SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 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
(State or other jurisdiction of 93-0790158
incorporation or organization) (I.R.S. Employer Identification No.)
1270 S.E. Monmouth Cut-Off Road
Dallas, Oregon 97338-9532 (503) 623-9273
(Address of principal (Registrant's zip code) (Registrant's telephone
executive offices) number, including area
code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months ( or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
The aggregate market value of voting Common Stock held by non-affiliates of
the registrant at August 14, 1999 was approximately $29,044,000. For purposes of
this calculation, officers and directors are considered affiliates.
Number of shares of Common Stock outstanding at August 14, 1998: 12,750,214.
Documents Incorporated by Reference
Part of Form 10-K Into Which
Document Documents are Incorporated
-------- ----------------------------
Proxy Statement for 1998
Annual Meeting of Shareholders Part III
<PAGE>
TABLE OF CONTENTS
Part I
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Item 1 Business 3
Item 1(a) Executive Officers of the Registrant 11
Item 2 Properties 12
Item 3 Legal Proceedings 12
Item 4 Submission of Matters to a Vote of Security Holders 12
Part II
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Item 5 Market for the Registrant's Common Equity and
Related Shareholder Matters 13
Item 6 Selected Financial Data 14
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7(a) Quantitative and Qualitative Disclosure About Market Risk 20
Item 8 Financial Statements and Supplementary Data 20
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 41
Part III
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Item 10 Directors and Executive Officers of the Registrant 41
Item 11 Executive Compensation 41
Item 12 Security Ownership of Certain Beneficial Owners and
Management 41
Item 13 Certain Relationships and Related Transactions 41
Part IV
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Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 42
Signatures 44
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Forward-Looking Statements
The statements concerning working capital needs constitute forward-looking
statements that are subject to risks and uncertainties. Factors that could
adversely affect the Company's working capital needs include, but are not
limited to, business conditions and growth in the electronics industry and
general economies, both domestic and international, lower than expected customer
orders, competitive factors (including increased competition, new product
offerings by competitors and price pressures), the availability of third party
parts and supplies at reasonable prices and technological difficulties and
resource constraints encountered in developing new products.
PART I
Item 1. BUSINESS
The Company is a leader in providing electronics 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 increasing complexity and technological advancement within the
electronic interconnect industry. 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 Institute
for Interconnecting Packaging Electronic Circuits ("IPC"), of which the U.S.
portion was $7.8 billion and was forecast to grow 6.5% annually through 2001.
The market dynamic for electronics OEMs includes greater emphasis on faster
product time-to-market, greater PCB complexity in tight space tolerances, and
increasing pressure to shorten the design-to-manufacture cycles. Additionally,
as OEMs have increasingly focused on core competencies, 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 acquired production facilities in Redmond,
Washington; Fremont, California; and Huntsville, Alabama, and acquired a 51%
interest in a production facility in Melaka, Malaysia. During this same period,
Praegitzer acquired or opened 12 design centers in the U.S. (11) and in Israel
(1). With its facilities and recent technological expansion, the Company
believes that it is one of the world's leading PCB design and manufacturing
companies. 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%, and 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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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.
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")
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software prior to sending the data to ensure design for manufacturability
("DFM") and to help speed the quick- turnaround process. Historically, circuit
design was the step in the PCB production process least likely to be outsourced
by OEMs. As PCB related design-for-manufacture challenges become more complex,
however, more OEMs are relying on outside resources for these services.
4. QUICK-TURNAROUND, PROTOTYPE AND PRE-PRODUCTION. Quick-turnaround is
characterized by shorter than standard lead time requirements, typically one to
10 days, and involves producing a small quantity, usually fewer than 50 PCBs.
Prototype evaluation is critical to product development and frequently requires
several iterations to finalize the design. Because time is critical, most
prototypes are manufactured on a quick- turnaround basis. Consequently, high
quality and timely delivery generally are the most important competitive factors
for the quick-turnaround market. Pre-production runs involve the manufacture of
limited quantities of PCBs during the transition from prototype to volume
production. Pre-production may require quick-turnaround delivery because of
overall time-to-market pressures and shorter product life cycles or as a
temporary solution in the event of volume production delay. Accordingly, high
quality and timely delivery continue to be the factors most important to the OEM
or contract manufacturer, although price is also a significant factor. Many OEMs
take advantage of a PCB manufacturer's quick-turnaround capability, even when
circuit design or volume production is done in-house or by other PCB
manufacturers. PCB manufacturers use quick-turnaround capabilities to build
relationships with OEMs, thereby developing additional OEM design and volume
production business.
5. VOLUME PRODUCTION. Volume production is characterized by longer lead times
and increased emphasis on lower cost as the product moves to full-scale
commercial production. At this stage of production, price, quality, on-time
delivery and process capability are the factors most important to the OEM or
contract manufacturer. As product life cycles grow shorter, the ability to meet
shorter lead time requirements becomes an increasingly significant competitive
factor.
Each stage of the PCB creation process requires substantially different
capabilities and as a result most companies specialize in only one stage.
Consequently, OEMs and contract manufacturers typically use different suppliers
at each stage, which requires costly and time-consuming duplicative tooling and
pre-production engineering. Accordingly, many OEMs and contract manufacturers
are establishing strategic relationships with fewer suppliers such as the
Company that provide a full range of services.
The Praegitzer Approach
The Company provides a full range of PCB and electronic interconnect
solutions that meet the growing technological demands of electronics OEMs and
contract manufacturers. The Company provides design services, quick-turnaround,
prototyping, pre-production and volume production of PCBs to its customers using
integrated processes that allow shorter time-to-market and time-to-manufacture
at a lower cost of manufacturing. The Company seeks to expand its supplier
relationships with electronics OEMs because these customers have the greatest
incentive to fully exploit the advantages provided by the Company's integrated
design and fabrication of complex PCBs. By working with high-end customers, the
Company can influence the design of customers' PCBs, optimize performance,
minimize production costs and shorten development and production time.
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
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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.
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. The
annual compound growth projections over the next five years for the portable
computer and desktop computer markets are approximately 28% and 11%,
respectively. 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.
The portable communications device market is expected to grow by 15% to 20%
compounded annually. 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.
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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. Demand is expected to increase as the use of electronic measuring
equipment and medical technologies such as magnetic resonance imaging (MRIs) and
laser surgery continues to increase. Since fiscal 1996, Company sales to this
sector have increased at a compound annual rate of 17%. Future drivers of growth
in this area include (i) increasing capital expenditures by OEMs, (ii)
improvements in technology, (iii) increasing research and development budgets,
and (iv) emerging global healthcare markets.
Business and Consumer. The business and consumer market accounted for
approximately $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. Demand has been driven by a number of
factors, the most significant of which is the expanding consumer market for
electronics. Since fiscal 1996, Company sales to this sector have increased at a
compound annual rate of 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 OSP (organic surface protection). The Company
also uses specialty materials such as GETEK(R), OHMEGA-PLY(R), cyanate ester and
polyimide for high temperature, fast signal speed and other high-performance
requirements.
The Company's substantial investment in 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 Company uses similar drills for routing
and plating processes.
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.
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.*
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- --------------------------------------------------------------------------------
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, 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
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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 strategy. The Company uses both internally developed and third party
software, with applications for manufacturing and shop floor control, DFM
analysis, quality assurance, CAD/CAM, human resources, and finance and
accounting.
In fiscal 1999, the Company 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."
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Backlog
The Company's backlog at June 30, 1998 was approximately $23.4 million,
compared to a backlog of approximately $25.0 million at June 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 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 June 30, 1998, the Company had approximately 2,000 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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Item 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth, as of July 31, 1998, executive officers of
the Company.
Name Age Position
- ---- --- --------
Robert L. Praegitzer 66 Chief Executive Officer and Chairman of the Board
Matthew J. Bergeron 35 President, Chief Operating Officer and Director
William J. Thale 38 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
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.
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.
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Item 2. PROPERTIES
The Company's principal properties are as follows:
<TABLE>
<CAPTION>
Ownership Square
Location Purpose Status Feet
-------- ------- --------- ------
<S> <C> <C> <C>
Dallas, Oregon Volume production Owned 130,000
White City, Oregon(1) Volume production Owned 105,000
Redmond, Washington Pre-production and prototype Leased 48,000
Fremont, California Quick-turnaround Leased 30,000
Huntsville, Alabama Pre-production and prototype Owned (2) 98,000
Melaka, Malaysia Volume production Leased 120,000
(1) Includes 40,000 square foot buildout which is not expected to be
operational until fall, 1998.
(2) 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.
</TABLE>
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 on August 3, 1998). This lease
expires in 2002, with an option to renew for an additional three-year period.
Item 3. LEGAL PROCEEDINGS
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended June 30, 1998.
12
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is listed for trading on the Nasdaq National
Market under the symbol "PGTZ". The following table sets forth for the periods
indicated the highest and lowest closing sales prices for the Common Stock, as
reported by the Nasdaq National market.
<TABLE>
<CAPTION>
Fiscal 1997 High Low
<S> <C> <C>
First quarter $14.25 $8.125
Second quarter $12.00 $9.00
Third quarter $12.625 $8.25
Fourth quarter $11.75 $8.50
Fiscal 1998
First quarter $14.25 $8.125
Second quarter $12.00 $9.00
Third quarter $12.625 $8.25
Fourth quarter $11.75 $8.50
</TABLE>
As of August 27, 1998, there were approximately 1,436 shareholders of
record, and the last per share sales price of the Common Stock on that date was
$8.50.
The Company has not declared any cash dividends it 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.
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 an onetime bonus to employees. The market price on
the date of the issuance was $14.875.
13
<PAGE>
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ---------- ----------- ------------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenue........................................ $ 51,757 $ 58,096 $ 95,101 $ 147,947 $ 182,773
Cost of goods sold............................. 46,244 48,343 72,941 122,013 148,487
----------- ---------- ----------- ------------- -----------
Gross Profit................................... 5,513 9,753 22,160 25,934 34,286
Selling, general and administrative expenses... 6,082 6,406 8,896 19,188 23,456
Impairment and in-process technology
expense............................... -- -- -- 11,650 --
----------- ---------- ----------- ------------- -----------
Income (loss) from operations.................. (569) 3,347 13,264 (4,904) 10,830
Interest expense............................... 1,217 1,563 1,799 2,295 3,757
Income (loss) from continuing operations
before income taxes................... (2,139) 1,876 11,767 (6,631) 7,297
Provision (benefit) for income taxes........... (919)(1) 691(1) 4,472(1) 1,670 2,215
----------- ---------- ----------- ------------- -----------
Income (loss) from continuing operations....... (1,220)(1) 1,185(1) 7,295(1) (8,301) 5,082
Net income (loss).............................. $ (3,119)(1)$ 1,185(1)$ 6,916(1)$ (8,301) $ 5,082
=========== ========== =========== ============= ===========
Net income (loss) per share - basic
and diluted........................... $ 0.13(1)$ 0.76(1)$ (0.68) $ 0.40
========== =========== ============= ===========
Weighted average number of shares outstanding -
diluted............................... 8,824 9,110 12,234 12,846
========== =========== ============= ===========
June 30,
----------------------------------------------------------------------
Balance Sheet Data: 1994 1995 1996 1997 1998
----------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Working capital................................ $ (5,999) $ (1,897) $ 10,743 $ 17,031 $ 19,296
Inventories.................................... 3,449 4,002 6,212 8,534 16,491
Total assets................................... 29,051 30,352 52,836 87,286 151,494
Short-term debt................................ 2,068 1,302 871 3,565 6,394
Long-term debt................................. 7,496 10,188 7,695 29,785 73,413
Mandatorily redeemable preferred
securities of a subsidiary trust...... -- -- -- -- --
Shareholders' equity........................... 4,118 5,699 34,641 37,641 43,980
(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.
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company is a leading provider of a full range of PCB and interconnect
solutions, including schematic capture and design, quick-turnaround, prototyping
and pre-production, and large volume production to electronics OEMs and contract
manufacturers. The Company provides its solutions to four key electronics
industry segments (with corresponding percentages of Company revenue for fiscal
1998): (i) data and
14
<PAGE>
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 Circuit Technology, Inc. ("CTI") (now its
Redmond facility) to increase its prototype production capability. In August
1996 the Company acquired Trend Circuits ("Trend") (now its Fremont facility) to
increase its quick-turnaround capability. In March 1998 the Company acquired its
Huntsville facility to increase its pre-production capability. In the last three
years, Praegitzer also acquired or opened 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.
Results of Operations
The following table sets forth certain financial data for the Company for
the periods indicated as a percentage of revenue.
15
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
1996 1997 1998
------------ ----------- -------------
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Cost of goods sold 76.7 82.5 81.2
------------ ----------- -------------
Gross profit 23.3 17.5 18.8
Selling, general and administrative expense 9.4 13.0 12.8
Impairment and in-process technology expense -- 7.9 --
------------ ----------- -------------
Income (loss) from operations 13.9 (3.3) 5.9
Interest expense 1.9 1.6 2.1
Other income 0.3 0.4 0.1
------------ ----------- -------------
Income (loss) from continuing operations 12.4 (4.5) 4.0
Provision for income taxes 4.7(1) 1.1 1.2
------------ ----------- -------------
Net income (loss) from continuing operations 7.7%(1) (5.6)% 2.8%
============ =========== =============
- --------------
(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>
Year Ended June 30, 1998 ("fiscal 1998") Compared to Year Ended June 30, 1997
("fiscal 1997")
Revenue. Revenue in fiscal 1998 increased 23.5% to $182.8 million from
$147.9 million in 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
16
<PAGE>
designers and other factors, including increased business from existing and new
customers such as Intel, NEC, Bay Networks and 3Com.
Cost of Goods Sold. Cost of goods sold includes direct labor, materials and
manufacturing overhead costs. The cost of goods sold in fiscal 1998 was $148.5
million, or 81.2% of revenue, compared to $122.0 million, or 82.5% of revenue,
in 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.
Gross Profit. Gross profit in fiscal 1998 increased 32.2% to $34.3 million
from $25.9 million in fiscal 1997. Gross margin increased to 18.8% in fiscal
1998 compared to 17.5% in fiscal 1997. These increases were due to both
increased revenue and a decrease in the cost of goods sold as a percentage of
revenue, as discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in fiscal 1998 increased $4.3 million, or 22.2%, to
$23.5 million from $19.2 million in fiscal 1997. The increase in expenses was
due to increased personnel and fixed costs associated with the expansion of the
design division and corporate sales force. As a percentage of revenue, selling,
general and administrative expenses decreased to 12.8% in fiscal 1998 from 13.0%
in fiscal 1997.
