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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED September 30, 2002
----------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE PERIOD From ___________ to ___________.
Commission file number 000-31223
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PEMSTAR INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1771227
-------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3535 TECHNOLOGY DRIVE N.W.
ROCHESTER, MN 55901
(Address of principal executive officers)
(Zip Code)
(507) 288-6720
-----------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year, if changed since
last report)
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 periods 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date.
Common Stock, $0.01 Par Value -- 37,296,703 shares as of October 31, 2002.
Index
Pemstar Inc.
Part I. Consolidated Financial Information Page
Item 1. Financial Statements (Unaudited):
Consolidated balance sheets - September 30, 2002 (unaudited) and March 31, 2002 ................................ 3
Consolidated statements of operations (unaudited) - Three months ended September 30, 2002 and 2001 and six
months ended September 30, 2002 and 2001 .................................................................... 4
Consolidated statements of cash flows (unaudited) - Six months ended September 30, 2000 and 2001 ............... 5
Notes to consolidated financial statements (unaudited) - September 30, 2002 .................................... 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................... 10-12
Item 3. Quantitative and Qualitative Disclosure of Market Risk ......................................................... 13
Item 4. Controls and Procedures ........................................................................................ 13
Part II. Other Information
Item 1. Legal Proceedings .............................................................................................. 14
Item 2. Changes in Securities and Use of Proceeds ...................................................................... 14
Item 3. Defaults upon Senior Securities ................................................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders ............................................................ 15
Item 5. Other Information .............................................................................................. 15
Item 6. Exhibits and Reports on Form 8-K ............................................................................... 15
Signatures .................................................................................................................. 16
Certifications .............................................................................................................. 17-18
Exhibits .................................................................................................................... 19
-2-
Part I. Financial Information
Pemstar Inc.
Consolidated Balance Sheets
(In thousands, except per share data) September 30, March 31
2002 2002
-------------- ----------
Assets (Unaudited) (Note A)
Current assets
Cash and equivalents $ 10,603 $ 11,483
Restricted cash 47 1,423
Accounts receivable, net 114,243 122,752
Recoverable income taxes 92 3,873
Inventories, net 82,554 92,929
Unbilled services 13,749 16,356
Deferred income taxes 30 45
Prepaid expenses and other 7,183 8,507
--------- --------
Total current assets 228,501 257,368
Property, plant and equipment 142,239 137,639
Less accumulated depreciation (47,690) (38,531)
--------- --------
94,549 99,108
Goodwill, net 39,166 34,678
Other assets 4,432 3,459
Deferred income taxes 1,712 1,111
--------- --------
Total assets $ 368,360 $395,724
========= ========
Liabilities and shareholder's equity
Current liabilities
Accounts payable $ 83,897 $ 79,410
Income taxes payable 775 21
Other current liabilities 26,097 15,738
Current maturities of long-term debt 13,138 13,999
Current maturities of capitalized lease obligations 3,399 10,865
--------- --------
Total current liabilities 127,306 120,033
Long-term debt, less current maturities 64,854 71,340
Capital lease obligations, less current maturities 2,545 3,122
Other liabilities and deferred credits 6,533 7,832
Shareholders' equity
Common stock, par value $0.01 per share--authorized 150,000
shares, issued and outstanding 37,209 at September 30, 2002 and
36,701 at March 31, 2002 372 367
Additional paid-in capital 234,505 232,233
Accumulated other comprehensive loss (1,137) (2,131)
Retained earnings - deficit (65,965) (36,164)
Loans to shareholders (653) (908)
--------- --------
167,122 193,397
--------- --------
Total liabilities and shareholders' equity $ 368,360 $395,724
========= ========
See notes to consolidated financial statements.
-3-
Pemstar Inc.
