Back to GetFilings.com
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 December 31, 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
----------------------
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
-----------------------------------------------------
(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 -- 37,414,777 shares as of January 31, 2003.
Index
Pemstar Inc.
Part I. Consolidated Financial Information Page
Item 1. Financial Statements (Unaudited): ----
Consolidated balance sheets - December 31, 2002
(unaudited) and March 31, 2002 ............................ 3
Consolidated statements of operations (unaudited) - Three
months ended December 31, 2002 and 2001 and nine months
ended December 31, 2002 and 2001 .......................... 4
Consolidated statements of cash flows (unaudited) -
Nine months ended December 31, 2002 and 2001 .............. 5
Notes to consolidated financial statements (unaudited) -
December 31, 2002 ......................................... 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 10-13
Item 3. Quantitative and Qualitative Disclosure of Market Risk ....... 14
Item 4. Controls and Procedures ...................................... 14
Part II. Other Information
Item 1. Legal Proceedings ............................................ 15
Item 2. Changes in Securities and Use of Proceeds .................... 15
Item 3. Defaults upon Senior Securities .............................. 16
Item 4. Submission of Matters to a Vote of Security Holders .......... 16
Item 5. Other Information ............................................ 16
Item 6. Exhibits and Reports on Form 8-K ............................. 16
Signatures ............................................................... 17
Certifications ........................................................... 18-19
Exhibits ................................................................. 20
2
Part I. Financial Information
Pemstar Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
December 31, March 31,
2002 2002
------------ ---------
Assets (Unaudited) (Note A)
Current assets
Cash and equivalents $ 26,532 $ 11,483
Restricted cash 86 1,423
Accounts receivable, net 117,512 122,752
Recoverable income taxes 123 3,873
Inventories, net 78,473 92,929
Unbilled services 13,307 16,356
Deferred income taxes 183 45
Prepaid expenses and other 5,409 8,507
--------- ---------
Total current assets 241,625 257,368
Property, plant and equipment 145,159 137,639
Less accumulated depreciation (52,846) (38,531)
--------- ---------
92,313 99,108
Goodwill, net 39,275 34,678
Other assets 4,302 3,459
Deferred income taxes 1,698 1,111
--------- ---------
Total assets $ 379,213 $ 395,724
========= =========
Liabilities and shareholders' equity
Current liabilities
Current maturities of long-term debt $ 75,561 $ 13,999
Current maturities of capital lease obligations 3,300 10,865
Accounts payable 85,023 79,410
Income taxes payable 569 21
Other current liabilities 25,843 15,738
--------- ---------
Total current liabilities 190,296 120,033
Long-term debt, less current maturities 14,845 71,340
Capital lease obligations, less current maturities 1,850 3,122
Other liabilities and deferred credits 5,790 7,832
Shareholders' equity
Common stock, par value $0.01 per share--
authorized 150,000 shares, issued and outstanding
37,388 shares at December 31, 2002 and 36,701 shares at
March 31, 2002 374 367
Additional paid-in capital 234,720 232,233
Accumulated other comprehensive loss (301) (2,131)
Accumulated deficit (67,908) (36,164)
Loans to shareholders (453) (908)
--------- ---------
166,432 193,397
--------- ---------
Total liabilities and shareholders' equity $ 379,213 $ 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 Nine Months Ended
December 31, December 31,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 171,841 $ 171,223 $ 501,327 $ 511,807
Cost of goods sold 159,199 170,202 480,130 480,310
--------- --------- --------- ---------
Gross profit 12,642 1,021 21,197 31,497
Selling, general and administrative expenses 11,819 19,303 39,979 39,828
Restructuring costs 503 -- 4,383 --
Amortization 27 522 102 1,516
--------- --------- --------- ---------
Operating income (loss) 293 (18,804) (23,267) (9,847)
Other expense (income)-net 288 (528) 475 (940)
Interest expense-net 1,706 1,589 7,137 5,086
--------- --------- --------- ---------
Loss before income taxes (1,701) (19,865) (30,879) (13,993)
Income tax expense (benefit) 242 (7,332) 865 (6,944)
--------- --------- --------- ---------
Net loss $ (1,943) $ (12,533) $ (31,744) $ (7,049)
========= ========= ========= =========
Net loss per common share:
Basic $ (0.05) $ (0.34) $ (0.86) $ (0.21)
Diluted (0.05) (0.34) (0.86) (0.21)
Shares used in computing net loss per common share:
Basic 37,294 36,519 37,034 34,082
Diluted 37,294 36,519 37,034 34,082
See notes to consolidated financial statements.