Net Income (Loss) from Operations. Operating income in fiscal 1998
increased $15.7 million to $10.8 million, or 5.9% of total revenues, compared to
an operating loss of $4.9 million in fiscal 1997. The gains in operating income
were driven by improvements in gross margin and the benefit from the elimination
of the $11.7 million nonrecurring expense related to impairment and in-process
technology in fiscal 1997. 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 in fiscal 1998 increased $1.5 million,
or 63.7%, to $3.8 million from $2.3 million in the prior year. The increase was
primarily the result of increased borrowings required to finance the Intergraph
acquisition and equipment purchases.
Income Taxes. Income taxes in fiscal 1998 were $2.2 million compared to an
income tax provision of $1.7 million in fiscal 1997. The effective tax rate in
fiscal 1998 was 30.4%. During fiscal 1997, the Company had a tax expense on a
pre-tax book loss primarily due to the add-backs of a goodwill and an in-process
technology write-off, neither of which were tax deductible. Federal and state
research and experimental tax credits, however, partially offset the effect of
these add-backs. Absent the add-back of the goodwill and in-process technology
write-offs, the Company's effective tax rate for fiscal 1997 would have been
29.4%.
Net Income. As a result of the factors described above, including the
write-off of $11.7 million non- recovery expenses related to impairment and
in-process technology expense, the net income in fiscal 1998 of $5.1 million
represents an increase of $13.4 million compared to the net loss of $8.3 million
in fiscal 1997.
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996 ("fiscal 1996")
Revenue. Revenue in fiscal year 1997 was $147.9 million, an increase of
$52.8 million, or 55.6%, from fiscal 1996. The increase resulted primarily from
the Company's acquisitions in fiscal 1997, including the acquisition of Trend,
now the Company's Fremont 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.
17
<PAGE>
Cost of Goods Sold. Cost of goods sold was $122.0 million in fiscal 1997,
or 82.5% of revenue, as compared to $72.9 million in fiscal 1996, or 76.7% of
revenue. 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 in fiscal 1997 was $25.9 million, or 17.5% of
revenue, compared to $22.2 million, or 23.3% of revenue, in fiscal 1996. This
decrease was due primarily to an increase in cost of goods sold as a percentage
of revenue, as discussed above.
Selling, General and Administrative Expense. Selling, general and
administrative expense in fiscal 1997 was $19.2 million, or 13.0% of revenue,
compared to $8.9 million, or 9.3% of revenue, in 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.
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.
Net Income (Loss) from Operations. Net loss from operations in 1997 was
$4.9 million compared to operating income of $13.3 million in 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, in
fiscal 1997.
Interest Expense. Interest expense in fiscal 1997 was $2.3 million, an
increase of $496,000, or 27.6%, from fiscal 1996. The increase was the result of
increased 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 in fiscal 1997 was $8.3 million, compared to
pro forma net income of $6.9 million in 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 June 30, 1998, the Company had $1.2 million in cash and cash
equivalents and working capital of approximately $19.3 million.
18
<PAGE>
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 for facility
expansions and equipment.
The Company increased its bank line of credit to $40.0 million at June 30,
1998 from $15.0 million at June 30, 1997. At June 30, 1998 borrowings of $37.5
million were outstanding and $652,000 was available for borrowings based on
eligible accounts receivable and inventory. Amounts outstanding under the line
of credit bear interest at the bank's prime rate (8.5% per annum at June 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 junior subordinated debt or equity prior to
January 1, 1999. 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 the Key
Agreement, the Heller Agreements and 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.
The Company believes existing cash and cash equivalents, funds generated
from operations, its credit facility with the bank and equipment financings as
well as proceeds from this offering will be sufficient to fund its operations
for the next twelve months. To enhance its ability to fund its operations, the
Company is actively exploring additional and alternative sources of financing to
supplement or replace its existing credit agreements. In that regard, the
Company anticipates causing a wholly owned business trust subsidiary to file a
registration statement with the Securities and Exchange Commission in the first
fiscal quarter of 1999 to register for sale to the public trust preferred
securities, the proceeds of which would be used to purchase $40 million
principal amount of junior subordinated deferrable interest debentures to be
issued by the Company. (Any offering of trust preferred securities will be made
only by means of a prospectus.) In connection with this proposed public
financing, the Company expects to use the net proceeds to repay amounts under
various of its credit agreements. There is no assurance that the proposed public
offering will be completed or that the terms of the offering will not differ
materially from those described above.
Recent Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Earnings." SFAS No. 130 establishes requirements for disclosure of
comprehensive income and becomes effective for the Company's first quarter of
the fiscal year ending June 30, 1999. Reclassification of prior year financial
statements for comparative purposes is required. Management has not completed an
evaluation of the effects this standard will have on the Company's financial
position or results of operations.
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 standards 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.
19
<PAGE>
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.
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.
Item 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Company's Financial Statements and the Report of Independent Public
Accountants thereon are presented in the following pages. The Financial
Statements filed in Item 8 are as follows:
Independent Auditors' Report
Consolidated Balance Sheets as of June 30, 1998 and 1997
Consolidated Statements of Operations for the years ended June 30, 1998,
1997 and 1996
Consolidated Statements of Cash Flows of the years ended June 30, 1998,
1997 and 1996
Consolidated Statements of Shareholders' Equity for the years ended June
30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
20
<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
21
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
- ------------------------------------------------------------------------------------
ASSETS 1997 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 441,950 $ 1,169,912
Receivables, net of allowance
for doubtful accounts of $400,000
at June 30, 1997 and 1996 24,452,506 28,562,209
Inventories (Note 4) 8,534,428 16,491,325
Prepaid expenses 454,304 2,438,844
Current deferred tax asset (Note 11) 628,532 474,175
------------ -------------
Total current assets 34,511,720 49,136,465
PROPERTY, PLANT, AND EQUIPMENT, Net (Note 5) 40,036,399 88,825,496
RESTRICTED CASH 162,903 -
OTHER ASSETS (Note 6) 12,574,899 13,532,050
------------ -------------
TOTAL $ 87,285,921 $ 151,494,011
============ =============
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 2,041,554 $ 3,709,446
Accounts payable 8,504,485 13,929,852
Accrued payroll and related benefits 2,878,913 3,955,300
Other current liabilities 491,610 1,851,425
Current portion of long-term
obligations (Notes 8 and 9) 3,564,591 6,393,664
------------ -------------
Total current liabilities 17,481,153 29,839,687
LONG-TERM OBLIGATIONS,
Net of current portion (Notes 8 and 9) 29,784,885 73,413,472
DEFERRED TAX LIABILITY (Note 11) 2,306,426 4,197,481
DEFERRED GAIN 72,578 63,550
COMMITMENTS AND CONTINGENCIES (Note 9) - -
SHAREHOLDERS' EQUITY:
Preferred stock; 500,000 shares authorized,
no shares issued and outstanding - -
Common stock, 50,000,000 shares authorized and
12,750,214 shares issued and outstanding at
June 30, 1998 and 12,434,518 at June 30, 1997 41,232,502 42,324,553
Retained earnings (deficit) (3,591,623) 1,655,268
------------ -------------
Total shareholders' equity 37,640,879 43,979,821
------------ -------------
TOTAL $ 87,285,921 $ 151,494,011
============ =============
See notes to consolidated financial statements.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
- -------------------------------------------------------------------------------------------------------
1996 1997 1998
<S> <C> <C> <C>
REVENUE $ 95,101,170 $ 147,947,303 $ 182,773,158
COST OF GOODS SOLD 72,941,213 122,012,818 148,487,031
------------- ------------- -------------
Gross profit 22,159,957 25,934,485 34,286,127
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE 8,895,548 19,188,455 23,456,329
IMPAIRMENT AND IN-PROCESS
TECHNOLOGY EXPENSE (Notes 3 and 7) - 11,650,000 -
------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS 13,264,409 (4,903,970) 10,829,798
Interest expense 1,798,914 2,295,140 3,757,236
Other income, net 301,642 568,412 224,125
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 11,767,137 (6,630,698) 7,296,687
PROVISION FOR INCOME TAXES (Note 11) 1,445,000 1,669,809 2,214,938
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 10,322,137 (8,300,507) 5,081,749
DISCONTINUED OPERATIONS (Note 10) (612,000) - -
------------- ------------- -------------
NET INCOME (LOSS) $ 9,710,137 $ (8,300,507) $ 5,081,749
============= ============= =============
PRO FORMA NET INCOME DATA
(Note 11) (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 2)
(1996 Pro Forma unaudited) from:
Continuing operations $ 0.80 $ (0.68) $ 0.40
Discontinued operations (0.04) - -
------------- ------------- -------------
NET INCOME (LOSS) PER SHARE,
BASIC AND DILUTED $ 0.76 $ (0.68) $ 0.40
============= ============= =============
See notes to consolidated financial statements.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
- -----------------------------------------------------------------------------------------------------
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 9,710,137 $ (8,300,507) $ 5,081,749
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
Loss (Gain) on sale of fixed assets (111,730) (564,858) (53,445)
Deferred taxes 502,000 474,325 2,045,412
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)
Inventory (688,624) (1,366,761) (6,475,384)
Accounts payable (2,684,743) 1,301,094 4,479,382
Income taxes payable 943,000 (980,835) (1,892,929)
Accrued payroll and related benefits 288,645 345,317 1,074,422
Other current liabilities (1,336,809) 214,561 453,904
Other (132,935) (90,912) (77,253)
----------- ------------ ------------
Net cash provided by operating activities 8,943,341 1,718,837 10,352,543
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (7,525,631) (24,760,670) (39,334,464)
Additions to other assets - (121,502) (746,927)
Proceeds from sale of property,
plant, and equipment 217,955 11,187,029 4,244,785
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)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net additions to (reductions in)
short-term borrowings (5,199,771) 11,463,066 25,063,359
Borrowing of long-term debt 3,880,409 21,814,498 21,300,000
Payments on long-term debt (7,713,451) (16,386,981) (3,261,600)
Proceeds from initial public
offering, net of expenses 19,340,185 - -
Issuances of common stock
under employee stock plans - 307,964 1,091,051
Dividends paid (6,783,635) - -
Payments on capital leases (108,460) (636,884) (641,325)
Increase (decrease) in bank overdrafts (438,270) 1,049,975 1,667,892
----------- ------------ ------------
Net cash provided by financing activities 2,977,007 17,611,638 45,219,377
----------- ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS $ 15,627 $ 403,263 $ 727,962
(Continued)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
- -----------------------------------------------------------------------------------------------------
1996 1997 1998
<S> <C> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS $ 15,627 $ 403,263 $ 727,962
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 23,060 38,687 441,950
----------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 38,687 $ 441,950 $ 1,169,912
=========== ============ ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION -
Cash paid during the year for interest $ 1,789,375 $ 1,915,515 $ 3,734,173
Cash paid during the year
for income taxes, net - 2,165,392 2,062,324
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>
25
<PAGE>
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
- ----------------------------------------------------------------------------------------------------------------
Common Stock
--------------------------- Retained
Number Earnings
of Shares Amount (Deficit) Total
--------- ----------- ----------- -----------
<S> <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 earnings 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 earnings June 30, 1998 - - 5,081,749 5,081,749
---------- ----------- ----------- -----------
BALANCES, JUNE 30,1998 12,750,214 $ 42,324,553 $ 1,655,268 $ 43,979,821
========== ============ =========== ============
See notes to consolidated financial statements.
</TABLE>
26
<PAGE>
PRAEGITZER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Praegitzer Industries, Inc. (the "Company" or
"Praegitzer") is incorporated under the laws of the State of Oregon, and
its principal business is the design, manufacture and sale of electronic
circuit boards.
Principles of Consolidation - The accompanying financial statements include
the accounts of the Company and its majority owned subsidiary, since its
acquisition on April 13, 1998. All significant intercompany transactions
and balances have been eliminated.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements. 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,
27
<PAGE>
on an ongoing basis, the continuing appropriateness of the remaining
amortizable life and the net realizable value of the unamortized balance.
Asset Impairments - Long-lived assets to be held and used by the Company
are reviewed for impairment when events and circumstances indicate costs
may not be recoverable. 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 7
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 8 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. 130, Reporting Comprehensive
Earning. SFAS No. 130 establishes requirements for disclosure of
comprehensive income and becomes effective for the Company's first quarter
of the fiscal year ending June 30, 1999. Reclassification of prior year
financial statements for comparative purposes is required. Management has
not completed an evaluation of the effects this standard will have on the
Company's financial position or results of operations.
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
28
<PAGE>
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. 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>
Proforma
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Weighted average shares outstanding-basic 9,070,209 12,233,769 12,694,039
Common stock options and warrants 40,024 - 151,757
------------ ------------ -------------
Weighted average shares outstanding-diluted 9,110,233 12,233,769 12,845,796
============ ============ =============
</TABLE>
3. ACQUISITIONS
Effective April 13, 1998, the Company acquired 51% of the outstanding
capital stock of Likom PCB Sdn Bhd ("Likom"), a printed circuit board
manufacturer located in Malaysia. The purchase price was up to 5.2 million
Ringgit, $1,432,000 based on the currency exchange rate on April 27, 1998,
which consisted of the transfer and contribution to Likom of third-party
software license rights, machinery and equipment currently owned or
purchased by the Company and cash.
The acquisition of Likom has been accounted for using the purchase method
of accounting. The operating results from the date of purchase have been
consolidated in the Company's financial statements. No goodwill was
recognized related to this acquisition.
On March 31, 1998, the Company acquired a printed circuit board fabrication
facility located in Huntsville, Alabama from Intergraph Corporation
("Intergraph"). The acquisition consisted of land, building, equipment and
inventory. The purchase price for the assets was $15.95 million, which was
paid in cash.
29
<PAGE>
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 7). 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:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
1997 1998
<S> <C> <C>
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
</TABLE>
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.
30
<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 200,000 and 330,000
shares were issued during the years ended June 30, 1998 and 1997,
respectively. At June 30, 1998 and 1997, the net book value of goodwill
associated with acquisitions was $11,486,072 and $12,414,228, respectively,
and is being amortized on a straight-line basis over 15 years.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Raw materials and supplies $ 3,117,427 $ 6,430,638
Work-in-process 5,417,001 10,060,687
----------- -----------
Total inventories $ 8,534,428 $16,491,325
=========== ===========
</TABLE>
31
<PAGE>
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Useful
Life
(Years) 1997 1998
<S> <C> <C> <C>
Land - $ 3,302,576 $ 1,468,212
Buildings and leasehold improvements 10 to 31 14,453,908 21,899,123
Equipment 3 to 10 42,770,430 83,949,892
Office furniture and fixtures 5 to 7 660,388 1,086,121
Projects in process - 1,669,207 10,670,668
Deposits on equipment - 2,962,150 5,726,843
------------ ------------
65,818,659 124,800,859
Accumulated depreciation and amortization (25,782,260) (35,975,363)
------------ ------------
Property, plant and equipment $ 40,036,399 $ 88,825,496
============ ============
</TABLE>
At June 30, 1998 and 1997, the Company had equipment of $2,535,381 and
$3,678,970, respectively, financed with capital leases. The total
accumulated amortization at June 30, 1998 and 1997 was $946,712 and
$617,499, respectively.
