the adjusted basis of shares of Common
Stock received on conversion will equal the adjusted basis of the Notes
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converted (reduced by the portion of adjusted basis allocated to any fractional
shares of Common Stock exchanged for cash), and the holding period of the Common
Stock received on conversion will include the period during which the converted
Notes were held by the holder. If any cash is received in lieu of fractional
shares, the holder will recognize gain or loss determined as if the holder had
received such fractional shares and immediately sold the shares for cash.
The conversion price applicable to the Notes is subject to adjustments in
certain circumstances. Under section 305 of the Code and the regulations
promulgated thereunder, a holder of a Note may be treated as having received a
constructive distribution, resulting in ordinary income to the extent of the
Company's current and accumulated earnings and profits, if, and to the extent
that, certain adjustments in the conversion price (such as adjustments to
compensate for taxable distributions on shares of Common Stock) increase the
proportionate interest of a holder of a Note in the assets or in the earnings
and profits of the Company. As such, in certain circumstances that may occur, an
adjustment in the conversion price may be treated as a taxable distribution to
holders of the Notes, without regard to whether the holders receive any cash or
other property, and without regard to whether the holders ever exercise
conversion rights.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") among the Company and each of the underwriters
named below (the "Underwriters"), for whom Advest, Inc. and Black & Company are
acting as representatives (the "Representatives"), the Company has agreed to
sell to each of the Underwriters and each of the Underwriters has severally
agreed to purchase from the Company the principal amount of the Notes set forth
opposite its name below:
Principal Amount
Underwriters of Notes
----------------
Advest, Inc...........................................
Black & Company, Inc..................................
----------------
Total............................................. $ 15,000,000
================
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the Notes listed above are subject to certain
conditions set forth therein. The Underwriters are committed to purchase all of
the Notes agreed to be purchased by the Underwriters pursuant to the
Underwriting Agreement (other than those covered by the over-allotment options
described below), if any Notes are purchased. In the event of default by any
Underwriter, the Underwriting Agreement provides that, in certain circumstances,
the purchase commitments of the non-defaulting Underwriters may be increased or
the Underwriting Agreement may be terminated.
The Representatives have advised the Company that the Underwriters propose
initially to offer such Notes to the public at the initial public offering price
thereof set forth on the cover page of this Prospectus, and to certain dealers
at such price less a concession not in excess of ___% of the principal amount of
such Notes. The relevant Underwriters may allow, and such dealers may reallow, a
discount not in excess of ___% of the principal amount of the Notes on sales to
certain other dealers. After the initial public offering of the Notes, the
public offering price and such concessions may be changed.
The Company has granted to the Underwriters an option to purchase up to an
additional $2,250,000 principal amount of the Notes at the applicable price to
the public less the applicable underwriting discount set forth on the cover page
of this Prospectus, solely to cover over-allotments, if any. Such option may be
exercised at any time up to 30 days after the date of this Prospectus. To the
extent such option is exercised, each of the Underwriters will become obligated,
subject to certain conditions, to purchase approximately the same
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percentage of such additional principal amount of Notes as the percentage it was
obligated to purchase pursuant to the Underwriting Agreement.
The Company has agreed with the Underwriters not to offer, pledge, sell,
contract to sell, or otherwise dispose of (or enter into any transaction which
is designed to, or could be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company), directly or
indirectly, or announce the offering of, any other shares of Common Stock or any
securities or options convertible into, or exchangeable or exercisable for,
shares of Common Stock (other than the Notes) for a period of 180 days following
the date hereof without the prior written consent of Advest, Inc., subject to
certain limited exceptions. In addition, each of the Company's officers,
directors and stockholders has agreed with the Underwriters not to offer, sell,
contract to sell, pledge or otherwise dispose of, or file a registration
statement with the Securities and Exchange Commission in respect of, or
establish or increase a put equivalent position or liquidate or decrease a call
equivalent position within the meaning of Section 16 of the Exchange Act with
respect to any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Common Stock, or publicly announce an
intention to effect any such transaction, for a period of 180 days after the
date hereof without the prior written consent of Advest, Inc., subject to
certain limited exceptions. Advest, Inc. currently does not intend to release
any securities subject to such lock-up agreements, but may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to such lock-up agreements.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities under the Securities Act, or
contribute to payments the Underwriters may be required to make in respect
thereof.
In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock or
the Notes. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
for or purchase Common Stock or Notes for the purpose of stabilizing their
market price. The Underwriters also may create a short position for the account
of the Underwriters by selling more Notes in connection with the offering than
they are committed to purchase from the Company, and in such case may purchase
Notes in the open market following completion of the offering to cover all or a
portion of such short position. The Underwriters may also cover all or a portion
of such short position, up to $2,250,000 principal amount of the Notes, by
exercising the Underwriters' over-allotment option referred to above. In
addition, the Representatives, on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters whereby it
may reclaim from an Underwriter (or dealer participating in the offering), for
the account of the other Underwriters, the selling concession with respect to
Notes that are distributed in the offering but subsequently purchased for the
account of the Underwriters in the open market.
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Any of the transactions described in this paragraph may result in the
maintenance of the price of the Common Stock and/or the Notes at a level above
that which might otherwise prevail in the open market. None of the transactions
described in this paragraph is required, and, if they are undertaken, they may
be discontinued at any time.
The Underwriters do not intend to confirm sales in the offering to any
accounts over which they exercise discretionary authority.
LEGAL MATTERS
The validity of the Notes will be passed upon for the Company by Stoel
Rives LLP, Portland, Oregon. Certain legal matters relating to the offering will
be passed upon for the Underwriters by Irell & Manella LLP, Los Angeles,
California.
EXPERTS
The financial statements of Praegitzer Industries, Inc. included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and are included in reliance upon such
report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of Praegitzer Asia Sdn. Bhd. included in this
Prospectus have been audited by Deloitte Touche Tohmatsu, independent auditors,
as stated in their report appearing herein, and are included in reliance upon
such report of such firm given upon their authority as experts in accounting and
auditing.
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INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report of Deloitte & Touche LLP...................... F-1
Consolidated Balance Sheets at September 30, 1998
(unaudited) and June 30, 1998 and 1997................................... F-2
Consolidated Statements of Operations for the three months
ended September 30, 1998 and 1997 (unaudited) and for the
years ended June 30, 1998, 1997 and 1996................................. F-3
Consolidated Statements of Cash Flows for the three months
ended September 30, 1998 and 1997 (unaudited) and for the
years ended June 30, 1998, 1997 and 1996................................. F-4
Consolidated Statements of Shareholders' Equity for the three
months ended September 30, 1998 and 1997 (unaudited) and
for the years ended June 30, 1998, 1997 and 1996......................... F-6
Notes to Consolidated Financial Statements................................. F-7
Independent Auditors' Report of Deloitte Touche Tohmatsu................... F-21
Balance Sheet at June 30, 1998............................................. F-22
Statement of Operations for the year ended June 30, 1998................... F-23
Statement of Shareholders' Equity for the year ended June 30, 1998......... F-24
Statement of Cash Flows for the year ended June 30, 1998................... F-25
Notes to Financial Statements.............................................. F-26
Pro Forma Statement of Operations for the year ended
June 30, 1998 (Unaudited)................................................ F-30
Notes to Pro Forma Combined Statements of Operations (Unaudited)........... F-31
86
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Praegitzer Industries, Inc.
