<PAGE>
As filed with the Securities and Exchange Commission on October 5, 2000
Registration No. 333-44376
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PNY TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 3577 11-2724278
(State of (Primary Standard Industrial (I.R.S. employer
incorporation) Classification code number) identification no.)
</TABLE>
299 Webro Road
Parsippany, New Jersey 07054
(973) 515-9700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Gadi Cohen
Chief Executive Officer
PNY Technologies, Inc.
299 Webro Road
Parsippany, New Jersey 07054
(973) 515-9700
(Name, address, including zip code and telephone number, including area code,
of agent for service)
Please address a copy of all communications to:
<TABLE>
<S> <C>
Arnold B. Peinado, III, Esq. Jeremy W. Dickens, Esq.
Milbank, Tweed, Hadley & McCloy LLP Weil, Gotshal & Manges LLP
1 Chase Manhattan Plaza 767 Fifth Avenue
New York, NY 10005 New York, NY 10153
(212) 530-5000 (212) 310-8000
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Amount maximum Proposed maximum
Title of each class of to be offering price aggregate offering Amount of
Securities to be registered registered(1) per share(2) price (2) Registration fee
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value... 10,235,000 $15.00 $153,525,000 $40,530.60(3)
---------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
(1) Includes 1,335,000 shares subject to options granted to the underwriters to
cover any over-allotments.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(o) under the Securities Act.
(3) A fee of $37,050 was previously paid upon the initial filing of this
Registration Statement.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated October 5, 2000
PROSPECTUS
8,900,000 Shares
lp22
Common Stock
--------------------------------------------------------------------------------
This is our initial public offering of common stock. We are offering up to
8,900,000 shares of common stock. No public market currently exists for our
shares.
We propose to list our common stock on the Nasdaq National Market under the
symbol "PNYT." The anticipated price range is $13.00 to $15.00 per share.
Investing in the shares involves risks. "Risk Factors" begin on page 5.
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price.......................................... $ $
Underwriting Discounts.........................................
Proceeds to PNY Technologies...................................
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 1,335,000
additional shares of common stock on the same terms and conditions as set forth
above to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares
on or about , 2000.
--------------------------------------------------------------------------------
Lehman Brothers
Robertson Stephens
Needham & Company, Inc.
Fidelity Capital Markets
a division of National Financial Services LLC
, 2000
<PAGE>
Depicted is a sample of our products, ranging from multimedia products,
including in the lower left hand corner, CD Media, Compact Flash and Smart
Media, to some of our memory products for desktops, notebooks, work stations and
servers. In the upper right hand corner are memory modules for OEM
applications. Diagonally descending from left to right are five images of
various key departments representing the steps in the manufacturing process.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................. 1
Risk Factors....................... 5
About this Prospectus.............. 9
Forward-Looking Statements......... 9
Use of Proceeds.................... 10
Dividend Policy.................... 10
Capitalization..................... 11
Dilution........................... 12
Selected Financial Data............ 13
Management's Discussion and
Analysis
of
Financial Condition and Results of
Operations ....................... 15
Business........................... 23
Management......................... 32
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Related Party Transactions.......................................... 39
Principal Stockholders.............................................. 40
Description of Capital Stock........................................ 42
Shares Eligible for Future Sale..................................... 45
United States Federal Income Tax Consequences to Non-U.S. Holders... 47
Underwriting........................................................ 50
Legal Matters....................................................... 53
Experts............................................................. 53
Where You Can Find Additional
Information........................................................ 53
Index to Consolidated Financial
Statements......................................................... F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information in this prospectus is accurate only as of the date
of this prospectus regardless of the time of delivery of this prospectus or of
any sale of our common stock.
Until , 2000, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This requirement is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
i
<PAGE>
PROSPECTUS SUMMARY
You should read the entire prospectus carefully, including "Risk Factors"
and our consolidated financial statements and the related notes beginning on
page F-1, before deciding to invest in our common stock.
PNY Technologies
We are a leading manufacturer of standard and custom memory modules and a
provider of related engineering and supply-chain management services to
original equipment manufacturers, or OEMs, retailers and other memory module
resellers. Our supply-chain management services include coordination and
planning, inventory management and materials procurement. Our memory modules
use all major memory technologies based on random access memory, which is a key
component in determining the speed and efficiency of many electronic devices.
These technologies include dynamic random access memory, or DRAM, which is the
most common variety of memory integrated circuit device, static random access
memory, or SRAM, and flash technology. Memory modules are compact circuit board
assemblies of memory semiconductors and related circuitry. Our OEM channel
customers use our memory modules in a wide range of applications, from high-end
computing and Internet and telecommunications infrastructure equipment, to
various consumer and commercial applications. Our reseller channel customers
sell our products to consumers and businesses, who use them to improve the
speed and performance of their computers, work stations, printers and other
electronic devices, such as digital cameras and personal digital assistants.
In our OEM channel, we primarily sell to electronics original equipment
manufacturers, contract electronics manufacturers, who provide manufacturing
services to OEMs on an outsourced basis, and semiconductor manufacturers,
generally in the United States and western Europe. OEMs design, build, market
and sell products to end users and distributors. We provide a full complement
of manufacturing and logistics services to our customers. These services
include design engineering, inventory forecasting, materials procurement,
component assembly and testing, product packaging and distribution. Our OEM
channel customers include industry leaders such as Cisco Systems, Inc., Jabil
Circuit, Inc., NEC Corporation, Network Appliance, Inc. and Oki Electric
Industry Company. We believe that our OEM channel customers rely on us for our
superior service, flexibility and responsiveness, as well as our engineering
and logistics expertise. Cisco Systems, our largest customer, recently
recognized our superior service when it awarded us one of its principal
supplier awards in 1999. For the six months ended June 30, 2000, sales to our
OEM channel customers accounted for approximately 55% of our total revenues,
compared to 26% for the six months ended June 30, 1999. We believe that the OEM
sales channel represents a significant growth opportunity for our business over
the next several years.
We are the leading manufacturer of memory modules for the U.S. retail
market. Sales of our memory products accounted for approximately 60% of retail
sales for the twelve months ended August 31, 2000, according to PC Data, Inc.
Our memory modules are the primary memory modules sold at several of the
largest domestic and international consumer electronics and office supply
chains, including Best Buy Co. Inc., CompUSA Inc., Dixons Group plc., Office
Depot and Staples, Inc. In addition to the retail channel, we sell our products
through other reseller channels, such as mail-order companies, electronic
component distributors and e-commerce companies. We believe that our 15 years
of experience selling in the reseller channel and our reputation for product
quality and availability have generated strong brand recognition among many
retail memory module customers. We have recently begun to capitalize on our
brand name and our relationships with our large reseller customers to enter
into other product areas, such as recordable compact discs and flash memory
accessories.
1
<PAGE>
The demand for memory modules in electronic systems is growing rapidly.
Dataquest, Inc. forecasts that the worldwide market for DRAM memory modules
will increase from $20.8 billion in 1999 to $69.4 billion in 2002, which
represents a 49.6% compound annual growth rate. Several factors contribute to
the increasing use of memory, including:
. the development of high-performance computers and servers,
. the increased complexity of software,
. the development of high-bandwidth and graphics-intensive applications,
and
. evolving Internet and telecommunications infrastructure requirements.
In addition, digital computing and processing have extended beyond traditional
applications, like computers and servers, to include a wide array of electronic
equipment. These new applications include routers, switches, hubs, digital
cameras, personal digital assistants and "smart" appliances.
There are two types of memory module manufacturers: (1) memory semiconductor
manufacturers, who produce their own silicon chips and assemble them into
memory modules, and (2) independent manufacturers like us, who purchase memory
semiconductors from third parties and then assemble those semiconductors into
memory modules. Memory semiconductor manufacturers generally focus on high-
volume standard memory modules and require long lead times. Independent memory
module manufacturers typically are smaller in size and seek to distinguish
themselves by reducing lead times and by being more responsive and flexible in
the types of products and services they provide. Dataquest expects independent
memory module manufacturer revenues to grow at a compound annual rate of 53.8%
from 1999 through 2002, compared to 47.9% for memory module revenues of
semiconductor manufacturers over the same period.
