SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
{x} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number: 0-27932
PRAEGITZER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0790158
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
19801 SW 72nd Avenue
Tualatin, Oregon 97062
(503) 454-6000
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days.
Yes {x} No { }
Number of shares of Common Stock outstanding as of October 29, 1999: 13,129,750
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PRAEGITZER INDUSTRIES, INC.
Table of Contents
Page No.
--------
Part I Financial Information
Condensed Consolidated Balance Sheet-
September 30, 1999 and June 30, 1999 .................................3
Condensed Consolidated Statement of Operations-
Three months ended September 30, 1999 and 1998 .......................4
Condensed Consolidated Statement of Cash Flows-
Three months ended September 30, 1999 and 1998 .......................5
Notes to Condensed Consolidated
Financial Statements .................................................6
Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................9
Part II Other Information
Item 2 Change in Securities and Use of Proceeds ..................13
Item 6 Exhibits and Reports on Form 8-K ..........................13
Signatures....................................................................14
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(In Thousands)
ASSETS
------
September 30, June 30,
1999 1999
-------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 131 $ 570
Accounts receivable, net 30,186 29,645
Inventories 17,955 16,652
Prepaid expenses 10,529 10,800
Assets held for sale 7,400 4,389
-------------- --------------
Total current assets 66,201 62,056
Property, plant and equipment 103,576 107,334
Less: Accumulated depreciation and amortization (36,122) (35,324)
-------------- --------------
67,454 72,010
Other assets 10,805 9,831
-------------- --------------
$ 144,460 $ 143,897
============== ==============
LIABILITIES
-----------
CURRENT LIABILITIES
Bank overdraft 4,107 1,924
Accounts payable 20,562 21,023
Accrued payroll and related expenses 2,821 4,095
Other current liabilities 1,909 3,892
Current portion of long-term obligations 7,668 12,328
-------------- --------------
Total current liabilities 37,067 43,262
Long-term obligations 73,372 67,326
Deferred tax liability 3,446 2,287
Other liabilities 315 170
Convertible subordinated notes 11,500 11,500
Common stock 44,090 43,886
Note receivable from officer and deferred compensation, net (629) (650)
Accumulated deficit (24,701) (23,884)
-------------- --------------
Total shareholders' equity 18,760 19,352
-------------- --------------
$ 144,460 $ 132,397
============== ==============
The accompanying notes are an integral part of these condensed financial statements.
</TABLE>
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<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended
September 30,
1999 1998
-------- --------
<S> <C> <C>
Revenue $ 47,275 $ 55,396
Cost of sales 40,590 46,202
-------- --------
Gross profit 6,685 9,194
Selling, general and
administrative expenses 5,630 7,012
-------- --------
Income from operations 1,055 2,182
Interest expense 2,147 1,467
Other income (expense) (50) 208
-------- --------
Income (loss) before income taxes (1,142) 923
Income tax provision (benefit) (325) 330
-------- --------
Net income (loss) $ (817) $ 593
======== ========
Basic and diluted net income per share $ (0.06) $ 0.05
======== ========
The accompanying notes are an integral part of these condensed financial statements.
</TABLE>
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<TABLE>
<CAPTION>
PRAEGITZER INDUSTRIES, INC
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months
Ended September 30,
1999 1998
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net cash provided by (used in) operating activities $ (1,536) $ 4,581
Cash Flows from Investing Activities:
Capital expenditures (2,508) (10,651)
Proceeds from sale of property, plant and equipment - 4,969
Other (83) (153)
-------- --------
Net cash used in investing activities (2,591) (5,835)
-------- --------
Cash Flows from Financing Activities:
Increase in short-term borrowings 1,743 2,489
Borrowings of long-term debt - 263
Payments on long-term debt and capital leases (358) (1,271)
Increase (decrease) in bank overdrafts 2,183 (1,384)
Issuances of common stock 204 328
Other (84) -
-------- --------
Cash provided by financing activities 3,688 425
-------- --------
Effect of foreign currency - (36)
Decrease in Cash and Cash Equivalents (439) (865)
Cash and Cash Equivalents at Beginning of Period 570 1,170
-------- --------
Cash and Cash Equivalents at End of Period $ 131 $ 305
======== ========
Supplemental disclosure of cash flow information:
Cash paid (received) during the respective periods for:
Interest $ 1,377 $ 1,814
Income Taxes $ (1,702) $ 13
The accompanying notes are an integral part of these condensed financial statements.
