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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 June 30, 2003
---------------------------
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 -- 37,574,489 shares as of August 1, 2003.
1
Index
Pemstar Inc.
Page
Part I. Consolidated Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated balance sheets - June 30, 2003 (unaudited) and March 31, 2003 ..................... 3
Consolidated statements of operations (unaudited) - Three months ended June 30,
2003 and 2002 ............................................................................... 4
Consolidated statements of cash flows (unaudited) - Three months ended June 30,
2003 and 2002 ............................................................................... 5
Notes to consolidated financial statements (unaudited) - June 30, 2003 ......................... 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations .................................................................................. 10-12
Item 3. Quantitative and Qualitative Disclosure about Market Risk ...................................... 12
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 ................................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders ............................................ 14
Item 5. Other Information .............................................................................. 14
Item 6. Exhibits and Reports on Form 8-K ............................................................... 14
Signatures ................................................................................................. 16
Exhibits ................................................................................................... 17
2
Part I. Financial Information
Pemstar Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
June 30, March 31,
2003 2003
----------- ---------
(Unaudited) (Note A)
Assets
Current assets
Cash and equivalents $ 8,733 $ 32,762
Restricted cash 2,399 4,268
Accounts receivable, net 116,772 112,316
Recoverable income taxes 435 282
Inventories, net 72,061 69,279
Unbilled services 13,355 10,797
Deferred income taxes 40 35
Prepaid expenses and other 8,354 7,474
--------- ---------
Total current assets 222,149 237,213
Property, plant and equipment 150,201 148,659
Less accumulated depreciation (60,480) (55,459)
--------- ---------
89,721 93,200
Goodwill, net 33,771 33,771
Deferred income taxes 1,741 1,705
Other assets 7,530 6,173
--------- ---------
Total assets $ 354,912 $ 372,062
========= =========
Liabilities and shareholders' equity
Current liabilities
Current maturities of long-term debt $ 20,456 $ 22,446
Current maturities of capital lease obligations 3,148 5,288
Accounts payable 83,991 88,083
Income taxes payable 90 191
Accrued expenses and other 20,306 22,631
--------- ---------
Total current liabilities 127,991 138,639
Long-term debt, less current maturities 58,624 56,127
Capital lease obligations, less current maturities 12,497 12,843
Other liabilities and deferred credits 5,888 4,586
Shareholders' equity
Common stock, par value $0.01 per share--authorized 150,000 shares,
issued and outstanding 37,561 shares at June 30, 2003 and 37,486
shares at March 31, 2003 376 375
Additional paid-in capital 235,121 234,943
Accumulated other comprehensive income (loss) 1,012 (14)
Accumulated deficit (85,914) (74,928)
Loans to shareholders (683) (509)
--------- ---------
149,912 159,867
--------- ---------
Total liabilities and shareholders' equity $ 354,912 $ 372,062
========= =========
See notes to consolidated financial statements.
3
Pemstar Inc.
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
Three Months Ended
June 30,
--------------------------------
2003 2002
---- ----
Net sales $ 145,500 $ 153,104
Cost of goods sold 138,918 152,436
------------- --------------
Gross profit 6,582 668
Selling, general and administrative expenses 12,280 14,418
Restructuring costs 3,455 2,956
------------- --------------
Operating loss (9,153) (16,706)
Other expense (income)-net (286) 23
Interest expense 2,039 2,835
------------- --------------
Loss before income taxes and cumulative effect of accounting
change (10,906) (19,564)
Income tax expense 80 272
------------- --------------
Loss before cumulative effect of accounting change (10,986) (19,836)
Cumulative effect of accounting change - (5,346)
------------- --------------
Net loss $ (10,986) $ (25,182)
============= ==============
Basic and diluted loss per common share:
Loss before cumulative effect of accounting change $ (.29) $ (.54)
Cumulative effect of accounting change - (.14)
------------- --------------
Net loss $ (.29) $ (.68)
============= ==============
Shares used in computing basic and diluted loss per common
share 37,534 36,768
See notes to consolidated financial statements.