Many OEM channel participants are increasingly outsourcing the production of
the memory modules used in their finished products or equipment to specialized
memory module manufacturers like ourselves. This trend results from the need
for OEM channel participants to: (1) focus on their core product design,
development and marketing competencies, (2) reduce time-to-market for new
products and increase manufacturing flexibility, (3) maintain a broad range of
memory module technologies, and (4) manage inventory costs.
We have established strong relationships with numerous OEMs, contract
electronics manufacturers and resellers, many of which are leaders in their
respective markets. These relationships are a result of our ability to provide
superior service to our customers, based on our: (1) strong supply-chain
management capabilities, (2) responsiveness and flexible customer service, (3)
comprehensive engineering and testing services, and (4) broad range of
products.
We intend to further our position as a leading manufacturer of standard and
custom memory modules and provider of related engineering and supply-chain
management services. In addition, we intend to enter new product categories in
the retail channel by capitalizing on our widely-recognized brand name. Our
strategy is to:
. expand sales to rapidly growing OEMs,
. continue to focus on both newer, leading-edge and older, trailing-edge
technologies,
. maintain our core market-leading customer base,
. maintain strong vendor relationships,
. capitalize on our brand name to expand into other retail product lines,
and
. pursue acquisitions of complementary businesses and facilities.
----------------
PNY is a Delaware corporation, originally incorporated in 1985. Our
principal executive office is located at 299 Webro Road, Parsippany, NJ 07054.
Our telephone number is (973) 515-9700. We maintain a website on the Internet
at www.pny.com. Our website and the information it contains are not a part of
this prospectus.
2
<PAGE>
The Offering
Common stock offered..................
8,900,000 shares
Common stock to be outstanding after
this offering........................ 40,081,378 shares
Use of proceeds ...................... We intend to use the net proceeds from
this offering to repay a portion of our
existing indebtedness, to redeem our
Series B preferred stock and Series C
preferred stock, and for working
capital and general corporate purposes.
Proposed Nasdaq National Market
symbol............................... "PNYT"
The number of shares of common stock to be outstanding after this offering
is based on 26,050,050 shares of common stock outstanding as of June 30, 2000
after giving effect to: (1) a 3-for-1 stock split effected in October 2000, (2)
the conversion of all of our Series A preferred stock into shares of common
stock and the assumed cashless exercise of warrants, which will result in the
issuance of an aggregate of 5,131,328 shares of common stock, and (3) the
8,900,000 shares of common stock being sold by us in this offering, and
excludes:
. 2,307,000 shares of common stock issuable upon exercise of stock
options outstanding as of June 30, 2000 under our employee stock option
plan, with a weighted average exercise price of $1.25 per share,
. 1,243,500 shares of common stock issuable upon exercise of warrants
outstanding as of June 30, 2000 which are held by some of our current
or former officers and directors, with a weighted average exercise
price of $1.03 per share, and
. 5,193,000 additional shares of common stock reserved for issuance under
our stock option plan.
Except as otherwise indicated, all information in this prospectus assumes that
the underwriters do not exercise the over-allotment option granted by us.
3
<PAGE>
Summary Consolidated Financial Data
The following tables set forth summary consolidated financial data and other
data for our company as of and for the periods indicated. You should read the
summary data set forth below in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and the related notes appearing elsewhere in this
prospectus. The pro forma net income per share for the year ended December 31,
1999 and for the six months ended June 30, 2000 reflect the conversion of all
of our Series A preferred stock into shares of common stock and the cashless
exercise of warrants described under "Capitalization," which will result in the
issuance of an aggregate of 5,131,328 shares of common stock, as if they had
occurred on the first day of each such period. The pro forma as adjusted
consolidated balance sheet data give effect to this offering, the application
of the net proceeds as described under "Use of Proceeds," the conversion of
shares of our Series A preferred stock, the cashless exercise of warrants as if
each had occurred on June 30, 2000 and reflects a 3-for-1 stock split effected
in October 2000. All share and per share amounts have been adjusted to give
retroactive effect to the stock split.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
---------------------------- ------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net sales.................... $270,924 $204,576 $273,571 $122,457 $198,556
Cost of sales (1)............ 250,306 177,577 233,035 105,476 168,727
-------- -------- -------- -------- --------
Gross profit ................ 20,618 26,999 40,536 16,981 29,829
Operating expenses (1)....... 25,719 22,447 24,321 11,214 18,714
-------- -------- -------- -------- --------
Operating (loss) income...... (5,101) 4,552 16,215 5,767 11,115
Interest and other (expense)
income, net................. (3,645) (2,388) (2,477) (1,098) (718)
-------- -------- -------- -------- --------
(Loss) income before income
taxes....................... (8,746) 2,164 13,738 4,669 10,397
Income taxes................. 2 120 1,364 475 1,980
-------- -------- -------- -------- --------
Net (loss) income............ $ (8,748) $ 2,044 $ 12,374 $ 4,194 $ 8,417
======== ======== ======== ======== ========
Net (loss) income per common
share:
Basic....................... $ (0.34) $ 0.08 $ 0.48 $ 0.16 $ 0.32
Diluted..................... (0.34) 0.07 0.39 0.13 0.25
Shares used in computing net
(loss) income per common
share:
Basic....................... 25,800 25,948 26,050 26,050 26,050
Diluted..................... 25,800 30,681 31,506 31,090 33,755
Unaudited pro forma net
income per common share:
Basic....................... $ 0.40 $ 0.27
Diluted..................... 0.38 0.25
Shares used in computing
unaudited pro forma net
income per common share:
Basic....................... 31,181 31,181
Diluted..................... 32,540 34,012
Other Data:
Depreciation and
amortization................ $ 2,279 $ 2,703 $ 2,776 $ 1,272 $ 1,587
Capital expenditures......... 4,177 3,254 2,105 524 2,667
</TABLE>
<TABLE>
<CAPTION>
At June 30, 2000
-----------------------
Pro Forma
Actual As Adjusted
----------- -----------
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............................. $ 5,325 $ 57,853
Working capital....................................... 8,906 104,839
Total assets ......................................... 142,235 194,763
Total debt and capital lease obligations, including
current maturities................................... 45,609 1,607
Redeemable preferred stock............................ 18,060 --
Total stockholders' equity............................ 2,253 116,843
</TABLE>
--------
(1) Stock-based compensation in the six months ended June 30, 2000 totaled
$3,128, $282 of which was included in cost of sales and $2,846 of which was
included in operating expenses.
4
<PAGE>
RISK FACTORS
You should carefully consider the risks described below, as well as the
other information in this prospectus, before making a decision to invest in our
common stock. The occurrence of any of the following risks could harm our
business and prospects. In that event, the trading price of our shares might
decline and you could lose all or part of your investment.
Risks Related to Our Business
Because we depend on a small number of customers for a significant portion of
our revenues and we do not have long-term contracts with these customers, the
loss of any of these customers will significantly reduce our revenues and
profitability.
Historically, a small number of customers has accounted for a significant
percentage of our revenues. Our largest OEM customer, Cisco Systems, accounted
for 37% of our total revenues for the six months ended June 30, 2000 and could
increase as a percentage of total revenues in the future. Our largest reseller
channel customer, CompUSA, accounted for 11% of our total revenues for the same
period. We do not have long-term contracts with our largest customers. There is
a risk that these customers or our other customers will cease to use our
products at current levels or at all. Furthermore, consolidation among our
customers may result in increased customer concentration and the potential loss
of business as a result of acquisitions. The loss of, or a significant
reduction in orders by, a major customer would decrease our revenues and our
profitability. We expect that sales of our products to a small number of
customers will continue to account for a significant percentage of our revenues
in the foreseeable future. Therefore, our financial results will depend in
significant part upon the success of our customers' businesses.