4
Pemstar Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
December 31,
----- --- ------------
2002 2001
-------- --------
Cash flows from operating activities:
Net loss $(31,744) $ (7,049)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation 15,165 13,367
Amortization 1,249 2,041
Deferred revenue (275) (265)
Deferred taxes (644) (10,111)
Other 1,383 (119)
Change in operating assets and liabilities:
Accounts receivable 7,287 (20,681)
Inventories 15,421 16,776
Prepaid expenses and other 10,285 (5,318)
Accounts payable 4,365 2,878
Accrued expenses and other 7,691 950
-------- --------
Net cash provided by (used in) operating activities 30,183 (7,531)
Cash flows (used in) investing activities:
Decrease in restricted cash 1,337 --
Business acquisitions, net of cash acquired (4,376) (27,723)
Purchases of property and equipment (8,684) (34,249)
Proceeds from sale of property -- 3,084
Other 37 46
-------- --------
Net cash (used in) investing activities (11,686) (58,842)
Cash flows (used in) provided by financing activities:
Bank overdrafts -- (13,456)
Proceeds from stock sales/exercise of stock options 904 86,133
Principal payments on long-term borrowings (33,754) (54,421)
Proceeds from long-term borrowings 27,884 55,035
Other 1,768 (482)
-------- --------
Net cash (used in) provided by financing activities (3,198) 72,809
Effect of exchange rate changes on cash (250) (82)
-------- --------
Net increase in cash and cash equivalents 15,049 6,354
Cash and cash equivalents:
Beginning of period 11,483 5,882
-------- --------
End of period $ 26,532 12,236
======== ========
See notes to consolidated financial statements.
5
Pemstar Inc.
Notes to Consolidated Financial Statements (Unaudited)
December 31, 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 nine-month period ended December 31,
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 and has completed step one of the
transition date review process. Based on that work, a potential for loss is
indicated with respect to approximately $5.5 million of the recorded goodwill.
Additional procedures to determine the extent of any such loss have begun.
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 adjusted to reflect the adoptions of SFAS
142 is provided below:
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- --------------------------
2002 2001 2002 2001
----------- ---------- ----------- -----------
Report net loss $ (1,943) $ (12,533) $ (31,744) $ (7,049)
Add back goodwill amortization, net of tax -- 354 -- 1,030
----------- ---------- ----------- -----------
Adjusted net loss $ (1,943) $ (12,179) $ (31,744) $ (6,019)
=========== ========== =========== ===========
Report basic net loss per share $ (0.05) $ (0.34) $ (0.86) $ (0.21)
Effect of add back of goodwill amortization -- 0.01 -- 0.03
----------- ---------- ----------- -----------
Adjusted net loss per share $ (0.05) $ (0.33) $ (0.86) $ (0.18)
=========== ========== =========== ===========
Report diluted net loss per share $ (0.05) $ (0.34) $ (0.86) $ (0.21)
Effect of add back of goodwill amortization -- 0.01 -- 0.03
----------- ---------- ----------- -----------
Adjusted net loss per share $ (0.05) $ (0.33) $ (0.86) $ (0.18)
========== ========== =========== ===========
Note B--Inventories
The components of inventories consist of the following:
December 31, March 31,
2002 2002
------------- -----------
Raw materials $ 63,047 $ 85,587
Work in process 13,256 8,763
Finished goods 7,339 5,255
Less allowance for inventory obsolescence (5,169) (6,676)
------------ -----------
$ 78,473 $ 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 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
December 2002, $4,398 of this additional purchase price was paid 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.