4
Pemstar Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three Months Ended
June 30,
--------------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net loss $ (10,986) $ (25,182)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities
Depreciation 5,481 5,093
Amortization 376 680
Cumulative effect of accounting change - 5,346
Deferred revenue (57) (90)
Deferred income taxes (41) (55)
Non-cash restructuring charges and other 1,258 781
Change in operating assets and liabilities:
Accounts receivable (3,882) 3,859
Inventories (2,134) (1,902)
Prepaid expenses and other (3,678) 3,928
Accounts payable (4,500) 7,929
Accrued expenses and other (1,259) 3,208
------------- --------------
Net cash (used in) provided by operating activities (19,422) 3,595
Cash flows (used in) investing activities:
Decrease in restricted cash 1,869 404
Purchases of property and equipment (2,769) (2,726)
Other 65 -
------------- --------------
Net cash (used in) investing activities (835) (2,322)
Cash flows (used in) financing activities:
Proceeds from employee stock sales 179 299
Proceeds from sale of warrants - 539
Principal payments on long-term borrowings (55,399) (33,588)
Proceeds from long-term borrowings 52,991 30,930
Proceeds from sale and leaseback - 1,185
Other (1,534) (555)
------------- --------------
Net cash (used in) financing activities (3,763) (1,190)
Effect of exchange rate changes on cash (9) 5
------------- --------------
Net (decrease) increase in cash and cash equivalents (24,029) 88
Cash and cash equivalents:
Beginning of period 32,762 11,483
------------- --------------
End of period $ 8,733 $ 11,571
============= ==============
See notes to consolidated financial statements.
5
Pemstar Inc.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2003
(Dollars and share amounts in thousands, except per share data)
Note A--Basis of Presentation and Accounting Policies
The accompanying unaudited condensed consolidated financial statements of
Pemstar Inc. (the Company) 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
three-month period ended June 30, 2003, are not necessarily indicative of the
results that may be expected for the year ending March 31, 2004.
The balance sheet at March 31, 2003 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, 2003, filed with the Securities and Exchange
Commission.
Stock-Based Compensation
During the first fiscal quarter ended June 30, 2003, employees exercised stock
options to acquire 4 shares at an average exercise price of $1.49 per share, and
purchased 71 shares under the employee stock purchase plan at an average price
of $2.44 per share.
The Company has adopted the pro forma disclosure only requirements of SFAS No.
123, "Accounting for Stock-Based Compensation", and accordingly, accounts for
stock options issued to employees using the intrinsic value method of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees." Compensation expense is recorded on the date stock options are
granted only if the current fair market value of the underlying stock exceeds
the exercise price of the option. Accordingly, no compensation cost has been
recognized for grants under these stock option plans since the exercise price
equaled the fair market value of the stock on the date of grant. Had
compensation cost for stock option grants been based on the grant date fair
values of awards (the method described in SFAS No. 123), reported net loss would
have been changed to the pro forma amounts reported below.
Three months ended
June 30,
2003 2002
---- ----
Net loss
As reported ..................................... $ (10,986) $ (25,182)
Additional compensation expense, net of tax ..... (785) (773)
----------- ----------
Pro forma ....................................... $ (11,771) $ (25,955)
=========== ==========
Basic and diluted loss per share:
As reported ..................................... $ (.29) $ (.68)
Pro forma ....................................... (.31) (.71)
6
New Accounting Pronouncements
Goodwill - Effective April 1, 2002, the Company adopted Statements of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets".
Under this standard, goodwill and intangibles with indefinite useful lives are
no longer amortized. This standard also requires, at a minimum, an annual
assessment of the carrying value of goodwill and other intangibles with
indefinite useful lives. If the carrying value of goodwill or an intangible
asset exceeds its fair value, an impairment loss shall be recognized. Intangible
assets with finite lives are amortized over their estimated useful lives. Prior
to fiscal 2003, goodwill and indefinite-lived intangible assets were amortized
over periods not exceeding 40 years. Goodwill of $33,771 at June 30, 2003 and
March 31, 2003 is net of accumulated amortization of $1,860.