We have audited the accompanying consolidated balance sheets of Praegitzer
Industries, Inc. and subsidiary as of June 30, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Praegitzer Industries, Inc. and
subsidiary as of June 30, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1998,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
September 4, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1998 AND SEPTEMBER 30, 1998
- ------------------------------------------------------------------------------------------------------------------------
June 30, September 30,
----------------------------------- ---------------
ASSETS 1997 1998 1998
--------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 441,950 $ 1,169,912 $ 305,357
Receivables, net of allowance for doubtful accounts of
$400,000 at June 30, 1997 and 1998 and September 30, 1998 24,452,506 28,562,209 33,018,920
Inventories (Note 5) 8,534,428 16,491,325 16,559,509
Prepaid expenses 454,304 2,438,844 6,818,620
Current deferred tax asset (Note 12) 628,532 474,175 559,175
--------------- --------------- ---------------
Total current assets 34,511,720 49,136,465 57,261,581
PROPERTY, PLANT, AND EQUIPMENT, Net (Note 6) 40,036,399 88,825,496 87,691,929
RESTRICTED CASH 162,903 - -
OTHER ASSETS (Note 7) 12,574,899 13,532,050 13,868,569
--------------- --------------- ---------------
TOTAL $ 87,285,921 $ 151,494,011 $ 158,822,079
=============== =============== ===============
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 2,041,554 $ 3,709,446 $ 2,325,712
Accounts payable 8,504,485 13,929,852 18,102,679
Accrued payroll and related benefits 2,878,913 3,955,300 5,180,875
Other current liabilities 491,610 1,851,425 2,324,362
Current portion of long-term obligations (Notes 9 and 10) 3,564,591 6,393,664 8,888,908
--------------- --------------- ---------------
Total current liabilities 17,481,153 29,839,687 36,822,536
LONG-TERM OBLIGATIONS, Net of current portion
(Notes 9 and 10) 29,784,885 73,413,472 72,270,836
DEFERRED TAX LIABILITY (Note 12) 2,306,426 4,197,481 4,702,481
DEFERRED GAIN 72,578 63,550 56,293
COMMITMENTS AND CONTINGENCIES (Note 10) - - -
SHAREHOLDERS' EQUITY:
Preferred stock; 500,000 shares authorized,
no shares issued and outstanding - - -
Common stock, 50,000,000 shares authorized and 12,434,518
shares issued and outstanding at June 30, 1997, 12,750,214
at June 30, 1998 and 12,807,442 at September 30, 1998 41,232,502 42,324,553 42,652,929
Accumulated other comprehensive earnings - - 68,310
Retained earnings (deficit) (3,591,623) 1,655,268 2,248,694
--------------- --------------- ---------------
Total shareholders' equity 37,640,879 43,979,821 44,969,933
--------------- --------------- ---------------
TOTAL $ 87,285,921 $ 151,494,011 $ 158,822,079
=============== =============== ===============
See notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND THREE MONTHS ENDED SEPTEMBER 1997 AND 1998
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
Year Ended June 30, September 30,
-------------------------------------------------- --------------------------------
1996 1997 1998 1997 1998
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE $ 95,101,170 $ 147,947,303 $ 182,773,158 $ 42,595,029 $ 55,395,921
COST OF GOODS SOLD 72,941,213 122,012,818 148,487,031 34,563,248 46,201,902
-------------- -------------- -------------- -------------- --------------
Gross profit 22,159,957 25,934,485 34,286,127 8,031,781 9,194,019
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSE 8,895,548 19,188,455 23,456,329 5,803,280 7,011,516
IMPAIRMENT AND IN-PROCESS
TECHNOLOGY EXPENSE
(Notes 4 and 8) - 11,650,000 - - -
-------------- -------------- -------------- -------------- --------------
INCOME (LOSS) FROM
OPERATIONS 13,264,409 (4,903,970) 10,829,798 2,228,501 2,182,503
Interest expense 1,798,914 2,295,140 3,757,236 725,603 1,466,874
Other income, net 301,642 568,412 224,125 97,811 207,797
-------------- -------------- -------------- -------------- --------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES 11,767,137 (6,630,698) 7,296,687 1,600,709 923,426
PROVISION FOR INCOME
TAXES (Note 12) 1,445,000 1,669,809 2,214,938 493,754 330,000
-------------- -------------- -------------- -------------- --------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS 10,322,137 (8,300,507) 5,081,749 1,106,955 593,426
DISCONTINUED OPERATIONS
(Note 11) (612,000) - - - -
-------------- -------------- -------------- -------------- --------------
NET INCOME (LOSS) $ 9,710,137 $ (8,300,507) $ 5,081,749 $ 1,106,955 $ 593,426
============== ============== ============== ============== ==============
PRO FORMA NET INCOME DATA
(Note 12) (Unaudited):
Income from continuing operations
before income taxes, as reported $ 11,767,137
Pro forma provision for income taxes (4,472,000)
Discontinued operations, as reported (612,000)
Pro forma tax benefit of
discontinued operations 233,000
--------------
Pro forma net income $ 6,916,137
==============
NET INCOME (LOSS) PER SHARE,
BASIC AND DILUTED (Note 3)
(1996 Pro Forma unaudited) from:
Continuing operations $ 0.80 $ (0.68) $ 0.40 $ 0.09 $ 0.05
Discontinued operations (0.04) - - - -
-------------- -------------- -------------- -------------- --------------
NET INCOME (LOSS) PER SHARE,
BASIC AND DILUTED $ 0.76 $ (0.68) $ 0.40 $ 0.09 $ 0.05
============== ============== ============== ============== ==============
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND THREE MONTHS ENDED SEPTEMBER 1997 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
Year Ended June 30, September 30,
---------------------------------------- ---------------------------
1996 1997 1998 1997 1998
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited)
Net income (loss) $ 9,710,137 $ (8,300,507) $ 5,081,749 $ 1,106,955 $ 593,426
Minority interest loss - - - - (256,033)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 4,911,279 7,376,595 8,902,708 2,058,999 3,292,658
Loss (gain) on sale of fixed assets (111,730) (564,858) (53,445) 329,869 67,715
Deferred taxes 502,000 474,325 2,045,421 47,170 420,000
Provision for doubtful accounts 292,354 135,000 - - -
Impairment and in-process technology expense - 11,650,000 - - -
Loss on discontinued operations 612,000 - - - -
Changes in operating assets and liabilities:
Receivables (3,361,233) (8,474,182) (3,186,023) 1,186,540 (4,456,710)
Inventory (688,624) (1,366,761) (6,475,384) (1,076,918) (68,184)
Accounts payable (2,684,743) 1,301,094 4,479,382 (1,664,817) 4,172,827
Income taxes payable 943,000 (980,835) (1,892,929) 153,016 (102,769)
Accrued payroll and related benefits 288,645 345,317 1,074,422 132,153 1,225,575
Other current liabilities (1,336,809) 214,561 453,904 (51,016) 225,287
Other current assets (132,935) (90,912) (77,262) 183,596 (533,262)
------------ ------------ ------------ ------------ ------------
Net cash provided by operating activities 8,943,341 1,718,837 10,352,543 2,405,547 4,580,530
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (7,525,631) (24,760,670) (39,334,464) (4,352,399) (10,650,853)
Additions to other assets - (121,502) (746,927) (190,395) (153,012)
Proceeds from sale of property, plant, and equipment 217,955 11,187,029 4,244,785 - 4,968,900
Acquisitions, net of cash acquired (2,000,000) (5,375,122) (19,170,255) - -
Net reductions in amounts due from
related parties and shareholders (2,594,714) - - - -
Change in restricted cash (2,331) 143,053 162,903 - -
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (11,904,721) (18,927,212) (54,843,958) (4,542,794) (5,834,965)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net additions to (reductions in) short-term borrowings (5,199,771) 11,463,066 25,063,359 751,181 2,488,983
Borrowing of long-term debt 3,880,409 21,814,498 21,300,000 - 263,158
Payments on long-term debt (7,713,451) (16,386,981) (3,261,600) (764,074) (1,087,656)
Proceeds from initial public offering, net of expenses 19,340,185 - - - -
Issuances of common stock under employee stock plans - 307,964 1,091,051 254,910 328,376
Dividends paid (6,783,635) - - - -
Payments on capital leases (108,460) (636,884) (641,325) (202,124) (183,732)
Increase (decrease) in bank overdrafts (438,270) 1,049,975 1,667,892 2,013,378 (1,383,734)
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 2,977,007 17,611,638 45,219,377 2,053,271 425,395
------------ ------------ ------------ ------------ ------------
Effect of foreign currency - - - - (35,515)
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 15,627 $ 403,263 $ 727,962 $ (83,976) $ (864,555)
(Continued)
F-4
<PAGE>
PRAEGITZER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND THREE MONTHS ENDED SEPTEMBER 1997 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
Year Ended June 30, September 30,
---------------------------------------- ---------------------------
1996 1997 1998 1997 1998
(unaudited)
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 15,627 $ 403,263 $ 727,962 $ (83,976) $ (864,555)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 23,060 38,687 441,950 441,950 1,169,912
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 38,687 $ 441,950 $ 1,169,912 $ 357,974 $ 305,357
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION -
Cash paid during the period for interest $ 1,789,375 $ 1,915,515 $ 3,734,173 $ 762,845 $ 1,813,813
Cash paid during the period for income taxes, net - $ 2,165,392 $ 2,062,324 $ 294,861 $ 12,831
NONCASH INVESTING AND FINANCING ACTIVITIES:
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 amount due from shareholder.
See notes to consolidated financial statements.
(Concluded)
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1997, AND 1998
AND THREE MONTHS ENDED SEPTEMBER 30, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Accumulated
---------------------------- Retained Other
Number Earnings Comprehensive
of Shares Amount (Deficit) Income Total
<S> <C> <C> <C> <C> <C>
BALANCES, JUNE 30, 1995 8,086,875 $ 4,308,916 $ 1,389,703 - $ 5,698,619
Stock issued in connection with acquisitions 700,000 7,143,714 - - 7,143,714
Initial public offering, net of expenses 2,275,000 19,340,185 - - 19,340,185
Dividends - (468,087) (6,783,635) - (7,251,722)
Net income June 30, 1996 - (392,679) 10,102,816 - 9,710,137
----------- ----------- ----------- --------- -----------
BALANCES, JUNE 30, 1996 11,061,875 29,932,049 4,708,884 - 34,640,933
Stock issued in connection with acquisitions 1,330,000 10,992,489 - - 10,992,489
Proceeds from exercise of Incentive Stock Options 12,000 114,000 - - 114,000
Proceeds from issuance under the ESPP 30,643 193,964 - - 193,964
Net loss June 30, 1997 - - (8,300,507) - (8,300,507)
----------- ----------- ----------- --------- -----------
BALANCES, JUNE 30, 1997 12,434,518 41,232,502 (3,591,623) - 37,640,879
Stock issued in connection with acquisitions 200,000 1,000 165,142 - 166,142
Proceeds from exercise of Incentive Stock Options 54,048 499,738 - - 499,738
Proceeds from issuance under the ESPP 61,648 591,313 - - 591,313
Net income June 30, 1998 - - 5,081,749 - 5,081,749
----------- ----------- ----------- --------- -----------
BALANCES, JUNE 30,1998 12,750,214 42,324,553 1,655,268 - 43,979,821
Proceeds from issuance under the ESPP (unaudited) 57,228 328,376 - - 328,376
Cummulative Effect of Currency Adjustements (unaudited) - 68,310 68,310
Net income September 30, 1998 (unaudited) - - 593,426 - 593,426
----------- ----------- ----------- --------- -----------
BALANCES, SEPTMBER 30,1998 (unaudited) 12,807,442 $42,652,929 $ 2,248,694 $ 68,310 $44,969,933
=========== =========== =========== ========= ===========
</TABLE>
F-6
<PAGE>
PRAEGITZER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998 AND
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (unaudited)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Praegitzer Industries, Inc. (the "Company" or
"Praegitzer") is incorporated under the laws of the State of Oregon, and
its principal business is the design, manufacture and sale of electronic
circuit boards.
Principles of Consolidation - The accompanying financial statements include
the accounts of the Company and its majority owned subsidiary, since its
acquisition on April 3, 1998. All significant intercompany transactions and
balances have been eliminated.
Quarterly Financial Statements - In the opinion of management, the
accompanying unaudited condensed consolidated financial statements of
Praegitzer Industries, Inc. contain all adjustments necessary to present
fairly the financial position of the Company as of September 30, 1998, and
the results of operations and cash flows for the three months ended
September 30, 1998 and 1997. The results of operations for the three months
ended September 30, 1998 are not necessarily indicative of the results
expected for the entire fiscal year ending June 30, 1999.
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.