7
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 acquisition. The pro
forma unaudited results of operations for the three and nine months ended
December 31, 2002 and 2001 are as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 171,841 $ 171,789 $ 501,327 $ 528,312
Net loss (1,943) (12,638) (31,744) (6,758)
Per share data:
Basic earnings $ (0.05) $ (0.35) $ (0.86) $ (0.20)
Diluted earnings (0.05) (0.35) (0.86) (0.20)
Note D--Comprehensive Loss
Total comprehensive loss was ($1,108) and ($12,857) for the three months ended
December 31, 2002 and 2001, respectively, and ($29,915) and ($6,705) for the
nine months ended December 31, 2002 and 2001, respectively. Comprehensive loss
differs from net loss 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 nine months.
In June 2002, the Company obtained a credit facility with a foreign bank for
borrowing of up to approximately $7,200, of which $6,258 was borrowed at
December 31, 2002.
In January 2003, the due date of the Revolving Credit Facility with US Bank was
accelerated to December 31, 2003 and the amortization schedules for other
equipment financing through US Bank were adjusted so that balances will be fully
paid by March 15, 2004.
The Company has received several non-binding proposals for refinancing,
extending and expanding its domestic credit facilities under proposed terms and
conditions provided from current and prospective lenders, that are in general,
more favorable than the existing credit facilities. The Company anticipates that
it will take several months to negotiate and close on these new credit
facilities.
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 Nine Months Ended
December 31, December 31,
--------------------------- --------------------------
2002 2001 2002 2001
------------ --------- ------------ --------
Basic:
Net loss $ (1,943) $ (12,533) $ (31,744) $ (7,049)
============ ========= ============ ========
Average shares outstanding 37,294 36,519 37,034 34,082
============ ========= ============ ========
Loss per share $ (0.05) $ (0.34) $ (0.86) $ (0.21)
============ ========= ============ ========
Diluted:
Net loss $ (1,943) $ (12,533) $ (31,744) $ (7,049)
============ ========= ============ ========
Average shares outstanding 37,294 36,519 37,034 34,082
============ ========= ============ ========
Loss per share $ (0.05) $ (0.34) $ (0.86) $ (0.21)
============ ========= ============ ========
Common stock equivalents and their impact on net loss have been excluded from
the diluted per share calculation for all periods presented, since the Company
incurred net losses and the inclusion of common stock equivalents would have had
an anti-dilutive impact. Potentially dilutive securities, which have been
excluded, consist of 1) unexercised stock options and warrants to purchase 6,036
and 3,571 shares of the Company's Common Stock as of December 31, 2002 and 2001,
respectively, and 2) 2.2 million shares of the Company's Common Stock issuable
upon conversion of convertible debt as of December 31, 2002.
During the three and nine months ended December 31, 2002, employees exercised
stock options to acquire 15 and 47 shares at an average exercise price of $0.88
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 third quarter of fiscal 2003 increased .4% to
$171.8 million from $171.2 million for the comparable three months of the prior
fiscal year. Net sales of excess raw materials to customers responding to a lack
of end market demand totaled $5.6 million for the third quarter of fiscal 2003
compared to such sales of $12.7 million in the same period of fiscal 2002.
Excluding inventory sales, net sales for the third quarter of fiscal 2003
increased 4.9% to $166.2 million from $158.5 million in the third quarter of
fiscal 2002. Net sales for the nine months ended December 31, 2002 decreased
2.0% to $501.3 million from $511.8 million for the comparable period of fiscal
2002. The decrease in net sales was due to lower volume from certain optical,
communications and storage customers. This decline in sales to optical,
communications and storage customers was partially offset by a more diversified
base of customers leading to stronger comparable sales in the computing,
industrial and medical markets. The Company's five largest customers in the
third quarter and first nine months of fiscal 2003 accounted for approximately
55% and 49%, respectively, of net sales with no single customer exceeding 25% of
net sales for the nine months ended December 31, 2002.