Consolidated Statements of Operations (Unaudited)
In thousands, except per share data)
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 176,382 $ 173,380 $ 329,486 $ 340,584
Cost of goods sold 168,495 158,343 320,931 310,108
----------- ----------- ----------- -----------
Gross profit 7,887 15,037 8,555 30,476
Selling, general and administrative expenses 13,790 10,395 28,160 20,525
Restructuring costs 924 - 3,880 -
Amortization 27 516 75 994
----------- ----------- ----------- -----------
Operating (loss) income (6,854) 4,126 (23,560) 8,957
Other expense (income)-net 164 (194) 187 (411)
Interest expense 2,596 1,491 5,431 3,496
----------- ----------- ----------- -----------
(Loss) income before income taxes (9,614) 2,829 (29,178) 5,872
Income tax expense (benefit) 351 (143) 623 388
----------- ----------- ----------- -----------
Net (loss) income $ (9,965) $ 2,972 $ (29,801) $ 5,484
=========== =========== =========== ===========
Net (loss) income per common share:
Basic $ (0.27) $ 0.08 $ (0.81) $ 0.17
Diluted (0.27) 0.08 (0.81) 0.16
Shares used in computing net (loss) income per
common share:
Basic 37,038 35,532 36,904 32,857
Diluted 37,038 37,268 36,904 34,746
See notes to consolidated financial statements.
-4-
Pemstar Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Six Months Ended
September 30,
----------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net (loss) income $ (29,801) $ 5,484
Adjustments to reconcile net (loss) income to net cash provided by (used
in) operating activities
Depreciation 10,092 8,397
Amortization 983 1,328
Deferred revenue (180) (174)
Other 774 (117)
Change in operating assets and liabilities:
Accounts receivable 9,727 (13,503)
Inventories 10,880 (8,823)
Prepaid expenses and other 7,893 (15,310)
Accounts payable 3,598 1,927
Accrued expenses and other 4,714 8,238
---------- ----------
Net cash provided by (used in) operating activities 18,680 (12,553)
Cash flows used in investing activities:
Decrease (increase) in restricted cash 1,375 (1,393)
Business acquisitions, net of cash acquired (7) (23,779)
Purchases of property and equipment (6,045) (24,910)
Other 8 1,625
---------- ----------
Net cash used in investing activities (4,669) (48,457)
Cash flows (used in) provided by financing activities:
Bank overdrafts - (11,395)
Proceeds from stock sales/exercise of stock options 682 85,354
Principal payments on long-term borrowings (35,498) (43,010)
Proceeds from long-term borrowings 18,234 37,177
Other 1,638 (429)
---------- ----------
Net cash (used in) provided by financing activities (14,944) 67,697
Effect of exchange rate changes on cash 53 52
---------- ----------
Net (decrease) increase in cash and cash equivalents (880) 6,739
Cash and cash equivalents:
Beginning of period 11,483 5,882
---------- ----------
End of period $ 10,603 $ 12,621
========== ==========
See notes to consolidated financial statements.
-5-
Pemstar Inc.
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2002
(In thousands, except per share data)
Note A--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended September 30,
2002, are not necessarily indicative of the results that may be expected for the
year ending March 31, 2003.
The balance sheet at March 31, 2002 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Pemstar Inc. Annual Report on Form 10-K for
the year ended March 31, 2002, filed with the Securities and Exchange
Commission.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Accounting Standards (SFAS) No. 141 (SFAS 141), Business Combinations, and SFAS
No. 142 (SFAS 142), Goodwill and Other Intangible Assets. SFAS 141 addresses
financial accounting and reporting for business combinations and requires that
the purchase method of accounting be used for all business combinations
initiated after June 31, 2001. Under SFAS 142, goodwill and certain other
intangible assets are no longer systematically amortized but instead will be
reviewed for impairment and written down and charged to results of operations
when their carrying amount exceed their estimated fair value. The Company
adopted SFAS 142 effective April 1, 2002.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144
(SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets,
which addresses financial accounting and reporting for the impairment of
long-lived assets to be disposed of. The Company adopted SFAS 144 effective
April 1, 2002. Management is currently evaluating the provisions of SFAS 144,
but believes there will be no effect on the Company's financial position,
results of operations or shareholders' equity resulting from the adoption.