SFAS No. 142 required the Company to complete a transitional impairment review
of its goodwill assets. As a result of the Company's completion of its
transitional impairment test, the Company recorded as a cumulative effect of a
change in accounting principle effective April 1, 2002 a write-off of goodwill
in the amount of $5,346 on which the Company recognized no tax benefit. The
consolidated statement of operations for the three months ended June 30, 2002
has been changed to reflect the $5,346 amount as a cumulative effect of a change
in accounting, which had not been reflected in the Form 10-Q when originally
filed in fiscal 2003.
Note B--Inventories
The components of inventories consist of the following:
June 30, March 31,
2003 2003
------------ -------------
Raw materials $ 56,041 $ 57,971
Work in process 11,376 10,078
Finished goods 9,644 6,611
Less allowance for inventory obsolescence (5,000) (5,381)
------------ ------------
$ 72,061 $ 69,279
============ ============
Note C--Comprehensive Loss
Total comprehensive loss was ($9,960) and ($23,454) for the three months ended
June 30, 2003 and 2002, respectively. Comprehensive loss differs from net loss
due to unrecognized foreign currency gains and losses.
Note D--Financing Arrangements
In April 2003, the Company entered into a new revolving credit facility that
provides up to $90,000 of revolving credit loans and letters of credit and
expires in April 2006. The facility, which is limited to the lesser of the
facility amount or the available borrowing base, calculated as a percentage of
eligible accounts receivable and inventory balances, bears interest until
January 4, 2004 at prime plus 1.5% and, thereafter, at prime or Eurodollar rate
plus a margin from 0.75% to 1.5%, and 2.75% to 3.5%, respectively, depending on
excess available borrowing capacity within the facility. The Company is
obligated to pay a monthly fee of 0.5% on the unused portion of the facility.
The Company used proceeds to pay off existing domestic revolving credit
facilities with IBM Credit Corporation and US Bank. The revolving credit
facility is collateralized by substantially all domestic assets and by
investments in foreign subsidiaries. At July 31, 2003, the Company had available
borrowing capacity of $4.9 million in excess of outstanding borrowings under the
facility.
7
Note E--Earnings Per Share Data
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 i) unexercised stock options and warrants to purchase 6,367
and 5,364 shares of the Company's Common Stock as of June 30, 2003 and 2002,
respectively, and ii) 2,193 shares of the Company's Common Stock issuable upon
conversion of convertible debt as of June 30, 2003 and 2002.
Note F--Restructuring Costs
A rollforward of restructuring provisions is as follows:
Employee
Termination
and Future
Severance Lease
Costs Costs Total
----- ----- -----
Fiscal 2003:
Fiscal 2003 restructuring charges $ 2,439 $ 1,037 $ 3,476
Cash payments (2,209) (500) (2,709)
Foreign currency translation adjustments 112 - 112
------------ ------------- -----------
Reserve balances at March 31, 2003 342 537 879
Fiscal 2004:
Fiscal 2004 restructuring charges 717 - 717
Cash payments (513) (181) (694)
Additions to fiscal 2003 restructuring charges - 1,426 1,426
Foreign currency translation adjustments 35 - 35
------------ ------------- -----------
Reserve balances at June 30, 2004 $ 581 $ 1,782 $ 2,363
============ ============= ===========
During the quarter ended June 30, 2003, the Company recorded charges of $3,455
for restructuring related costs as a result of a Company initiative based upon a
strategic review of the Company's primary products and business aimed at
optimizing and aligning its manufacturing capacity with customer demand, while
positioning the Company for stronger operating results. The fiscal 2004
restructuring charge consisted of asset write-downs of $1,312 for machinery and
equipment; $717 for employee termination and severance costs related to
approximately 100 salaried and hourly employees located primarily at three
domestic operating sites; and $1,426 for adjustment of expected future lease
costs, associated with the fiscal 2003 closing of one California facility. The
fiscal 2004 special charge was primarily the result of restructuring operations
for those businesses and locations experiencing negligible or negative growth
due to continued market declines in the Communications and Optical business
sectors.