6. OTHER ASSETS
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Goodwill $ 12,414,228 $ 11,486,072
Other 160,671 2,045,978
------------ ------------
Total other assets $ 12,574,899 $ 13,532,050
============ ============
</TABLE>
Other assets are presented net of related accumulated amortization of
$3,302,606 and $2,296,946 at June 30, 1998 and 1997, respectively.
7. 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 both
time and cash flow. Recognizing the problem, the Company acquired Trend
(now Fremont Division), an operation that is
32
<PAGE>
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.
8. LONG-TERM NOTES PAYABLE
<TABLE>
<CAPTION>
1997 1998
<S> <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
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
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
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
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
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
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
Other notes payable, 0% to 10% at June 30, 1998 305,779 977,004
------------ ------------
Subtotal 31,248,715 77,067,931
Current portion (2,917,466) (4,874,852)
------------ ------------
Total long-term notes payable $ 28,331,249 $ 72,193,079
============ ============
</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.
33
<PAGE>
The Company's loan agreements with Heller Financial, Inc. and Finova Credit
Corporation contain certain financial covenants. At June 30, 1998 the
Company was not compliant with certain of these financial covenants, which
caused the Company to be in technical default under its credit agreement
with Key Bank and its loan agreements with Heller Financial, Inc. and
Finova Credit Corporation. The Company has received waivers from its
lenders for all of these defaults. The Company was in compliance with all
other covenants at June 30, 1998.
Maturities on the notes payable as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
Year Ending June 30,
--------------------------------------------------
<S> <C>
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
============
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
Capital Leases
The Company has acquired certain equipment under capital lease obligations
bearing interest rates ranging from 9.25% to 31.03% and monthly
installments totaling $143,591 including interest at June 30, 1998 and
interest rates ranging from 9.25% to 13.69% and monthly installments
totaling $68,136 including interest at June 30, 1997.
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:
34
<PAGE>
<TABLE>
<CAPTION>
Capital Operating
Year Ending June 30, Leases Leases
----------------------------------------------------------
<S> <C> <C>
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
=========== ============
</TABLE>
Several of Praegitzer's operating leases contain renewal options. Rent
expense relating to the building and equipment leases totaled $5,781,332,
$3,834,948, and $796,642 for the years ended June 30, 1998, 1997, and 1996
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.
10. 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.
11. 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 for the years
ended June 30, 1998 and 1997. 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.
35
<PAGE>
<TABLE>
<CAPTION>
Period April 4, 1996- Pro Forma Year Ended Year ended June 30,
June 30, 1996 June 30, 1996 1997 1998
------------------ -------------------- ------------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Current:
Federal $ 891,000 $ 4,278,000 $ 1,126,752 $ 475,382
State 52,000 742,000 68,732 (305,865)
----------- ----------- ----------- -----------
943,000 5,020,000 1,195,484 169,517
Deferred:
Federal 466,000 (595,000) 425,676 1,976,712
State 36,000 47,000 48,649 68,709
----------- ----------- ----------- -----------
502,000 (548,000) 474,325 2,045,421
----------- ----------- ----------- -----------
$ 1,445,000 $ 4,472,000 $ 1,669,809 $ 2,214,938
=========== =========== =========== ===========
</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>
Period Proforma
April 4, 1996- Year Ended Year Ended June 30,
June 30, 1996 June 30, 1996 1997 1998
------------- ------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Federal income taxes at the
staturtory rate $ 1,402,000 $ 4,118,000 $ (2,320,744) $ 2,480,870
State income tax, net of 67,000 323,000 (265,228) 364,834
federal benefit
Tax credits utilized (23,000) (171,000) (626,778) (1,097,843)
Goodwill - - 4,856,150 360,296
Other (1,000) 202,000 26,409 106,781
----------- ----------- ----------- -----------
$ 1,445,000 $ 4,472,000 $ 1,669,809 $ 2,214,938
=========== =========== =========== ===========
</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>
Year Ended June 30,
1997 1998
------------ ------------
<S> <C> <C>
Reserves and other liabilities $ 415,777 $ 217,527
Other 268,986 321,733
Property, plant, and equipment (2,362,657) (4,262,566)
------------ ------------
$ (1,677,894) $ (3,723,306)
============ ============
</TABLE>
36
<PAGE>
Net deferred tax assets and liabilities are included in the following
balance sheet accounts at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Current deferred asset $ 628,532 $ 474,175
Deferred tax liability (2,306,426) (4,197,481)
------------ ------------
Net deferred tax liability $ (1,677,894) $ (3,723,306)
============ ============
</TABLE>
12. MAJOR CUSTOMERS
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.
13. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan which covers all employees and permits
discretionary contributions by the participants. The Company has
contributed $318,938, $132,588, and $251,188 to the plan for the years
ended June 30, 1998, 1997 and 1996.
14. 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:
37
<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 10.46
Canceled (222,318) 9.95
Exercised (17,382) 9.57
----------
Options outstanding at June 30, 1998 1,229,520 $10.03
==========
Options exercisable at:
June 30, 1996 - -
June 30, 1997 130,357 $ 9.69
June 30, 1998 310,744 $ 9.65
</TABLE>
The range of exercise prices for options outstanding at June 30, 1998 and
1997 was $8.375-$13.50. Options available for grant at June 30, 1998
totaled 241,098.
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, 1998, 1997 and 1996 using the Black-Scholes option pricing model.
The weighted average assumptions used for stock option grants in 1998, 1997
and 1996 were a risk free interest rate of 5.48%, 6.44% and 6.19%,
respectively, no expected dividend yield, an expected life of 4.8 years, 6
years and 6.5 years, respectively, and an expected volatility of 55%, 44%
and 52%, respectively. The weighted average estimated fair value of
employee stock options granted during the years ended June 30, 1998, 1997
and 1996 was $5.49, $5.13 and $5.67 per share, respectively.
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>
Year ended June 30,
------------------------------------------
1996 1997 1998
<S> <C> <C> <C>
Net income (loss) as reported, 1996 pro forma $6,916,137 $(8,300,507) $5,081,749
Pro forma net income (loss) 6,512,685 (8,992,908) 4,386,882
Pro forma diluted net income (loss) per share 0.71 (0.74) 0.34
</TABLE>
38
<PAGE>
The effects of applying SFAS No. 123 for providing pro forma disclosures
for the years ended June 30, 1998, 1997 and 1996 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 3), Praegitzer issued
stock warrants to purchase 46,333 shares of common stock to the former
shareholders of CTI. The warrants can be exercised at $12 per share and
expire in 2006. At June 30, 1998, no shares had been purchased under the
stock warrants.
15. 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 $77,182,424, or 100.1% of the carrying value of
$77,067,931 at June 30, 1998 and $31,944,045, or 102.2% of the carrying
value of $31,248,714 at June 30, 1997. The fair value of the Key Bank
interest rate swap is estimated to be $4,704,547 or 109.9% of the carrying
value of $4,282,171 at June 30, 1998 and $5,189,703 or 109.2% of the
carrying value of $4,753,683 at June 30, 1997.
16. 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 3 and 7 (in thousands,
except per share amounts):
39
<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>
40
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors of the Company is included under
"Election of Directors" in the Company's definitive Proxy Statement for its
Annual Meeting of Stockholders filed or to be filed not later than 120 days
after the end of the fiscal year covered by this Report and is incorporated
herein by reference.
For information concerning the executive officers of the Company, see
"Executive Officers of the Registrant" under Part I of this report.
Information with respect to Section 16(a) of the Securities Exchange Act is
included under "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders
filed or to be filed not later than 120 days after the end of the fiscal year
covered by this Report and is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under
"Executive Compensation" in the Company's definitive Proxy Statement for its
1998 Annual Meeting of Stockholders filed or to be filed not later than 120 days
after the end of the fiscal year covered by this Report and is incorporated
herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management is included under "Voting Securities and Principal Shareholders"
in the Company's definitive Proxy Statement for its 1998 Annual Meeting of
Stockholders filed or to be filed not later than 120 days after the end of the
fiscal year covered by this Report and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
with management is included under "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders filed or to be filed not later than 120 days after the
end of the fiscal year covered by this Report and is incorporated herein by
reference.
41
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements:
The following consolidated financial statements are included in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets as of June 30, 1998 and 1997
Consolidated Statements of Operations for the years ended June 30, 1998, June
30, 1997 and June 30, 1996 Consolidated Statements of Cash Flows for the years
ended June 30, 1998, June 30, 1997 and June 30, 1996
Consolidated Statements of Shareholders' Equity for the years ended June
30,1998, June 30, 1997 and June 30, 1996
Notes to Consolidated Financial Statements
(a)2. Financial Statement Schedules:
All schedules have been omitted since they are either not required or the
information is otherwise included.
(a)3. Exhibits:
Exhibit
Number Description
- ------- -----------
3(i) Second Amended and Restated Articles of Incorporation
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)
10.1* 1995 Stock Incentive Plan (incorporated by reference to Exhibit 10.1
of the Form S-1)
10.2 Form of Incentive Stock Option Agreement (Incorporated by reference to
Exhibit 10.2 of the Form S-1)
10.3 Form of Nonstatutory Stock Option Agreement (Incorporated by reference
to Exhibit 10.3 of the Form S-1)
10.4 1996 Employee Stock Purchase Plan (Incorporated by reference to
Exhibit 10.17 of the Company's Annual Report on Form 10-K for the Year
Ending June 30, 1997 (the "1997 Form 10-K"))
10.5 Borrowing Agreement between the Company and Heller Financial dated
August 22, 1996 (Incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q for Quarter Ending September
30, 1996 (the "September 30, 1996 Form 10-Q"))
10.6 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
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 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)
42
<PAGE>
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
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
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 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
10.20 Offer Letter between the Company and James M. Buchanan dated March 24,
1998
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule (Electronic Filing)
- --------------
* Represents a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Company filed an amendment to a Form 8-K on August 6, 1997, which
contained the audited financial statements for Trend Circuits, Inc. ("Trend")
for the two years ended December 31, 1995. It also contained the unaudited
interim financial statements of Trend for the six months ended June 30, 1996 and
1995, an unaudited balance sheet of Trend dated as of June 30, 1996, and
unaudited Pro Forma Combined Statements of Operations for the Company and Trend
for the year ended June 30, 1996. These financial statements were amended by a
filing dated September 12, 1997.
The Company filed a Form 8-K on April 14, 1998 reporting the
acquisition of a printed circuit board fabrication facility from Intergraph
Corporation.
The Company filed a Form 8-K on April 29, 1998 reporting the
acquisition of a controlling interest tin Likom PCB Sdn. Bhd. The filing was
amended by a filing dated June 29, 1998 which contained the audited balance
sheets of Likom PCB Sdn. Bhd. for the two years ended June 30, 1997 and the
related statements of operations and cash flows for the three years ended June
30, 1997. It also contained the unaudited Pro Forma Balance Sheet at March 31,
1998, Statement of Operations for the year ended June 30, 1997, and Statement of
Operations for the nine months ended March 31, 1998 for the Company and Likom
PCB Sdn. Bhd.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRAEGITZER INDUSTRIES, INC.
By: ROBERT L. PRAEGITZER
--------------------------------------
Robert L. Praegitzer
Chairman of the Board and Chief
Executive Officer
Dated: September 4, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below appoints Matthew J. Bergeron as his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
to this Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities Exchange Commission,
granting unto said attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
ROBERT L. PRAEGITZER
- ---------------------------- Chairman and Chief Executive September 4, 1998
Robert L. Praegitzer Officer
MATTHEW J. BERGERON
- ---------------------------- President, Chief Operating September 4, 1998
Matthew J. Bergeron Officer and Director
DANIEL J. BARNETT
- ---------------------------- Director September 4, 1998
Daniel J. Barnett
THEODORE L. STEBBINS
- ---------------------------- Director September 4, 1998
Theodore L. Stebbins
44
<PAGE>
MERRILL A. MCPEAK
- ---------------------------- Director September 4, 1998
Merrill A. McPeak
GORDON B. KUENSTER
- ---------------------------- Director September 4, 1998
Gordon B. Kuenster
WILLIAM J. THALE
- ---------------------------- Chief Financial Officer September 4, 1998
William J. Thale
45
EXHIBIT 3.(i)
SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
PRAEGITZER INDUSTRIES, INC.
ARTICLE I
The name of the Corporation is PRAEGITZER INDUSTRIES, INC.
ARTICLE II
A. The Corporation is authorized to issue shares of two classes of stock:
50,000,000 shares of Common Stock and 500,000 shares of Preferred Stock.
B. Holders of Common Stock are entitled to one vote per share on any matter
submitted to the shareholders. On dissolution of the Corporation, after any
preferential amount with respect to the Preferred Stock has been paid or set
aside, the holders of Common Stock and the holders of any series of Preferred
Stock entitled to participate in the distribution of assets are entitled to
receive the net assets of the Corporation.
C. The Board of Directors is authorized, subject to limitations prescribed
by the Oregon Business Corporation Act, as amended from time to time (the
"Act"), and by the provisions of this Article, to provide for the issuance of
shares of Preferred Stock in series, to establish from time to time the number
of shares to be included in each series and to determine the designations,
relative rights, preferences and limitations of the shares of each series. The
authority of the Board of Directors with respect to each series includes
determination of the following:
(1) The number of shares in and the distinguishing designation of that
series;
(2) Whether shares of that series shall have full, special,
conditional, limited or no voting rights, except to the extent otherwise
provided by the Act;
(3) Whether shares of that series shall be convertible and the terms
and conditions of the conversion, including provision for adjustment of the
conversion rate in circumstances determined by the Board of Directors;
(4) Whether shares of that series shall be redeemable and the terms
and conditions of redemption, including the date or dates upon or after which
they shall be
<PAGE>
redeemable and the amount per share payable in case of redemption, which amount
may vary under different conditions or at different redemption dates;
(5) The dividend rate, if any, on shares of that series, the manner of
calculating any dividends and the preferences of any dividends;
(6) The rights of shares of that series in the event of voluntary or
involuntary dissolution of the Corporation and the rights of priority of that
series relative to the Common Stock and any other series of Preferred Stock on
the distribution of assets on dissolution; and
(7) Any other rights, preferences and limitations of that series that
are permitted by law to vary.
ARTICLE III
No director of the Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for conduct as a director,
provided that this Article shall not eliminate the liability of a director for
any act or omission for which such elimination of liability is not permitted
under the Oregon Business Corporation Act. No amendment to the Oregon Business
Corporation Act that further limits the acts or omissions for which elimination
of liability is permitted shall affect the liability of a director for any act
or omission which occurs prior to the effective date of the amendment.