Shortages of, or price fluctuations in, component parts used in our memory
products could delay shipments and adversely affect our profitability.
Many of the components we use in our memory modules are commodities. Memory
semiconductors based on dynamic random access memory, or DRAM, technology
represented more than 90% of our component costs in 1999. The market for DRAM
semiconductors is volatile. It is often characterized by periods of shortage
and high prices and periods of oversupply and low prices. We purchase DRAM
semiconductors from a small number of suppliers, such as Infineon Technologies
Corporation, Micron Semiconductor, Inc., Toshiba America Electronics
Components, Inc., Vanguard International Semiconductor Corp. and other major
DRAM manufacturers. We do not have long-term contracts with any of these
suppliers. Our dependence on a small number of DRAM suppliers and our lack of
long-term contracts expose us to several risks, including the risk that we may
be unable to obtain an adequate supply of components or that we will experience
uncontrolled price increases and late deliveries. At times, industry capacity
shortages have caused some of our DRAM suppliers to curtail shipments of
components to their customers, including us. This means that although we may
have customer orders, we may not be able to obtain the materials that we need
to fill those orders in a timely manner. A disruption or termination of our
relationship with any of our significant DRAM suppliers, or our inability to
develop new relationships, could cause delays, disruptions or reductions in our
product shipments and could require us to redesign some of our products. This
could potentially damage our relationships with current or prospective
customers, increasing our costs or prices and decreasing our revenues.
We have experienced losses in the past, due to the volatile nature of the
memory semiconductor market and there is a risk that future volatility could
negatively impact our operating results.
We have in the past experienced and may in the future experience substantial
period-to-period fluctuations in our operating results due to downturns in the
memory module market. These downturns are often characterized by accelerated
erosion of average sales prices and production overcapacity. These market
downturns, which we experienced in 1996 and 1997, adversely affected our
revenues, gross margins and profitability. At times we have also offered some
of our reseller channel customers price protection. Under our price protection
program, our customers receive credits from us if we reduce the list price of
our products. Volatility in memory semiconductor prices and the effects of
price protection contributed substantially to our net losses in 1996 and 1997.
5
<PAGE>
Changes in end-user demand for the products sold by any of our key customers
could have a rapid and exaggerated effect on that customer's demand for our
products in any given period. Also, declines in semiconductor prices could
affect the valuation of our inventory, which could harm our financial
condition.
The execution of our growth strategy depends on our ability to retain key
personnel, including our executive officers. In addition, there is a risk that
we may be unable to attract and integrate new personnel into our company.
Our success depends on the continued contributions of our senior management,
including Gadi Cohen, our President, CEO and Chairman of the Board, and other
key personnel. We have obtained key man life insurance for Mr. Cohen, but have
not entered into an employment agreement with him.
Competition for employees in our industry is intense. We have had, and may
continue to have, difficulty hiring and retaining the necessary engineering,
sales and marketing, and management personnel to support our growth. We have
recently hired several of our senior executives, including some who joined us
in 2000. These individuals have not previously worked with us or with each
other. They also have backgrounds in different parts of the electronics
industry. There is a risk that we will not be able to integrate these
individuals into our business. In addition, the loss of any key employee, the
failure of any key employee to perform in his or her current position, or the
inability of our officers and key employees to expand, train and manage our
employee base, could harm our ability to compete in the memory module industry.
Our President, CEO and Chairman of the Board will have substantial influence
over our operations, can control matters requiring stockholder approval, and
may have interests that are different from, or in addition to, your interests.
His spouse will receive material benefits in connection with this offering.
Mr. Cohen, our President, CEO and Chairman of the Board, will beneficially
own approximately 60.6% of our common stock following the completion of this
offering, or approximately 58.7% if the underwriters exercise their over-
allotment option in full. As a result, Mr. Cohen will continue to have the
ability to control all matters requiring approval by our stockholders,
including the election and removal of directors and approval of significant
corporate transactions. Mr. Cohen may have interests that are different from,
or in addition to, your interests. We will redeem $18.1 million of our
preferred stock owned by Mr. Cohen's spouse with a portion of the net proceeds
of this offering.
Increased competition may result in a decreased demand or lower prices for our
products. Our failure to effectively compete could reduce our profitability.
We compete primarily on the basis of service, quality and price. Some of our
competitors include large domestic and international companies that may have
substantially greater financial, technical, marketing, distribution and other
resources, broader product lines, lower cost structures and longer standing
relationships with customers and suppliers. As a result, our competitors may be
better able than us to respond to volatile average sales prices, may be able to
deliver competitive products at a lower price or may be able to provide
services we cannot.
Some of our significant suppliers, including, Infineon, Micron and Toshiba
are also competitors. These suppliers have the ability to manufacture
competitive products at lower costs than we do as a result of their higher
levels of integration. Because they also manufacture the memory semiconductors
we use, they have a significant advantage in times of semiconductor shortages.
We also face competition in the OEM sales channel from current and prospective
customers that evaluate our capabilities against the merits of manufacturing
products internally. Our inability to effectively compete in the memory module
markets could decrease our revenues and impair our financial results.
We have experienced significant growth in a short period of time, particularly
in our OEM channel, and we may have trouble managing our expansion.
We have grown rapidly in recent years. Our net sales increased approximately
62% in the six months ended June 30, 2000, compared to the six months ended
June 30, 1999, primarily as a result of strong growth
6
<PAGE>
in our OEM channel business, driven by Cisco Systems. We cannot assure you that
we will be able to meet performance expectations without disrupting the quality
and reliability of service to our customers or diverting management resources.
Our rapid growth may place a significant strain on our management, financial
resources and information systems. If we are unable to manage our growth
effectively, it may hurt our operating results.
We may become involved in litigation over intellectual property rights, which
may adversely affect our ability to manufacture and sell our products.
The memory semiconductor industry is characterized by vigorous protection
and pursuit of intellectual property rights. Third parties may bring suits
against us. Litigation could result in significant expense to us and divert the
efforts of our technical and management personnel. In the event of an adverse
result in litigation, we could be required to pay substantial damages, cease
the manufacture, use and sale of some products, expend significant resources to
develop non-infringing technology, discontinue the use of some processes or
obtain licenses to use the infringed technology. Licenses may not be available
on commercially reasonable terms, if at all. Our failure to obtain a license or
our failure to obtain a license on commercially reasonable terms could cause us
to incur substantial costs and suspend manufacturing products using the
infringed technology. If we obtain a license, we would likely be required to
make royalty payments for sales under the license. These payments would
increase our cost of sales and reduce our gross profit.
We have limited experience in acquiring and integrating new businesses. We may
have difficulty integrating and managing our newly-acquired Irish facility,
which may impair our operating results.
We recently acquired a memory module assembly facility in Ballivor, Ireland.
While we have experience operating similar facilities, we have not previously
worked with this facility's employees and have not previously operated a
facility in Ireland. There is a risk that we will not be able to effectively
integrate the Ballivor facility or any future acquisition into our existing
business, which could increase our operating costs.
A key component of our strategy is to pursue strategic acquisitions of
complimentary businesses and facilities. We have limited experience in
acquiring other businesses, facilities, product lines and technologies. There
is a risk that we would not be successful in overcoming problems encountered in
connection with any future acquisitions, and our inability to do so could harm
our growth prospects.
If we are unable to obtain additional financing, we may not be able to support
our future growth.