As of June 30, 2003, approximately $169 of cash payments had been made against
the accrual associated with the fiscal 2004 charges and approximately 60
employees have been terminated.
Certain machinery and equipment were written down to their estimated fair values
by recording a charge, in the three months ended June 30, 2003, of $1,312. The
write-down of these assets was primarily as a direct result of the continued
decline in the optical business sector, which has resulted in excess capacity
and under-utilized machinery and equipment.
The Company expects to substantially complete all actions relative to the 2003
restructuring charges by December 31, 2003 and expects to take additional
charges of approximately $4,300 for future lease costs related to expected
closures of one major facility and four minor facilities.
During the quarter ended June 30, 2002, the Company recorded special charges of
$2,956 for restructuring consisting of $1,146 for employee termination and
severance costs related to approximately 130 salaried
8
and hourly employees located at various worldwide operating sites; and $1,037
for lease termination costs, net of anticipated sublease rental of $1,649 and
$773 of asset write-downs, associated with the closing of one facility. During
the quarter ended June 30, 2003, various adjustments totaling $1,427 were
recorded to the fiscal 2003 restructuring program reserves consisting mainly of
the additional lease termination costs due to revision of estimates of sublease
rental assumed in the initial restructuring charge.
As of June 30, 2003, approximately $2,553 of cash payments had been made against
the accrual associated with the fiscal 2003 charges.
Note G--Cash Requirements
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The Company incurred an operating loss of approximately $9,153 for the three
months ended June 30, 2003, which included $3,455 of restructuring costs. The
Company continues to evaluate its operations to determine the need for further
restructuring in response to market conditions. The Company's ability to
continue to fund its operations and to grow the business depends on its ability
to generate additional cash from operations or obtain additional sources of
funds for working capital.
The new revolving credit facility, entered into by the Company as discussed in
Note D, requires the maintenance of certain minimum cash flow levels. In
anticipation of a potential covenant violation at the end of its first fiscal
quarter of 2004, the Company obtained a waiver from its lenders providing relief
for the potential violation, as well as amending future covenant requirements to
reflect expected operating results for the balance of fiscal 2004. The Company's
operating plan includes initiatives to reduce specific cash expenditures related
to general and administrative expenses.
Compliance by the Company with certain covenants in its new credit facility is
dependent upon the Company achieving certain revenue and expense targets in its
fiscal 2004 operating plan. The Company expects to meet its financial
projections for the 2004 fiscal year. The Company also believes that, if
necessary, it would be able to secure additional financing from its lenders or
sell additional Company equity securities; however, there can be no assurance
that such funding can be obtained or that future credit facility violations will
be waived.
Management believes that, as a result of: 1)the restructuring actions it has
taken to reduce cash expenditures, 2)the efforts it continues to make to
increase revenues from continuing customers and to generate new customers in
various industry sectors, and 3)the execution of a new revolving credit facility
that provides additional borrowing capacity, it will meet its fiscal 2004
financial plan. However, there can be no assurance that such financial plan will
be met.
9
Item 2--Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net sales - Net sales for the first quarter of fiscal 2004 decreased 5.0% to
$145.5 million from $153.1 million for the comparable three months of the prior
fiscal year. The decrease in net sales was due to lower volume from certain
optical, communications and storage customers. This continuation of the decline
in sales to optical, communications and storage customers was in part a result
of reduced consumer spending in Asia due to the outbreak of Severe Acute
Respiratory Syndrome and 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 first quarter of
fiscal 2004 accounted for approximately 46.9% of net sales with IBM comprising
25.5% of net sales in the first quarter of fiscal 2004.