-6-
A reconciliation of reported net (loss) income adjusted to reflect the adoptions
of SFAS 142 is provided below:
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Report net (loss) income $ (9,965) $ 2,972 $ (29,801) $ 5,484
Add back goodwill amortization, net of tax - 347 - 676
----------- ---------- ----------- ----------
Adjusted net (loss) income $ (9,965) $ 3,319 $ (29,801) $ 6,160
=========== ========== =========== ==========
Report basic net (loss) income per share $ (0.27) $ 0.08 $ (0.81) $ 0.17
Effect of add back of goodwill amortization - 0.01 - 0.02
----------- ---------- ----------- ----------
Adjusted net (loss) income per share $ (0.27) $ 0.09 $ (0.81) $ 0.19
=========== ========== =========== ==========
Report diluted net (loss) income per share $ (0.27) $ 0.08 $ (0.81) $ 0.16
Effect of add back of goodwill amortization - 0.01 - 0.02
----------- ---------- ----------- ----------
Adjusted net (loss) income per share $ (0.27) $ 0.09 $ (0.81) $ 0.18
=========== ========== =========== ==========
Note B--Inventories
The components of inventories consist of the following:
September 30, March 31,
2002 2002
---------------- ------------
Raw materials $ 74,218 $ 85,587
Work in process 13,211 8,763
Finished goods 4,831 5,255
Less allowance for inventory obsolescence (9,706) (6,676)
------------- ------------
$ 82,554 $ 92,929
============= ============
Note C--Acquisitions
In May 2001, the Company acquired certain assets and assumed certain liabilities
of U.S. Assemblies New England, Inc., which operates through an 85 square foot
facility located in Taunton, Massachusetts. The purchase price was approximately
$14,300, including $1,600 of assumed indebtedness.
In September 2001, the Company purchased the membership interests and business
of Pacific Consultants LLC (a provider of electromechanical design and test
consulting services) to complement and extend its engineering capabilities. The
initial purchase price was approximately $20,100, including common stock valued
at $10,000, cash and costs of $4,400, and cash or common stock of $5,700 payable
up to two years from the date of the acquisition. The purchase agreement
provides for additional purchase price, payable in cash or common stock, of up
to $40,000, if earnings targets are met for the acquired business in the two
years following the close, which will be reported as additional goodwill. In
September 2002, $4,500 was recorded as an estimate of such payments due
following the conclusion of the first year of the acquired operations.
In November 2001, the Company purchased certain assets of MTS Systems
Corporation including equipment located at the 57 square foot facility in
Chaska, Minnesota. The purchase price was approximately $3,600.
These acquisitions were accounted for as purchases and, accordingly, the results
of operations of these businesses have been included in the consolidated
statement of operations since their respective dates of
-7-
acquisition. The pro forma unaudited results of operations for the three and six
months ended September 30, 2002 and 2001 are as follows:
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 176,382 $ 179,602 $ 329,486 $ 356,523
Net (loss) income (9,965) 3,024 (29,801) 5,880
Per share data:
Basic earnings $ (0.27) $ 0.09 $ (0.81) $ 0.18
Diluted earnings (0.27) 0.08 (0.81) 0.17
Note D--Comprehensive Income
Total comprehensive (loss) income was $(10,699) and $4,068 for the three months
ended September 30, 2002 and 2001, respectively, and $(28,807) and $6,152 for
the six months ended September 30, 2002 and 2001, respectively. Comprehensive
(loss) income differs from net (loss) income due to unrecognized foreign
currency gains and losses.
Note E--Financing Arrangements
In May 2002, the Company sold to two investors $5,000 face value of 6 1/2%
convertible senior subordinated notes with a conversion price of $2.28 together
with related seven year warrants to purchase shares of the Company's common
stock. The related seven year warrants are exercisable for 788 shares of the
Company's common stock at an exercise price of $2.28 per share, and the Company
granted additional warrants to the investors on May 10, 2002 to purchase 1,000
shares of the Company's common stock at an exercise price of $2.00 per share. In
July 2002, the Company entered into an amendment and termination agreement
terminating its remaining obligations to sell notes and related warrants
pursuant to the securities purchase agreement. In the amendment and termination
agreement, the Company agreed to issue additional warrants to purchase 250
shares of the Company's common stock at an exercise price of $1.62 and to
provide the investors certain rights to participate in any offering by the
Company of equity securities (or rights to purchase equity securities) during
the next six months.