Gross Profit - Gross profit increased $11.6 million in the third quarter of
fiscal 2003 to $12.6 million (7.4% of net sales) from $1.0 million (0.6% of net
sales) in the same quarter of fiscal 2002. Higher gross profit stemmed primarily
from increased capacity utilization from growth in sales (excluding excess
inventory sales), cost savings from current fiscal year restructuring actions
and the decreased level of inventory write-offs. Gross profit decreased $10.3
million during the first nine months of fiscal 2003 to $21.2 million (4.2% of
net sales) from $31.5 million (6.2% of net sales) in the same period of fiscal
2002. These decreases in gross profit resulted from reduced sales volume to
optical, communications and storage customers and continued underutilization of
capacity in certain operations. We incurred inventory write-downs of
approximately $2.3 million in the third quarter of fiscal 2003 versus $4.9
million in the same quarter of fiscal 2002, primarily as a result of customer
financial difficulties and bankruptcies. For the nine month periods, such
inventory write-downs totaled $7.3 million and $4.9 million for fiscal 2003 and
2002, respectively.
Selling, general and administrative expenses - Selling, general and
administrative expenses were $11.8 million (6.9% of net sales) in the third
quarter of fiscal 2003, a decrease of $7.5 million from $19.3 million (11.3% of
net sales) for the same quarter of fiscal 2002. Selling, general and
administrative expenses were $40.0 million (8.0% of net sales) during the first
nine months of fiscal 2003, an increase of $0.2 million from $39.8 million (7.8%
of net sales) for the same period of fiscal 2002. The decrease during the three
months ended December 31, 2002 was the result of cost savings from current year
restructuring actions and a decreased level of accounts receivable write-offs.
The increase during the nine-month period ended December 31, 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 third quarter and nine months ended December 31, 2002 of $0.8
million and $3.7 million, respectively, for the uncertainty of collection of
accounts receivable from bankrupt and troubled customers versus $4.0 million for
the three and nine month periods ended December 31, 2001.
Restructuring costs - Restructuring costs of $0.5 million were recognized in the
third quarter of fiscal 2003, resulting primarily from worldwide workforce
reductions. Restructuring costs were $4.4 million for the nine months ended
December 31, 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 $1.4 for the three
and nine-month periods ended December 31, 2002 to an insignificant amount for
fiscal year 2003 as a result of adopting SFAS
10
No. 142, "Goodwill and Other Intangible Assets", on April 1, 2002 and the
resultant discontinuation of amortization of goodwill. There is potential for
amortization of up to $5.5 million, which could adjust the results of the three
months ended June 30, 2002 under transition rules of SFAS No. 142. The review to
determine the amount of such write down, if any, is presently in progress.
Other expense (income) - Other expense (income) net was $0.3 million for the
third quarter of fiscal 2003 compared to $(0.5) million income for the same
period of fiscal 2002. Other expense, net increased from $(0.9) million income
in fiscal 2002 to $0.5 million expense for the nine months ended December 31,
2002. The net change in the quarter and nine month period ended December 31,
2002, was the result of decreased exchange gains in certain international
operations.
Interest expense - Our interest expense (net) increased $0.1 million to $1.7
million for the third quarter of fiscal 2003 from $1.6 million for the same
period of fiscal 2002. Interest expense (net) increased $2.0 million to $7.1
million for the nine months ended December 31, 2002 from $5.1 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 $0.9 million represented an effective
tax rate of 2.8% for the nine-month period ended December 31, 2002 compared with
an income tax benefit of $7.0 million for the nine-month period ended December
31, 2001. The current year rate results from the inability in fiscal 2003 to
recognize benefits for the loss carryforwards in the United States and The
Netherlands, due to the uncertainty regarding their realization, together with
the low tax rates or tax holidays in certain non-United States jurisdictions.
The tax benefits of pretax losses were recorded for the three and nine months
ended December 31, 2001, because it was not clear at December 31, 2001, that the
tax benefits of the pretax losses would not be recognizable on an ongoing basis.