Gross profit - Gross profit increased $5.9 million in the first quarter of
fiscal 2004 to $6.6 million (4.5% of net sales) from $0.7 million (0.4% of net
sales) in the same quarter of fiscal 2003. Higher gross profit stemmed primarily
from cost savings from current and prior fiscal year restructuring actions and
the decreased level of inventory write-offs partially offset by decreased
capacity utilization from the reduction in sales. We incurred inventory
write-downs of $3.5 million in the first quarter of fiscal 2003 primarily as a
result of customer financial difficulties and bankruptcies, versus no
significant write-downs of inventory during the first quarter of fiscal 2004.
Selling, general and administrative expenses - Selling, general and
administrative expenses were $12.3 million (8.4% of net sales) in the first
quarter of fiscal 2004, a decrease of $2.1 million from $14.4 million (9.4% of
net sales) for the same quarter of fiscal 2003. The decrease during the first
quarter of fiscal 2004 was the result of cost savings from current and prior
year restructuring actions and a decrease in the amount of bad debt expense. We
incurred bad debt expense of $1.9 million for the first quarter of fiscal 2003
versus bad debt expense of $0.1 million for the first quarter of fiscal 2004.
Restructuring costs - Restructuring costs of $3.5 million, consisting of $1.3
million for asset write-downs, $0.7 million for employee termination and
severance costs and $1.4 million for future lease costs, were recognized in the
first quarter of fiscal 2004 related to a decision to consolidate the San Jose
and Mountain View, CA, operations into one site and to close four smaller,
leased locations and make certain domestic workforce reductions. The Company
anticipates recording additional charges of $4.3 million related to
restructuring activity during the second quarter of fiscal 2004.
Restructuring costs of $3.0 million, consisting of $0.8 million for asset
write-downs, $1.1 million for employee termination and severance costs and $1.0
million for future lease costs, were recognized in the first quarter of fiscal
2003 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 expected business levels.
Amortization - As a result of adopting SFAS No. 142, "Goodwill and Other
Intangible Assets", on April 1, 2002, the Company recorded an impairment charge
of $5.3 million at the April 1, 2002 transition date for the cumulative effect
of a change in accounting principle, which has been reflected in the first
quarter of fiscal 2003 as a restatement of prior year reported results.
Interest expense - Our interest expense decreased $0.8 million to $2.0 million
for the first quarter of fiscal 2004 from $2.8 million for the same period of
fiscal 2003. In April 2003 the Company entered into a new revolving credit
facility that has more favorable interest rates, and paid off the existing
domestic revolving credit facilities. Additionally, total debt and capital
leases outstanding was lower during the first quarter of fiscal 2004 as compared
to the first quarter of fiscal 2003 ($94.7 million outstanding as of June 30,
2003 versus $98.6 million outstanding as of June 30, 2002).
10
Other expense (income) - Other expense (income) net, which consists primarily of
exchange gains in certain international operations, was ($0.3) million for the
first quarter of fiscal 2004, and was negligible for the first quarter of fiscal
2003.
Income tax expense - Income tax expense was $0.1 million (0.7% effective tax
rate) for the first quarter of fiscal 2004, compared to $0.3 million (1.5%
effective tax rate) for the first quarter of fiscal 2003. The effective rates
remain very low, consistent with prior year results, given the inability to
recognize carryforward losses in the United States and low or zero tax incentive
rates in most foreign operations.
Liquidity and Capital Resources
The Company has historically 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, 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 June 30, 2003, the Company had cash and cash equivalent balances of $8.7
million and total bank, other interest bearing debt and capital lease
obligations totaling $94.7 million. Included therein, we had approximately $48.9
million outstanding under our domestic revolving credit facility, $15.1 million
outstanding in facilities for our China operation and $5.7 million outstanding
under our Thailand credit facility. Each credit facility bears interest on
outstanding borrowings at variable interest rates, which as of June 30, 2003
were 5.5% for the domestic revolving credit facility, 5.0% for the China
facilities and 5.0% for the Thailand facility. At July 31, 2003, the Company had
available borrowing capacity of $4.9 million in excess of outstanding borrowings
under the domestic facility. These credit facilities are secured by
substantially all of our assets.