In June 2002, the Company obtained a credit facility with a foreign bank for
borrowing of up to approximately $7,200, of which $6,585 was borrowed at
September 30, 2002.
-8-
Note F--Earnings Per Share Data
The following table sets forth the computation of basic and diluted earnings per
share for the periods indicated.
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
Basic:
Net (loss) income $ (9,965) $ 2,972 $ (29,801) $ 5,484
Average shares outstanding 37,038 35,532 36,904 32,857
Basic (loss) income per share $ (0.27) $ 0.08 $ (0.81) $ 0.17
=========== =========== =========== ============
Diluted:
Net (loss) income $ (9,965) $ 2,972 $ (29,801) $ 5,484
Add back interest on convertible debt, net of tax 185 - 287 -
----------- ----------- ----------- ------------
Net (loss) income, as adjusted $ (9,780) $ 2,972 $ (29,514) $ 5,484
=========== =========== =========== ============
Average shares outstanding 37,038 35,532 36,904 32,857
Shares issued on conversion of convertible debt - - - -
Net effect of dilutive stock options and warrants
-based on the treasury stock method - 1,736 - 1,889
----------- ----------- ----------- ------------
Totals 37,038 37,268 36,904 34,746
=========== =========== =========== ============
Diluted (loss)income per share $ (0.27) $ 0.08 $ (0.81) $ 0.16
=========== =========== =========== ============
During the three and six months ended September 30, 2002, employees exercised
stock options to acquire 12 and 32 shares at an average exercise price of $0.82
and $0.88 per share, respectively.
-9-
Item 2--Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net sales - Net sales for the second quarter of fiscal 2003 increased 1.7% to
$176.4 million from $173.4 million for the comparable three months of the prior
fiscal year. Net sales of inventory to customers responding to a lack of end
market demand totaled $13.7 million for the second quarter of fiscal 2003
compared to inventory sales of $2.9 million in the same period of fiscal 2002.
Sales of inventory to customers for the first quarter of fiscal 2003 and 2002
were less than $.5 million. Excluding inventory sales, net sales for the second
quarter of fiscal 2003 decreased 4.5% to $162.7 million from $170.5 million in
the second quarter of fiscal 2002. Net sales for the six months ended September
30, 2002 decreased 3.3% to $329.5 million from $340.6 million for the comparable
period of fiscal 2002. The decrease in net sales was due to lower volume from
certain optical and communications customers. This decline in sales to optical
and communications customers was partially offset by a more diversified base of
customers leading to stronger comparable sales in the computing, industrial and
medical markets. The decrease was also partially offset by the increase in net
sales of $16.6 million from businesses acquired near the end of second quarter
and during third quarter fiscal 2002. The Company's five largest customers in
the second quarter and first half of fiscal 2003 accounted for approximately 47%
and 50%, respectively, of net sales with no single customer exceeding 25% of net
sales for the first half of fiscal 2003.
Gross Profit - Gross profit decreased $7.1 million in the second quarter of
fiscal 2003 to $7.9 million (4.5% of net sales) from $15.0 million (8.7% of net
sales) in the same quarter of fiscal 2002. Gross profit decreased $21.9 million
during the first six months of fiscal 2003 to $8.6 million (2.6% of net sales)
from $30.5 million (8.9% of net sales) in the same period of fiscal 2002. These
decreases in gross profit resulted from reduced sales volume to optical and
communications customers, the effect of inventory sales without margin, and
continued underutilization of capacity in certain operations. We incurred
inventory write-downs of approximately $1.8 million in the second quarter of
fiscal 2003, primarily as a result of customer financial difficulties and
bankruptcies.