Revenue Recognition - Revenue is recognized when goods are shipped to the
customer.
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
Cash and Cash Equivalents includes all cash and short-term debt
instruments, purchased with an original maturity of three months or less.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
trade accounts receivable. The risk is limited due to the fact that the
Company's trade accounts receivable are derived from sales in various
geographic areas to numerous companies varying in size within the
electronics industry. Additionally, the Company performs ongoing credit
evaluations of its customers' financial condition and generally does not
require collateral, such as letters of credit or security agreements.
Credit losses have consistently been within management's expectations.
Property, Plant, and Equipment - Depreciation of property and equipment is
provided on the straight-line method based on the estimated useful lives of
the individual assets, primarily 3 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 over the terms of the loans.
Goodwill - The Company amortizes costs in excess of fair value of net
assets of businesses acquired using the straight-line method over a period
of fifteen years. Management reviews, on an ongoing basis, the continuing
appropriateness of the remaining amortizable life and the net realizable
value of the unamortized balance.
F-7
<PAGE>
Asset Impairments - Long-lived assets to be held and used by the Company
are reviewed for impairment when events and circumstances indicate costs
may not be recoverable. Losses are recognized when the book values exceed
expected undiscounted future cash flows. If impairment exists, the asset's
book value is written down to its estimated fair value. Assets to be
disposed are written down to their fair value, less sales costs. See Note 8
for a discussion of a charge in 1997 related to impairment of goodwill.
Derivative Financial Instruments - The Company has only limited involvement
with derivative financial instruments. See note 9 for a discussion of the
Company's derivative instruments as of June 30, 1998.
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 ("SFAS") 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.
Future Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The new standard becomes effective for the
Company's fiscal year ending June 30, 1999. Adoption of this statement may
result in additional disclosures but will have no material impact on the
Company's results of operations or financial position.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The new statement will require
recognition of all derivatives as either assets or liabilities on the
balance sheet at fair value. The new statement becomes effective for the
first quarter of fiscal year ending June 30, 2000. Management has not
completed an evaluation of the effects this standard will have on the
Company's financial position or results of operations.
Reclassifications - Certain amounts from the prior year's financial
statements have been reclassified to be consistent with the current year
presentation.
2. COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, as of
the first quarter of fiscal year 1999. SFAS No. 130 establishes new rules
for the reporting of comprehensive income and its components, but has no
impact on the Company's net earnings or total shareholders' equity.
F-8
<PAGE>
Comprehensive income and its components, net of tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
1996 1997 1998 1997 1998
------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss) $ 9,710,137 $ (8,300,507) $ 5,081,749 $ 1,106,955 $ 593,426
Other comprehensive income:
Currency translation adjustment 68,310
------------ ------------ ------------ ------------ ------------
Total comprehensive income (loss) $ 9,710,137 $ (8,300,507) $ 5,081,749 $ 1,106,955 $ 661,736
============ ============ ============ ============ ============
</TABLE>
3. EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, Earnings per Share, which
specifies new standards for computing and disclosing earnings per share and
is effective for periods ending after December 15, 1997. The Company has
adopted this standard and has restated its earnings per share ("EPS") for
prior periods presented. The basic EPS has been computed by dividing net
income by the weighted average number of shares outstanding during each
period. Diluted EPS has been computed by dividing net income by the
weighted average common and common equivalent shares outstanding during
each period using the treasury stock method, if the common equivalent
shares were not anti-dilutive. The difference between the basic and diluted
weighted average shares is due to common stock equivalent shares resulting
from outstanding stock options and warrants. Net income for the calculation
of both basic and diluted EPS is the same for all periods presented. The
calculation of the weighted average outstanding shares is as follows:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
1996 1997 1998 1997 1998
------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Weighted average shares outstanding-basic 9,070,209 12,233,769 12,694,039 12,647,553 12,778,828
Common stock options and warrants 40,024 - 151,757 283,148 17,695
------------ ------------ ------------ ------------ ------------
Weighted average shares outstanding-diluted 9,110,233 12,233,769 12,845,796 12,930,701 12,796,523
------------ ------------ ------------ ------------ ------------
</TABLE>
4. ACQUISITIONS
Effective April 13, 1998, the Company acquired 51% of the outstanding
capital stock of Likom PCB Sdn Bhd ("Likom"), a printed circuit board
manufacturer located in Malaysia. The purchase price was up to 5.2 million
Ringgit, $1,432,000 based on the currency exchange rate on April 27, 1998,
which consisted of the transfer and contribution to Likom of third-party
software license rights, machinery and equipment currently owned or
purchased by the Company and cash.
The acquisition of Likom has been accounted for using the purchase method
of accounting. The operating results from the date of purchase have been
consolidated in the Company's financial statements. No goodwill was
recognized related to this acquisition.
F-9
<PAGE>
On March 31, 1998, the Company acquired a printed circuit board fabrication
facility located in Huntsville, Alabama from Intergraph Corporation
("Intergraph"). The acquisition consisted of land, building, equipment and
inventory. The purchase price for the assets was $15.95 million, which was
paid in cash.
The acquisition was accounted for under the purchase method of accounting
and, accordingly, the operating results of Intergraph from the date of
purchase are included in the Company's financial statements. The estimated
fair market value of assets approximate the fair market value of the
liabilities and, accordingly, no goodwill was recognized.
On August 28, 1996, the Company acquired Trend Circuits, Inc. ("Trend"), a
circuit board manufacturing company. The acquisition was accomplished by a
merger of Trend with and into Praegitzer. The purchase price included
$5,000,000 of cash and 1,000,000 shares of Praegitzer's common stock valued
at $10.65 per share.
The acquisition was accounted for under the purchase method of accounting
and, accordingly, the operating results of Trend from the date of purchase
are included in the Company's financial statements. The estimated fair
market value of assets and liabilities acquired was approximately
$9,600,000 and $11,900,000, respectively. The Company incurred a one-time
charge of $8,000,000 related to a portion of the purchase price allocated
to in-process technology which was expensed at the closing of the
transaction. The remaining excess of the aggregate purchase price over the
fair market value of the net assets acquired of $9,900,000 was recognized
as goodwill and is being amortized over fifteen years.
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 fifteen years. During the year ended June 30, 1997 the
Company recorded an impairment of goodwill related to CTI of $3,650,000
(See Note 8). The remaining goodwill is being amortized over the remaining
life of 15 years.
The following unaudited pro forma results of operations assume the
acquisitions occurred on July 1, 1996:
Year Ended June 30,
-----------------------------------
1997 1998
Revenue $ 172,511,303 $ 197,332,158
Net income (loss) $ (2,761,507) $ 2,630,749
Net income (loss) per share (0.23) 0.21
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the Likom, Intergraph, CTI
and Trend acquisitions been consummated as of July 1, 1996 nor is it
necessarily indicative of future operating results.
F-10
<PAGE>
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
which resulted in a restatement of prior years financial statements.
In addition, the Company acquired several other companies during the last
three years, which were not significant to its financial position, results
of operations or cash flows. During the year ended June 30, 1998, one
acquisition was accounted for as a pooling of interest; however, prior
period financial statements were not restated because the retroactive
effect was not material. During the year ended June 30, 1997, two
acquisitions were accounted for as pooling of interests; however, prior
period financial statements were not restated because the retroactive
effect was not material. All other acquisitions were accounted for using
the purchase method. Under the purchase method, the results of operations
of acquired companies are included prospectively from the date of
acquisition, and the acquisition cost is allocated to the acquirees' assets
and liabilities based upon their fair market values at the date of the
acquisition. To accomplish the mergers a total of 330,000 and 200,000
shares were issued during the years ended June 30, 1997 and 1998,
respectively.
At June 30, 1997 and 1998 and September 30, 1998 (unaudited), the net book
value of goodwill associated with acquisitions was $12,414,228, $11,486,072
and $11,264,144, respectively, and is being amortized on a straight-line
basis over 15 years.
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1997 1998 1998
(unaudited)
<S> <C> <C> <C>
Raw materials and supplies $ 3,117,427 $ 6,430,638 $ 6,378,513
Work-in-process 5,417,001 10,060,687 10,180,996
------------ ------------ ------------
Total inventories $ 8, 534,428 $ 16,491,325 $ 16,559,509
============ ============ ============
</TABLE>
F-11
<PAGE>
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Useful
Life June 30, September 30,
(Years) 1997 1998 1998
(unaudited)
<S> <C> <C> <C> <C>
Land - $ 3,302,576 $ 1,468,212 $ 1,870,008
Buildings and leasehold improvements 10 to 31 14,453,908 21,899,123 24,702,024
Equipment 3 to 10 42,770,430 83,949,892 84,372,221
Office furniture and fixtures 5 to 7 660,388 1,086,121 1,281,859
Projects in process - 1,669,207 10,670,668 13,505,575
Deposits on equipment - 2,962,150 5,726,843 851,087
------------ ------------ ------------
65,818,659 124,800,859 126,582,774
Accumulated depreciation and amortization (25,782,260) (35,975,363) (38,890,845)
------------ ------------ ------------
Property, plant and equipment $ 40,036,399 $ 88,825,496 $ 87,691,929
============ ============ ============
</TABLE>
At June 30, 1997 and 1998 and September 30, 1998 (unaudited), the Company
had equipment of $3,678,970, $2,535,381 and $2,535,381, respectively,
financed with capital leases. The total accumulated amortization at June
30, 1997 and 1998 and September 30, 1998 (unaudited) was $617,499, $946,712
and $1,113,624, respectively.
7. OTHER ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
1997 1998 1998
(unaudited)
<S> <C> <C> <C>
Goodwill $ 12,414,228 $ 11,486,072 $ 11,264,144
Other 160,671 2,045,978 2,604,425
------------ ------------ ------------
Total other assets $ 12,574,899 $ 13,532,050 $ 13,868,569
============ ============ ============
</TABLE>
Other assets are presented net of related accumulated amortization of
$2,296,946, $3,302,606 and $3,574,523, at June 30, 1997 and 1998 and
September 30, 1998 (unaudited), respectively.