</TABLE>
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PRAEGITZER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of Praegitzer Industries, Inc. (the "Company")
contain all adjustments necessary to present fairly the financial position of
the Company as of September 30, 1999, and the results of operations and cash
flows for the three months ended September 30, 1999 and 1998. The results of
operations for the three months ended September 30, 1999 are not necessarily
indicative of the results expected for the entire fiscal year ending June 30,
2000.
These financial statements have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such regulations, although the Company believes
the disclosures provided are adequate to prevent the information presented from
being misleading.
This report on Form 10-Q for the quarter ended September 30, 1999,
should be read in conjunction with the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1999. Portions of the accompanying financial
statements are derived from the audited year-end financial statements of the
Company dated June 30, 1999.
Consolidation - In August 1999, the Company closed its Malaysian printed circuit
board manufacturing facility, Praegitzer Asia Sdn. Bd. ("PASB"). As a result,
the Company has not consolidated the PASB operations into the financial
statements for the three-month period ended September 30, 1999. Consolidation
was not deemed necessary due to the inability to receive accurate information
and management's belief that PASB operations for July and August 1999 were not
material to the operations of the Company. The net assets of PASB are included
in assets held for sale, and are approximately $2.0 million at September 30,
1999.
Comprehensive Income - Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income, establishes standards for the reporting of
comprehensive income and its components, but has no impact on the Company's net
earnings or total shareholders' equity. To date such transactions that are
required to be reported in comprehensive income are not material to the
Company's financial position or results of operations.
Segments - SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for disclosure about operating segments in
annual financial statements and selected information in interim financial
reports. Based on definitions contained within SFAS 131, the Company has
determined that it operates within one segment. The Company operates primarily
in the United States ("U.S."). During the three months ended September 30, 1999
and 1998, sales to U.S. customers totaled $41.9 million and $44.9 million,
respectively, and sales to
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international customers totaled $5.3 million and $10.5 million, respectively.
Long-lived assets located outside of the U.S. are primarily held at the Melaka,
Malaysia facility and were held for sale as of September 30, 1999 as disclosed
in Note 4.
Note 2: Earnings per share
Basic earnings per share ("EPS") is computed on the basis of weighted
average number of common shares outstanding. Diluted EPS is computed on the
basis of weighted average common shares outstanding plus the effect of
outstanding stock options and warrants using the "treasury stock" method, if the
common equivalent shares were not anti-dilutive. The calculation of the weighted
average outstanding shares is as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
---------- ----------
<S> <C> <C>
Weighted average shares outstanding-basic 12,994,674 12,778,828
Common stock options and warrants - 17,695
---------- ----------
Weighted average shares outstanding-diluted 12,994,674 12,796,523
========== ==========
</TABLE>
Common stock equivalents were anti-dilutive at September 30, 1999.
Note 3: Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market and consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- -------------
<S> <C> <C>
Raw materials and supplies $ 6,718 $ 6,271
Work-in-progress 11,237 10,381
============= =============
Total inventory $ 17,955 $ 16,652
============= =============
</TABLE>
Note 4: Restructuring
During the 1999 fiscal year the Company undertook several actions to
reduce future operating costs and capital expenditures. Those actions resulted
in the closure of three manufacturing facilities and the restructuring of the
Company's sales and administrative support functions.
At June 30, 1999, $2.8 million was accrued for severance and closure
costs and included in other current liabilities as a result of the restructuring
charges. At September 30, 1999, all of this $2.8 million accrual for severance
and closure costs had been utilized for its intended purposes. In addition, at
September 30, 1999, the Company held approximately $7.4 million of assets
related to the closed facilities for sale. The Company expects to dispose of the
remaining assets by the end of the second quarter. Management believes that any
further costs associated with the restructuring or any differences between the
selling price and the amount recorded for
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assets held for sale will not materially affect the financial position, results
of operations or cash flows of the Company.