Selling, general and administrative expenses - Selling, general and
administrative expenses were $13.8 million (7.8% of net sales) in the second
quarter of fiscal 2003, an increase of $3.4 million from $10.4 million (6.0% of
net sales) for the same quarter of fiscal 2002. Selling, general and
administrative expenses were $28.2 million (8.5% of net sales) during the first
six months of fiscal 2003, an increase of $7.7 million from $20.5 million (6.0%
of net sales) for the same period of fiscal 2002. The increase during the three
and six-month periods ended September 30, 2002 was a result of additional
expenses from acquired businesses, and increased legal, insurance, audit and
information technology expenses. The increase also reflects charges incurred in
the second quarter and six months ended September 30, 2002 of $1.2 million and
$3.1 million, respectively, for the uncertainty of collection of accounts
receivable from bankrupt and troubled customers.
Restructuring costs - Restructuring costs of $0.9 million were recognized in the
second quarter of fiscal 2003, resulting primarily from worldwide workforce
reductions. Restructuring costs were $3.9 million for the six months ended
September 30, 2002 for the consolidation of certain facilities and worldwide
workforce reductions. These actions were taken to rescale physical space and
employee counts in affected operations to the current business levels. Further
actions may be required in response to significant variation from presently
expected revenue levels.
Amortization - Amortization decreased approximately $0.5 and $0.9 for the three
and six-month periods ended September 30, 2002 to an insignificant amount for
fiscal year 2003 as a result of adopting SFAS No. 142, "Goodwill and Other
Intangible Assets", on April 1, 2002 and the resultant discontinuation of
amortization of goodwill.
-10-
Other expense (income) - Other expense (income) net was $0.2 million expense for
the second quarter of fiscal 2003 compared to $(0.2) million income for the same
period of fiscal 2002. Other expense (income), net changed from $0.4 million
income in fiscal 2002 to $0.2 million expense for the six months ended September
30, 2002. There were gains on sales of assets and exchange gains in certain
international operations not present in the quarter and six month period ended
September 30, 2002 that were not present in comparable periods in fiscal d003.
Interest expense - Our interest expense (net) increased $1.1 million to $2.6
million for the second quarter of fiscal 2003 from $1.5 million for the same
period of fiscal 2002. Interest expense (net) increased $1.9 million to $5.4
million for the six months ended September 30, 2002 from $3.5 million for the
same period of fiscal 2002. These increases were a result of increased interest
rates on our variable rate primary line of credit and increased fees and
deferred financing charges associated with amending our credit facilities in
fiscal 2003.
Income tax expense - Income tax expense of $0.6 million represented an effective
tax rate of 2.1% for the six-month period ended September 30, 2002 compared with
an effective tax rate of 6.6% for the six-month period ended September 30, 2002.
This results from the inability to recognize benefits for the loss carryforwards
in the United States and The Netherlands, due to the uncertainty regarding their
realization, and the low tax rates or tax holidays in certain non-United States
jurisdictions.
Liquidity and Capital Resources
The Company has funded its operations from the proceeds of bank debt, private
offerings of debt, private and public offerings of equity, cash generated from
operations and lease financing of capital equipment. Our principal uses of cash
have been to finance working capital, acquisitions, new operations, and capital
expenditures and to fulfill debt service requirements. We anticipate these uses
will continue to be our principal uses of cash in the future.
As of September 30, 2002, the Company had cash and cash equivalents balances of
$10.6 million and total bank and other interest bearing debt totaling $83.9
million. Of these borrowings, we had approximately $1.6 million outstanding
under our US Bank revolving credit facility and $45.8 million outstanding under
our IBM Credit Corporation credit facility. We also have a $2.6 million credit
facility serving our Netherlands operations, a $0.4 facility serving our
Singapore operations, $7.6 million in facilities for our China operation and
$6.6 million outstanding under our Thailand credit facility. Each credit
facility bears interest on outstanding borrowings at variable interest rates,
which as of September 30, 2002 were 8.25% for the IBM facility, 6.25% for the US
Bank facility, 5.5% for the Netherlands facility, 4.83% for the Singapore, from
5.36% to 5.85% for the China facilities and 5.0% for the Thailand facility.
