SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
{x} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number: 0-27932
PRAEGITZER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0790158
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1270 S.E. Monmouth Cut-Off Road
Dallas, Oregon 97338-9532
(503) 623-1000
(Address, including zip code, and telephone number, including area code,
of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days.
Yes {x} No { }
Number of shares of Common Stock outstanding as of November 9, 1998: 12,807,442
1
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PRAEGITZER INDUSTRIES, INC.
Table of Contents
Page No.
Part I Financial Information
Condensed Consolidated Balance Sheet-
September 30, 1998 and June 30, 1998 .................................3
Condensed Consolidated Statement of Operations-
Three months ended
September 30, 1998 and 1997 ..........................................4
Condensed Consolidated Statement of Cash Flows-
Three months ended September 30, 1998 and 1997 .......................5
Notes to Condensed Consolidated Financial Statements .................6
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................8
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K ...........................10
Signatures....................................................................11
2
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(In Thousands)
ASSETS
September 30, June 30,
1998 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 305 $ 1,170
Accounts receivable, net 33,019 28,562
Inventories 16,560 16,491
Prepaid expenses 7,378 2,913
------------ ------------
Total current assets 57,262 49,136
Property, plant and equipment 126,583 124,801
Less: Accumulated depreciation and amortization (38,891) (35,975)
------------ ------------
87,692 88,826
Other assets 13,868 13,532
------------ ------------
$ 158,822 $ 151,494
============ ============
LIABILITIES
CURRENT LIABILITIES
Bank overdraft 2,326 3,709
Accounts payable 18,103 13,930
Accrued payroll and related expenses 5,181 3,955
Other current liabilities 2,324 1,852
Current portion of long-term obligations 8,889 6,394
------------ ------------
Total current liabilities 36,823 29,840
Long-term obligations 72,271 73,413
Deferred tax liability 4,702 4,197
Other liabilities 56 64
Common stock 42,653 42,325
Accumulated other comprehensive income 68 --
Retained Earnings 2,249 1,655
------------ ------------
Total shareholders' equity 44,970 43,980
------------ ------------
$ 158,822 $ 151,494
============ ============
The accompanying notes are an integral part of these condensed
financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended
September 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenue $ 55,396 $ 42,595
Cost of sales 46,202 34,563
------------ ------------
Gross profit 9,194 8,032
Selling, general and
administrative expenses 7,012 5,803
------------ ------------
Income from operations 2,182 2,229
Interest expense 1,467 726
Other income 208 98
------------ ------------
Income before income taxes 923 1,601
Income taxes 330 494
------------ ------------
Net income $ 593 $ 1,107
============ ============
Basic and diluted net income per share $ 0.05 $ 0.09
============ ============
The accompanying notes are an integral part of these condensed
financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months
Ended September 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net cash provided by operating activities $ 4,581 $ 2,406
Cash Flows from Investing Activities:
Capital expenditures (10,651) (4,352)
Proceeds from sale of property, plant and equipment 4,969 -
Other (153) (191)
------------ ------------
Net cash used in investing activities (5,835) (4,543)
------------ ------------
Cash Flows from Financing Activities:
Increase in short-term borrowings 2,489 751
Borrowings of long-term debt 263 -
Payments on long-term debt and capital leases (1,271) (966)
Increase (decrease) in bank overdrafts (1,384) 2,013
Issuances of common stock 328 255
------------ ------------
Cash provided by financing activities 425 2,053
------------ ------------
Effect of foreign currency (36) -
Decrease in Cash and Cash Equivalents (865) (84)
Cash and Cash Equivalents at Beginning of Period 1,170 442
------------ ------------
Cash and Cash Equivalents at End of Period $ 305 $ 358
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the respective periods for:
Interest $ 1,814 $ 763
Income Taxes $ 13 $ 295
The accompanying notes are an integral part of these condensed
financial statements.
</TABLE>
5
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PRAEGITZER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of Praegitzer Industries, Inc. (the "Company")
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.
These financial statements have been prepared by the Company pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such regulations, although the Company believes
the disclosures provided are adequate to prevent the information presented from
being misleading.
This report on Form 10-Q for the quarter ended September 30, 1998, should
be read in conjunction with the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1998. Portions of the accompanying financial
statements are derived from the audited year-end financial statements of the
Company dated June 30, 1998.