In the fiscal quarter ended March 31, 2002, these benefits were reversed.
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, although
acquisition activity is not being aggressively pursued in the current economic
climate.
As of December 31, 2002, the Company had a cash and cash equivalent balance of
$26.5 million and total bank and other interest bearing debt totaling $95.6
million. Of these borrowings, we had approximately $4.3 million outstanding
under our US Bank revolving credit facility and $52.7 million outstanding under
our IBM Credit LLC credit facility. At December 31, 2002, we also had $2.6
million outstanding under our credit facility serving our Netherlands
operations, $11.5 million outstanding in facilities for our China operation and
$6.3 million outstanding under our Thailand credit facility. Each credit
facility bears interest on outstanding borrowings at variable interest rates,
which as of December 31, 2002 were 8.25% for the IBM facility, 6.25% for the US
Bank facility, 5.0% for the Netherlands facility, from 5.04% 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. Subsequent to December 31, 2002, the
amount outstanding under our credit facility serving our Netherlands operation
was paid off. This facility is no longer available.
We are required to meet certain financial covenants under these facilities. The
covenants include: 1) net income as a percentage of net sales, 2) the ratio of
our liabilities to net worth, 3) the ratio of our current assets to current
liabilities, 4) the ratio of our earnings before interest, taxes, depreciation
and amortization, or EBITDA, less specified expenditures, to our principal and
interest payments, 5) our tangible net worth and 6) capital expenditures. We are
in compliance with all covenants, having successfully reached agreements with
our senior secured
11
lenders, effective January 27 and 29, 2003, to amend these credit facilities
through their expiration on December 31, 2003. The term of the US Bank revolving
credit facility was revised to align with the December 31, 2003 expiration of
the IBM Credit LLC credit facility and other US Bank debt was rescheduled to
provide acceleration of payments to be completed over the twelve months ended
March 15, 2004.
The Company has received several non-binding proposals for refinancing,
extending and expanding its credit facilities under proposed terms and
conditions provided from current and prospective lenders, that are in general,
more favorable than the Company's existing credit facilities. The Company
anticipates that it will take several months to negotiate and close on these new
credit facilities.
We currently anticipate that our fianacial results for the fourth quarter of
fiscal 2003 will range from break-even to a net loss of ($0.06) per share. We
believe operation within this guidance will meet all financial covenants. Our
failure to meet this guidance or expectations for future quarters' earnings
could adversely affect our liquidity and capital resources under existing and
prospective credit arrangements.
Net cash provided by operating activities for the nine months ended December 31,
2002 was $30.1 million compared to net cash used of $7.5 million for the
comparable period of the prior fiscal year. Increased net cash from operating
activities was attributable primarily to decreases in accounts receivable
balances and other working capital reductions, compared to increases in these
amounts in the prior year period offset by the increased losses in fiscal 2003.
Net cash used in investing activities for the nine months ended December 31,
2002 was $11.7 million compared to $58.9 million for the comparable period of
the prior fiscal year. This reduction resulted from a lower level of investment
in equipment and from the decline in business acquisitions in the nine months
ended December 31, 2002 compared to the same period of the prior fiscal year.
The only amounts paid for business acquisitions in the nine months ended
December 31, 2002 are related to contingent deferred payments provided for in
the purchase of Pacific Consultants LLP completed in fiscal 2002.
Net cash used in financing activities for the nine months ended December 31,
2002 was $3.2 million compared to net cash provided by financing activities of
$72.8 million for the comparable period of the prior fiscal year. Our principal
use of cash from financing activities in the nine months ended December 31, 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 have curtailed our regular review of acquisition and additional facilities
expansion or joint venture opportunities. We continue to pursue major new
program opportunities with new and existing customers, which may require us to
sell additional equity or secure additional financing in order to fund the
12
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, or future
terrorist attacks in the United States and the engagement of military forces of
the United States and its allies in other parts of the world, as well as any
future events in response to these developments, including rumors or threats of
war, actual conflicts or trade disruptions; changes in demand for electronics
manufacturing and design 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.