8. IMPAIRMENT OF GOODWILL
During the year ended June 30, 1997 the Company recorded an impairment of
$3,650,000 of certain goodwill associated with the CTI acquisition. The
impairment was due to the inability of the CTI operation (now Redmond
Division), which was purchased to serve as the Company's quick-turn
operation, to move its product mix from 75% production 25%
quick-turnaround. Further, it was anticipated that turning Redmond's
operation into a quick-turnaround operation would be very costly in
F-12
<PAGE>
both time and cash flow. Recognizing the problem, the Company acquired
Trend (now Fremont Division), an operation that is 80% to 90%
quick-turnaround. The Company plans to utilize the Fremont Division for the
majority of its quick-turnaround requirements. This resulted in an
impairment of goodwill related to the CTI acquisition.
In determining the amount of the impairment charge, the Company developed
estimates of operating cash flows over the remaining business life cycle.
Future cash flows, excluding interest charges, were discounted using an
estimated 8% incremental borrowing rate.
9. LONG-TERM NOTES PAYABLE
<TABLE>
<CAPTION>
June 30, September 30,
1997 1998 1998
(unaudited)
<S> <C> <C> <C>
Line of credit of $40,000,000 payable to Key Bank, 8.5% at June 30, 1998,
collateralized by inventory and accounts receivable, expires March 31, 2000 $ 12,447,658 $ 37,511,017 $ 40,000,000
Note payable to Heller Financial, Inc., 9.9375% at June 30, 1998 payable in
monthly installments of $180,952 beginning February 1,1999 plus accrued
interest at LIBOR plus 4.25% collaterialized by real property and equipment
at the Huntsville, Alabama facility, $6.1 million due April 1, 2003 - 15,200,000 15,200,000
Note payable to Heller Financial, Inc., 8.4375% at June 30, 1998 payable in
monthly installments of $111,111 plus accrued interest at LIBOR plus 2.75%,
collaterialized by real property and equipment at the Dallas, Oregon
facility due November 1, 2004 10,000,000 8,666,667 8,333,333
Notes payable to Heller Financial, Inc., 7.8% to 7.9%, due in monthly
installments of $94,697 including interest, collateralized by machinery and
equipment due January 1, 2005 and April 1, 2005 - 5,864,824 5,695,081
Note payable to Heller Financial, Inc., 8.2375% at June 30, 1998 payable in
monthly installments of $55,555 plus accrued interest at LIBOR plus 2.55%,
collateralized by real property and equipment at the White City, Oregon
facility, due February 1, 2004 4,500,000 3,833,333 3,666,667
Note payable to Finova Capital Corporation, 9.93%, payable in 35 monthly
installments plus accrued interest, through August 1, 1999, $2.2 million
due September 1, 1999 3,995,278 3,251,862 3,037,140
Shareholder loan payable to Rubitasi Holding Company, 0%, at June 30, 1998
payable in 36 monthly installments plus accrued interest at the Maybank rate,
interest begins to accrue on November 12, 1998 at which time the first
payment is due. - 1,763,224 1,842,105
Other notes payable, 0% to 10% at June 30, 1998 305,779 977,004 1,250,243
------------- ------------- -------------
Subtotal 31,248,715 77,067,931 79,024,569
Current portion (2,917,466) (4,874,852) (7,577,865)
------------- ------------- -------------
Total long-term notes payable $ 28,331,249 $ 72,193,079 $ 71,446,704
============= ============= =============
</TABLE>
To reduce the risk of fluctuations in interest rates the Company entered
into an interest rate swap agreement with Key Bank during the year ended
June 30, 1997. The swap has a notional amount of $5 million and effectively
changes the Company's interest rate exposure on the Key Bank lease line
from a variable rate to a 6.10% fixed rate. This agreement matures in 2003.
F-13
<PAGE>
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, including an asset to liabilities
ratio of 1.1 to 1, an earnings before interest, taxes, depreciation,
amortization ("EBITDA") plus rents to interest expense plus rents of 2.5 to
1, and an EBITDA to borrowed funds ratio of 3.5 to 1. At June 30, 1998 the
Company was in violation of a covenant relating ot the ratio of EBITDA to
borrowed funds. The Company obtained a waiver from the lender and was in
compliance with all other covenants at June 30, 1995. At September 30, 1998
the Company was in compliance with all debt covenants.
Maturities on the notes payable as of June 30, 1998 were as follows:
Year Ending June 30,
-----------------------------------------------------------
1999 4,874,852
2000 45,454,708
2001 5,589,016
2002 5,254,857
2003 10,738,420
Thereafter 5,156,078
------------
Total $ 77,067,931
============
10. COMMITMENTS AND CONTINGENCIES
Capital Leases
The Company has acquired certain equipment under capital lease obligations
bearing interest rates ranging from 9.25% to 13.69% and monthly
installments totaling $68,136 including interest at June 30, 1997 and
interest rates ranging from 9.25% to 31.03% and monthly installments
totaling $143,591 including interest at June 30, 1998 and September 30,
1998 (unaudited).
Operating Leases
Praegitzer leases buildings and equipment under operating lease agreements
that expire at various times through 2004.
The following table is a schedule of future minimum principal payments
under capital leases and future minimum rentals under operating lease
agreements at June 30, 1998:
F-14
<PAGE>
Capital Operating
Year Ending June 30, Leases Leases
----------------------------------------------------------------------
1999 1,518,812 4,656,795
2000 1,051,225 3,248,599
2001 148,807 2,505,892
2002 15,282 2,405,742
2003 5,079 1,304,314
Thereafter - 450,765
----------- -----------
Total $ 2,739,205 $14,572,107
=========== ===========
Several of Praegitzer's operating leases contain renewal options. Rent
expense relating to the building and equipment leases totaled $796,642,
$3,834,948, and $5,781,332, for the years ended June 30, 1996, 1997, and
1998 respectively; and $1,552,606 and $1,772,410 for the three months ended
September 30, 1997 and 1998 (unaudited), respectively.
The Company is involved as a defendant in litigation in the ordinary course
of business, the outcome of which can not be predicted with certainty.
Management believes that any ultimate liability with respect to such
litigation will not materially affect the financial position, results of
operations or cash flows of the Company.
11. 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.
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 during the year ended June 30, 1996.
12. INCOME TAXES
The following information reflects income taxes on the Company's earnings
from April 4, 1996 the date of the closing of the Company's initial
offering of common stock to the public, to June 30, 1996 and the years
ended June 30, 1997 and 1998 and for the three months and September 30,
1997 and 1998. The Company terminated its S corporation election on April
4, 1996 and is now taxed as a C corporation. The following information also
includes unaudited pro forma information as if the Company's earnings from
continuing operations had been subject to federal and state income taxes as
a C corporation for all periods presented.
F-15
<PAGE>
<TABLE>
<CAPTION>
Three Months
Pro Forma Year Ended Period April 4, 1996- Year ended June 30, Ended September 30,
June 30, 1996 June 30, 1996 1997 1998 1997 1998
------------- -------------------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Current:
Federal $ 4,278,000 $ 891,000 $ 1,126,752 $ 475,382 $ 435,444 $ 35,000
State 742,000 52,000 68,732 (305,865) 11,140 (125,000)
----------- ----------- ----------- ----------- ----------- -----------
5,020,000 943,000 1,195,484 169,517 446,584 (90,000)
Deferred:
Federal (595,000) 466,000 425,676 1,976,712 30,660 340,000
State 47,000 36,000 48,649 68,709 16,510 80,000
----------- ----------- ----------- ----------- ----------- -----------
(548,000) 502,000 474,325 2,045,421 47,170 420,000
----------- ----------- ----------- ----------- ----------- -----------
$ 4,472,000 $ 1,445,000 $ 1,669,809 $ 2,214,938 $ 493,754 $ 330,000
=========== =========== =========== =========== =========== ===========
</TABLE>
The income tax provision on earnings from continuing operations subsequent
to the date of the Offering which are subject to income taxes and the pro
forma 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>
Proforma Three Months
Year Ended April 4, 1996- Year Ended June 30, Ended September 30,
June 30, 1996 June 30, 1996 1997 1998 1997 1998
------------- ------------- ------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes at the
statutory rate $ 4,118,000 $ 1,402,000 $ (2,320,744) $ 2,480,870 $ 560,249 $ 322,350
State income tax, net of 323,000 67,000 (265,228) 364,834 64,028 36,840
federal benefit
Tax credits utilized (171,000) (23,000) (626,778) (1,097,843) (317,600) (140,000)
Goodwill - - 4,856,150 360,296 174,720 87,750
Other 202,000 (1,000) 26,409 106,781 12,357 23,060
------------ ------------- ------------- ------------- ------------- -------------
$ 4,472,000 $ 1,445,000 $ 1,669,809 $ 2,214,938 $ 493,754 $ 330,000
============ ============= ============= ============= ============= =============
</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 significant items comprising the Company's net deferred tax liability
are as follows:
<TABLE>
<CAPTION>
June 30, September 30,
1997 1998 1998
------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
Reserves and other liabilities $ 415,777 $ 217,527 $ 213,257
Other 268,986 321,733 320,070
Property, plant, and equipment (2,362,657) (4,262,566) (4,676,633)
------------- ------------- -------------
$ (1,677,894) $ (3,723,306) $ (4,143,306)
============= ============= =============
</TABLE>
Net deferred tax assets and liabilities are included in the following
balance sheet accounts at June 30, 1997 and 1998 and September 30, 1998:
F-16
<PAGE>
<TABLE>
<CAPTION>
June 30, September 30,
1997 1998 1998
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Current deferred asset $ 628,532 $ 474,175 $ 559,175
Deferred tax liability (2,306,426) (4,197,481) (4,702,481)
------------ ------------ ------------
Net deferred tax liability $ (1,677,894) $ (3,723,306) $ (4,143,306)
============ ============ ============
</TABLE>
13. MAJOR CUSTOMERS
During the three-month period ended September 30, 1997 and 1998 (unaudited)
and for the year ended June 30, 1998 the Company had no customers that
represented more than 10% of total revenue. For the year ended June 30,
1997 the Company recognized 12% of total revenue from one customer. For the
year ended June 30, 1996 the Company recognized 23% of total revenue from
two customers.
14. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan that covers all employees and permits
discretionary contributions by the participants. The Company has
contributed $251,188, $132,588 and $318,938, to the plan for the years
ended June 30, 1996, 1997 and 1998. During the three-month period ended
September 30, 1997 and 1998 (unaudited) the Company made no contributions
to the plan.
15. STOCK INCENTIVE PLAN AND STOCK WARRANTS
Under the Company's Stock Incentive Plan, the Board of Directors may grant
incentive and non-qualified options, stock bonuses, restricted stock, stock
appreciation rights, and cash bonus rights to employees and directors to
purchase up to 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.
Under the Stock Incentive Plan, the option price is equal to fair market
value at the grant date. Options currently expire no later than ten years
from the grant date and generally vest after four years.
The following table summarizes the stock option activity under the
Company's option plan:
F-17
<PAGE>
<TABLE>
<CAPTION>
Weighted
average
Number exercise
of shares price
---------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding at June 30, 1995 -
Granted 667,000 $ 9.56
----------
Options outstanding at June 30, 1996 667,000 9.56
Granted 499,563 9.84
Canceled (68,800) 9.51
Exercised (12,000) 9.50
----------
Options outstanding at June 30, 1997 1,085,763 9.80
Granted 383,457 10.75
Canceled (222,318) 9.95
Exercised (17,382) 9.57
----------
Options outstanding at June 30, 1998 1,229,520 $ 10.03
==========
Granted (unaudited) 177,000 7.28
Canceled (unaudited) - -
Exercised (unaudited) - -
----------
Options outstanding at September 30, 1998 (unaudited) 1,406,520 $ 9.68
==========
Options exercisable at:
June 30, 1996 - -
June 30, 1997 130,357 $ 9.69
June 30, 1998 310,744 $ 9.65
September 30, 1998 (unaudited) 408,143 $ 9.83
</TABLE>
The range of exercise prices for options outstanding at June 30, 1997 and
1998 was $8.375-$13.50. The range of exercise prices for options
outstanding at September 30, 1998 (unaudited) was $5.813-$13.50. Options
available for grant at September 30, 1998 (unaudited) totaled 64,098.
The Company has elected to account for its stock based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees;" however, as required by SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company has computed for pro forma
disclosure purposes the value of options granted during the years ended
June 30, 1996, 1997 and 1998 and during the three months ended September
30, 1997 and 1998 (unaudited) using the Black-Scholes option pricing model.
The weighted average assumptions used for stock option grants in during the
years ended June 30, 1996, 1997 and 1998 and during the three months ended
September 30, 1997 and 1998 (unaudited) were a risk free interest rate of
6.19%, 6.44%, 5.48%, 6.44% and 5.48%, respectively, no expected dividend
yield, an expected life of 6.5 years, 6 years, 4.8 years, 6 years and 4.8
years, respectively, and an expected volatility of 52%, 44%, 55%, 44% and
55%, respectively. The weighted average estimated fair value of employee
stock options granted during the years ended June 30, 1996, 1997 and 1998
and during the three months ended September 30, 1997 and 1998 (unaudited)
was $5.67, $5.13, $5.49, $5.43 and $5.34 per share, respectively.
F-18
<PAGE>
If the Company had accounted for the plan in accordance with SFAS No. 123,
the Company's net income and pro forma net income per share would have been
reported as follows:
<TABLE>
<CAPTION>
Three months ended
Year ended June 30, September 30,
------------------------------------------- --------------------------
1996 1997 1998 1997 1998
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss) as reported, 1996 pro forma $ 6,916,137 $ (8,300,507) $ 5,081,749 $ 1,106,955 $ 593,426
Pro forma net income (loss) $ 6,512,685 $ (8,992,908) $ 4,386,882 $ 952,767 $ 388,566
Pro forma diluted net income (loss) per share $ 0.71 $ (0.74) $ 0.34 $ 0.07 $ 0.03
</TABLE>
The effects of applying SFAS No. 123 for providing pro forma disclosures
for the years ended June 30, 1996, 1997 and 1998 and the three months ended
September 30, 1997 and 1998 are not likely to be representative of the
effects on reported net income and earnings per share for future years
since options vest over several years and additional awards are made each
year.
The Company has an Employee Stock Purchase Plan ("ESPP"). Under the ESPP
employees may purchase shares of the Company's common stock at 85% of fair
market value at specific, predetermined dates. There are 200,000 authorized
to be issued under the ESPP.
In connection of the acquisition of CTI (see Note 4), 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 September 30, 1998, no shares had been purchased under
the stock warrants.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of long-term debt has been estimated by discounting
projected future cash flows, using current rate at which similar loans
would be made to borrowers with similar credit ratings and for the same
maturities. Current maturities of long-term debt were included and capital
lease obligations were excluded. The fair value of the Company's long-term
debt is estimated to be $31,944,045, or 102.2% of the carrying value of
$31,248,714 at June 30, 1997, $77,182,424, or 100.1% of the carrying value
of $77,067,931 at June 30, 1998 and $79,109,957, or 100.1% of the carrying
value of $79,024,569 at September 30, 1998 (unaudited). The fair value of
the Key Bank interest rate swap is estimated to be the settlement amount.
The could settle the swap at a loss of $24,000, $23,000, and $31,000 at
June 30, 1997 and 1998 and September 30, 1998 (unaudited), respectively.
17. 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 the cash flows of the Company for the periods represented,
with the exception of the one-time charges reported in the quarter ended
September 30, 1996, see further discussion in Notes 4 and 8 (in thousands,
except per share amounts):
F-19
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31, March 31, June 30,
1997 1997 1998 1998
<S> <C> <C> <C> <C>
Net sales $ 42,595 $ 46,032 $ 44,713 $ 49,433
Gross profit 8,032 10,034 8,773 7,447
Income from operations 2,229 4,019 3,379 1,203
Income (loss) before taxes 1,601 3,379 2,545 (228)
Net income 1,107 2,269 1,732 (26)
Net income per share, basic and diluted 0.09 0.18 0.14 0.00
September 30, December 31, March 31, June 30,
1996 1996 1997 1997
Net sales $ 29,449 $ 34,791 $ 38,303 $ 45,404
Gross profit 5,086 6,965 5,208 8,675
Income (loss) from operations (9,846) 2,172 (50) 2,820
Income (loss) before taxes (10,088) 1,900 (801) 2,358
Net income (loss) (10,673) 1,185 (546) 1,733
Net income (loss) per share, basic and diluted (0.93) 0.10 (0.04) 0.14
</TABLE>
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Praegitzer Asia Sdn. Bhd.
Kawasan Perindustarian Chang
Fusa III, Mukum Chang
Daerah Melaka Tengah
72250 Melaka
Malaysia
We have audited the accompanying balance sheet of Praegitzer Asia Sdn. Bhd. as
of June 30, 1998, and the related statements of operations, stockholders'
equity, and cash flows for the year ended June 30, 1998. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in Malaysia and the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of Praegitzer Asia Sdn. Bhd. as of June 30,
1998, and the results of its operations and its cash flows for the year ended
June 30, 1998 in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE TOUCHE TOHMATSU
Kuala Lumpur, Malaysia
September 17, 1998
F-21
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER ASIA SDN. BHD.
(Incorporated in Malaysia)
BALANCE SHEET
JUNE 30, 1998
- -------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 95,501
Restricted cash (Note 1) 36,040
Accounts receivable (Note 2) 901,829
Inventories (Note 3) 634,700
Prepaid expenses 29,245
-----------
Total current assets 1,697,315
PROPERTY, PLANT, AND EQUIPMENT, Net (Note 4) 4,705,570
LONG-TERM INVESTMENTS 9,815
-----------
TOTAL $ 6,412,700
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade $ 974,068
Others 1,324,590
Due to holding company (Note 5) 579,746
Accrued and other liabilities 119,340
Current portion of long-term obligation (Note 6) 999,016
-----------
Total current liabilities 3,996,760
-----------
LONG-TERM OBLIGATIONS, Net of current portion (Note 6) 2,491,405
-----------
SHAREHOLDERS' DEFICIT:
Common stock - 50,000,000 shares authorized and 42,740,000 shares issued 16,963,684
Additional paid-in capital 1,432,000
Accumulated deficit (17,658,775)
Cumulative foreign currency translation adjustments (812,374)
-----------
Total shareholders' deficit (75,465)
TOTAL $ 6,412,700
===========
See notes to financial statements.
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER ASIA SDN. BHD.
(Incorporated in Malaysia)
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998
- ---------------------------------------------------------------------------------------------
<S> <C>
NET SALES $ 3,219,300
COST OF GOODS SOLD 4,624,439
-------------
Gross loss (1,405,139)
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE 1,004,849
-------------
OPERATING LOSS (2,409,988)
-------------
OTHER EXPENSE:
Interest expense 223,806
Other expense 45,887
-------------
Total other expense 269,693
-------------
NET LOSS $ (2,679,681)
=============
See notes to financial statements.
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER ASIA SDN. BHD.
(Incorporated in Malaysia)
STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative
Foreign
Additional Retained Currency
Common Paid-In Earnings Translation
Stock Capital (Deficit) Adjustments Total
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $16,963,684 $ - $ (14,979,094) $ - $ 1,984,590
Capital contribution from shareholder - 1,432,000 - - 1,432,000
Foreign currency translation adjustments - - - (812,374) (812,374)
Net loss - - (2,679,681) - (2,679,681)
------------ ----------- ------------- ----------- -----------
Balance at end of year $ 16,963,684 $ 1,432,000 $ (17,658,775) $ (812,374) $ (75,465)
============ =========== ============= =========== ===========
See notes to financial statements.
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER ASIA SDN. BHD.