We are a rapidly growing company and may need to raise additional capital
through public or private equity offerings or debt financings. We do not know
whether additional financing will be available when needed, or, if available,
whether the terms of any financing will be favorable to us. If we cannot raise
needed funds on acceptable terms, we may not be able to develop or enhance our
products, improve our manufacturing lines and testing equipment, take advantage
of future opportunities, including acquisitions, or respond to competitive
pressures or unanticipated events, all of which could harm our business,
financial condition and results of operations. To the extent we raise
additional capital by issuing equity securities, our stockholders may
experience substantial dilution and the new equity securities may have rights,
preferences or privileges senior to those of our common stock.
As a result of operating our manufacturing facilities located in France and
Ireland and our significant foreign-based revenues, we are exposed to risks
associated with doing business in foreign countries, particularly foreign
currency fluctuations, which could adversely affect our operating results.
We currently have manufacturing facilities in France and Ireland and may in
the future expand to other countries. General economic conditions and
fluctuations in currency exchange rates affect the prices of our products and
the prices of the components used in our products. We sell a significant
portion of our products in western European markets, such as France, the U.K.,
Ireland and Germany. A significant portion of our European sales are
denominated in local currencies, principally the British pound, euro, French
franc and
7
<PAGE>
German mark. If there were a significant devaluation of these currencies
against the U.S. dollar, the operating results of our European subsidiaries,
when expressed in U.S. dollars, could be adversely affected. In addition, we
purchase a significant portion of the semiconductors used in our U.S.
operations from the U.S.-based affiliates of foreign suppliers. Although these
purchases are currently denominated in U.S. dollars, devaluation of the U.S.
dollar relative to the currency of a foreign supplier could result in an
increase in our component costs, which could harm our operating results.
International sales of our products accounted for approximately 13% of our
revenues for the six months ended June 30, 2000 and 17% for the year ended
December 31, 1999. We expect our international sales to increase as a result of
the recent acquisition of our manufacturing facility in Ireland.
Risks Related to this Offering
An active public market for our common stock may not develop, which could
depress our stock price and impede your ability to sell your shares.
Before this offering, you could not buy or sell our common stock on the
public market. An active public market for our common stock may not develop or
be sustained after the offering, which could affect your ability to sell your
shares and may depress their market value. The market price of your shares may
fall below the initial public offering price.
Our management will have broad discretion to use the proceeds from this
offering, including the ability to apply the proceeds to uses that do not
increase our operating results or market value.
Our management will have considerable discretion in the application of the
net proceeds of this offering, and you will not have the opportunity, as part
of your investment decision, to assess whether the net proceeds are being used
appropriately. The net proceeds may be used for corporate purposes that do not
increase our operating results or market value. Pending application, the net
proceeds of this offering may be placed in investments that do not produce
income or that lose value. The failure to apply these funds effectively could
impair our financial condition.
A substantial amount of our shares will be eligible for sale beginning 180 days
after this offering, which could result in a decline in our stock price.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the trading price of our common stock
could fall. These sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
favorable. After giving effect to this offering based on the number of shares
outstanding as of June 30, 2000, and assuming conversion of all our outstanding
Series A preferred stock and the cashless exercise of warrants, we will have
40,081,378 shares of common stock outstanding. As of June 30, 2000, all of the
shares of our common stock held by existing stockholders were "restricted
securities" as that term is defined in Rule 144 under the Securities Act of
1933, and 100% will be available for sale in the public market commencing 180
days after the date of this prospectus, subject to applicable securities laws,
or earlier if the underwriters release their lock-up restrictions or in the
limited circumstances described in "Underwriting." As of June 30, 2000, there
were exercisable options to purchase 577,000 shares of our common stock issued
under our stock option plan and exercisable warrants to purchase 913,500
shares. Should the holders of these options and warrants exercise their
securities, there will be additional shares eligible for sale 180 days after
the date of this prospectus. We intend to file a registration statement on Form
S-8 to register the shares of common stock issuable upon exercise of options
granted under our stock option plan.
In connection with this offering, other than as described under
"Underwriting," all of our officers, directors and existing significant
stockholders, and substantially all of our option holders and warrant holders,
will enter into agreements not to dispose of or hedge any shares of common
stock for a period of 180 days after the date of this prospectus without the
prior written consent of Lehman Brothers. We cannot be sure what effect, if
any, future sales of our shares or the availability of shares for future sale
will have on the market price
8
<PAGE>
of our common stock. The market price of our common stock could drop due to
sales of a large number of shares in the market after this offering or the
perception that sales of large numbers of shares could occur.
Purchasers in this offering will suffer immediate and substantial dilution of
their investment.
The initial public offering price is substantially higher than the pro forma
net book value per share of our outstanding common stock. Our existing
stockholders have paid an average of $0.51 per share for their common stock,
which is considerably less than the amount to be paid for the common stock in
this offering. As a result, assuming an initial public offering price of $14.00
per share, investors purchasing common stock in this offering will incur
immediate dilution of $11.10 in pro forma net tangible book value per share of
common stock. In addition, we have issued options to acquire common stock at
prices significantly below the initial public offering price. To the extent
those outstanding options are ultimately exercised, there will be further
dilution to investors in this offering.
ABOUT THIS PROSPECTUS
This prospectus includes statistical data regarding our company and the
memory module market in which we compete. We derived this data from our records
or from information published or prepared by various independent sources for
market data, including Dataquest, Inc., PC Data, Inc. and the Semiconductor
Industry Association. PC Data does not include memory modules sold by Circuit
City or Office Depot in their retail sales data and excludes mail order. We
have based the market data relating to our relative position in our industry on
industry sources that we believe to be reliable and the good faith estimates of
our management.
Unless otherwise indicated, the information in this prospectus gives effect
to a 3-for-1 stock split of our common stock, which we effected in October 2000
and assumes that:
. the underwriters do not exercise their overallotment option,
. holders of warrants to purchase an aggregate of 1,462,500 shares of our
common stock exercise their warrants in a cashless exercise, resulting
in 1,033,928 shares of our common stock being issued,
. the initial public offering price of our common stock will be $14.00 per
share, which is the midpoint of the range indicated on the cover page of
this prospectus, and
. we effect the conversion of 13,658 shares of our Series A preferred
stock into 4,097,400 shares of common stock.
We own or have rights to product names, trade names and trademarks that we
use in conjunction with the sale of our products, including the PNY name and
logo. This prospectus also contains product names, trade names and trademarks
that belong to other organizations.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, including statements
concerning conditions in the memory, high performance computing, networking and
communications and consumer electronics industries, and concerning our
business, financial condition, operating strategies, and our operational and
legal risks. We use words like "believe," "expect," "anticipate," "intend,"
"future," "plan" and other similar expressions to identify forward-looking
statements. Purchasers of our common stock should not place undue reliance on
these forward-looking statements, which speak only as of the date of this
prospectus. These forward-looking statements are based on our current
expectations and are subject to a number of risks and uncertainties, including
those identified under "Risk Factors" and elsewhere in this prospectus. Our
actual results could differ materially from those expressed in these forward-
looking statements, and any events anticipated in the forward-looking
statements may not actually occur. Although we believe that the expectations
reflected in these forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements.
Except as required by law, we undertake no duty to update any forward-looking
statements after the date of this prospectus to conform those statements to
actual results or to reflect the occurrence of unanticipated events.
9
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from this offering will be approximately
$114.6 million, or approximately $132.0 million if the underwriters exercise
their over-allotment option in full, based on an assumed public offering price
of $14.00 per share and after deducting our underwriting and estimated offering
expenses.
We intend to use the net proceeds of this offering to repay substantially
all of our existing indebtedness under our credit facilities, which was $44.0
million at June 30, 2000, and redeem $15.0 million of our Series B preferred
stock and $3.1 million of our Series C preferred stock held by the spouse of
our President, CEO and Chairman of the Board, and the remainder for working
capital and general corporate purposes. See "Related Party Transactions." We
may also use a portion of the proceeds of this offering for the acquisition of,
or investment in, companies, manufacturing facilities, technologies or other
assets that complement our business. We have no present understandings,
commitments or agreements to enter into any potential acquisitions or
investments.