ARTICLE IV
The Corporation shall indemnify to the fullest extent not prohibited
by law any current or former director of the Corporation who is made, or
threatened to be made, a party to an action, suit or proceeding, whether civil,
criminal, administrative, investigative or other (including an action, suit or
proceeding by or in the right of the Corporation), by reason of the fact that
such person is or was a director, officer, employee or agent of the Corporation
or a fiduciary within the meaning of the Employee Retirement Income Security Act
of 1974 with respect to any employee benefit plan of the Corporation, or serves
or served at the request of the Corporation as a director, officer, employee or
agent, or as a fiduciary of an employee benefit plan, of another corporation,
partnership, joint venture, trust or other enterprise. The Corporation shall pay
for or reimburse the reasonable expenses incurred by any such current or former
director in any such proceeding in advance of the final disposition of the
proceeding if the person sets forth in writing (i) the person's good faith
belief that the person is entitled to indemnification under this Article and
(ii) the person's agreement to repay all advances if it is ultimately determined
that the person is not entitled to indemnification under this Article. No
amendment to this Article that limits the Corporation's obligation to indemnify
any person shall have any effect on such
2
<PAGE>
obligation for any act or omission that occurs prior to the later of the
effective date of the amendment or the date notice of the amendment is given to
the person. This Article shall not be deemed exclusive of any other provisions
for indemnification or advancement of expenses of directors, officers,
employees, agents and fiduciaries that may be included in any statute, bylaw,
agreement, general or specific action of the Board of Directors, vote of
shareholders or other document or arrangement.
3
AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Amendment to Loan and Security Agreement (this "Amendment") is
entered into as of September 4, 1998 between PRAEGITZER INDUSTRIES, INC.
("Borrower"), and FINOVA CAPITAL CORPORATION ("FINOVA"), with respect to the
following:
A. Borrower and FINOVA have previously entered into that certain Loan
and Security Agreement dated as of September 19, 1996 (the "Loan Agreement").
Capitalized terms are used in this Amendment as defined in the Loan Agreement,
unless otherwise defined herein.
B. Borrower has advised FINOVA of the following: (i) Borrower and Key
Bank National Association ("Key Bank") are party to that certain Credit Facility
and Security Agreement dated as of March 31, 1998 (the "Key Bank Credit
Agreement"); (ii) the Key Bank Credit Agreement replaced that certain Credit
Facility and Security Agreement between Key Bank of Washington and Borrower
dated as of April 12, 1996, as amended (the "Replaced Key Bank Credit
Agreement"), a copy of which is attached to the Loan Agreement as Exhibit B
thereto; (iii) Borrower and Heller Financial, Inc. ("Heller") are party to
certain agreements (the "Heller Agreements") wherein Heller has agreed to
provide financial services to Borrower on the terms and conditions set forth
therein; (iv) pursuant to an asset purchase agreement dated March 4, 1998
between Borrower and Intergraph Corporation, a Delaware corporation
("Intergraph") and documents related thereto, Borrower acquired certain assets
from Intergraph on or about March 31, 1998, including, without limitation, a
printed circuit board fabrication facility in Huntsville, Alabama (the
"Intergraph Acquisition"); (v) Borrower and Sanwa Business Credit Corporation
("Sanwa") are party to certain agreements (the "Sanwa Agreements") wherein Sanwa
has agreed to provide financial services to Borrower on the terms and conditions
set forth therein; and (vi) Borrower and Bank Leumi ("Leumi") are party to that
certain loan agreement (the "Leumi Agreement") wherein Leumi has agreed to
provide financial services to Borrower on the terms and conditions set forth
therein. The Key Bank Credit Agreement, the Heller Agreements, the Sanwa
Agreements, and the Leumi Agreement are collectively referred to herein as the
"Credit Agreements."
C. Borrower has advised FINOVA that it has caused the establishment of
a statutory business trust under Delaware law (the "Trust") for the purposes of
(i) issuing and selling at a proposed aggregate price of up to $46,000,000
certain Trust preferred securities currently referred to as the "Praegitzer
Industries Trust I __ % Cumulative Trust Preferred Securities" (the "Preferred
Securities"); (ii) issuing and selling to Borrower in an aggregate liquidation
amount equal to 3% of the total capital of the Trust the Trust's common
securities (the "Common Securities"); and (iii) using the proceeds from the sale
of the Preferred Securities and the Common Securities to acquire junior
subordinated debentures issued by Borrower. Borrower has further advised FINOVA
that (i) Borrower's payments to the Trust pursuant to the junior subordinated
debentures will provide the source of funds for distributions and other payments
by the Trust to the holders of the Preferred Securities; and (ii) the
obligations evidenced by the Preferred Securities will be fully guaranteed by
Borrower. The transactions described in this Paragraph C shall be referred to
herein as the "Offering."
<PAGE>
D. Borrower and FINOVA wish to amend the Loan Agreement pursuant to
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the terms and
conditions hereof, the parties hereto agree as follows:
1. Waiver of Events of Default. Subject to the conditions set forth
herein, FINOVA hereby waives the following Events of Default:
(a) Any Event of Default arising under Section 17.1(j) of the Loan
Agreement in so far as such Event of Default results from Borrower's
failure to comply with the financial covenants of the Key Bank Credit
Agreement or Paragraph 5(z) of the Replaced Key Bank Credit Agreement
for any compliance period ending from and including June 30, 1997
through and including September 30, 1998.
(b) Any Event of Default resulting from Borrower's failure to comply
with Section 13.14 of the Loan Agreement insofar as such Event of
Default results from Borrower's failure to comply with any of the
financial covenants of the Replaced Key Bank Credit Agreement for the
compliance periods ending March 31, 1998 and June 30, 1998. (c) Any
Event of Default arising under Section 17.1(j) of the Loan Agreement
in so far as such Event of Default results from Borrower's failure to
comply with Paragraphs 5(bb) or 5(dd) of the Replaced Key Bank Credit
Agreement for the compliance period ending March 31, 1998. (d) Any
Event of Default existing as of the date hereof arising under Section
17.1(j) of the Loan Agreement in so far as such Event of Default
results from Borrower's failure to comply with any financial covenant
set forth in the Heller Agreements, the Sanwa Agreements, or the Leumi
Agreement.
(e) Any Event of Default existing as of the date hereof arising under
Section 17.1(j) of the Loan Agreement in so far as such Event of
Default results from one or more cross-defaults under any of the
Credit Agreements resulting from a default of a financial covenant
under any of the Credit Agreements.
(f) Any Event of Default resulting from Borrower's failure to comply
with Section 13.9 of the Loan Agreement or any similar provision of
any of the Credit Agreements in the period from and including June 30,
1997 through and including the date hereof.
The waivers contained in this Paragraph 1 shall not be construed as a waiver of
any past, present or future noncompliance with Sections 13.9 or 13.14 of the
Loan Agreement or Event of Default arising out of Section 17.1(j) of the Loan
Agreement other than as specifically set forth herein.
-2-
<PAGE>
2. Consents. FINOVA hereby consents to the following: (a) the
Offering; and (b) the Intergraph Acquisition.
3. Conditions Precedent. The effectiveness of this Amendment is and
shall at all times remain subject to the following conditions:
(a) Key Bank shall waive, in form and substance satisfactory to FINOVA
in its discretion reasonably exercised, any and all Events of Default,
if any, under the Key Bank Credit Agreement relating to Borrower's
failure to comply with (i) the financial covenants set forth therein
for any compliance period ending from and including June 30, 1998
through and including the date hereof; and (ii) Borrower's failure to
comply with the financial covenants of any of the other Credit
Agreements.
(b) Key Bank, Heller, Sanwa, and Leumi shall have not taken any
adverse action against Borrower under the Credit Agreements as of the
date hereof as a result of Borrower's failure to comply with any
covenants set forth therein.
(c) Heller, Sanwa, and Leumi shall waive, in form and substance
satisfactory to FINOVA in its discretion reasonably exercised, any and
all defaults under the Credit Agreements relating to Borrower's
failure to comply with the financial covenants set forth therein.
(d) All obligations of Borrower in connection with the Offering shall
be unsecured and subject and subordinate in right of payment to
FINOVA.
(e) No Event of Default that has not been specifically waived herein
has occurred and is continuing from and including June 30, 1997
through and including the date hereof.
4. Additional Covenants. The Loan Agreement is hereby amended by
adding the following covenants thereto:
(a) Borrower shall provide FINOVA and its agents with all financial
information, projections, budgets, business plans, cash flows and
availability projections requested by FINOVA showing the viability of
Borrower after the Offering, all of which shall be satisfactory to
FINOVA in its sole discretion
(b) Borrower shall provide FINOVA with the agreements delivered or
executed or to be delivered or executed in connection with the
Offering, including without limitation, any indentures, trust
agreements, guarantee agreements, trust expense agreements, and any
statements or filings required to be made by Borrower pursuant to any
federal or state statute, law or regulation, all of which shall be
satisfactory to FINOVA in its sale discretion.
-3-
<PAGE>
(c) Borrower shall provide FINOVA and its agents with all financial
information, projections, budgets, business plans, cash flows and
availability projections requested by FINOVA in connection with the
Intergraph Acquisition.
(d) Borrower shall provide FINOVA with the asset purchase agreement
for the Intergraph Acquisition and any and all documents and
instruments executed or delivered or to be executed or delivered in
connection therewith.
(e) Borrower shall execute and cause any applicable third parties to
execute any and all security documents, including without limitation,
security agreements, subordination agreements, mortgages, pledges, UCC
financing statements and UCC amendments, as requested by FINOVA to
maintain or establish, as applicable, the first priority perfected
status of FINOVA's security interests in the assets of the Borrower,
including, without limitation, any assets acquired in connection with
the Intergraph Acquisition.
(f) Section 13.14 of the Loan Agreement is hereby amended by requiring
that the aggregate payments made by Borrower described in Paragraph
5(z) of the Replaced Key Bank Credit Agreement shall not exceed Eight
Million Dollars ($8,000,000) for any period consisting of four (4)
consecutive quarters.
(g) Within ten (10) days from the date hereof, Borrower shall notify
FINOVA in writing of Borrower's default under any note, indenture,
loan agreement, mortgage, lease or other agreement to which Borrower
is a party to which Borrower is bound, or of any other default under
any Indebtedness of Borrower, occurring in the period from and
including June 30, 1997 through and including the date hereof.
(h) Borrower shall execute and cause any applicable third parties to
execute any agreements, including, without limitation, debt and
collateral subordination agreements, requested by FINOVA in its sole
discretion to effectuate the subordination of all obligations of
Borrower in connection with the Offering.
5. Waiver and Consent Fee. In addition to all other fees and expenses,
Borrower shall pay to FINOVA a fee of ten thousand dollars ($10,000) in
consideration of the accommodations provided to Borrower herein, fully earned
and payable on the date hereof.
6. Reaffirmation. Except as amended by the terms herein, the Loan
Agreement and each other Loan Document remains in full force and effect. If
there is any conflict between the terms and provisions of this Amendment and the
terms and provisions of the Loan Agreement or any other Loan Document, the terms
and provisions of this Amendment shall govern.
-4-
<PAGE>
7. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
8. Governing Law. This Amendment shall be governed by and construed
according to the laws of the State of Arizona.
9. Attorneys' Fees and Jury Trial. Borrower shall pay, on demand, all
attorneys' fees and costs incurred in connection with the negotiation,
documentation and execution of this Amendment. If any legal action or proceeding
shall be commenced at any time by any party to this Amendment in connection with
its interpretation or enforcement, the prevailing party or parties in such
action or proceeding shall be entitled to reimbursement of its reasonable
attorneys' fees and costs in connection therewith, in addition to all other
relief to which the prevailing party or parties may be entitled. Each of the
parties hereto waives its right to a trial by jury in any action to enforce,
defend or interpret, or otherwise concerning, this Amendment.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment as of the date first above written.
PRAEGITZER INDUSTRIES, INC.
By: SCOTT D. GILBERT
-------------------------------------
Title: Vice President ad Treasurer
----------------------------------
FINOVA CAPITAL CORPORATION
By: MARILYN MILAM
-------------------------------------
Title: Vice President
----------------------------------
-5-
Loan No. 1910069-0008
- --------------------------------------------------------------------------------
Heller Financial
SECURITY AGREEMENT
------------------
THIS SECURITY AGREEMENT ("Agreement") is made this 31st day of March 1998, by
and between Praegitzer Industries, Inc., an Oregon Corporation ("Debtor"), whose
business address is 1270 Monmouth Cutoff, Dallas, Oregon 97338, and Heller
Financial, Inc., a Delaware corporation ("Secured Party"), whose address is
Commercial Equipment Finance Division, 500 West Monroe Street, Chicago, Illinois
60661.
WITNESSETH:
1. Secure Payment. To secure payment of indebtedness in the principal sum of up
to One Million Five Hundred Nineteen Thousand One Hundred Five and 74/100
Dollars ($1,519,105.74), as evidenced by a note or notes executed and delivered
by Debtor to Secured Party (the "Notes") and any obligations now or hereafter
arising under the Loan Documents (as defined below) (all the foregoing
hereinafter called the "Indebtedness"), Debtor hereby grants and conveys to
Secured Party a first priority continuing lien and security interest in the
property described on the Schedule(s) attached hereto (the "Schedules"), all
products and proceeds (including insurance proceeds) thereof, if any, and all
substitutions, replacements, attachments, additions, and accessions thereto, all
or any of the foregoing hereinafter called the "Collateral." The Schedules may
be supplemented from time to time to evidence the Collateral subject to this
Agreement.
2. Warranties, Representations and Covenants. Debtor warrants, represents,
covenants and agrees as follows:
(a) Perform Obligations. Debtor shall pay as and when due all of the
Indebtedness secured by this Agreement and perform all of the obligations
contained in this Agreement according to its terms. Debtor shall use the loan
proceeds for business uses and not for personal, family, household, or
agricultural uses.
(b) Perfection. This Agreement creates a valid and first priority
continuing lien and security interest in the Collateral, securing the payment
and performance of the Indebtedness and, assuming UCC-1 financing statements
describing the Collateral in substantially the same manner as described on the
attached Schedule A is duly filed with the Secretary of State of the States of
Oregon and Washington, with the official real estate records of the Counties of
Polk and Jackson, Oregon and the County of King, Washington, all actions
necessary to perfect such security interest have been duly taken.
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<PAGE>
(c) Collateral Free and Clear. Except as may be set forth on the Schedules,
Debtor shall keep the Collateral free and clear of all liens, claims, charges,
encumbrances and other security interests of any kind (other than the security
interest granted hereby and any lien securing payment of ad valorem property
taxes, fees or assessments that are not delinquent). Debtor shall defend the
title to the Collateral against all persons and against all claims and demands
whatsoever. At the request of Secured Party, Debtor shall furnish further
assurance of title, execute any written agreement and to any other acts
necessary to effectuate the purposes and provisions of this Agreement, including
in order to perfect, continue, or terminate the security interest of Secured
Party in the Collateral, and pay all costs in connection therewith.