Note 5: Future Accounting Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, will require recognition of all derivatives as either assets or
liabilities on the balance sheet at fair value. The new statement becomes
effective at the beginning of the fiscal year ending June 30, 2001. Management
has not completed an evaluation of the effects this standard will have on the
Company's financial position or results of operations.
Note 6: Subsequent Event
On October 26, 1999, the Company announced it had entered a definitive
merger agreement with two subsidiaries of Tyco International Ltd. ("Tyco") in
which the Tyco subsidiaries will acquire, for cash, all of the outstanding
common shares of the Company at a price of $5.50 per share.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
- --------
The Company is a leading provider of a full range of printed circuit
board and interconnect solutions, including schematic capture and design,
quick-turnaround, prototyping and pre-production, and large volume production
electronics OEMs and contract manufacturers. The Company's design division
provides schematic capture and design services. The Fremont facility specializes
in quick-turnaround prototype production, the White City facility specializes in
medium volume production and the Dallas facility specializes in high technology
and medium to high volume production.
In fiscal 1999, the Company restructured its operations to reflect a
general decline in customer demand, which caused pricing and margin pressures in
the PCB industry, and the unprofitable results of its facilities in Huntsville,
Alabama and Melaka, Malaysia. The restructuring resulted in the closure of these
two unprofitable facilities as well as the closure of the Redmond, Washington
facility. In addition, the Company eliminated approximately 114 sales and
administrative positions. See Note 4 to the condensed consolidated financial
statements.
This discussion and analysis is designed to be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in the Company's Form 10-K for the fiscal year ended June
30, 1999.
Results of Operations
- ---------------------
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
- ------------------------------------------------------------------------------
Revenue for the three months ended September 30, 1999 was $47.3
million, a decrease of $8.1 million, or 15%, from the three months ended
September 30, 1998. The decrease in revenue was due primarily to the
restructuring of the Company's operations that resulted in the closure of three
manufacturing facilities in the quarter ended June 30, 1999 and the quarter
ended September 30, 1999.
The costs of goods sold for the three months ended September 30, 1999
was $40.6 million, or 85.8% of revenue, compared to $46.2 million, or 83.4% of
revenue, for the three months ended September 30, 1998. This increase in cost of
goods sold as a percentage of revenue was due primarily to higher equipment
costs in the Fremont and White City plants resulting from the significant
capital enhancements made to those facilities as well as higher than expected
material costs company-wide.
Gross profit for the three months ended September 30, 1999 was $6.7
million, or 14.1% of revenue, compared to $9.2 million, or 16.6% of revenue, for
the three months ended September 30, 1998. The decrease in margin was primarily
the result of the increased building, equipment and material costs as well as
continued pricing pressures related to diminishing market demand and increased
offshore competition.
Selling, general and administrative expense for the three months ended
September 30, 1999 was $5.6 million, or 11.9% of revenue, compared to $7.0
million, or 12.7% of revenue, for
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the three months ended September 30, 1998. The reduction was due primarily to
the restructuring of the Company's operations in the quarter ended June 30,
1999, which resulted in the elimination of approximately 114 sales and
administrative positions.
Interest expense for the three months ended September 30, 1999
increased 46.4% to $2.2 million from $1.5 million in the prior year. The
increase was the result of a higher average debt balance outstanding in the
quarter ended September 30,1999 primarily due to the issuance of $11.5 million
in convertible subordinate notes in December 1999.
The effective income tax rate benefit for the quarter ended September
30, 1999 was 28.5%, compared to a 35.8% effective rate for the quarter ended
September 30, 1998. This reduction was primarily due to add-back of
non-deductible goodwill and the repeal of certain R&D tax credits.
The Company incurred a net loss of $817,000 for the three months ended
September 30, 1999, a decrease of $1.4 million from net income of $593,000 for
the three months ended September 30, 1998. This decrease was primarily due to
lower gross margins resulting from costs associated with building and equipment
expansions as well as lower margins resulting from weaker customer demand and
increased offshore competition.