(Incorporated in Malaysia)
STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 1998
- ---------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,679,681)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 554,024
Effect of foreign exchange rate fluctuation on net loss (58,724)
Changes in operating assets and liabilities:
Accounts receivable (477,627)
Inventories (403,164)
Prepaid expenses (13,298)
Accounts payable 2,176,332
Accrued and other liabilities 34,077
------------
Net cash used in operating activities (868,061)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (1,208,521)
Placement of deposit with a licensed bank (36,040)
------------
Net cash used in investing activities (1,224,561)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term obligations 2,548,072
Payments of long-term obligations (679,820)
Proceeds from additional paid-in capital 282,875
------------
Net cash provided by financing activities 2,151,127
------------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES (37,156)
------------
INCREASE IN CASH AND CASH EQUIVALENTS 1,349
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 94,152
------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 95,501
============
See notes to financial statements.
</TABLE>
F-25
<PAGE>
PRAEGITZER ASIA SDN. BHD.
(Incorporated in Malaysia)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Praegitzer Asia Sdn. Bhd. (the "Company") is
incorporated in Malaysia and is principally involved in manufacturing and
selling of printed 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 amounts reported in its
financial statements and accompanying notes. The Company's financial
statements include amounts that are based on management's best estimates
and judgments. Actual results could differ from those estimates.
Cash and Cash Equivalents include highly liquid investments, which are
readily convertible into cash and have original maturities of three months
or less.
Restricted Cash - As of June 30, 1998, a deposit placed with a local
licensed bank amounting to $36,040 was pledged as collateral on an
outstanding bank guarantee with a third party. This amount is classified
as restricted cash on the balance sheet.
Inventories are stated at the lower of cost and net realizable value. Cost
is determined on the weighted average method.
Property, Plant, and Equipment - Property, plant, and equipment are stated
at cost less accumulated depreciation. Depreciation, except for
construction-in-progress and plant and machinery under installation which
are not depreciated, is computed on the straight-line method based on the
following estimated useful lives:
Plant and machinery 2-1/2 to 10 years
Furniture, fittings, and equipment 3 to 10 years
Computers 5 years
Motor vehicles 5 years
Revenue Recognition - Revenue is recognized upon shipment of products.
Income Taxes - The Company accounts for income taxes using the liability
method under which deferred tax assets and liabilities are recognized for
the future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities using enacted rates. Future
tax benefits are recognized to the extent that realization of such benefits
can be reasonably anticipated.
Foreign Currency Translation - The local currency, Malaysian Ringgit, has
been primarily used as the functional currency. Gains and losses resulting
from transactions in other than the functional currency are reflected in
net income. Assets and liabilities of the Company are translated into U.S.
Dollars at the closing rate while revenue and expenses are translated at
average rates prevailing during the year. Translation adjsutments are
reported as a component of shareholders' equity.
F-26
<PAGE>
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of:
Trade (net of allowance for doubtful accounts of $35,320) $675,489
Other 226,340
--------
Total accounts receivable $901,829
========
3. INVENTORIES
Inventories consist of:
Raw materials $364,171
Work-in-process 248,566
Finished goods 21,963
--------
Total inventories $634,700
========
4. PROPERTY, PLANT, AND EQUIPMENT
Plant, equipment, and motor vehicles consist of the following:
Plant and machinery $5,522,852
Plant and machinery under installation 1,676,264
Furniture, fitting, and equipment 208,189
Computers 131,557
Motor vehicles 99,323
Construction in progress 367,889
----------
8,006,074
Accumulated depreciation (3,300,504)
----------
Total property, plant, and equipment, net $4,705,570
==========
Property, plant, and equipment above include the following amounts for
capitalized leases:
Plant and machinery $ 3,842,158
Motor vehicles 84,907
-----------
3,927,065
Accumulated depreciation (2,663,800)
-----------
Total $ 1,263,265
===========
5. DUE TO HOLDING COMPANY
Effective April 13, 1998, the holding company, Praegitzer Industries,
Inc., a company incorporated in the United States of America, entered into
an agreement to acquire 51% equity interest in the Company from Ributasi
Holdings Sdn. Bhd., a company incorporated in Malaysia. In exchange for
the shares, the
F-27
<PAGE>
holding company agreed to contribute third-party software license rights,
machinery and equipment, and cash with a total value of up to 5.2 million
Malaysian Ringgit ($1,432,000) based on the currency exchange rate on
April 27, 1998. As of June 30, 1998, the equity had not been transferred
to Praegitzer Industries, Inc.'s name.
The amount due to the holding company of $579,746 arose mainly from
interest-free advances with no fixed terms of repayment and expenses paid
on behalf of the Company. In addition, the selling shareholders agreed to
provide additional funding in the form of a line of credit of up to 5
million Malaysian Ringgit of which 2,262,800 Malaysian Ringgit ($569,975)
had been borrowed and included in long-term debt as of June 30, 1998.
6. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
Hire purchase installments payable in monthly installments
of $55,811 plus interest at an average rate of 5.87%
per annum, collateralized by plant and equipment $ 896,581
Hire purchase installments payable in monthly installments
of $880 plus interest at an average rate of 7.73%
per annum, collateralized by motor vehicles 45,768
Shareholder loan payable to Ributasi Holding Company,
0% at June 30, 1998, payable in 36 monthly installments
plus accrued interest at the Maybank rate, interest
begins to accrue on November 12, 1998 at which time
the first payment is due 2,225,565
-----------
Loan payable to Lian Plastic Industries, an affiliated
company, no fixed payment terms 322,507
3,490,421
Less current portion 999,016
-----------
Total long-term obligations $ 2,491,405
===========
The long-term obligations are repayable over the following periods:
Year Ending
June 30,
1999 $ 999,016
2000 840,859
2001 583,198
2002 197,438
2003 3,522
Thereafter 866,388
-----------
$ 3,490,421
===========
F-28
<PAGE>
7. INCOME TAXES
There is no current or deferred tax expense for the year ended June 30,
1998 as the Company is in a loss position. The carryforward tax loss and
unutilized capital allowance as of June 30, 1998 amounted to $8,695,810
and $3,242,026, respectively, and have an indefinite carryforward period.
The income tax effect of temporary differences comprising the deferred tax
assets and deferred tax liabilities is a result of the following:
Deferred tax assets:
Tax loss carryforwards $ 2,434,827
Tax capital allowances carryforwards 686,157
Other 42,905
------------
3,163,889
Less: Valuation allowance (3,163,889)
------------
$ -
===========
8. RELATED PARTY TRANSACTIONS
The Company has transactions in the normal course of business with
companies affiliated with certain of its directors. Sales to and rental of
premises payable to these affiliated companies for the year ended June 30,
1998 amounted to $168,451 and $213,718, respectively. As of June 30, 1998,
accounts receivable and accounts payable include amounts owed by or to
these affiliated companies amounting to $45,352 and $436,067,
respectively.
9. COMMITMENTS
As of June 30, 1998, the Company has the following capital commitments for
plant and machinery:
Approved and contracted for $ 1,268,617
Approved but not contracted for 1,585,582
------------
Total $ 2,854,199
============
* * * * * *
F-29
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
Praegitzer Pro forma
Industries, Likom PCB Pro forma June 30,
Inc. Sdn Bhd Adjustments 1998
<S> <C> <C> <C> <C>
Revenue $ 182,773 $ 3,219 $ (859) (2) $ 185,133
Cost of goods sold 148,487 4,624 (536) (2) 152,575
----------- ----------- ----------- -----------
Gross profit (loss) 34,286 (1,405) (323) 32,558
Selling, general and administrative expense 23,456 1,005 (278) (2) 24,183
----------- ----------- ----------- -----------
EARNINGS (LOSS) FROM OPERATIONS 10,830 (2,410) (45) 8,375
Interest expense 3,757 224 (53) (2) 3,928
Other income (expense) 224 (161) 29 (2) 92
Minority interest loss - - 1,370 (1)
(10) (2) 1,360
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 7,297 (2,795) 1,397 5,899
PRO FORMA PROVISION (BENEFIT) FOR
INCOME TAXES 2,215 - - 2,215
----------- ----------- ----------- -----------
PRO FORMA INCOME (LOSS) $ 5,082 $ (2,795) $ 1,397 $ 3,684
=========== =========== =========== ===========
Pro forma loss per share - basic and diluted $ 0.40 $ 0.29
=========== ===========
Pro forma weighted average shares outstanding 12,846 12,846
=========== ===========
</TABLE>
F-30
<PAGE>
PRAEGITZER INDUSTRIES, INC.
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------
Effective April 13, 1998, Praegitzer Industries, Inc. ("Praegitzer") acquired
51% of the outstanding capital stock of Likom PCB Sdn Bhd ("Likom"), a printed
circuit board manufacturer located in Malaysia. The acquisition of Likom has
been accounted for using the purchase method of accounting. The purchase price
is up to $5.2 million Malaysian Ringgit ($1,432,000) based on the currency
exchange rate on April 27, 1998, which will consist of the transfer and
contribution to Likom over an eighteen-month period ending in October 1999 of
third-party software license rights, machinery and equipment currently owned by
Praegitzer. At its option Praegitzer may contribute cash in lieu of this
property. The unaudited pro forma combined financial statements reflect an
adjustment for the recognition of the minority interest. No purchase price
adjustments have been recognized as the historical cost of the assets and
liabilities approximates the fair value; accordingly, no goodwill has been
recognized. The pro forma balance sheet has not at June 30, 1998 been included
as the amounts are included within the consolidated balance sheet included
elsewhere. The pro forma statement of operations was prepared as if the
transaction had occurred on July 1, 1997.
In the opinion of management of Praegitzer, all adjustments necessary to present
fairly such pro forma financial statements have been made. These unaudited pro
forma financial statements are not necessarily indicative of what actual results
would have been had the transaction occurred at the beginning of the respective
period nor do they purport to indicate the results of future operations of
Praegitzer.
- --------------------------------------------------
(1) The recognition of the minority interest in the loss from operations during
the respective period.
(2) Elimination of the account balances which have been included in
Praegitzer's consolidated statement of operations from the acquisition date
through June 30, 1998.
See Independent Accountants' Review Report
F-31
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC. WORLDWIDE
<S> <C> <C> <C>
[Photograph of DALLAS DIVISION [Photograph of REDMOND DIVISION
manufacturing facility] Dallas, Oregon manufacturing facility] Redmond, Washington
130,000 sq. ft. 48,000 sq. ft.