(d) Possession and Operating Order of the Collateral. Subject to Secured
Party's rights and remedies upon the occurrence of an Event of Default (defined
below), Debtor shall retain possession of the Collateral at all times and shall
not sell, exchange, assign, loan, deliver, lease, mortgage, or otherwise dispose
of the Collateral or any part thereof without the prior written consent of
Secured Party, Debtor shall at all times keep the Collateral at the location[s]
specified on the Schedules (except for removals thereof in the usual course of
business for temporary periods). At Debtor's sole cost and expense, Debtor shall
also keep the Collateral in good repair and condition and shall not misuse,
abuse, waste or otherwise allow it to deteriorate, except for normal wear and
tear. Secured Party may verify any Collateral in any reasonable manner which
Secured Party may consider appropriate, and Debtor shall furnish all reasonable
assistance and information and perform any acts which Secured Party may
reasonably request in connection therewith.
(e) Insurance. Debtor shall insure the Collateral against loss by fire
(including extended coverage), theft and other hazards (not including flood or
earth movement), for its full insurable value including replacement costs, with
a deductible not to exceed One Hundred Thousand and 00/100 Dollars ($100,000.00)
per occurrence and without co-insurance. In addition, Debtor shall obtain
liability insurance covering liability for bodily injury, including death and
property damage, in an amount of at least Five Million and 00/100 Dollars
($5,000,000.00) per occurrence or such greater amount as may comply with general
industry standards, or in such other amounts as Secured Party may otherwise
require. All policies of insurance required hereunder shall be in such form,
amounts, and with such companies as Secured Party may approve; shall provide for
at least thirty (30) days prior written notice to Secured Party prior to any
modification or cancellation thereof; shall name Secured Party as loss payee or
additional insured, as applicable, and shall be payable to Debtor and Secured
Party as their interests may appear; shall waive any claim for premium against
Secured Party; and, with respect to the policies insuring against loss by fire,
theft and other hazards, shall provide that no act or neglect of Debtor shall
invalidate the coverage afforded thereunder to Secured Party, and with respect
to liability insurance policies, shall provide coverage unless Debtor
intentionally fails to disclose all hazards existing as of the inception of the
policy. Certificates of insurance or policies evidencing the insurance required
hereunder along with satisfactory
2
<PAGE>
proof of the payment of the premiums therefor shall be delivered to Secured
Party who is authorized, but under no duty, to obtain such insurance upon
failure of Debtor to do so. Debtor shall give immediate written notice to
Secured Party and to insurers of loss or damage to the Collateral and shall
promptly file proofs of loss with insurers. Debtor hereby irrevocably appoints
Secured Party as Debtor's attorney-in-fact, coupled with an interest, for the
purpose of obtaining, adjusting and canceling any such insurance and endorsing
settlement drafts. Debtor hereby assigns to Secured Party, as additional
security for the Indebtedness, all sums which may become payable under such
insurance.
In the event Debtor fails to provide Secured Party with evidence of the
insurance coverage required by this Agreement, Secured Party may purchase
insurance at Debtor's expense to protect Secured Party's interests in the
Collateral. This insurance may, but need not, protect Debtor's interests. The
coverage purchased by Secured Party may not pay any claim made by Debtor or any
claim that is made against Debtor in connection with the Collateral. Debtor may
later cancel any insurance purchased by Secured Party, but only after providing
Secured Party with evidence that Debtor has obtained insurance as required by
this Agreement. If Secured Party purchases insurance for the Collateral, Debtor
will be responsible for the costs of that insurance, including interest and
other charges imposed by Secured Party in connection with the placement of the
insurance, until the effective date of the cancellation or expiration of the
insurance. The costs of the insurance may be added to the Indebtedness. The
costs of the insurance may be more than the cost of insurance Debtor is able to
obtain on its own.
(f) If Collateral Attaches to Real Estate. If the Collateral or any part
thereof has been attached to or is to be attached to real estate, an accurate
description of the real estate and the name and address of the record owner is
set forth on the Schedules. Debtor shall, on demand of Secured Party, furnish
Secured Party with a disclaimer or waiver or any interest in any such Collateral
satisfactory to Secured Party and signed by all persons other than Debtor having
an interest in the real estate.
(g) Financial Statements. Debtor shall furnish to Secured Party, as soon as
practicable, and in any vent within sixty (60) days after the end of each fiscal
quarter of Debtor and each guarantor of all or any part of the Indebtedness
(each, a "Guarantor"), respectively, Debtor's and each Guarantor's unaudited
financial statements including in each insurance, balance sheets, income
statements, and statements of cash flow, on a consolidated and consolidating
basis, as appropriate, and separate profit and loss statements as of and for the
quarterly period then ended and for the respective person's fiscal year to date,
prepared in accordance with generally accepted accounting principles,
consistently applied ("GAAP"). Debtor shall also furnish to Secured Party, as
soon as practicable, and in any event within ninety (90) days after the end of
each fiscal year of Debtor and each Guarantor, respectively, Debtor's and
Guarantor's annual audited financial statements, including balance sheets,
income statements and statements of cash flow for the fiscal year then ended, on
a consolidated and consolidating basis, as appropriate, which have been prepared
by its independent accountants in accordance with
3
<PAGE>
GAAP. Such audited financial statements shall be accompanied by the independent
accountant's opinion, which opinion shall be in form generally recognized as
"unqualified."
(h) Authorization. Debtor is now, and will at all times remain, duly
licensed, qualified to do business and in good standing in every jurisdiction
where failure to be so licensed or qualified and in good standing would have a
material adverse effect on its business, properties or assets. Debtor has the
power to authorize, execute and deliver this Agreement, the Notes and any other
documents and instruments relating thereto (the Agreements, Notes and other
documents and instruments, all as amended from time to time, are hereafter
collectively referred to as the "Loan Documents"), to incur and perform
obligations hereunder and thereunder, and to grant the security interests
created hereby. As of the time of delivery thereof to Secured Party, the Loan
Documents will have been duly authorized, executed, and delivered by or on
behalf of Debtor, and will constitute the legal, valid, and binding obligations
of Debtor, enforceable against Debtor in accordance with their respective terms.
Debtor shall preserve and maintain its existence and shall not wind up its
affairs or otherwise dissolve. Debtor shall not, without thirty (30) days prior
written notice to Secured Party, (1) change its name or so change its structure
that any financing statement or other record notice becomes misleading or (2)
change its principal place of business or chief executive or accounting offices
from the address stated herein.
(i) Litigation. There are no actions, suits, proceedings, or investigations
("Litigation") pending or, to the knowledge of Debtor, threatened against Debtor
or otherwise affecting the Collateral other than as disclosed in Schedule 2(i)
attached hereto. Debtor shall promptly notify Secured Party in writing of
Litigation against it if: (1) the outcome of such Litigation may materially or
adversely affect the finances or operations of Debtor (for purposes of this
provision, Five Hundred Thousand and 00/100 Dollars ($500,000.00) shall be
deemed material) or (2) such Litigation questions the validity of any Loan
Document or any action taken or to be taken pursuant thereto. Debtor shall
furnish to Secured Party such information regarding any such Litigation as
Secured Party shall reasonably request.
(j) No Conflicts. Debtor is not in violation of any material term or
provision of its by-laws, or of any material agreement or instrument, or of any
judgment, decree, order, or any statute, rule, or governmental regulation
applicable to it. The execution, delivery, and performance of the Loan Documents
do not and will not violate, constitute a default under, or otherwise conflict
with any such term or provision or result in the creation of any security
interest, lien, charge, or encumbrance upon any of the properties or assets of
Debtor, except for the security interest herein created.
(k) Compliance with Laws. Debtor shall use and maintain the Collateral in a
lawful manner in accordance with all applicable laws, regulations, ordinances,
and codes and shall otherwise comply in all material respects with all
applicable laws, rules, and regulations and duly observe all valid requirements
of all governmental authorities, and all statutes,
4
<PAGE>
rules and regulations relating to its business, including (i) the Internal
Revenue Code of 1986, as amended from time to time, (ii) all federal, state, and
local laws, rules, regulations, orders, and decrees relating to health, safety,
hazardous substances, and environmental matters, including the Resource Recovery
and Reclamation Act of 1976, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, the Toxic Substances Control Act, the
Clean Water Act of 1977, and the Clean Air Act, all as amended from time to time
(collectively, "Environmental Laws"), (iii) the Employees Retirement Income
Security Act of 1974, as amended from time to time, and (iv) the Fair Labor
Standards Act, as amended from time to time.
(l) Taxes. Debtor has timely filed all tax returns (federal, state, local,
and foreign) required to be filed by it and has paid or established reserves for
all taxes, assessments, fees, and other governmental charges in respect of its
properties, assets, income and franchises. Debtor shall promptly pay and
discharge all taxes, assessments, license fees (related to the Collateral) and
other governmental charges prior to the date on which penalties are attached
thereto, establish adequate reserves for the payments of such taxes,
assessments, and other governmental charges and make all required withholding
and other tax deposits, and, upon request, provide Secured Party with receipts
or other proof that any or all of such taxes, assessments, license fees or
governmental charges have been paid in a timely fashion; provided, however, that
nothing contained herein shall require the payment of any tax, assessment, or
other governmental charge so long as its validity is being diligently contested
in good faith and by appropriate proceedings diligently conducted and Debtor has
established cash reserves therefor in accordance with GAAP. Should any stamp,
excise, or other tax, including mortgage, conveyance, deed, intangible, or
recording taxes become payable in connection with or respect of any of the Loan
Documents, Debtor shall pay the same (including interest and penalties, if any)
and shall hold Secured Party harmless with respect thereto.
(m) Environmental Laws. Except as disclosed by Debtor (or Debtor's
representative or agent) in writing to Secured Party's counsel (including
internal counsel) on or prior to the date hereof, Debtor has (1) not received
any summons, complaint, order, or other notice that it is not in compliance
with, or that any public authority is investigating its compliance with, any
Environmental Laws and (2) no knowledge of any material violation of any
Environmental Laws on or about its assets or property. Debtor shall provide
Secured Party, promptly following receipt, copies of any correspondence, notice,
complaint, order, or other document that it receives asserting or alleging a
circumstance or condition which requires or may require cleanup, removal,
remedial action or other response by or on the part of Debtor under any
Environmental Laws, or which seeks damages or civil, criminal or punitive
penalties from Debtor for an alleged violation of any Environmental Laws.
(n) Regulations. No proceeds of the loans or any other financial
accommodation hereunder will be used, directly or indirectly, for the purpose of
purchasing or carrying any
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<PAGE>
margin security, as that term is defined in Regulations G, T, U, X of the Board
of governors of the Federal Reserve System.
(o) Books and Records. Debtor shall maintain, at all times, true and
complete books and records in accordance with GAAP and consistent with those
applied in the preparation of Debtor's financial statements. At all reasonable
times, upon reasonable notice, and during normal business hours, Debtor shall
permit Secured Party or its agents to audit, examine and make extracts from or
copies of any of its books, ledgers, reports, correspondence, and other records
relating to the Collateral.
(p) Setoff. Without limiting any other right of Secured Party, whenever
Secured Party has the right to declare any Indebtedness to be immediately due
and payable (whether or not it has so declared), Secured Party is hereby
authorized at any time and from time to time to the fullest extent permitted by
law, to set off and apply against any and all of the Indebtedness, any and all
monies then or thereafter owed to Debtor by Secured Party in any capacity,
whether or not the obligation to pay such monies owed by Secured Party is then
due. Secured Party shall be deemed to have exercised such right or setoff
immediately at the time of such election even though any charge therefor is made
or entered on Secured Party's records subsequent thereto.
(q) Standard of Care; Notice of Claims. Debtor acknowledges and agrees that
Secured Party shall not be liable for any acts or omissions nor for any error of
judgment or mistake of fact or law other than as a sole and direct result of
Secured Party's gross negligence or willful misconduct. Debtor shall give
Secured Party written notice of any action or inaction by Secured Party or any
agent or attorney of Secured Party that may give rise to a claim against Secured
Party or any agent or attorney of Secured Party or that may be a defense to
payment or performance of and of the Indebtedness for any reason, including
commission of a tort (subject, in any event, to the first sentence of this
paragraph) or violation of any contractual duty or duty implied by law. Debtor
agrees that unless such notice is fully given as promptly as possible (and in
any event within thirty (30) days) after the Chairman of the Board, Chief
Executive Officer, President, Chief Operating Officer, Chief Financial Officer,
Secretary, any Senior or Executive Vice President or internal counsel of Debtor,
or any Vice President of Business and/or Technical Operations of Debtor's
Dallas, Oregon operations, has knowledge, or with the exercise of reasonable
diligence should have had knowledge, of any such action or inaction, Debtor
shall not assert, and Debtor shall be deemed to have waived, any claims or
defense arising therefrom.
(r) Indemnity. Debtor shall indemnify, defend and hold harmless Secured
Party, its parent, affiliates, officers, directors, agents, employees, and
attorneys harmless from and against any loss, expense (including reasonable
attorneys' fees and costs), damage or liability arising directly or indirectly
out of (i) any breach of any representation, warranty or covenant contained in
any Loan Document, (ii) any claim or cause of action that would deny Secured
Party the full benefit or protection of any provision in any Loan Document, or
(iii) the ownership, possession, lease, operation, use, condition, sale, return,
or other
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<PAGE>
disposition of the Collateral, except to the extent the loss, expense, damage or
liability arises solely and directly from Secured Party's gross negligence or
willful misconduct. If after receipt of any payment of all or any part of the
Indebtedness, Secured Party is for any reason compelled to surrender such
payment to any person or entity, because such payment is determined to be void
or voidable as a preference, impermissible set-off, or a diversion of trust
funds, or for any other reason, the Loan Documents shall continue in full force
and effect and Debtor shall be liable to Secured Party for the amount of such
payment surrendered. The provisions of the preceding sentence shall be and
remain effective notwithstanding any contrary action which may have been taken
by Secured Party in reliance upon such payment, and any contrary action so taken
shall be without prejudice to Secured Party's rights under this Agreement and
shall be deemed to have been conditioned upon such payment having become final
and irrevocable. Additionally, Debtor shall be liable for all charges, costs,
expenses and attorneys' fees incurred by Secured Party (including a reasonable
allocation of the compensation, costs and expenses of internal counsel, based
upon time spent): (i) in perfecting, defending or protecting its security
interest in the Collateral, or any part thereof; (ii) in the negotiation,
execution, delivery, administration, amendment or enforcement of the Loan
Documents or the collection of any amounts due under any Note or other Loan
Document; (iii) in any lawsuit or other legal proceeding in any way connected
with any of the Loan Documents, including any contract or tort or other actions,
any arbitration or other alternative dispute resolution proceeding, all appeals
and judgment enforcement actions and any bankruptcy proceeding (including any
relief from stay and/or adequate protection motions, cash collateral disputes,
assumption/rejection motions and disputes or objections to any proposed
disclosure statement or reorganization plan). Debtor acknowledges and agrees
that the preceding sentence shall survive and not be merged with any judgment in
connection with any exercise of any right or remedy by Secured Party provided
under this Agreement. The provisions of this paragraph shall survive the
termination of this Agreement and the other Loan documents.