The domestic revolving credit facility requires the maintenance of certain
minimum cash flow levels. At the end of its first fiscal quarter of 2004, the
Company obtained amendments of EBITDA covenants from its lenders providing
relief for current reported periods, as well as amending future covenant
requirements to reflect expected operating results for the balance of fiscal
2004. The Company's operating plan includes initiatives to reduce specific cash
expenditures related to general and administrative expenses. The credit facility
requires consent of the lenders for certain investments and acquisitions.
Net cash (used in) operating activities for the first quarter of fiscal 2004 was
$(19.4) million compared to net cash provided of $3.6 million for the comparable
period of the prior fiscal year. Decreased net cash from operating activities in
fiscal 2004 was attributable primarily to increased balances in accounts
receivable and prepaid expenses and other current assets, and a decrease in
accounts payable balance. In the first quarter of fiscal 2003, combined
decreased balances in accounts receivable and prepaid expenses and other and an
increase in accounts payable balance, in excess of the operating loss, resulted
in cash provided from operations. Increased use of working capital resulted from
increased inventories due to the impact of SARS on our Asian operations in
conjunction with production order and payment delays from certain optical and
communications customers.
Net cash (used in) investing activities for the first quarter of fiscal 2004 was
$(0.8) million compared to net cash used of $(2.3) million for the comparable
period of the prior fiscal year. This reduction resulted primarily from a $1.9
million decrease in restricted cash as deposits were released during the first
quarter of fiscal 2004, after bonds related to our headquarters were paid off
subsequent to the sales and leaseback of such facilities in late fiscal 2003.
These releases offset capital expenditures of $(2.8) million, primarily in our
Asian operations. During the remainder of fiscal 2004, the Company expects to
satisfy its remaining obligations, of $13,681 at March 31, 2003 for historic
business acquisitions and Asian expansion, in a combination of cash and foreign
debt financing.
11
Net cash (used in) financing activities for the first quarter of fiscal 2004 was
$(3.8) million compared to net cash used of $(1.2) million for the comparable
period of the prior fiscal year. Debt repayments net of borrowings were $(2.4)
million for the first quarter of fiscal 2004, compared to $(2.7) million for the
comparable prior year period. During the first quarter of fiscal 2003 the
Company received $0.5 million from the sale of warrants and $1.2 million
relating to the sale and leaseback of manufacturing equipment.
Our continued viability depends on our ability to generate sufficient 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 form our
restructuring activities. We believe that as a result of: 1) the restructuring
actions taken in fiscal 2003 and further actions planned in fiscal 2004 to
reduce cash expenditures, 2)the efforts we continue to make to increase revenues
from continuing customers, as well as efforts to generate new customers in
various industry sectors, and 3)the sale and leaseback financing, and our new
revolving credit facility, that provides additional borrowing capacity, we have
sufficient cash flow to meet our needs for the remainder of fiscal 2004. We may
not achieve these targets or realize the intended expense reductions. If our
operating goals are not met, we may be required to secure additional waivers of
any resulting covenant violations under existing lending facilities, 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 or
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;
continued reduction in end user demand in Asia due to the outbreak of Severe
Acute Respiratory Syndrome (SARS) and market disruption caused by 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, 2003. 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.
Item 3--Quantitative and Qualitative Disclosure about Market Risk
The Company realized unrecognized gains of $1,026 for the first quarter of
fiscal 2004, resulting in a net accumulated unrecognized other comprehensive
gain of $1,012 as of June 30, 2003. These gains resulted 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 the
Netherlands and Thailand ($14,812 and $11,128, respectively, at June 30, 2003).
Additional credit facilities denominated in local currencies of foreign
locations are designed to limit risks.
12
Item 4--Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and its Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure control and procedures (as
defined in Exchange Act Rule 13a-15) as of the end of the period covered by this
report. Based upon that evaluation, the Company's Chief Executive Officer along
with the Company's Chief Financial Officer concluded that the Company's
disclosure controls and procedures, which include among other things, a
disclosure committee made up of the General Counsel, Principal Accounting
Officer and Executive Director of Planning and Investor Relations, are effective
in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings.
Changes in internal controls.