Our U.S. revolving credit facility will be repaid in its entirety with the
proceeds of this offering. As of June 30, 2000, we had $41.0 million
outstanding under our U.S. facility. This revolving facility expires on
February 23, 2002 and had a blended interest rate of 9.48% at June 30, 2000.
Our European credit facilities, a portion of which will be repaid with the net
proceeds of this offering, have maturities ranging from June 2001 to February
2007 and had interest rates ranging from 3.88% to 7.50% at June 30, 2000. We
had $3.0 million outstanding under our European credit facilities at June 30,
2000.
Pending use of the net proceeds as described above, we intend to invest the
net proceeds of the offering in short-term interest-bearing securities. We
estimate that the net proceeds of the offering will be sufficient to fund our
operations for the next twelve months.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock and we do not
anticipate paying any dividends on our common stock in the foreseeable future.
We currently expect to retain all earnings, if any, for investment in our
business. In addition, the terms of our U.S. credit facility prohibit us from
paying dividends without our lenders' consent.
We will pay dividends on our common stock only if and when declared by our
board of directors. The board's ability to declare a dividend is subject to
limits imposed by Delaware corporate law. In determining whether to declare
dividends, the board will consider these limits, our financial condition,
results of operations, working capital requirements, future prospects and other
factors it considers relevant.
10
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of June 30, 2000 on:
. an actual basis, and
. a pro forma basis to reflect (1) the assumed conversion of 13,658 shares
of our Series A preferred stock into 4,097,400 shares of our common
stock, (2) the cashless exercise of warrants to purchase 1,462,500
shares of common stock at an exercise price of $4.10 per share,
resulting in 1,033,928 shares of our common stock being issued, (3) our
proposed sale of shares of common stock in this offering at an assumed
initial public offering price of $14.00 per share and (4) our
application of the estimated net proceeds of this offering after
deducting fees and expenses. See "Use of Proceeds" and "Description of
Capital Stock."
The capitalization information in the table below is qualified by, and
should be read in conjunction with, our consolidated financial statements and
related notes appearing elsewhere in this prospectus. The table gives effect to
a 3-for-1 stock split of our common shares, which we effected in October 2000.
The table does not include 2,307,000 shares of common stock issuable upon
exercise of options outstanding as of June 30, 2000, at a weighted average
exercise price of $1.25 per share, and warrants to acquire 1,243,500 shares of
common stock at a weighted average exercise price of $1.03 per share, held by
some of our current or former officers and directors. The following table also
assumes that the underwriters do not exercise their over-allotment option.
<TABLE>
<CAPTION>
At June 30, 2000
--------------------
Pro Forma
Actual As Adjusted
------- -----------
(in thousands,
except
share data)
<S> <C> <C>
Cash and cash equivalents................................. $ 5,325 $ 57,853
======= ========
Current maturities of long-term obligations............... $44,138 $ 733
======= ========
Long-term obligations, net of current maturities:
Long-term debt.......................................... $ 597 $ --
Capital lease obligations............................... 874 874
------- --------
Total long-term obligations, net of current
maturities........................................... 1,471 874
Redeemable preferred stock................................ 18,060 --
Stockholders' equity:
Convertible Series A preferred stock, cumulative,
participating, par value $0.01 per share; designated
15,000 shares, 13,658 shares issued and outstanding on
an actual basis; none on a pro forma as adjusted basis
(preference in liquidation of $15,759)................. -- --
Common stock, $0.01 par value; 125,000,000 shares
authorized; 26,050,050 shares issued and outstanding on
an actual basis; 40,081,378 shares issued and
outstanding on a pro forma as adjusted basis........... 261 401
Deferred stock compensation............................. (6,577) (6,577)
Additional paid-in capital.............................. 11,349 125,799
Treasury stock--727 shares of convertible Series A
preferred stock, at cost on an actual basis and 218,100
shares of common stock on a pro forma as adjusted
basis.................................................. (683) (683)
Accumulated deficit..................................... (1,355) (1,355)
Accumulated other comprehensive loss ................... (649) (649)
Notes receivable........................................ (93) (93)
------- --------
Total stockholders' equity.............................. 2,253 116,843
------- --------
Total capitalization.................................. $21,784 $117,717
======= ========
</TABLE>
11
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000 was $1.7 million,
or $0.05 per share of common stock. We calculate net tangible book value per
share by subtracting our total liabilities from our total tangible assets,
which equals total assets less intangible assets, and dividing this amount by
the number of shares of common stock outstanding on a pro forma basis as of
June 30, 2000. The pro forma information gives effect to the conversion of all
of our outstanding Series A preferred stock into common stock and assumes that
some of our warrant holders exercise their warrants pursuant to a cashless
exercise, which will result in an aggregate of 5,131,328 shares of common stock
being issued. Assuming we sell 8,900,000 shares of common stock in this
offering at an assumed initial public offering price of $14.00 per share, and
assuming the application of the estimated net proceeds from this offering as
set forth in "Use of Proceeds," our pro forma net tangible book value as of
June 30, 2000 would have been $116.3 million, or $2.90 per share of common
stock. On the basis of the foregoing assumptions, there will be an immediate
increase in pro forma net tangible book value of $2.85 per share to our
existing stockholders and an immediate dilution in net tangible book value of
$11.10 per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Pro forma net tangible book value per share at June 30,
2000..................................................... $0.05
Increase per share attributable to this offering.......... 2.85
-----
Pro forma net tangible book value per share after the
offering................................................... 2.90
------
Pro forma net tangible book value dilution per share to new
investors.................................................. $11.10
======
</TABLE>
The following table summarizes on a pro forma as adjusted basis, as of June
30, 2000, the difference between our existing stockholders and new investors
with respect to the number of shares of common stock purchased from us, the
total consideration paid to us, and the average price per share paid. The
following table does not include shares subject to outstanding options or
reserved for issuance under our Stock Option Plan as of June 30, 2000 or
1,243,500 shares of common stock issuable upon exercise of warrants held by our
current and former officers and directors. To the extent that outstanding
options or warrants are exercised and shares of common stock are issued, there
will be further dilution to new investors.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders .... 33,082,534 78.7% $ 15,821,000 11.2% $ 0.48
New investors............. 8,900,000 21.3 125,050,000 88.8 14.00
---------- ----- ------------ -----
Total................... 41,982,534 100.0% $140,871,000 100.0%
========== ===== ============ =====
</TABLE>
If the underwriters exercise their over-allotment option in full, the number
of shares of common stock held by new investors will increase to 43,352,034
shares, or approximately 23.7% of the total number of shares of common stock to
be outstanding immediately after this offering.