(s) Complete Information. No representation or warranty made by Debtor in
any Loan Document and no other document or statement furnished to Secured Party
by or on behalf of Debtor contains any material misstatement of a material fact
or omits to state any material fact necessary in order to make the statements
contained therein not misleading. Except as expressly set forth in the
Schedules, there is no fact know to Debtor that will or could have a materially
adverse affect on the business, operation, condition (financial or otherwise),
performance, properties or prospects of Debtor or Debtor's ability to timely pay
all of the Indebtedness and perform all of its other obligations contained in or
secured by this Agreement. Each representation and warranty made by Debtor in
this Agreement shall be deemed to have been made as of the date of this
Agreement and as of the date each advance of funds under a Note.
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(t) Collateral Documentation. Debtor shall deliver to Secured Party prior
to any advance or loan, satisfactory documentation regarding the Collateral to
be financed, including such invoices, canceled checks evidencing payments, or
other documentation as may be reasonably requested by Secured Party.
Additionally, Debtor shall satisfy Secured Party that Debtor's business and
financial information is as has been represented and there has been no material
change in Debtor's business, financial condition, or operations.
3. Prepayment. Upon forty-five (45) days prior written notice to Secured Party,
Debtor may prepay in whole, but not in part (except as set forth below), on any
regularly scheduled payment date under the Note, the then entire unpaid
principal balance of any Note, together with all accrued and unpaid interest
thereon to the date of such prepayment, provided that along with and in addition
to such prepayment, Debtor shall pay (i) any and all other sums then due under
any of the Loan Documents, and (ii) a prepayment fee as liquidated damages and
not as a penalty, in a sum equal to three percent (3%) of the principal balance
being prepaid for any prepayment on or before the second anniversary of the date
of the Note and once percent (1%) of the principal balance being prepaid for any
prepayment after the second anniversary of the date of the Note and before the
seventh anniversary date of the Note. The prepayment fee described in clause
(ii) above shall also be due upon the acceleration of the maturity date of any
Note following the occurrence of any Event of Default. Notwithstanding anything
to the contrary set forth above, provided no Event of Default has occurred and
is continuing, in each yearly period following the date of this Agreement (each
such yearly period shall begin on the date of this Agreement or an anniversary
date thereof, as the case may be, and end on the day immediately preceding the
next anniversary date of this Agreement), Debtor shall be permitted to prepay
(without paying any fee, liquidated damages or other penalties) principal
outstanding under the Note in the amount of One Hundred Thousand and 00/100
Dollars ($100,000.00), or less, together with all accrued and unpaid interest
thereon to the date of such prepayment, provided, however, that each such
prepayment shall be made on a regularly scheduled payment date under the Note.
4. Events of Default. If any one of the following events (each of which is
herein called an "Event of Default") shall occur: (a) Debtor fails to pay any
part of the Indebtedness within ten (10) calendar days of its due date, or (b)
any warranty or representation of Debtor in any Loan Document is materially
untrue, misleading or inaccurate, or (c) Debtor breaches or defaults in the
performance of any of its obligations under Paragraphs (c) through (e) of
Section 2, above, or (d) Debtor or any Guarantor breaches or defaults in the
performance of any other agreement or covenant under any Loan Document and fails
to cure such breach or default within thirty (30) days after written notice of
the breach or default from Secured Party, or (e) Debtor of any Guarantor
breaches or defaults in the payment or performance of any debt or other
obligation owed by it to Secured Party or any affiliate of Secured Party and
fails to cure such breach or default within the applicable cure period, if any,
or (f) Debtor breaches or defaults in the payment or performance of any debt or
other obligation, whether now or hereafter existing, with an outstanding
principal balance in excess of One Million and 00/100 Dollars ($1,000,000.00),
and the
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same is subsequently accelerated, or (g) there shall be a change in the
beneficial ownership and control, directly or indirectly, of the majority of the
outstanding voting securities or other interests entitled (without regard to the
occurrence of any contingency) to elect or appoint members of the board of
directors or other managing body of Debtor or any Guarantor other than any such
change as the result of the death of Robert L. Praegitzer or Sally E.
Praegitzer, or as the result of a transfer for estate planning purpose of any
shares of Debtor owned by Robert L. Praegitzer or Sally E. Praegitzer to a trust
for the benefit of his or her heirs, as to which Robert L. Praegitzer or Sally
E. Praegitzer, or both, are the sole trustee(s) (a "change of control"), or
there is any merger, consolidation, dissolution, liquidation, winding up or sale
or other transfer of all or substantially all of the assets of Debtor or any
Guarantor pursuant to which there is a change of control or cessation of Debtor
or the Guarantor or the business of either, or (h) Debtor or any Guarantor shall
file a voluntary petition in bankruptcy, shall apply for or permit the
appointment by consent or acquiescence of a receiver, conservator,
administrator, custodian or trustee for itself or all or a substantial part of
its property, shall make an assignment for the benefit of creditors or shall be
unable, fail or admit in writing its inability to pay its debts generally as
such debts become due, or (i) there shall have been filed against Debtor or any
Guarantor an involuntary petition in bankruptcy or Debtor or any Guarantor shall
suffer or permit the involuntary appointment of a receiver, conservator,
administrator, custodian or trustee for all or a substantial part of its
property or the issuance of a warrant of attachment, diligence, execution or
similar process against all or any substantial part of its property; unless, in
each case, such petition, appointment or process is fully bonded against,
vacated, or dismissed within forty-five (45) days from its effective date but
not later than ten (10) days prior to any proposed disposition of any assets
pursuant to any such proceeding, or (j) if there is a material adverse change in
the business or financial condition or prospects of Debtor, then, and in any
such event, Secured Party shall have the right to exercise any one or more of
the remedies hereinafter provided.
Each of the following events shall also constitute an Event of Default hereunder
and upon the occurrence of any one or more of them, Secured Party shall have the
right to exercise any one or more of the remedies hereinafter provided:
(aa) If at the end of the fist fiscal year of Debtor ending after the date
of this Agreement, and each fiscal year ending thereafter (each a "Fiscal
Year"), Debtor's operating income before income expense, income taxes,
depreciation, amortization and extraordinary gains and/or losses, all as
determined in accordance with GAAP ("EBITDA"), for each such Fiscal Year, is
less than one and one-half (1.5) times as much as the sum of all of Debtor's
interest expense incurred during the Fiscal Year plus the current portion of
long term debt and capitalized leases reported as of the end of the Fiscal Year,
all as determined in accordance with GAAP; or
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(bb) If Debtor at any time has a net worth as determined in accordance with
GAAP of less than Thirty Million and 00/100 Dollars ($30,000,000.00) increasing
annually by an amount equal to 50% of the reported net after-tax earnings
beginning with the Fiscal Year ending June 30, 1997 and each subsequent year
thereafter; or
(cc) If at the end of any Fiscal Year End of Debtor, the sum of Debtor's
notes payable, capitalized lease obligations and all other borrowed funds
(whether reflected as a current liability or a long-term liability) as
determined by GAAP is greater than three and one-half (3/5) times Debtor's
EBITDA for the Fiscal Year then ended.
5. Remedies. If an Event of Default shall occur, in addition to all rights and
remedies of a secured party under the Uniform Commercial Code, Secured Party
may, at its option, at any time (a) declare the entire unpaid Indebtedness to be
immediately due and payable; (b) without demand or legal process, enter into the
premises where the Collateral may be found and take possession of and remove the
Collateral, all without charge to or liability on the part of Secured party; or
(c) require Debtor to discontinue its use of the Collateral, and, to the extent
it is not permanently affixed to or otherwise a part of real property, assemble,
crate, pack, ship, and deliver the Collateral to Secured Party in such manner
and at such place as Secured Party may require, all at Debtor's sole cost and
expense. DEBTOR HEREBY EXPRESSLY WAIVES ITS RIGHTS, IF ANY, TO (1) PRIOR NOTICE
OF REPOSSESSION AND (2) A JUDICIAL OR ADMINISTRATIVE HEARING PRIOR TO SUCH
REPOSSESSION. Secured Party may, at its option, ship, store and repair the
Collateral so removed and sell any or all of it at a public or private sale or
sales. Unless the Collateral is perishable or threatens to decline speedily in
value or is of a type customarily sold on a recognized market, Secured Party
will give Debtor reasonable notice of the time and place of any public sale
thereof or of the time after which any private sale or any other intended
disposition thereof is to be made, it being understood and agreed that Secured
Party may be a buyer at any such sale and Debtor may not, either directly or
indirectly, be a buyer at any such sale. The requirements, if any, for
reasonable notice will be met if such notice is delivered to Debtor in
accordance with Section 10 of this Agreement at least ten (10) days before the
time of sale or disposition. In accordance with Section 2(r), Debtor shall also
be liable for and shall upon demand pay to Secured Party all expenses incurred
by Secured Party in connection with the undertaking or enforcement by Secured
Party of any of its rights or remedies hereunder or at law, all of which costs
and expenses shall be additional Indebtedness hereby secured. After any such
sale or disposition, Debtor shall be liable for any deficiency of the
Indebtedness remaining unpaid, with interest thereon at the rate set forth in
the related Notes.
6. Cumulative Remedies. All remedies of Secured Party hereunder are cumulative,
are in addition to any other remedies provided for by law or in equity and may,
to the extent permitted by law, be exercised concurrently or separately, and the
exercise of any one remedy shall not be deemed an election of such remedy or to
preclude the exercise of any other remedy. No failure on the part of Secured
Party to exercise, and no delay in
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exercising any right or remedy, shall operate as a waiver thereof or in any way
modify or be deemed to modify the terms of this Agreement or any other Loan
Document or the Indebtedness, nor shall any single or partial exercise by
Secured Party of any right or remedy preclude any other or further exercise of
the same or any other right or remedy.
7. Assignment. Secured Party may transfer or assign all or any part of the
Indebtedness and the Loan Documents without releasing Debtor or the Collateral,
and upon such transfer or assignment the assignee or holder shall be entitled to
all the rights, powers, privileges and remedies of Secured party to the extent
assigned or transferred. The obligations of Debtor shall not be subject, as
against any such assignee or transferee, to any defense, set-off, or counter-
claim available to Debtor against Secured Party and any such defense, set-off,
or counter-claim may be asserted only against Secured Party.
8. Time is of the Essence. Time and manner of performance by Debtor of its
duties and obligations under the Loan Documents is of the essence. If Debtor
shall fail to comply with any provision of any of the Loan documents, Secured
Party shall have the right, but shall not be obligated, to take action to
address such non-compliance, in whole or in part, and all moneys spent and
expenses and obligations incurred or assumed by Secured Party shall be paid by
Debtor upon demand and shall be added to the Indebtedness. Any such action by
Secured Party shall not constitute a waiver of Debtor's default.
9. Enforcement. This Agreement shall be governed by and construed in accordance
with the internal laws and decisions of the State of Illinois, without regard to
principles of conflicts of law. At Secured Party's election and without limiting
Secured Party's right to commence an action in any other jurisdiction, Debtor
hereby submits to the exclusive jurisdiction and venue of any court (federal,
state or local) having situs within the State of Illinois, expressly waives
personal service of process and consents to service by certified mail, postage
prepaid, directed to the Chief Financial Officer of Debtor at the last known
address of Debtor, which service shall be deemed completed within ten (10) days
after the mailing thereof.
10. Further Assurance; Notice. Debtor shall, at its expense, do, execute and
deliver such further acts and documents as Secured Party may from time to time
reasonably require to assure and confirm the rights created or intended to be
created hereunder, to carry out the intention or facilitate the performance of
the terms of the Loan Documents or to assure the validity, perfection, priority
or enforceability or any security interest created hereunder. Debtor agrees to
execute any instrument or instruments necessary or expedient for filing,
recording, perfecting, notifying, foreclosing, and/or liquidating of Secured
Party's interest in the Collateral upon request of, and as determined by,
Secured Party, and Debtor hereby specifically authorizes Secured Party to
prepare and file Uniform Commercial code financing statements and other
documents and to execute same for and on behalf of Debtor as Debtor's attorney-
in-fact, irrevocably and coupled with an interest, for such purposes. All
notices required or otherwise given by either party shall be in writing and
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shall be delivered by hand, by registered or certified first class United States
mail, return receipt requested, or by overnight courier to the other party at
its address stated herein or at such other address as the other party may from
time to time designate by written notice (and, if to Debtor, directed to the
Chief Financial Officer of Debtor). All notices shall be deemed given when
received, when delivery is refused or when the returned for failure to be called
for.
11. Waiver of Jury Trial. Debtor and Secured Party hereby waive their respective
rights to a jury trial of any claim or cause of action based upon or arising in
connection with any of the Loan Documents. this waiver is informed and freely
made. Debtor and Secured Party acknowledge that this waiver is a material
inducement to enter into a business relationship, that each has already relied
on the waiver in entering into the Loan Documents, and that each will continue
to rely on the waiver in their related future dealings. Debtor and Secured Party
further warrant and represent that each has reviewed this waiver with its legal
counsel and that each knowingly and voluntarily waives its jury trial rights
following consultation with legal counsel.
12. Complete Agreement. The Loan Documents are intended by Debtor and Secured
Party to be the final, complete, and exclusive expression of the agreement
between them. The Loan documents may not be altered, modified or terminated in
any manner except by a writing duly signed by the parties thereto. Debtor and
Secured Party intend the Loan Documents to be valid and binding and no
provisions hereof and thereof which may be deemed unenforceable shall in any way
invalidate any other provisions of the Loan Documents, all of which shall remain
in full force and effect. The Loan Documents shall be binding upon the
respective successors, legal representatives, and assigns of the parties. The
singular shall include the plural, the plural shall include the singular, and
the use of any gender shall be applicable to all genders. The use in any of the
Loan Documents of the word "including," or other words of similar import, when
following any general term, statement or matter shall not be construed to limit
such term, statement or matter to any specific item or matters, whether or not
language of nonlimitation, such as "without limitation" or "but not limited to,"
or words of similar import, are used with reference thereto, but rather shall be
deemed to refer to all other items or matters that could reasonably fall within
the broadest possible scope of such term, statement or matter. If there be more
than one Debtor, the warranties, representations and agreements contained herein
and in the other Loan Documents shall be joint and several. The Schedules on the
following page[s] are incorporated herein by this reference and made a part
hereof. Sections and subsections headings are included for convenience of
reference only and shall not be given any substantive effect.
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IN WITNESS WHEREOF, Secured Party and Debtor have each signed this Security
Agreement as of the day and year first above written.