700+ employees 260+ employees
VOLUME PROTOTYPE AND
PRE-PRODUCTION
WHITE CITY DIVISION [Photograph of FREMONT DIVISION [Photograph of production
White City, Oregon production facility] Fremont, California facility]
105,000 sq. ft. 30,000 sq. ft.
350+ employees 290+ employees
VOLUME QUICK-
TURNAROUND
[Photograph of production MALAYSIA DIVISION [Photograph of HUNTSVILLE DIVISION
facility] Melaka, Malaysia production facility] Huntsville, Alabama
120,000 sq. ft. 98,000 sq. ft.
160+ employees 130+ employees
VOLUME PROTOTYPE AND
PRE-PRODUCTION
DESIGN DIVISIONS [Praegitzer Industries, Inc. Logo]
PORTLAND, OREGON o SAN JOSE, LOS
ANGELES AND SAN DIEGO, CALIFORNIA o Praegitzer Industries, Inc.
DENVER, COLORADO o ORLANDO, FLORIDA o
NASHUA, NEW HAMPSHIRE o PHILADELPHIA, The Fine Line in Printed Circuits
PENNSYLVANIA o DALLAS AND AUSTIN,
TEXAS o SEATTLE, WASHINGTON o TEL AVIV,
ISRAEL
</TABLE>
87
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make representations other than those contained in this
Prospectus and, if given, or made, such information or representations must not
be relied upon as having been authorized by the Company, the Trust or any of the
underwriters. This Prospectus does not constitute an offer to sell or
solicitation of an offer to buy, any security other than the securities offered
by this Prospectus, or an offer to sell or a solicitation of an offer to buy to
any person in any jurisdiction in which such offer or solicitation is not
authorized, or in which the person making the offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such an
offer or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information on this Prospectus is correct as of any time subsequent to the date
hereof.
--------------------
TABLE OF CONTENTS
Page
Available Information....................................................... 3
Prospectus Summary.......................................................... 4
Risk Factors................................................................ 11
Use of Proceeds............................................................. 21
Dividend Policy............................................................. 21
Market Price of Common Stock................................................ 22
Capitalization.............................................................. 23
Selected Consolidated Financial Data and Other Information.................. 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 27
Business.................................................................... 37
Management.................................................................. 49
Certain Transactions........................................................ 54
Principal Shareholders...................................................... 56
Description of Notes........................................................ 58
Description of Capital Stock................................................ 79
Certain United States Federal Income Tax Consequences....................... 81
Underwriting................................................................ 83
Legal Matters............................................................... 85
Experts..................................................................... 85
Index to Financial Statements............................................... 86
================================================================================
<PAGE>
================================================================================
$15,000,000
Praegitzer Industries, Inc.
% Convertible Subordinated Notes
Due December __, 2008
of
[Praegitzer Industries, Inc.
LOGO]
--------------------
PROSPECTUS
--------------------
Advest, Inc.
Black & Company, Inc.
____________, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Set forth below is an estimate of the approximate amount of fees and other
expenses (other than underwriting commissions) payable by the Company in
connection with the issuance and distribution of the Notes pursuant to the
Prospectus contained in this Registration Statement. The Company will pay all of
these expenses.
SEC registration fee............................................... $ 4,796
NASD fee........................................................... 2,000
Nasdaq listing fees................................................ 22,500
Legal fees and expenses............................................ 275,000
Accounting fees and expenses....................................... 100,000
Printing and engraving expenses.................................... 30,000
Miscellaneous expenses............................................. 65,704
==========
Total..................................................... $ 500,000
==========
- --------------
Item 14. Indemnification of Directors and Officers.
Article IV of the Company's Second Amended and Restated Articles of
Incorporation, as amended (the "Articles"), requires indemnification of current
or former directors of the Company to the fullest extent not prohibited by the
Oregon Business Corporation Act (the "Act"). The Act permits or requires
indemnification of directors and officers in certain circumstances. The effects
of the Articles and the Act (the "Indemnification Provisions") are summarized as
follows:
(a) The Indemnification Provisions grant a right of indemnification in
respect of any proceeding (other than an action by or in the right of the
Company), if the person concerned acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
Company, was not adjudged liable on the basis of receipt of an improper personal
benefit and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the conduct was unlawful. The termination of a
proceeding
II-1
<PAGE>
by judgment, order, settlement, conviction or plea of nolo contendere, or its
equivalent, is not, of itself, determinative that the person did not meet the
required standards of conduct.
(b) The Indemnification Provisions grant a right of indemnification in
respect of any proceeding by or in the right of the Company against the expenses
(including attorney fees) actually and reasonably incurred if the person
concerned acted in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of the Company, except that no right
of indemnification will be granted if the person is adjudged to be liable to the
Company.
(c) Every person who has been wholly successful, on the merits or
otherwise, in the defense of any proceeding to which the person was a party
because of the person's status as a director or officer of a controversy
described in (a) or (b) above is entitled to indemnification as a matter of
right.
(d) Because the limits of permissible indemnification under Oregon law are
not clearly defined, the Indemnification Provisions may provide indemnification
broader than that described in (a) and (b).
(e) The Company may advance to a director or officer the expenses incurred
in defending any proceeding in advance of its final disposition if the director
or officer affirms in writing in good faith that he or she has met the standard
of conduct to be entitled to indemnification as described in (a) or (b) above
and undertakes to repay any amount advanced if it is determined that the person
did not meet the required standard of conduct.
The Company may obtain insurance for the protection of its directors and
officers against any liability asserted against them in their official
capacities. The rights of indemnification described above are not exclusive of
any other rights of indemnification to which the persons indemnified may be
entitled under any bylaw, agreement, vote of shareholders or directors or
otherwise.
The Company has agreed to indemnify the Underwriters and the Underwriters
have agreed to indemnify the Company for certain liabilities, including
liabilities under the Securities Act of 1933, as amended. Reference is made to
the Underwriting Agreement filed as Exhibit 1.1 herewith.
II-2
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
As of July 28, 1997, the Company issued 200,000 shares of Common Stock in a
private placement exempt from registration under Rule 506 of the Securities Act
to the shareholders of Mosher Design Services, Inc. as consideration for the
merger of Mosher Design Services, Inc. with and into the Company. As of August
1, 1997 the Company issued a total of 1,364 shares to employees. The shares were
issued one per employee in a one-time bonus to employees. The aggregate market
value on the date of the issuance was $14,875.
Item 16. Exhibits.
Exhibit
Number Description
------- -----------
*1.1 Form of Underwriting Agreement
**3(i) Second Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3(i) of the Company's
Annual Report on Form 10-K for the year ended June 30, 1998 (the
"1998 Form 10-K"))
**3(ii) Bylaws (incorporated by reference to Exhibit 3(ii) of the
Company's Registration Statement on Form S-1, Registration No.
333-01228 (the "Form S-1"))
**4.1 See Article II of Exhibit 3(i) and Articles II and V of Exhibit
3(ii)
*4.2 Form of Subordinated Indenture to be entered into between
Praegitzer Industries, Inc. and U.S. Trust Company, N.A. as the
Indenture Trustee
*4.3 Form of Notes Certificate
*5.1 Opinion of Stoel Rives LLP regarding the legality of the
securities being registered
**10.1 1995 Stock Incentive Plan (incorporated by reference to Exhibit
10.1 of the Form S-1)
**10.2 Form of Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.2 of the Form S-1)
**10.3 Form of Nonstatutory Stock Option Agreement (incorporated by
reference to Exhibit 10.3 of the Form S-1)
**10.4 1996 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.17 of the Company's Annual Report on Form 10-K for the
year ending June 30, 1997 (the "1997 Form 10-K"))
**10.5 Borrowing Agreement between the Company and Heller Financial
dated August 22, 1996 (incorporated by reference to Exhibit 10.2
of the Company's Quarterly Report on Form 10-Q for the quarter
ending September 30, 1996 (the "September 30, 1996 Form 10-Q"))
**10.6 Borrowing Agreement between the Company and Finova Capital dated
July 19, 1996 (incorporated by reference to Exhibit 10.3 of the
September 30, 1996 Form 10-Q)
II-3
<PAGE>
Exhibit
Number Description
------- -----------
**10.7 First Amendment to Loan and Security Agreement between the
Company and Finova Capital dated as of September 4, 1998
(incorporated by reference to Exhibit 10.7 of the 1998 Form 10-K)
**10.8 Swap Agreement between the Company and Key Bank dated December
10, 1996 (incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ending
December 31, 1996)
**10.9 Borrowing Agreement between the Company and Heller Financial
dated May 30, 1997 (incorporated by reference to Exhibit 10.8 of
the 1997 Form 10-K)
**10.10 Borrowing Agreement between the Company and Heller Financial
dated December 29, 1997 (incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-Q for the
quarter ending December 31, 1997 (the "December 31, 1997 Form
10-Q"))
**10.11 Borrowing Agreement between the Company and Heller Financial
dated December 29, 1997 (incorporated by reference to Exhibit
10.2 of the December 31, 1997 Form 10-Q)
**10.12 Borrowing Agreement between the Company and Heller Financial
dated March 27, 1998 (incorporated by reference to Exhibit 10.1
of the March 31, 1998 Form 10-Q (the "March 31, 1998 Form 10-Q"))
**10.13 Borrowing Agreement between the Company and Heller Financial
dated March 31, 1998 (incorporated by reference to Exhibit 10.12
of the 1998 Form 10-K)
**10.14 Credit Agreement between the Company and Key Bank National
Association dated March 31, 1998 (incorporated by reference to
Exhibit 10.2 of the March 31, 1998 Form 10-Q)
**10.15 First Amendment to Credit Agreement between the Company and Key
Bank National Association dated as of August 6, 1998
(incorporated by reference to Exhibit 10.14 of the 1998 Form
10-K)
**10.16 Lease Agreement between CTI and Seapointe Development, Inc. dated
April 1989 and amendments thereto (incorporated by reference to
Exhibit 10.13 of the Form S-1)
**10.17 Lease between CTI and Redmond Quadrant Associates LP dated June
15, 1995 (incorporated by reference to Exhibit 10.14 of the Form
S-1)
**10.18 Employment Agreement between the Company and Robert L. Praegitzer
dated November 17, 1995 (incorporated by reference to Exhibit
10.20 of the Form S-1)
**10.19 Employment Agreement between the Company and Robert J. Versiackas
dated August 26, 1996 (incorporated by reference to Exhibit 10.18
of the 1998 Form 10-K)
**10.20 Offer Letter between the Company and James M. Buchanan dated
March 24, 1998 (incorporated by reference to Exhibit 10.19 of the
1998 Form 10-K)
II-4
<PAGE>
Exhibit
Number Description
------- -----------
12 Statement re Computation of Ratio of Earnings to Fixed Charges
**21.1 Subsidiaries of the Company (incorporated by reference to Exhibit
21.1 of the 1998 Form 10-K)
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Deloitte Touche Tohmatsu
*23.3 Consent of Stoel Rives LLP (included in Exhibit 5.1)
**24.1 Power of Attorney (included on signature page)
*25.1 Form T-1 Statement of Eligibility of U.S. Trust Company, N.A. to
act as trustee for the % Convertible Subordinated Notes of
Praegitzer Industries, Inc.