13
Item 3--Quantitative and Qualitative Disclosure of Market Risk
The accumulated other comprehensive loss decreased $836 and $1,830 for the three
and nine months ended December 31, 2002. These changes result primarily from
changes in the exchange rate of the Singapore dollar and the Euro in
relationship to the United States dollar applied to our net invested asset
currency exposure in Singapore and the Netherlands ($7,582 and $10,050
respectively, at December 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.
14
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 Securities
Exchange Act of 1934. 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 and 12 of the Securities Act of 1933. 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 were consolidated into a
single action, now captioned, In re PEMSTAR Securities Litigation. An Amended
Consolidated Complaint was filed January 9, 2003.
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 putative class 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
Not applicable.
15
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. 9 to the Amended and Restated Revolving Credit
Agreement between the Company, Turtle Mountain Corporation,
Pemstar Pacific Consultants Inc. and IBM Credit LLC dated January
27, 2003, 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, June 28, 2002, and
August 14, 2002.
10.2 Amendment No. 10 to the Amended and Restated Revolving Credit
Agreement between the Company, Turtle Mountain Corporation,
Pemstar Pacific Consultants Inc. and IBM Credit LLC dated January
29, 2003, 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, June 28, 2002,
August 14,2002, and January 27, 2003.
10.3 Fifth Amendment between the Company and U.S. Bank National
Association dated January 29, 2003, to the Loan and Security
Agreement with U.S. Bank National Association dated June 28, 2001,
as amended on December 20, 2001, March 25, 2002, May 3, 2002, and
June 27, 2002.
10.4 Sixth Amendment between the Company and U.S. Bank National
Association dated January 29, 2003, to the Loan and Security
Agreement with U.S. Bank National Association dated June 28, 2001,
as amended on December 20, 2001, March 25, 2002, May 3, 2002, June
27, 2002 and January 29, 2003.
12.1 Computation of Ratio of Earnings to Fixed Charges.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.ss.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.ss.1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) The registrant did not file any reports on Form 8-K during the three
months ended December 31, 2002.
16
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: February 13, 2003 /s/ Allen J. Berning
----------------------------- -----------------------------------------
Allen J. Berning
Chairman and Chief Executive Officer
Date: February 13, 2003 /s/ Gregory S. Lea
----------------------------- -----------------------------------------
Gregory S. Lea
Executive Vice President and Chief
Financial Officer
17
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
February 13, 2003
-----------------------------------------
Date
18
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
February 13, 2003
-----------------------------------------
Date
19
EXHIBIT INDEX
Exhibit No.
- -----------
10.1 Amendment No. 9 to the Amended and Restated Revolving Credit
Agreement between the Company, Turtle Mountain Corporation,
Pemstar Pacific Consultants Inc. and IBM Credit LLC dated January
27, 2003, 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, June 28, 2002,
and August 14, 2002.
10.2 Amendment No. 10 to the Amended and Restated Revolving Credit
Agreement between the Company, Turtle Mountain Corporation,
Pemstar Pacific Consultants Inc. and IBM Credit LLC dated January
29, 2003, 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, June 28, 2002,
August 14,2002, and January 27, 2003.
10.3 Fifth Amendment between the Company and U.S. Bank National
Association dated January 29, 2003, to the Loan and Security
Agreement with U.S. Bank National Association dated June 28,
2001, as amended on December 20, 2001, March 25, 2002, May 3,
2002, and June 27, 2002.
10.4 Sixth Amendment between the Company and U.S. Bank National
Association dated January 29, 2003, to the Loan and Security
Agreement with U.S. Bank National Association dated June 28,
2001, as amended on December 20, 2001, March 25, 2002, May 3,
2002, June 27, 2002 and January 29, 2003.
12.1 Computation of Ratio of Earnings to Fixed Charges.
99.1 Certification pursuant to 18 U.S.C.ss.1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C.ss.1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
20