HELLER FINANCIAL, INC., PRAEGITZER INDUSTRIES, INC.,
a Delaware corporation an Oregon corporation
By: JOHN WATSON By: SCOTT GILBERT
------------------------ ------------------------
Name: John Watson Name: Scott Gilbert
---------------------- ----------------------
Title: VP Title: VP-Finance
--------------------- ---------------------
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Loan No. 1910069-0008
- --------------------------------------------------------------------------------
Heller Financial
PROMISSORY NOTE
$1,519,105.74 March 31, 1998
FOR VALUE RECEIVED, Praegitzer Industries, Inc., an Oregon corporation
("Maker"), promises to pay to the order of Heller Financial, Inc., a Delaware
corporation (together with any holder of this Note, "Payee"), at its office
located at 500 West Monroe Street, Chicago, Illinois 60661, or at such other
place as Payee may from time to time designate, the principal sum of One Hundred
Five Hundred Nineteen One Hundred Five and 74/100 Dollars ($1,519,105.74),
together with interest thereon at a fixed rate equal to seven and 80/100 percent
(7/80%) per annum. Principal and interest shall be payable in eighty-four (84)
consecutive monthly installments commencing May 1, 1998, and continuing on the
same day of each consecutive calendar month thereafter until this Note is fully
paid, each such installment in the amount of Twenty-Three thousand Five Hundred
Twenty-Six and 02/100 Dollars ($23,526.02); provided, however, that in any and
all events the final installment payment hereunder shall be in the amount of the
entire then outstanding principal balance hereunder, plus all accrued and unpaid
interest, charges and other amounts owing hereunder or under the Security
Agreement (defined below). All payments shall be applied first to interest and
then to principal. Interest shall be computed on the basis of a 360 day year
comprised of 30-day months. Maker shall make an interest only initial payment on
April 1, 1998 of accrued interest from the loan disbursement date through March
31, 1998.
Notwithstanding the foregoing, if at any time implementation of any
provision hereof shall cause the interest contracted for or charged herein or
collectable hereunder to exceed the applicable lawful maximum rate, then the
interest shall be limited to such applicable lawful maximum.
This Note is secured by the collateral described in the Security Agreement
dated March 31, 1998, between the Maker and Payee (the "Security Agreement;" and
together with all related documents and instruments, the "Loan Documents") to
which reference is made for a statement of the nature and extent of protection
and security afforded, certain rights of Payee and certain rights and
obligations of Maker, including Maker's rights, if any, to prepay the principal
balance hereof; provided, however, that in addition to any other sum payable
hereunder, under the Security Agreement or any of the other Loan documents, in
the event of a prepayment of the principal balance hereunder, whether voluntary,
following acceleration or otherwise, Maker shall pay to Payee together with such
prepayment a Breakage Fee (defined below), which Breakage Fee, together with the
amounts payable under Section 3(ii) of the Security Agreement, if any,
represents liquidated damages to Payee for the loss of its bargain and not a
penalty. As used herein, the term "Breakage Fee" shall mean the amount, if any,
by which (A) the present value, in the aggregate, of the then remaining
installments of principal and interest due hereunder, absent the prepayment,
using a discount rate equal to (i) the yield to maturity as of the date two (2)
days prior to the date of the prepayment on United States Treasury securities
with a final maturity approximately equal to the remaining term hereof, absent
the prepayment, as published in The Wall Street Journal, plus (ii) two and
10/100 percent (2.10%), exceeds (B) the then outstanding principal balance
hereunder, absent the prepayment.
Time is of the essence hereof. If payment of any installment or any other
sum due under this Note or the Loan Documents is not paid when due, Maker agrees
to pay a late charge equal to the lesser of (i) five cents (5 cents) per dollar
on, and in addition to, the amount of each such payment, or (ii) the maximum
amount Payee is permitted to charge by law. In the event of the occurrence of an
Event of Default (as defined in the Security Agreement), then the entire unpaid
principal balance hereof with accrued and unpaid interest thereon, together with
all other sums payable under this Note or the Loan Documents, shall, at the
option of Payee and without notice or demand, become immediately due and
payable, such accelerated balance bearing interest until paid at the rate of
three and 00/100 percent (3.00%) per annum above the fixed rate set forth in the
first paragraph of this Note.
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Maker and all endorsers, guarantors or any others who may at any time
become liable for the payment hereof hereby consent to any and all extensions of
time, renewals, waivers and modifications of, and substitutions or release or
security or of any party primarily or secondarily liable on, or with respect to,
this Note or any of the Loan Documents or any of the terms and provisions
thereof that may be made, granted or consented to by Payee, and agree that suit
may be brought and maintained against any one or more of them, at the election
of Payee, without joinder of the others as parties thereto, and that Payee shall
not be required to first foreclose, proceed against, or exhaust any security
herefor, in order to enforce payment of this Note by any one or more of them.
Maker and all endorsers, guarantors or any others who may at any time become
liable for the payment hereof hereby severally waive presentment, demand for
payment, notice of nonpayment, protest, notice of protest, notice of dishonor,
and all other notices in connection with this Note, filing of suit and diligence
in collecting this Note or enforcing any of the security herefor, and, without
limiting any provision of any of the Loan Documents, agree to pay, if permitted
by law, all expenses incurred in collection, including reasonable attorneys'
fees, and hereby waive all benefits of valuation, appraisement and exemption
laws.
If there be more than one Maker, all the obligations, promises, agreements
and covenants of maker under this Note are joint and several.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW. AT PAYEE'S ELECTION AND WITHOUT LIMITING PAYEE'S
RIGHT TO COMMENCE AN ACTION IN ANY OTHER JURISDICTION, MAKER HEREBY SUBMITS TO
THE EXCLUSIVE JURISDICTION AND VENUE OF ANY COURT (FEDERAL, STATE OR LOCAL)
HAVING SITUS WITHIN THE STATE OF ILLINOIS, EXPRESSLY WAIVES PERSONAL SERVICE OF
PROCESS AND CONSENTS TO SERVICE BY CERTIFIED MAIL, POSTAGE PREPAID, DIRECTED TO
THE LAST KNOWN ADDRESS OF MAKER, WHICH SERVICE SHALL BE DEEMED COMPLETED WITHIN
TEN (10) DAYS AFTER THE DATE OF MAILING THEREOF.
MAKER HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS NOTE. THIS WAIVER IS INFORMED AND
FREELY MADE. MAKER ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO
ENTER INTO A BUSINESS RELATIONSHIP, THAT PAYEE HAS ALREADY RELIED ON THE WAIVER
IN MAKING THE LOAN EVIDENCED BY THIS NOTE, AND THAT PAYEE WILL CONTINUE TO RELY
ON THE WAIVER IN ITS RELATED FUTURE DEALINGS. MAKER FURTHER WARRANTS AND
REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
Witness/Attest: PRAEGITZER INDUSTRIES, INC.
TERESA H. PEARSON By: SCOTT GILBERT
- ----------------- ------------------------
Name: Scott Gilbert
----------------------
Title: VP - Finance
---------------------
2
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT entered into as of August 6, 1998
by and between PRAEGITZER INDUSTRIES, INC., an Oregon corporation ("Borrower"),
and KEYBANK NATIONAL ASSOCIATION ("Bank"), is as follows:
1. Recitals. Borrower and Bank are parties to that certain Credit Agreement
dated as of March 31, 1998 ("Agreement"). Borrower and Bank desire to revise the
Agreement in the manner set forth herein.
2. Definitions.
(a) The following definitions are hereby added to the Agreement:
"Praegitzer Trust" means Praegitzer Industries Trust I, a Delaware
business trust.
"Praegitzer Trust Transaction" means, (i) the formation by Borrower of
the Praegitzer Trust, (ii) the purchase by Borrower of the common stock of
the Praegitzer Trust, (iii) the purchase by the Praegitzer Trust of the
subordinated debentures of Borrower, and (iv) the sale and issuance of the
Trust Preferred Securities (defined in the Term Sheet) in accordance with
the term sheet and description attached as Exhibit 1 (the "Term Sheet"),
and the execution, delivery and performance of the Guarantee (defined in
the Term Sheet) and Expense Agreement (defined in the Term Sheet) and other
agreements as described or contemplated by the Term Sheet.
"Senior Indebtedness" means all obligations owing from Borrower to
Bank, including without limitation all Indebtedness evidenced by the Loan
Documents, and any and all advances, debts, obligations, and liabilities of
Borrower to Bank, whether nor or hereafter existing and however evidenced.
3. Subordinated Debt. Section 7.17 is amended in its entirety to read as
follows:
During the period after the Closing Date and before January 1, 1999,
Borrower shall issue not less than $25,000,000 of equity or subordinated debt,
which debt shall be explicitly subordinated to all Senior Indebtedness on terms
satisfactory to Bank in its sole discretion. Notwithstanding the foregoing, such
subordinated debt may
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<PAGE>
include among other things, subordinated debentures that may be purchased by the
Praegitzer Trust on terms substantially as set forth in the Term Sheet, which
subordinated debentures shall be explicitly subordinated to all Senior
Indebtedness. The Bank hereby consents to the Praegitzer Transaction on the
terms substantially set forth on the Term Sheet, provided, however, that
distributions payable on each Trust Preferred Security shall not be greater than
14% of the Liquidation Amount of $10 per Trust Preferred Security, and provided,
further, that the Praegitzer Transaction may be materially less than
$40,000,000.
4. Guaranties. Section 8.8 is amended in its entirety to read follows:
Except for (i) the guaranty by the Borrower of the obligations of the
Praegitzer Trust and (ii) up to $5,000,000 of guaranties of the obligations of
its Malaysian Subsidiary, guarantee or become liable in any way as surety,
endorser (other than as endorser of negotiable instruments or deposit or
collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower or any
Subsidiary as security for, any liabilities or obligations of any other Person
except any of the foregoing required by his Agreement.
5. Transactions With Affiliates. Section 8.14 is amended in its entirety to
read as follows:
Except for the Praegitzer Trust Transaction, enter into any transaction
directly or indirectly with or for any affiliate except in the ordinary course
of business on a basis no less favorable to such affiliate than would be
obtained in a comparable arm's length transaction with a Person not an affiliate
involving assets that are not material to the business and operations of
Borrower.
6. Consent - Investments in Other Persons. Notwithstanding Section 8.6 of
the Agreement and any other provisions of the Agreement to the contrary, Bank
hereby consents to the Praegitzer Trust Transaction.
7. Release. Borrower hereby waives any and all defenses, claims,
counterclaims and offsets against Bank which may have arisen or accrued through
the date of this First Amendment and acknowledges that Bank and its officers,
agents and attorneys have made no representations or promises to Borrower except
as specifically reflected in the Agreement as amended hereby.
8. Effective Date. This First Amendment shall be effective upon the
execution of this First Amendment by Borrower and Bank.
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<PAGE>
9. Ratification. Except as otherwise provided in this First Amendment, all
of the provisions of the Agreement are hereby ratified and confirmed and shall
remain in full force and effect.
10. One Agreement. The Agreement, as modified by the provisions of this
First Amendment, shall be construed as one agreement.
11. Counterparts. This First Amendment may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed to be an
original, and all of which when taken together shall constitute one and the same
agreement.
12. Oregon Statutory Notice.
UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY BANK
AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT
FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S
RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY BANK TO BE
ENFORCEABLE.
IN WITNESS WHEREOF, Borrower and Bank have caused this First Amendment to
be executed as of the date first above written.
PRAEGITZER INDUSTRIES, INC.
By: SCOTT D. GILBERT
-------------------------------------
Title: Vice President and Treasurer
----------------------------------
KEYBANK NATIONAL ASSOCIATION
By: MARY K. YOUNG
-------------------------------------
Mary K. Young
Title: Commercial Banking Officer
----------------------------------
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EXHIBIT 10.19
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into as of August 26, 1996 by and between
PRAEGITZER INDUSTRIES, INC., an Oregon corporation ("Praegitzer") and ROBERT J.
VERSIACKAS ("Versiackas").
RECITALS
A. Versiackas is an officer and shareholder of Trend Circuits, Inc., a
California corporation ("Trend"), and has expertise and experience in the
fabrication, assembly, and marketing of circuit boards and the business carried
on by Trend and has developed certain products, technologies, and strategies for
the benefit of Trend.
B. Pursuant to a Merger Agreement dated as of August 16, 1996, Praegitzer
and Trend agreed to merge, with Praegitzer as the surviving corporation (the
"Merger").
C. Praegitzer wishes to continue the services of Versiackas, and Versiackas
is willing to serve Praegitzer, on the terms and conditions set forth herein.
AGREEMENT
ARTICLE 1. EMPLOYMENT
1.1 Term. Praegitzer agrees to employ Versiackas as Vice President of
Operations - Fremont, and Versiackas agrees to serve as Vice President of
Operations - Fremont, for a term of at least two years starting on the closing
date of the Merger and continuing thereafter unless terminated in accordance
with the termination provisions of Article 10.
1.2 Duties. Versiackas accepts employment with Praegitzer on the terms and
conditions set forth in this Agreement, and agrees to devote his full time and
attention (reasonable periods of illness excepted) to the performance of his
duties under this Agreement. Versiackas shall perform the specific duties and
shall exercise the specific authority assigned to him from time to time by the
senior management of Praegitzer, which shall be consistent with duties generally
assigned to senior executives of Praegitzer. In performing his duties,
Versiackas shall be subject to the direction and control of the senior
management of Praegitzer. Versiackas further agrees that in all aspects of his
employment, he shall comply with the reasonable instructions, policies, and
rules of Praegitzer established from time to time, and shall perform his duties
faithfully, intelligently, to the best of his ability, and in the best interest
of Praegitzer. Versiackas' devotion of reasonable periods of time to personal
purposes, outside business activities, or charitable activities shall not be
deemed a breach of this Agreement, if such purposes or activities do not violate
the
PAGE 1 - EMPLOYMENT AGREEMENT (ROBERT J. VERSIACKAS)
<PAGE>
Noncompetition Agreement between Praegitzer and Versiackas of even date or
materially interfere with the services he is required to render to or on behalf
of Praegitzer.
ARTICLE 2. COMPENSATION
2.1 Base Compensation; Bonus. In consideration of all services to be
rendered by Versiackas to Praegitzer, Praegitzer shall pay to Versiackas base
compensation of $130,000 per year, payable in accordance with the salary payment
policy of Praegitzer. As further compensation, Praegitzer shall pay a bonus to
Versiackas in accordance with Praegitzer's standard policies. If at the end of
each quarter during the first two years of this Agreement the total salary and
bonus paid to Versiackas by Praegitzer is less than an annualized rate of
$165,000, Praegitzer shall pay Versiackas an amount equal to the difference.
Praegitzer may also pay Versiackas bonuses at such times and in such amounts as
the Board of Directors of Praegitzer determines in its sole discretion;
provided, however, that after the second year, this Agreement shall not be
construed to require the Board of Directors of Praegitzer to pay any bonus to
Versiackas.