Liquidity and Capital Resources
- -------------------------------
As of September 30, 1999, the Company had cash of $131,000 and working
capital of $29.1 million, compared to cash of $570,000 and working capital of
$18.8 million at June 30, 1999. Principal sources of liquidity in the quarter
ended September 30, 1999 were borrowings under the Company's bank line of
credit. Principal uses of cash during the three months ended September 30, 1999
were property, plant and equipment expenditures of $2.5 million and the paydown
of certain operating liabilities.
At September 30, 1999 borrowings of $35.6 million were outstanding on
the Company's $40 million bank line of credit. There was no capacity available
for additional borrowing based on eligible receivables and inventory. Amounts
outstanding under the line of credit bear interest at the bank's prime rate plus
2 points (10.25% per annum at September 30, 1999). Under the line of credit, the
Company must maintain certain financial ratios and other covenants.
As of September 30, 1999, the Company had $29.7 million of outstanding
notes payable to Heller Financial bearing interest at annual rates ranging from
7.8% to 9.625% and secured by real property and miscellaneous equipment at the
Company's Dallas and White City, Oregon and Huntsville, Alabama facilities.
Subsequent to September 30, 1999, the Company entered into a Deferral
Loan and Lease Modification Agreement dated October 12, 1999 with its lenders
and equipment lessors (the "Modification Agreement"). Pursuant to the
Modification Agreement (i) the Company's capital equipment lessors revised the
Company's lease payment schedules and (ii) each lender either (a) made a loan to
the Company (each a "Deferral Loan"), the proceeds of which were used to pay
amounts owing under the Company's existing loan obligations and to prepay future
payments owing under those obligations through February 2000, or (b) deferred
certain payments on its existing obligations through February 2000 (the
aggregate of such Deferral Loans, deferred payments and revised lease payments
collectively, the "Deferred Amount"). In January 2000, the
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Company will pay an aggregate fee to the lenders and lessors equal to two
percent of the Deferred Amount ($201,207). Each lender and lessor also has the
option of receiving (i) an additional fee equal to three percent of its portion
of Deferred Amount (a maximum aggregate amount of $301,810) or (ii) the right to
convert all or a portion of its share of the Deferred Amount into the Company's
common stock at $5.77 per share. The amount that may be converted decreases over
the term of the loan or lease and conversion is subject to certain other
restrictions. Under the terms of the Modification Agreement, the lenders and
lessors each waived the Company's prior defaults under its existing loan and/or
lease agreements.
Although the Company has no commitments in material amounts, it expects
total capital expenditures for the fiscal year ending June 30, 2000 to be
approximately 4% of revenue for facilities expansion and equipment.
The Company believes that its existing cash and cash equivalents, funds
generated from operations, and funds available under its credit facility with
the bank and equipment financing will be sufficient to fund its operations for
the remainder of the fiscal year.
Year 2000 Compliance
The Company has developed a program to perform assessment and
remediation of its computer software programs and operating systems, including
applications used in its financial, shop-floor control and manufacturing
equipment control systems, to determine their readiness for the Year 2000. The
inability of computer software programs and operating systems to accurately
recognize, interpret and process date codes designating the Year 2000 and beyond
could cause systems to yield inaccurate results or encounter operating problems,
including disruption of the business operations these systems control. The
Company has completed its assessment of the financial, shop-floor control
systems and manufacturing equipment control systems. Remediation of the
financial systems is 100% complete and remediation of the manufacturing
equipment control and shop-floor control systems systems is 85% complete. The
Company expects to complete its remediation of all of its systems by the end of
November 1999.
The Company also may be exposed to risks from computer systems of
parties with which the Company transacts business. The Company has contacted all
of its critical suppliers to determine the extent to which the Company may be
vulnerable to those parties' failure to remedy their own Year 2000 issues and to
ascertain what actions, if needed, may be taken by the Company in response to
such risks. To date, approximately 90% of the suppliers contacted have indicated
they are, or expect to be, Year 2000 compliant.
The Company currently estimates that it will spend between $650,000 and
$750,000 in addressing the Year 2000 issue. The estimates are subject to change
as additional information is obtained in connection with the Year 2000 Program.