These credit facilities are secured by substantially all of our assets. We are
also required to meet financial covenants under these facilities relating to net
income as a percentage of net sales, the ratio of our liabilities to net worth,
the ratio of our current assets to current liabilities, the ratio of our
earnings before interest, taxes, depreciation and amortization, or EBITDA, less
specified expenditures, to our principal and interest payments, our tangible net
worth and capital expenditures. As stated in our October 8 and October 30, 2002
press releases we successfully reached agreements with our senior secured
lenders, effective September 27, 2002, to amend credit facilities for the
duration of the fiscal year ending March 31, 2003, and extend the agreements to
December 31, 2003. As of September 30, 2002 we were in compliance with all debt
covenants. In our October 30, 2002 press release we provided guidance on
financial results at a projected break-even to net loss of $3.5 million for the
fiscal third quarter. We believe operation within this guidance will meet all
financial covenants. Our failure to meet this guidance could adversely affect
our liquidity and capital resources.
Net cash provided by operating activities for the six months ended September 30,
2002 was $18.7 million compared to net cash used of $12.6 million for the
comparable period of the prior fiscal year. Increased net cash from operating
activities was attributable primarily to decreases in accounts receivable and
inventory balances and other working capital reductions, offset by net losses
compared to net income in the prior year period.
-11-
Net cash used in investing activities for the six months ended September 30,
2002 was $4.7 million compared to $48.5 million for the comparable period of the
prior fiscal year. The reduction in net cash used in investing activities
resulted from a lower level of investment in equipment and in the absence of
business acquisitions in the six months ended September 30, 2002 compared to the
same period of the prior fiscal year.
Net cash used in financing activities for the six months ended September 30,
2002 was $14.9 million compared to net cash provided by financing activities of
$67.7 million for the comparable period of the prior fiscal year. Our principal
use of cash from financing activities in the six months ended September 30, 2002
resulted from paying down debt, net of sale leaseback proceeds, compared to cash
from the net proceeds from our second public offering of our common stock in the
prior fiscal year.
Our continued viability depends on our ability to generate additional cash from
operations or obtain additional sources of funds for working capital. Our
ability to maintain sufficient liquidity depends, in part, on our achieving
anticipated revenue targets and intended expense reductions from our
restructuring activities and further improvement of working capital management.
We believe that we have sufficient cash flow to meet our needs for the next
twelve months as a result of: 1) the restructuring actions we have taken in
fiscal 2003 to reduce cash expenditures, 2) the efforts we continue to make to
increase revenues from continuing customers, 3) efforts to generate new
customers in various industry sectors, and 4) the new agreements we have reached
to provide additional borrowing capacity. We also continue to pursue other
financing transaction opportunities that would enhance our liquidity. We may not
achieve these targets, realize the intended expense reductions, make additional
improvements to working capital management or reach agreement on new financing
arrangements. If our operating goals are not met, we will be required to secure
additional financing from lenders or sell additional securities.
We regularly review acquisition and additional facilities expansion or joint
venture opportunities, as well as major new program opportunities with new and
existing customers, any of which may require us to sell additional equity or
secure additional financing in order to fund the requirement. The sale of
additional equity could result in additional dilution to our shareholders. We
cannot be assured that financing arrangements will be available in amounts or on
terms acceptable to us.
Forward-looking Statements: This discussion contains certain "forward-looking"
statements. These forward-looking statements may contain statements of intent,
belief or current expectations of Pemstar Inc. and its management. Such
forward-looking statements are not guarantees of future results and involve
risks and uncertainties that may cause actual results to differ materially from
the potential results discussed in the forward-looking statements. In addition
to factors discussed above, risks and uncertainties that may cause such
differences include but are not limited to: a continued decline in economic
conditions or a recession; the effects of the September 11, 2001, terrorist
attacks in the United States and the engagement of military forces of the United
States and its allies in Afghanistan, as well as any future events in response
to these developments, including future terrorist attacks on the United States,
rumors or threats of war, actual conflicts or trade disruptions; changes in
demand for electronics manufacturing services; changes in demand by major
customers due to cancellations, reductions or delays of orders; shortages or
price fluctuations in component parts; difficulties managing our expansion and
integrating acquired businesses; increased competition and other risk factors
listed from time to time in the Company's Securities and Exchange Commission
filings, including but not limited to Exhibit 99 of the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 2002. The foregoing list is not
exhaustive and the Company disclaims any obligation to subsequently revise any
forward-looking statements to reflect events or circumstances after the date of
such statements.