12
<PAGE>
SELECTED FINANCIAL DATA
We have derived the consolidated statement of operations data for the years
ended December 31, 1997, 1998 and 1999 and the consolidated balance sheet data
as of December 31, 1998 and 1999 from our audited consolidated financial
statements included elsewhere in this prospectus. We have derived the
consolidated statement of operations data for the years ended December 31, 1995
and 1996 and the consolidated balance sheet data as of December 31, 1995, 1996
and 1997 from our audited consolidated financial statements, although those
financial statements are not included in this prospectus. We have derived the
statement of operations data for the six months ended June 30, 1999 and 2000
and the balance sheet data as of June 30, 2000 from our unaudited consolidated
financial statements included elsewhere in this prospectus. In the opinion of
our management, the unaudited consolidated financial statements reflect all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of this information. Results for an interim period are not
necessarily indicative of our results to be expected for the full year. The pro
forma net income per common share for the year ended December 31, 1999 and for
the six months ended June 30, 2000 reflect the conversion of all of our Series
A preferred stock into shares of common stock and the cashless exercise of
warrants described under "Capitalization," which will result in the issuance of
an aggregate of 5,131,328 shares of common stock, as if they had occurred on
the first day of each such period and reflects a 3-for-1 stock split of our
common stock effected in October 2000. All share and per share amounts have
been adjusted to give retroactive effect to the stock split. You should read
the following selected consolidated financial data in conjunction with our
consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------ ------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net sales............... $481,445 $325,761 $270,924 $204,576 $273,571 $122,457 $198,556
Cost of sales (1) ...... 451,891 309,768 250,306 177,577 233,035 105,476 168,727
-------- -------- -------- -------- -------- -------- --------
Gross profit ........... 29,554 15,993 20,618 26,999 40,536 16,981 29,829
Operating expenses:
Selling (1)............ 11,973 18,573 15,109 13,491 15,082 6,793 9,916
Shipping and
warehouse............. 827 1,319 1,662 1,709 1,538 729 787
General and
administrative (1)
(2)................... 8,433 8,386 8,948 7,247 7,701 3,692 8,011
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses.............. 21,233 28,278 25,719 22,447 24,321 11,214 18,714
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)
....................... 8,321 (12,285) (5,101) 4,552 16,215 5,767 11,115
Interest expense, net... (4,322) (3,524) (3,678) (2,443) (2,648) (1,161) (1,613)
Other income, net....... 168 256 33 55 171 63 895
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes........... 4,167 (15,553) (8,746) 2,164 13,738 4,669 10,397
Income taxes (benefit).. 526 (111) 2 120 1,364 475 1,980
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 3,641 $(15,442) $ (8,748) $ 2,044 $ 12,374 $ 4,194 $ 8,417
======== ======== ======== ======== ======== ======== ========
Net income (loss) per
common share:
Basic.................. $ 0.14 $ (0.60) $ (0.34) $ 0.08 $ 0.48 $ 0.16 $ 0.32
Diluted................ 0.14 (0.60) (0.34) 0.07 0.39 0.13 0.25
Shares used in computing
net income (loss) per
common share:
Basic.................. 25,800 25,800 25,800 25,948 26,050 26,050 26,050
Diluted................ 25,800 25,800 25,800 30,681 31,506 31,090 33,755
Unaudited pro forma net
income per common
share: ................
Basic.................. $ 0.40 $ 0.27
Diluted................ 0.38 0.25
Shares used in computing
unaudited pro forma net
income per common
share:.................
Basic.................. 31,181 31,181
Diluted................ 32,540 34,012
Other Data:
Depreciation and
amortization........... $ 1,310 $ 1,927 $ 2,279 $ 2,703 $ 2,776 $ 1,272 $ 1,587
Capital expenditures.... 4,432 4,703 4,177 3,254 2,105 524 2,667
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
At December 31, At
----------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 3,708 $ 2,754 $ 3,523 $ 1,675 $ 6,496 $ 5,325
Working capital
(deficit).............. 39,388 (1,911) (12,352) (10,397) 260 8,906
Total assets............ 124,855 98,294 66,580 65,930 81,143 142,235
Total debt and capital
lease obligations,
including
current maturities..... 42,788 52,890 32,917 34,974 26,626 45,609
Redeemable preferred
stock.................. 15,000 15,000 18,060 18,060 18,060 18,060
Total stockholders'
equity (deficiency) ... 305 (13,975) (21,910) (20,559) (8,547) 2,253
</TABLE>
--------
(1) Stock-based compensation for the six months ended June 30, 2000 consists of
the following:
Cost of sales................$ 282
Selling...................... 55
General and administrative... 2,791
Total stock-based
compensation..............$3,128
(2) Includes a charge of $565 in 1995 for the impairment of long-lived assets.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our consolidated
financial statements and related notes appearing elsewhere in this prospectus.
This discussion contains forward-looking statements regarding the electronics
industry, our expectations regarding our future performance, liquidity and
capital resources. Our actual results may differ materially from those
contained in any forward-looking statements. See "Forward-Looking Statements."
Overview
We are a leading manufacturer of standard and custom memory modules and a
provider of related engineering, manufacturing and supply-chain management
services to OEMs, retailers and other memory module resellers. Our four
manufacturing facilities are strategically located near our largest customers,
with two in the United States, located in Parsippany, New Jersey and Santa
Clara, California, and two in western Europe, located in Bordeaux, France and
Ballivor, Ireland.
The memory semiconductor industry has experienced significant economic
swings at various times due to imbalances between available supply and demand
of memory semiconductor devices, resulting in significant fluctuations in
product availability and average selling prices. From 1991 to 1995, the DRAM
market was characterized by generally increasing prices and our revenues and
operating income benefited from higher average selling prices. From 1996
through 1998, however, the DRAM market was characterized by rapidly declining
prices and, as a result, we experienced declining revenues and lower operating
income. Our operating results also suffered during this period due to inventory
devaluation and price protection charges. Although the DRAM market was
characterized by periodic price fluctuations in 1999 and in the first six
months of 2000, the price at the beginning and the end of this period was
approximately the same. Our revenues and operating income improved
significantly in 1999 and in the first six months of 2000.
While we are subject to the effect that industry supply and demand of DRAM
has on average selling prices and our revenues, we have undertaken steps to
limit these effects on other components of our operating results. For example,
in mid-1998, we implemented an inventory-management model designed to minimize
inventory devaluations by maintaining smaller quantities of on-hand inventory.
In addition, beginning in 1998 we began monitoring and managing our customers'
unsold on-hand inventory in order to minimize our price protection risk. In
1999, we attempted to further limit our risk by implementing a cost-plus
pricing model with some of our largest OEM customers.
Revenues
We recognize sales, net of product returns, rebates and price protection,
typically at the time of product shipment. Adjustments for product returns,
rebates and price protection do not represent a significant portion of our
sales. We do not typically enter into long-term sales contracts with our
customers.
We sell our products through two sales channels: the OEM sales channel and
the reseller sales channel. The OEM sales channel consists primarily of OEMs
who use memory modules in the manufacture of their electronic products and
contract electronics manufacturers who perform manufacturing functions for OEMs
on an outsourced basis, as well as electronics component distributors and
semiconductor manufacturers who sell memory modules to OEMs. The reseller sales
channel consists primarily of the retail sector, which includes consumer
electronics and office supply retail chains, as well as mail-order companies,
electronics component distributors, value-added resellers and e-commerce
companies. For the first six months of 2000, our OEM channel sales accounted
for approximately 55% of our total revenues, compared to 26% for the comparable
1999 period, while sales through our reseller sales channel accounted for
approximately 45% of total revenues, compared to 74% for the comparable 1999
period. We expect our OEM business to continue to expand as a percentage of our
revenues in the future.
15
<PAGE>
Historically, a small number of customers have accounted for a significant
percentage of our revenues. Our five largest customers collectively accounted
for 66% of our total revenues in the first six months of 2000 and 58% and 48%
in the years ended December 31, 1999 and 1998, respectively. Our largest OEM
channel customer, Cisco Systems, accounted for 37% of our total revenues for
the six months ended June 30, 2000 and our largest reseller channel customer,
CompUSA, accounted for 11% of our total revenues in that period. A key element
of our strategy is to continue to target a small number of core customers that
we believe have the potential to generate significant revenue. We expect that
sales to a core group of customers will continue to account for a significant
percentage of our total revenues for the foreseeable future.
Costs and Expenses
Our cost of sales includes the cost of components and materials, labor costs
and manufacturing overhead. DRAM component costs represent the largest portion
of cost of sales, accounting for in excess of 90% of our cost of sales in 1999.
We value our memory components using the lower of cost or spot market value. We
adjust our raw materials inventory on a weekly basis and our finished goods
inventory on a monthly basis. We work to minimize our inventory risk by
ordering materials and components only to the extent necessary to satisfy
existing customer demand and maintain a relatively small safety stock to enable
us to meet unexpected demand.