During the period covered by this report, there were no changes made in our
internal controls over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that materially affected or are reasonable likely to
materially affect our internal controls over financial reporting.
13
Part II. Other Information
Item 1--Legal Proceedings
The Company is currently a defendant, along with several current and former
officers and directors, in a consolidated putative class action captioned: in re
PEMSTAR Securities Litigation, alleging violations of Section 10(b) and Section
20(a) of the Securities Exchange Act of 1934 and Sections 11 and 12 of the
Securities Act of 1933. The lawsuit is a consolidation of several lawsuits, the
first of which was commenced in United States District Court for the District of
Minnesota on July 24, 2002. The plaintiffs, several individual shareholders,
allege, in essence, that the defendants defrauded the Company's shareholders by
making optimistic statements during a time when they should have known that
business prospects were less promising and allege that the registration
statement filed by the Company in connection with the secondary offering
contained false, material misrepresentations. An Amended Consolidated Complaint
was filed January 9, 2003. On August 23, 2002 and October 2, 2002 two different
individual shareholders also commenced virtually identical shareholder
derivative actions against the Company as nominal defendant and its Board. Those
actions are currently pending in Unites States District Court for the District
of Minnesota. The allegations in the derivative actions are based on many of the
same facts that gave rise to the securities action. The lawsuit alleges that the
Board of the Company breached its fiduciary duties. 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 is vigorously defending
against the claims. The Company has recorded no loss accrual as such amounts are
not deemed estimable.
Item 2--Changes in Securities and Use of Proceeds
Not applicable.
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. 2 of the Loan and Security Agreement between the
Company, Turtle Mountain Corporation, Pemstar Pacific Consultants
Inc. and Gentlelife, Inc., Congress Financial Corporation and Fleet
Capital Corporation dated April 25, 2003, as amended on June 30,
2003.
10.2 Amendment No. 3 of the Loan and Security Agreement between the
Company, Turtle Mountain Corporation, Pemstar Pacific Consultants
Inc. and Gentlelife, Inc., Congress Financial Corporation and Fleet
Capital Corporation dated April 25, 2003, as amended on June 30, 2003
and July 10, 2003.
12.1 Computation of Ratio of Earnings to Fixed Charges.
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a)/15d-14(a) (Section 302 Certification).
14
31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14(a)/15d-14(a) (Section 302 Certification).
32.1 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.
32.2 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. May 2, 2003 announcing the sale and leaseback transaction of
land and buildings housing the Company's corporate headquarters
and Rochester manufacturing facilities. The filing also
announced the close of the new credit facilities with Congress
Financial Corporation and Fleet Capital Corporation and, as
amended, US Bank.
ii. May 7, 2003 announcing the Company's earnings for the quarter
and year ended March 31, 2003.
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: August 6, 2003 /s/ Allen J. Berning
-------------------- ----------------------------------------------
Allen J. Berning
Chairman and Chief Executive Officer
Date: August 6, 2003 /s/ Gregory S. Lea
-------------------- ----------------------------------------------
Gregory S. Lea
Executive Vice President and Chief Financial Officer
16
EXHIBIT INDEX
Exhibit No.
- -----------
10.1 Amendment No. 2 of the Loan and Security Agreement between the Company,
Turtle Mountain Corporation, Pemstar Pacific Consultants Inc. and
Gentlelife, Inc., Congress Financial Corporation and Fleet Capital
Corporation dated April 25, 2003, as amended on June 30, 2003.
10.2 Amendment No. 3 of the Loan and Security Agreement between the Company,
Turtle Mountain Corporation, Pemstar Pacific Consultants Inc. and
Gentlelife, Inc., Congress Financial Corporation and Fleet Capital
Corporation dated April 25, 2003, as amended on June 30, 2003 and July
10, 2003.
12.1 Computation of Ratio of Earnings to Fixed Charges.
31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a)
(Section 302 Certification).
31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a)/15d-14(a)
(Section 302 Certification).
32.1 Certification pursuant to 18 U.S.C.(S)1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C.(S)1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.