-12-
Item 3--Quantitative and Qualitative Disclosure of Market Risk
The accumulated other comprehensive loss increased (decreased) $734 and $(993)
for the three and six months ended September 30, 2002. These changes result
primarily from changes in the exchange rate of the Baht and Euro in relationship
to the United States dollar applied to our net invested asset currency exposure
in Thailand and the Netherlands ($14,838 and $9,035 respectively, at September
31, 2002). Additional credit facilities denominated in local currencies of
foreign locations are designed to limit these risks.
Item 4--Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Our chief executive officer and our chief financial officer, after evaluating
the effectiveness of the Company's disclosure controls and procedures as of a
date (the "Evaluation Date") within 90 days before the filing date of this
quarterly report, have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures were adequate and designed to ensure that
material information relating to the Company would be made known to them by
others within the Company.
(b) Changes in internal controls.
There were no significant changes in the Company's controls or in other factors
that could significantly affect the Company's disclosure controls and procedures
subsequent to the date of their most recent evaluation.
-13-
Part II. Other Information
Item 1--Legal Proceedings
On July 24, 2002 a putative class action was commenced by a former shareholder
of the Company alleging that certain current and former officers and directors
of the Company violated Section 10(b) and Section 20(a) of the federal
securities laws. The lawsuit alleges, in essence, that the defendants defrauded
their shareholders by making optimistic statements during a time when they
should have known that business prospects were less promising. The lawsuit is
captioned Matt L. Brody, on behalf of himself and all others similarly situated
v. Pemstar, Inc., Allen Berning, William Leary, William Kullback, Robert Murphy,
Steve Petracca, Karl Shurson, Robert Ahmann, Paul Singh, Gregory Lea, Thomas
Burton & Bruce Jaffe, and is pending in United States District Court for the
District of Minnesota. Five other almost identical securities actions have been
brought against Pemstar and certain former officers and directors in the United
States District Court for the District of Minnesota. The additional five actions
allege identical claims with the exception of one case which alleges a violation
of Sections 11 & 12 of the 1934 Securities Exchange Act. This action alleges, in
addition to securities fraud, that the Registration statement filed by the
Company in connection with a secondary offering contained false, material
misrepresentations. All of these actions have been consolidated into a single
action.
On August 23, 2002 and October 2, 2002 two different individual shareholders
also commenced identical shareholder derivative actions against the Company as
nominal defendant and its Board. Those actions are currently pending in United
States District Court for the District of Minnesota. The allegations in the
derivative actions are almost identical to those in the securities action.
It is too early to predict the likelihood of prevailing on the various lawsuits
described above. Pemstar believes the actions are wholly without merit and will
vigorously defend against the claims.
Item 2--Changes in Securities and Use of Proceeds
On May 3, 2002, we entered into a Securities Purchase Agreement with two
institutional accredited investors. Pursuant to the Securities Purchase
Agreement, we agreed to issue and sell up to $50 million principal amount of 6
1/2% convertible senior subordinated notes due May 1, 2007 together with
related seven-year warrants to purchase shares of common stock. In addition, we
entered into a letter agreement on May 8, 2002 with investors pursuant to which
we agreed to issue the investors seven-year warrants to purchase an aggregate of
1,000,000 shares of our common stock at an exercise price of $2.00.
The sale of $5 million principal amount of 6 1/2% convertible senior
subordinated notes and related warrants exercisable for approximately 788,312
shares of common stock occurred on May 10, 2002. The applicable conversion price
for the 6 1/2% convertible senior subordinated notes and the exercise price for
their related warrants is $2.28. In addition, on May 10, 2002 we issued the
seven-year warrants issuable pursuant to the May 8, 2002 letter agreement. On
July 19, 2002, we entered an amendment and termination agreement to terminate
our remaining obligations to sell notes and related warrants provided for in the
Securities Purchase Agreement. In this amendment and termination agreement, we
agreed to issue additional warrants to purchase 250,000 shares of our common
stock at an exercise price of $1.62 and to provide the investors certain rights
to participate in any offering by us of equity securities (or rights to purchase
equity securities) during the following six months.