The level of capacity utilization of our manufacturing facilities impacts
our operating results. During periods of high capacity utilization, our gross
margins generally improve, while during periods of lower capacity utilization,
our gross margins usually decline.
Selling expenses have both a fixed and variable component and consist
primarily of personnel costs and travel expenses for our domestic and
international sales and marketing employees, commissions paid to internal
salespersons and independent manufacturers' representatives, and marketing
programs. Our largest selling expense is advertising. We typically pay our
reseller channel customers an advertising fee based on a specified percentage
of sales for placing our products in their circulars and flyers.
General and administrative expenses consist primarily of personnel costs for
our executive and administrative employees, professional fees, information
systems, human resources and non-manufacturing facilities expenses.
In 2000, we granted options at exercise prices below the deemed fair market
value of our common stock for financial reporting purposes. This will result in
significant non-cash compensation charges to operations over the vesting
periods of these options. Also, in connection with the consummation of this
offering, we intend to grant options to purchase up to 324,600 shares at an
exercise price of $7.00 per share to existing employees who currently do not
hold stock options, we expect to incur stock-based compensation charges of
approximately $2.3 million over their four-year vesting period. In addition, in
1996 and 1997 we issued warrants that require variable accounting treatment,
which results in non-cash compensation charges equal to the difference between
the fair market value of the underlying shares and the amount of cumulative
compensation expense recorded through the reporting period. We will incur these
non-cash charges until the warrants are exercised or forfeited. See note 12 and
note 18 to our consolidated financial statements appearing elsewhere in this
prospectus.
International Operations
International sales represented 13% of our total revenues for the first six
months of 2000, 17% of our revenues for the year ended December 31, 1999 and
20% for the year ended December 31, 1998. No single foreign country accounted
for more than 10% of our revenues in the first six months of 2000, or in the
years ended December 31 1999 or 1998. Approximately 7.3% of our consolidated
sales were denominated in foreign currencies in the six months ended June 30,
2000. If the value of the U.S. dollar increases relative to a particular
foreign currency, our products could become relatively more expensive, which
could result in a reduction of sales in a particular country. In addition, we
purchase substantially all of the memory semiconductors used in our U.S.
manufacturing operations from local distributors of foreign suppliers.
16
<PAGE>
Devaluation of the U.S. dollar relative to the currency of a foreign supplier
could result in an increase in our cost of memory semiconductors. Our
international sales also could be adversely affected by risks including
regulatory risks, tariffs and other trade barriers.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information," we have reported segment information on the basis of our U.S.
operations and European operations. We make decisions regarding the allocation
of resources and the location of production of memory products on a world-wide
basis, based upon a number of factors, including capacity constraints, the
location of our customers and international tax planning. These decisions may
result in significant fluctuations in operating results in our geographic
segments in each reporting period. For example, income before income taxes
attributable to U.S. operations decreased from 83% in the year ending December
31, 1999 to 50% in the six months ended June 30, 2000 as a result of a $3.1
million stock-based compensation expense in our U.S. operations and the
increased use of the our European facilities to manufacture products sold to
our U.S.-based customers. These factors resulted in significantly higher
profits being recorded by our European subsidiaries.
Results of Operations
The following table sets forth, for the periods indicated, certain
consolidated statement of operations data reflected as a percentage of net
sales:
<TABLE>
<CAPTION>
Six Months
Ended June
Year Ended December 31, 30,
-------------------------- ------------
1997 1998 1999 1999 2000
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (1).................... 92.4 86.8 85.2 86.1 85.0
------- ------- ------- ----- -----
Gross profit......................... 7.6 13.2 14.8 13.9 15.0
Operating expenses:
Selling (1)........................ 5.6 6.6 5.5 5.5 5.0
Shipping and warehouse............. 0.6 0.8 0.6 0.6 0.4
General and administrative (1)..... 3.3 3.5 2.8 3.0 4.0
------- ------- ------- ----- -----
Total operating expenses......... 9.5 10.9 8.9 9.1 9.4
------- ------- ------- ----- -----
Operating (loss) income.............. (1.9) 2.3 5.9 4.8 5.6
Interest expense, net................ (1.4) (1.2) (1.0) (1.0) (0.9)
Other income, net.................... 0.0 0.0 0.1 0.1 0.5
------- ------- ------- ----- -----
(Loss) income before income taxes.... (3.3) 1.1 5.0 3.9 5.2
Income taxes......................... 0.0 0.1 0.5 0.4 1.0
------- ------- ------- ----- -----
Net (loss) income.................... (3.3)% 1.0% 4.5% 3.5% 4.2%
======= ======= ======= ===== =====
</TABLE>
--------
(1) Included in cost of sales, selling expenses and general and administrative
expenses for the six months ended June 30, 2000 is stock-based
compensation of approximately 0.2%, 0.0% and 1.4% of net sales,
respectively.
Comparison of the Six Months Ended June 30, 2000 and 1999
Net Sales. Net sales were $198.6 million for the six months ended June 30,
2000, compared to $122.5 million for the six months ended June 30, 1999,
representing an increase of 62.1%. This increase was attributable to the growth
of our OEM business. For the six months ended June 30, 2000, sales to our OEM
customers were $109.0 million and sales to our reseller sales channel customers
were $89.6 million.
Gross Profit. Our gross profit was $29.8 million for the six months ended
June 30, 2000, compared to $17.0 million for the comparable 1999 period,
representing an increase of 75.7%. Gross profit as a percentage of revenues was
15.0% for the six months ended June 30, 2000, compared to 13.9% for the
comparable 1999 period. This increase in gross profit as a percentage of sales
resulted from increased economies of scale, including absorption of overhead
from higher production volumes, as well as the leveraging of these costs over
17
<PAGE>
an increased revenue base. Cost of sales was $168.7 million for the six months
ended June 30, 2000 and $105.5 million for the six months ended June 30, 1999.
Cost of sales as a percentage of sales was 85.0% for the six months ended June
30, 2000, compared to 86.1% for the six months ended June 30, 1999.
Selling. Selling expenses were $9.9 million for the six months ended June
30, 2000, compared to $6.8 million for the six months ended June 30, 1999. The
increase in selling expenses in 2000 is attributable to the increase in
variable expenses, such as commissions totaling $2.1 million and advertising
expenses totaling $1.0 million, resulting from increased sales volumes. Selling
expenses as a percentage of sales were 5.0% for the six months ended June 30,
2000, compared to 5.5% for the six months ended June 30, 1999. This decrease
resulted from increased economies of scale stemming from growth in our OEM
business.
Shipping and warehouse. Shipping and warehouse expenses consist primarily of
shipping supplies and overhead. Our shipping and warehouse expenses were $0.8
million for the six months ended June 30, 2000, compared to $0.7 million for
the six months ended June 30, 1999. Shipping and warehouse expenses as a
percentage of sales were 0.4% for the six months ended June 30, 2000, compared
to 0.6% for the six months ended June 30, 1999. Shipping and warehouse expenses
increased for the six months ended June 30, 2000, compared to the comparable
1999 period as a result of the higher volume of shipments, but decreased as a
percentage of sales due to the growth of our business.
General and administrative. General and administrative expenses were $8.0
million for the six months ended June 30, 2000, compared to $3.7 million for
the six months ended June 30, 1999. This increase was attributable to increased
employee-related costs including stock-based compensation. Included in general
and administrative expenses is stock-based compensation. Stock-based
compensation represents non-cash charges relating to stock options and
warrants. These charges were approximately $2.8 million and the included
charges for warrants to purchase an aggregate of 294,000 shares, which were
issued in 1996 and 1997. The accounting for these warrants requires periodic
recognition of compensation expense in an amount equal to the difference
between the exercise price and the fair value of the underlying shares at the
end of each reporting period. We did not record any compensation expense for
these warrants for any period prior to January 1, 2000 since the market value
of the underlying shares was less than the exercise price. General and
administrative expenses as a percentage of revenues were 4.0% for the six
months ended June 30, 2000, compared to 3.0% for the six months ended June 30,
1999. General and administrative expenses increased as a percentage of revenues
due to an increase in employee-related costs described above, partially offset
by an increased revenue base.