Note 2: Earnings per share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("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:
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Three Months Ended
September 30,
1998 1997
------------- -------------
Weighted average shares outstanding-basic 12,778,828 12,647,553
Common stock options and warrants 17,695 283,148
------------- -------------
Weighted average shares outstanding-diluted 12,796,523 12,930,701
============= =============
Note 3: Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market and consist of the following:(In thousands)
September 30, June 30,
1998 1998
--------------- ---------------
Raw Materials and supplies $ 6,379 $ 6,430
Work-in-progress 10,181 10,061
=============== ===============
Total inventory $ 16,560 $ 16,491
=============== ===============
Note 4: Future Accounting Pronouncements
In June 1997, the 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 the fiscal
year ending June 30, 2000. Management has not completed an evaluation of the
effects SFAS No. 133 will have on the Company's financial position or results of
operations.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company designs and manufactures complex, rigid multilayer printed
circuit boards. The Company's design division provides schematic capture and
design services. The Fremont facility specializes in quick-turnaround prototype
production, the Redmond facility specializes in high technology and low volume
production, the Huntsville facility specializes in low volume production and
quick-turnaround prototype production, the White City facility specializes in
medium volume production and the Dallas facility specializes in medium to high
volume production.
This discussion and analysis should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in the Company's Form 10-K for the fiscal year ended June
30, 1998.
8
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Results of Operations
- ---------------------
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
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.
9
<PAGE>
Liquidity and Capital Resources
As of September 30, 1998, the Company had cash of $305,000, compared to
$1.2 million as of June 30, 1998, and working capital of $20.4 million at
September 30, 1998, compared to $19.3 million at June 30, 1998. Principal
sources of liquidity in the first three months of fiscal 1999 were cash from
operations and financing under the Company's line of credit. Principal uses of
liquidity during the three months ended September 30, 1998 were property, plant
and equipment expenditures of $10.7 million related to expansions and capacity
improvements of the Company's manufacturing facilities.
At September 30, 1998 borrowings of $40.0 million were outstanding on the
Company's $40 million bank line of credit (the "Existing Line of Credit").
Amounts outstanding under the Existing Line of Credit bear interest at the
bank's prime rate (8.5% per annum at September 30, 1998). Under the Existing
Line of Credit, the Company must maintain certain financial ratios and other
covenants. As of September 30, 1998 the Company was in compliance with all loan
covenants. The Existing Line of Credit also requires that the Company issue at
least $25 million in subordinated debt or equity prior to January 1, 1999, grant
the lender a deed of trust on the Company's Dallas facility, and reduce its
outstanding balance under the Existing Line of Credit of $9 million prior to
January 1, 1999. The Company is negotiating with the lender to reduce the new
subordinated debt or equity requirement and to reduce the paydown requirement.
As of September 30, 1998 the Company had $32.9 million of outstanding notes
payable to Heller Financial bearing interest at annual rates ranging from 7.8%
to 9.9375% and secured by real property and miscellaneous equipment at the
Company's Dallas and White City, Oregon and Huntsville, Alabama facilities. The
Company had a $4.0 million note payable to Finova Capital outstanding at
September 30, 1998. The note is secured by miscellaneous equipment and bears
interest at an annual rate of 9.93%.
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 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 has entered into a Letter of Intent with a 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 a public offering of $15 million aggregate
principal amount of convertible subordinated notes for which the Company has
filed a registration statement with the Securities and Exchange Commission. 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 does not represent a final commitment to lend by the lender.
There is no assurance the proposed public offering of convertible subordinated
notes will be completed.
10
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Although the Company has no commitments in material amounts, it expects
total capital expenditures for the fiscal year to range from 8% to 12% of
revenue for facilities expansion and equipment.
The Company believes that its existing cash and cash equivalents, funds
generated from operations, its credit facility with the bank and equipment
financings will be sufficient to fund its operations for the remainder of the
fiscal year. To enhance its ability to fund its operations, the Company is
actively exploring additional and alternative sources of financing to supplement
or replace its existing credit agreements.
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.
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.
11
<PAGE>
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
During the three month period ending September 30, 1998 there were no
reports on Form 8-K filed.
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRAEGITZER INDUSTRIES, INC
Date: November 16, 1998 MATTHEW J. BERGERON
-----------------------------------------
(Matthew J. Bergeron, President)
(Duly Authorized Officer)
WILLIAM J. THALE
-----------------------------------------
(William J. Thale)
(Principal Financial Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<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>