-14-
Item 3--Default on Senior Securities
Not applicable.
Item 4--Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5--Other Information
Not applicable.
Item 6--Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Amendment No. 7 to the Amended and Restated Revolving Credit Agreement
between the Company, Turtle Mountain Corporation, Pemstar Pacific
Consultants Inc. and IBM Credit Corporation dated August 14, 2002, to
the Amended and Restated Revolving Credit Agreement dated June 29,
2001, as amended on February 14, 2002, March 29, 2002, May 3, 2002,
May 10, 2002, June 27, 2002, and June 28, 2002 (incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K filed August 16,
2002).
10.2 Amendment No. 8 to the Amended and Restated Revolving Credit Agreement
between the Company, Turtle Mountain Corporation, Pemstar Pacific
Consultants Inc. and IBM Credit Corporation effective September 27,
2002, to the Amended and Restated Revolving Credit Agreement dated
June 29, 2001, as amended on February 14, 2002, March 29, 2002, May 3,
2002, May 10, 2002, June 27, 2002, and August 14, 2002.
12.1 Computation of Ratio of Earnings to Fixed Charges.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.(S)1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.(S)1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) The Company filed Form 8-K reports on the following dates:
i. August 16, 2002 filing Amendment No. 7 to the Amended and
Restated Revolving Credit Agreement between the Company, Turtle
Mountain Corporation, Pemstar Pacific Consultants Inc. and IBM
Credit Corporation dated August 14, 2002, to the Amended and
Restated Revolving Credit Agreement dated June 29, 2001, as
amended on February 14, 2002, March 29, 2002, May 3, 2002, May
10, 2002, June 27, 2002 and June 28, 2002.
-15-
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.
Pemstar Inc.
Date: November 12, 2002 /s/ Allen J. Berning
------------------------------ ------------------------------------
Allen J. Berning
Chairman and Chief Executive Officer
Date: November 12, 2002 /s/ Gregory S. Lea
------------------------------ ------------------------------------
Gregory S. Lea
Executive Vice President and Chief
Financial Officer
-16-
CERTIFICATION
I, Allen J. Berning, certify that:
1. I have reviewed this quarterly report on form 10-Q of Pemstar, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Al Berning
-------------------------------
Allen J. Berning
Chief Executive Officer
November 12, 2002
-------------------------------
Date
-17-
CERTIFICATION
I, Greg S. Lea, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pemstar, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Greg S. Lea
-------------------------------
Greg S. Lea
Chief Financial Officer
November 12, 2002
-------------------------------
Date
-18-
EXHIBIT INDEX
Exhibit No.
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10.1 Amendment No. 7 to the Amended and Restated Revolving Credit
Agreement between the Company, Turtle Mountain Corporation,
Pemstar Pacific Consultants Inc. and IBM Credit Corporation dated
August 14, 2002, to the Amended and Restated Revolving Credit
Agreement dated June 29, 2001, as amended on February 14, 2002,
March 29, 2002, May 3, 2002, May 10, 2002 June 27, 2002, and June
28, 2002(incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K filed August 16, 2002).
10.2 Amendment No. 8 to the Amended and Restated Revolving Credit
Agreement between the Company, Turtle Mountain Corporation,
Pemstar Pacific Consultants Inc. and IBM Credit Corporation
effective September 27, 2002, to the Amended and Restated
Revolving Credit Agreement dated June 29, 2001, as amended on
February 14, 2002, March 29, 2002, May 3, 2002, May 10, 2002 and
June 27, 2002, June 28, 2002 and August 14, 2002.
12.1 Computation of Ratio of Earnings to Fixed Charges.
99.1 Certification pursuant to 18 U.S.C.(S)1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C.(S)1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-19-