Based on its assessments to date, the Company believes it will not
experience any material disruption as a result of Year 2000 issues in its
computer software programs and operating systems used in its internal
operations, its interface with key suppliers and customers, or processing orders
and billing. However, if certain critical third party suppliers, such as those
supplying electricity, water, telephone service or critical materials,
experience difficulties resulting in disruption of the
11
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service or delivery of supplies to the Company, or if the Company's internal
operating systems fail to comply, a shutdown of the Company's operations could
occur for the duration of the disruption. The Company is finalizing its
contingency plans to mitigate the effect of such events, and intends to complete
its contingency plans by the end of November 1999. Furthermore, due to the
general uncertainty inherent in the Year 2000 problem, there can be no
assurances that Year 2000 issues will not have a material adverse effect on the
Company's business, financial condition or results of operations.
Merger with Tyco
On October 26, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Sigma Circuits, Inc. ("Sigma"), a wholly
owned subsidiary of Tyco International Ltd. ("Tyco"), and T merger Sub (OR),
Inc. ("Merger Sub"), a wholly owned subsidiary of Sigma. Pursuant to the Merger
Agreement, Merger Sub has commenced a tender offer to acquire the outstanding
shares of the Company's common stock at $5.50 per share. After the close of the
tender offer, assuming certain conditions are met, Merger Sub will merge with
and into the Company with the Company being the surviving corporation. As a
result, the Company will be a direct wholly owned subsidiary of Sigma and an
indirect wholly owned subsidiary of Tyco. At the effective time of the merger,
shares of common stock not tendered in the tender offer will be canceled and
converted into the right to receive $5.50 per share. There are a number of
conditions which must be satisfactorily completed prior to the closing of the
merger including, without limitation, the consummation of the tender offer and
obtaining the necessary regulatory and anti-trust, as well as shareholder
approvals. Commitments and contingencies related to the pending merger could
adversely affect the Company if difficulties arise in completing the merger. Due
to the level of uncertainty surrounding the closure and/or timing of the merger,
the discussions and analyses above do not include the potential impact on the
Company's financial condition and results of operations resulting from either
the completion of the merger or failure to complete the merger in a timely
manner or at all.
12
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PART II - OTHER INFORMATION
Item 2: Change in Securities and Use of Proceeds
Company entered a Deferral Loan and Lease Modification Agreement with
its lenders and equipment lessors dated October 12, 1999 (the "Modification
Agreement"). Pursuant to the Modification Agreement, each lender and lessor has
the right to convert all or a portion of its share of $10,060,336 into the
Company's common stock at $5.77 per share. The maximum aggregate number of
shares that could be acquired on conversion is 1,743,559. The amount that may be
converted decreases over the term of the loan or lease and conversion is subject
to certain other restrictions. The grant of this right was exempt from
registration under the Securities Act of 1933, as amended (the "Act"), pursuant
Rule 506 promulgated under the Act.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
During the three month period ending September 30, 1999, there
were no reports on Form 8-K filed.
13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRAEGITZER INDUSTRIES, INC
Date: November 15, 1999 MATTHEW J. BERGERON
----------------------------------------
(Matthew J. Bergeron, President)
(Duly Authorized Officer and Principal
Financial Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 131
<SECURITIES> 0
<RECEIVABLES> 30,829
<ALLOWANCES> (643)
<INVENTORY> 17,955
<CURRENT-ASSETS> 66,201
<PP&E> 103,576
<DEPRECIATION> (36,122)
<TOTAL-ASSETS> 144,460
<CURRENT-LIABILITIES> 37,067
<BONDS> 73,372
0
0
<COMMON> 44,090
<OTHER-SE> (25,330)
<TOTAL-LIABILITY-AND-EQUITY> 144,460
<SALES> 47,275
<TOTAL-REVENUES> 47,275
<CGS> 40,590
<TOTAL-COSTS> 40,590
<OTHER-EXPENSES> 5,630
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,147
<INCOME-PRETAX> (1,142)
<INCOME-TAX> (325)
<INCOME-CONTINUING> (817)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (817)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