**27.1 Financial Data Schedule
27.2 Financial Data Schedule for the quarter ended September 30, 1998
- --------------
* To be filed by amendment.
** Previously filed.
II-5
<PAGE>
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to any arrangement, provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(2) The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
497(h) under the Securities Act is part of this Registration Statement as
of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement for the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended Registration Statement to be signed on its behalf
by the undersigned, in the City of Dallas, State of Oregon, on the 16th day of
November, 1998.
PRAEGITZER INDUSTRIES, INC.
BY: MATTHEW J. BERGERON
-------------------------------------
Matthew J. Bergeron
President and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
* Chairman and Chief November 16, 1998
- ----------------------------- Executive Officer
Robert L. Praegitzer
MATTHEW J. BERGERON President, Chief Operating November 16, 1998
- ----------------------------- Officer and Director
Matthew J. Bergeron
* Director November 16, 1998
- -----------------------------
Daniel J. Barnett
* Director November 16, 1998
- -----------------------------
Theodore L. Stebbins
II-7
<PAGE>
* Director November 16, 1998
- -----------------------------
Merrill A. McPeak
* Director November 16, 1998
- -----------------------------
Gordon B. Kuenster
* Director November 16, 1998
- -----------------------------
William J. Thale
*By MATTHEW J. BERGERON
------------------------------
Matthew J. Bergeron
Attorney-In-Fact
II-8
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
*1.1 Form of Underwriting Agreement
**3(i) Second Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3(i) of the Company's
Annual Report on Form 10-K for the year ended June 30, 1998 (the
"1998 Form 10-K"))
**3(ii) Bylaws (incorporated by reference to Exhibit 3(ii) of the
Company's Registration Statement on Form S-1, Registration No.
333-01228 (the "Form S-1"))
**4.1 See Article II of Exhibit 3(i) and Articles II and V of Exhibit
3(ii)
*4.2 Form of Subordinated Indenture to be entered into between
Praegitzer Industries, Inc. and U.S. Trust Company, N.A. as the
Indenture Trustee
*4.3 Form of Notes Certificate
*5.1 Opinion of Stoel Rives LLP regarding the legality of the
securities being registered
**10.1 1995 Stock Incentive Plan (incorporated by reference to Exhibit
10.1 of the Form S-1)
**10.2 Form of Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.2 of the Form S-1)
**10.3 Form of Nonstatutory Stock Option Agreement (incorporated by
reference to Exhibit 10.3 of the Form S-1)
**10.4 1996 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.17 of the Company's Annual Report on Form 10-K for the
year ending June 30, 1997 (the "1997 Form 10-K"))
**10.5 Borrowing Agreement between the Company and Heller Financial
dated August 22, 1996 (incorporated by reference to Exhibit 10.2
of the Company's Quarterly Report on Form 10-Q for the quarter
ending September 30, 1996 (the "September 30, 1996 Form 10-Q"))
**10.6 Borrowing Agreement between the Company and Finova Capital dated
July 19, 1996 (incorporated by reference to Exhibit 10.3 of the
September 30, 1996 Form 10-Q)
**10.7 First Amendment to Loan and Security Agreement between the
Company and Finova Capital dated as of September 4, 1998
(incorporated by reference to Exhibit 10.7 of the 1998 Form 10-K)
**10.8 Swap Agreement between the Company and Key Bank dated December
10, 1996 (incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ending
December 31, 1996)
**10.9 Borrowing Agreement between the Company and Heller Financial
dated May 30, 1997 (incorporated by reference to Exhibit 10.8 of
the 1997 Form 10-K)
II-9
<PAGE>
Exhibit
Number Description
------- -----------
**10.10 Borrowing Agreement between the Company and Heller Financial
dated December 29, 1997 (incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-Q for the
quarter ending December 31, 1997 (the "December 31, 1997 Form
10-Q"))
**10.11 Borrowing Agreement between the Company and Heller Financial
dated December 29, 1997 (incorporated by reference to Exhibit
10.2 of the December 31, 1997 Form 10-Q)
**10.12 Borrowing Agreement between the Company and Heller Financial
dated March 27, 1998 (incorporated by reference to Exhibit 10.1
of the March 31, 1998 Form 10-Q (the "March 31, 1998 Form 10-Q"))
**10.13 Borrowing Agreement between the Company and Heller Financial
dated March 31, 1998 (incorporated by reference to Exhibit 10.12
of the 1998 Form 10-K)
**10.14 Credit Agreement between the Company and Key Bank National
Association dated March 31, 1998 (incorporated by reference to
Exhibit 10.2 of the March 31, 1998 Form 10-Q)
**10.15 First Amendment to Credit Agreement between the Company and Key
Bank National Association dated as of August 6, 1998
(incorporated by reference to Exhibit 10.14 of the 1998 Form
10-K)
**10.16 Lease Agreement between CTI and Seapointe Development, Inc. dated
April 1989 and amendments thereto (incorporated by reference to
Exhibit 10.13 of the Form S-1)
**10.17 Lease between CTI and Redmond Quadrant Associates LP dated June
15, 1995 (incorporated by reference to Exhibit 10.14 of the Form
S-1)
**10.18 Employment Agreement between the Company and Robert L. Praegitzer
dated November 17, 1995 (incorporated by reference to Exhibit
10.20 of the Form S-1)
**10.19 Employment Agreement between the Company and Robert J. Versiackas
dated August 26, 1996 (incorporated by reference to Exhibit 10.18
of the 1998 Form 10-K)
**10.20 Offer Letter between the Company and James M. Buchanan dated
March 24, 1998 (incorporated by reference to Exhibit 10.19 of the
1998 Form 10-K)
12 Statement re Computation of Ratio of Earnings to Fixed Charges
**21.1 Subsidiaries of the Company (incorporated by reference to Exhibit
21.1 of the 1998 Form 10-K)
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Deloitte Touche Tohmatsu
*23.3 Consent of Stoel Rives LLP (included in Exhibit 5.1)
**24.1 Power of Attorney (included on signature page)
*25.1 Form T-1 Statement of Eligibility of U.S. Trust Company, N.A. to
act as trustee for the % Convertible Subordinated Notes of
Praegitzer Industries, Inc.
**27.1 Financial Data Schedule
II-10
<PAGE>
Exhibit
Number Description
------- -----------
27.2 Financial Data Schedule for the quarter ended September 30, 1998
- --------------
* To be filed by amendment.
** Previously filed.
II-11
Exhibit 12
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Three Months Ended
Year Ended June 30, September 30,
------------------------------------------------------------ ----------------------
1994 1995 1996 1997 1998 1997 1998
-------- --------- --------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before taxes $ (2,139) $ 1,876 $ 11,767 $ (6,631) $ 7,297 $ 1,601 $ 923
Add Fixed charges 1,511 1,920 2,065 3,573 5,913 1,244 2,237
Less Capitalized Interest - - - - (229) - (179)
-------- --------- --------- --------- --------- --------- ---------
Earnings (loss) for
computation purposes (628) 3,796 13,832 (3,058) 12,981 2,845 2,981
Fixed charges (interest on
debt, expensed or capitalized,
and one-third of rental
expense 1,511 1,920 2,065 3,573 5,913 1,244 2,237
-------- --------- --------- --------- --------- --------- ---------
Ratio of earnings to
fixed charge - 2.0 6.7 - 2.2 2.3 1.3
======== ========= ========= ========= ========= ========= =========
</TABLE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Praegitzer Industriees,
Inc. on Form S-1 of our report dated September 4, 1998, appearing in the
Prospectus, which is part of this Registration Statement. We also consent to the
reference to us under the headings "Selected Consolidated Financial Data and
Other Information" and "Experts" in such Prospectus.
DELOITTE TOUCHE LLP
Portland, Oregon
November 13, 1998
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Praegitzer Industriees,
Inc. on Form S-1 of our report dated September 17, 1998, appearing in the
Prospectus, which is part of this Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
DELOITTE TOUCHE TOHMATSU
Kuala Lumpur, Malaysia
November 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 1007519
<NAME> Praegitzer Industries, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 305
<SECURITIES> 0
<RECEIVABLES> 33,419
<ALLOWANCES> 400
<INVENTORY> 16,560
<CURRENT-ASSETS> 57,262
<PP&E> 126,583
<DEPRECIATION> 38,891
<TOTAL-ASSETS> 158,822
<CURRENT-LIABILITIES> 36,823
<BONDS> 72,271
0
0
<COMMON> 42,653
<OTHER-SE> 2,317
<TOTAL-LIABILITY-AND-EQUITY> 158,822
<SALES> 55,396
<TOTAL-REVENUES> 55,396
<CGS> 46,202
<TOTAL-COSTS> 46,202
<OTHER-EXPENSES> 7,012
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,467
<INCOME-PRETAX> 923
<INCOME-TAX> 330
<INCOME-CONTINUING> 593
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 593
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