2.2 Other Benefits. Base compensation and bonuses paid to Versiackas shall
be in addition to any contribution made by Praegitzer for the benefit of
Versiackas to any qualified retirement plan maintained by Praegitzer for the
benefit of its employees. Praegitzer shall provide to Versiackas and Versiackas'
family the same benefits that Praegitzer provides to other executive employees
and their families, subject to Versiackas' satisfaction of the eligibility
conditions for such benefits.
2.3 Stock Options. Effective with the execution of this Agreement,
Versiackas shall be granted options to acquire 16,043 shares of the common stock
of Praegitzer at the last sale price per share reported on the Nasdaq National
Market System on the day this Agreement is executed (or if such day is not a
trading day, on the next preceding trading day), and otherwise on the terms that
stock options are granted to employees of Praegitzer generally pursuant to the
Praegitzer Stock Incentive Plan. The options will be Incentive Stock Options to
the extent possible.
ARTICLE 3. EXPENSES
Versiackas shall be entitled to reimbursement from Praegitzer for
reasonable expenses necessarily incurred by him in performing his duties under
this Agreement, on presentation of vouchers indicating in reasonable detail the
amount and business purpose of each such expense and on compliance with the
other requirements of Praegitzer's expense reimbursement policy.
PAGE 2 - EMPLOYMENT AGREEMENT (ROBERT J. VERSIACKAS)
<PAGE>
ARTICLE 4. VACATION; ILLNESS
4.1 Vacation. Subject to the approval of time by the Board of Directors of
Praegitzer, Versiackas shall be entitled to one or more vacations totaling 30
working days in each calendar year. Any unused vacation time shall be carried
over to future years.
4.2 Illness. Subject to Section 10.1(b)(2), Versiackas shall receive full
compensation for any period of illness or incapacity during the term of this
Agreement.
ARTICLE 5. FACILITIES AND PERSONNEL
Versiackas shall be given a private office, secretarial services, and other
facilities, supplies, and services needed to perform his duties under this
Agreement.
ARTICLE 6. RELOCATION
Praegitzer may not require Versiackas to relocate his residence from the
San Jose, California area without his consent. However, Praegitzer may require
Versiackas to travel to Praegitzer's headquarters in Dallas, Oregon or elsewhere
at reasonable times and as reasonably required to perform his duties under this
Agreement.
ARTICLE 7. NONCOMPETITION
Versiackas shall enter into a Noncompetition Agreement with Praegitzer,
dated as of the date of this Agreement, and perform his obligations and
covenants thereunder.
ARTICLE 8. PATENTS AND PATENT APPLICATIONS
All patents or patent applications now held in Versiackas' name, or that
may be granted or made during the term of this Agreement, are hereby
acknowledged and declared by Versiackas to be held in trust for the sole use and
benefit of Praegitzer, and Versiackas shall not be entitled to transfer, convey,
assign, encumber, or otherwise dispose of any such proprietary rights without
Praegitzer's prior written consent. Versiackas shall execute and deliver to
Praegitzer on request any transfer documents needed to show Praegitzer's
ownership of proprietary rights developed by Versiackas either before or during
the term of this Agreement for the use and benefit of Trend and Praegitzer.
ARTICLE 9. REPRESENTATION AND WARRANTY OF VERSIACKAS
Versiackas represents and warrants to Praegitzer that there is no
employment contract or any other contractual obligation to which he is subject
that prevents him from entering into this Agreement or from performing fully his
duties under this Agreement.
PAGE 3 - EMPLOYMENT AGREEMENT (ROBERT J. VERSIACKAS)
<PAGE>
ARTICLE 10. TERMINATION OF EMPLOYMENT
10.1 Causes for Termination of Employment. Praegitzer's employment of
Versiackas may be terminated as follows:
(a) After two years from the date of this Agreement, either Praegitzer
or Versiackas may terminate the employment of Versiackas for any reason and
without cause by giving 30 days' prior written notice to the other, provided,
however, that Praegitzer may pay to Versiackas 60 days' base compensation in
lieu of giving such notice.
(b) Praegitzer shall have the right to terminate Versiackas'
employment at any time, without notice and without payment of compensation in
lieu of notice, under any of the following conditions:
(i) For cause, including, but not limited to, (i) any form of
dishonesty, criminal conduct, unethical business practice, or conduct involving
moral turpitude connected with Versiackas' employment or that otherwise reflects
adversely on Praegitzer's reputation or operations in a material way; (ii)
unauthorized expenditure of Praegitzer's funds or misappropriation of
Praegitzer's assets; (iii) conviction of any felony; (iv) Versiackas' refusal to
comply with Praegitzer's reasonable instructions, policies, or rules after
written notice of such noncompliance; (v) continued neglect or willful
misconduct by Versiackas with respect to his duties and obligations under this
Agreement, or continued or repeated absence from employment during usual work
hours; (vi) any material breach, which breach continues after notice and a
reasonable opportunity to cure, of Versiackas' obligations under this Agreement
or the Noncompetition Agreement; or (vii) habitual use of alcohol or drugs.
(ii) Versiackas has suffered a disability as a result of illness,
accident, or other cause and is unable to perform a substantial portion of his
usual duties of employment for a total (consecutive or cumulative) of 180 days
in any twelve-month period after the date the disability commenced.
(c) Versiackas shall have the right to terminate his employment with
Praegitzer for any material breach of Praegitzer's obligations under this
Agreement, which breach continues after notice and a reasonable opportunity to
cure.
10.2 Death. This Agreement and Versiackas' employment with Praegitzer shall
terminate automatically on Versiackas' death.
10.3 Effect of Termination; Severance Pay. On termination of employment,
Versiackas (or Versiackas' estate in the event of Versiackas' death) shall
receive Versiackas' base compensation prorated through the effective date of
termination of employment, plus any other compensation due under this Article
10, and any other payments, including, but not limited to, earned vacation pay,
to which Versiackas is entitled under Praegitzer's policies.
PAGE 4 - EMPLOYMENT AGREEMENT (ROBERT J. VERSIACKAS)
<PAGE>
If this Agreement is terminated in the first two years of its term by Praegitzer
without cause, as defined in Section 10.1(b)(i), or by Versiackas pursuant to
Section 10.1(c), Praegitzer shall pay to Versiackas, in addition to any other
sums due hereunder through the date of such termination, severance pay equal to
Versiackas's base compensation hereunder for the lesser of (i) one year, or (ii)
the time remaining until the expiration of two years after the date of this
Agreement.
ARTICLE 11. MISCELLANEOUS PROVISIONS
11.1 Binding Effect. This Agreement shall be binding on and inure to the
benefit of the parties and their heirs, personal representatives, successors,
and assigns.
11.2 Assignment. Versiackas shall not assign any rights or delegate any
duties under this Agreement.
11.3 Amendment, Waiver, etc. The terms of this Agreement may be amended or
waived only by an instrument in writing signed by the party against which
enforcement of such amendment or waiver is sought. Any waiver of any term of
this Agreement or any breach hereof shall not operate as a waiver of any other
such term, condition or breach, and no failure to enforce any provision hereof
shall operate as a waiver of such provision or of any other provision hereof.
11.4 Headings. The headings are for convenience only and will not control
or affect the meaning or construction of the provisions of this Agreement.
11.5 Jurisdiction; Governing Law. The construction and performance of this
Agreement will be governed by the laws of the State of Oregon (except for the
choice of law provisions thereof).
11.6 Notices. Any notice, demand or request required or permitted to be
given under this Agreement (i) shall be in writing; (ii) shall be delivered
personally, including by means of facsimile or courier, or mailed by registered
or certified mail, postage prepaid and return receipt requested; (iii) shall be
deemed given on the date of personal delivery or on the date set forth on the
return receipt; and (iv) shall be delivered or mailed to the addresses or
facsimile numbers set forth below or to such other address as any party may from
time to time direct:
PAGE 5 - EMPLOYMENT AGREEMENT (ROBERT J. VERSIACKAS)
<PAGE>
PRAEGITZER: Praegitzer Industries, Inc.
1270 S.E. Monmouth Cut-Off Road
Dallas, OR 97338-9532
Phone: 503-623-9273
Fax: 503-623-3403
Attn: Mr. Robert L. Praegitzer
President, Chief Executive Officer, and Chairman
Copies to: Stoel Rives LLP
Standard Insurance Center
900 S.W. Fifth Avenue, Suite 2300
Portland, OR 97204-1268
Phone: 503-224-3380
Fax: 503-220-2480
Attn: Stephen E. Babson
VERSIACKAS: Robert J. Versiackas
112 Rassani Drive
Danville, CA 94506
11.7 Attorneys' Fees. If suit or action is filed by any party to enforce
the provisions of this Agreement, or otherwise with respect to the subject
matter of this Agreement, the substantially prevailing party shall be entitled
to recover reasonable attorneys' fees as fixed by the court and, if any appeal
is taken, reasonable attorneys' fees as fixed by the appellate court.
11.8 Entire Agreement. This Agreement and the Noncompetition Agreement
embody the entire agreement and understanding of the parties regarding
Versiackas' employment with Praegitzer and supersede any and all prior
agreements, arrangements, and understandings relating to the matter.
11.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original but all of which together
will constitute a single instrument.
PAGE 6 - EMPLOYMENT AGREEMENT (ROBERT J. VERSIACKAS)
<PAGE>
11.10 Severability. If any provision of this Agreement shall be invalid or
unenforceable in any respect for any reason, the validity and enforceability of
any such provision in any other respect and of the remaining provisions of this
Agreement shall not be in any way impaired.
PRAEGITZER INDUSTRIES, INC.
By: MATTHEW J. BERGERON
-------------------------------
Matthew J. Bergeron
Senior Vice President and Chief
Financial Officer
ROBERT J. VERSIACKAS
- -----------------------------------
ROBERT J. VERSIACKAS
PAGE 7 - EMPLOYMENT AGREEMENT (ROBERT J. VERSIACKAS)
March 24, 1998
Jim Buchanan
10114 East Coopers Hawk Drive
Sun Lakes, AZ 85248
RE: Revised Offer Letter
Dear Jim:
With great pleasure Praegitzer Industries Incorporated would like to extend the
following offer of employment. You will soon feel the sense of pride we share in
belonging to this growing organization. Our progress and growth are the result
of each person's taking responsibility for a share of the work that needs to be
done. As responsibility increases, so do the rewards.
Effective March 20, 1998, Praegitzer Industries offers you a position as Senior
Vice President of Sales and Marketing. This position reports to me as President.
We would anticipate a starting date of April 13, 1998.
Effective on your first day of work, your salary will be $15,417 per month.
Beginning with the start of fiscal 1999, you will be eligible for a $65,000
target bonus based on 100% of plan with the opportunity to achieve a $115,000
bonus total based upon exceeding the sales and EPS targets by 10%. You will also
be eligible for participation in the Executive Deferred Compensation Program and
six weeks vacation per year. You will receive $700 per month automobile
allowance. This position will have stock options in the amount of 125,000
shares, price to be effective your starting date.
Relative to an employment agreement, the Company will prepare the standard
change of control agreement for your review and acceptance. Stock options vest
100% upon change of control.
The Company will reimburse you for the reasonable closing costs associated with
the purchase of a home near Corporate headquarters and will pay for the
transportation of your household goods to your new home. Additionally, the
Company will pay for a house-hunting for trip for your spouse. In the event that
you do not choose to relocate, the Company will provide an apartment and will
also provide for up to 12 visits per year to Portland for your spouse.
Your benefit package includes the following, effective on date of hire:
* Health and Dental coverage
* Group Life and AD&D, Short term Disability
* Flexible Spending Account
* Buy-up plans for Group Life and AD&D, Short term Disability
* 401K is available 90 days after hire date
<PAGE>
* Employee Stock Purchase Plan is available to you on the first offering
after the completion of the 90 days form your hire date.
This offer of employment will not alter or effect your status as described in
the Employee Handbook, and you will be subject to all rights, rules and
guidelines as outlined in the Employee Handbook except to the extent outlined in
the employment agreement between you and the Company. You will be expected to
comply with our non-disclosure agreement during your employment with Praegitzer
Industries Inc. Copies of the employment agreement and deferred compensation
agreement will be sent under a separate cover.
If a change of control occurs and/or your employment with Praegitzer Industries,
Inc. is terminated for any reason other than cause, within 18 months after such
change of control, you will be entitled to the following benefits:
1. Your full base salary for a period of 18 months
2. For an 18-month period, the Company will provide you with life,
disability, accident and health insurance substantially similar to
those you received immediately prior to your termination.
3. For 18 months, the Company will provide you with the continued use of
or payment of a company car allowance in the amount of $700 per month.
4. If, during the first 12 months of employment, should you be terminated
for any reason except causes related to criminal activity or ethical
misconduct, you will receive 24 months of base salary from the date of
termination.
We are anxious to receive your confirmation of acceptance to this position, and
we would appreciate learning of your decision ASAP. Jim, we sincerely look
forward to having you join us and are certain of the mutual benefits.
By signing below you acknowledge acceptance of this offer of employment subject
to the conditions listed above. Please return one copy of this letter in the
enclosed envelope.
Submitted by:
- ------------------------------------- --------------
Matthew Bergeron Date
President and Chief Operating Officer
- ------------------------------------- --------------
Jim Buchanan Date
Exhibit 21.1
LIST OF SUBSIDIARIES
Jurisdiction of
Name Incorporation
- ---- -------------
Praegitzer International, LLC Oregon
Praegitzer Asia Sdn Bhd Malaysia
Praegitzer International (H.K.) Limited Hong Kong
Praegitzer Industries (B.V.I.) Inc. British Virgin Islands
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-07533, 333-07535, and 333-09319 on Form S-8 and Registration Statement No.
333-24633 on Form S-3 of Praegitzer Industries, Inc. of our report dated
September 2, 1998, included in this Form 10-K of Praegitzer Industries, Inc. for
the year ended June 30, 1998.
DELOITTE & TOUCHE LLP
Portland, Oregon
September 2, 1998
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,170
<SECURITIES> 0
<RECEIVABLES> 28,562
<ALLOWANCES> 0
<INVENTORY> 16,491
<CURRENT-ASSETS> 49,136
<PP&E> 124,801
<DEPRECIATION> 35,974
<TOTAL-ASSETS> 151,494
<CURRENT-LIABILITIES> 29,840
<BONDS> 73,413
0
0
<COMMON> 42,325
<OTHER-SE> 1,655
<TOTAL-LIABILITY-AND-EQUITY> 151,494
<SALES> 182,773
<TOTAL-REVENUES> 182,773
<CGS> 148,487
<TOTAL-COSTS> 148,487
<OTHER-EXPENSES> 23,456
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,757
<INCOME-PRETAX> 7,297
<INCOME-TAX> 2,215
<INCOME-CONTINUING> 5,082
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,082
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