Other income (expense). Other income (expense) consists primarily of
interest expense. Interest expense consists of interest related to our U.S.
revolving credit facility, as well as interest under our non-U.S. lines of
credit. Interest expense was $1.7 million for the six months ended June 30,
2000, compared to $1.2 million for the comparable 1999 period. Interest expense
increased due to higher interest rates, as well as higher debt balances in
2000. Higher interest expense in 2000 was partially offset by increased
investment income of approximately $0.3 million and foreign exchange gains of
approximately $0.6 million.
Income taxes. Income tax expense was $2.0 million for the six months ended
June 30, 2000, compared to $0.5 million for the comparable 1999 period. Our
effective tax rate for the year ended December 31, 1999 was approximately 10%
as a result of the utilization of U.S. net operating loss carryforwards. We
expect our fiscal 2000 effective tax rate to approximate 19% as we utilize the
remainder of our net operating loss carryforwards by the end of 2000, offset by
higher effective tax rates on income earned by our foreign subsidiaries, state
income taxes and alternative minimum taxes.
Comparison of the Years Ended December 31, 1999, 1998 and 1997
Net sales. Net sales were $273.6 million in 1999, $204.6 million in 1998 and
$270.9 million in 1997. Net sales increased 33.7% in 1999 due to growth in the
OEM sales channel. Sales decreased 24.5% from 1997
18
<PAGE>
to 1998, primarily due to a decrease in average sales prices, which was
partially offset by an increase in units sold. For the years ended December 31,
1999, 1998 and 1997, sales to our OEM channel customers were $87.8 million,
$31.8 million and $40.8 million, respectively, and sales to our reseller
channel customers were $185.8 million, $172.8 million and $230.1 million,
respectively.
Gross Profit. Gross profit was $40.5 million in 1999, $27.0 million in 1998
and $20.6 million in 1997. Gross profit as a percentage of sales was 14.8% in
1999, 13.2% in 1998 and 7.6% in 1997. The 5.6% increase in gross profit as a
percentage of sales from 1997 to 1998 was due to improved inventory management,
which resulted in lower price protection and inventory devaluation charges.
Inventory devaluation charges decreased from $11.6 million in 1997 to $2.1
million in 1998. The 1.6% increase in gross profit as a percentage of sales
from 1998 to 1999 resulted from revenues increasing by 33.8%, while labor and
overhead increased by only 6.0%. Cost of sales was $233.0 million in 1999,
$177.6 million in 1998 and $250.3 million in 1997. Cost of sales as a
percentage of sales was 85.2% in 1999, 86.8% in 1998 and 92.4% in 1997.
Selling. Our selling expenses were $15.1 million in 1999, $13.5 million in
1998 and $15.1 million in 1997. Selling expenses as a percentage of sales were
5.5% in 1999, 6.6% in 1998 and 5.6% in 1997. In the second half of 1998, we
downsized our sales department and closed three satellite sales offices. Since
then, we have shifted from maintaining a predominantly direct sales force to
contracting with independent sales representatives and providing a mix of both
direct and indirect sales teams. This shift has significantly reduced our fixed
overhead and we believe has improved customer satisfaction by allowing us to
place our sales representatives closer to our customers.
Shipping and warehouse. Our shipping and warehouse expenses were $1.5
million in 1999, $1.7 million in 1998 and $1.7 million in 1997. Shipping and
warehouse expenses as a percentage of revenues were 0.6% in 1999, 0.8% in 1998
and 0.6% in 1997. Shipping and warehouse expenses decreased from 1998 to 1999
as a result of greater automation.
General and administrative. General and administrative expenses were $7.7
million in 1999, $7.2 million in 1998 and $8.9 million in 1997. The increase in
general and administrative expenses in 1999 is a function of increased
employee-related costs. General and administrative expenses decreased between
1997 and 1998 as a result of layoffs of our personnel in the face of adverse
economic conditions in the memory module market in 1997 and 1998. General and
administrative expenses as a percentage of revenues were 2.8% in 1999, 3.5% in
1998 and 3.3% in 1997. From 1998 to 1999, general and administrative expenses
decreased as a percentage of revenues due primarily to a reduction in our
workforce and due to an increased revenue base. General and administrative
expenses increased as a percentage of revenues from 1997 to 1998 as a result of
lower revenues in 1998.
Other income (expense). Interest expense was $2.7 million in 1999, $2.5
million in 1998 and $3.8 million in 1997 due to declining average debt
balances, offset by higher interest rates in 1999.
Income taxes. Income tax expense was $1.4 million in 1999, increasing from
nominal amounts in 1997 and 1998. Foreign taxable income in 1999 increased in
connection with the expiration of a French tax holiday. We recognized limited
U.S. income taxes over the period from 1997 through 1999 because of the
utilization of net operating loss carryforwards throughout the periods.
19
<PAGE>
Quarterly Results of Operations
The following table sets forth unaudited quarterly consolidated statement of
operations data for each of the six quarters ended June 30, 2000. In the
opinion of management, this information has been prepared on a basis
substantially consistent with our audited consolidated financial statements
appearing elsewhere in this prospectus, and reflect all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of the data.
The quarterly data should be read together with our consolidated financial
statements and related notes appearing elsewhere in this prospectus. The
operating results for any one quarter are not necessarily indicative of the
results to be expected for any future period.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1999 1999 1999 1999 2000 2000
-------- -------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales............... $63,364 $59,093 $77,615 $73,499 $88,589 $109,967
Cost of sales........... 55,876 49,600 64,116 63,443 74,986 93,741
------- ------- ------- ------- ------- --------
Gross profit............ 7,488 9,493 13,499 10,056 13,603 16,226
Operating expenses:
Selling................ 3,203 3,590 4,458 3,831 5,237 4,679
Shipping and
warehouse............. 373 356 393 416 365 422
General and
administrative........ 1,770 1,922 1,912 2,097 3,390 4,621
------- ------- ------- ------- ------- --------
Total operating
expenses............ 5,346 5,868 6,763 6,344 8,992 9,722
------- ------- ------- ------- ------- --------
Operating income........ $ 2,142 $ 3,625 $ 6,736 $ 3,712 $ 4,611 $ 6,504
======= ======= ======= ======= ======= ========
As a Percentage of Net
Sales:
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 88.2 83.9 82.6 86.3 84.6 85.2
------- ------- ------- ------- ------- --------
Gross profit............ 11.8 16.1 17.4 13.7 15.4 14.8
Operating expenses:
Selling................ 5.1 6.1 5.7 5.2 5.9 4.3
Shipping and
warehouse............. 0.6 0.6 0.5 0.6 0.4 0.4
General and
administrative........ 2.8 3.3 2.5 2.9 3.8 4.2
------- ------- ------- ------- ------- --------
Total operating
expenses............ 8.5 10.0 8.7 8.7 10.1 8.9
------- ------- ------- ------- ------- --------
Operating income........ 3.3% 6.1% 8.7% 5.0% 5.3% 5.9%
======= ======= ======= ======= ======= ========
</TABLE>
In the first three quarters of 1999, the cost of DRAM increased, which
resulted in increased average selling prices for our memory modules during that
period. As we sold our lower-cost layers of inventory during this period, we
recognized higher gross profits. DRAM prices declined in the fourth quarter of
1999 and the first quarter of 2000, which led to lower average selling prices.
We granted price protection concessions to some of our retail customers for
products purchased during 1999 at higher average selling prices and that
remained unsold at December 31, 1999. We recorded the expense related to these
concessions in the fourth quarter of 1999.
Advertising expense represents the largest component of selling expense, and
is incurred almost entirely in connection with our reseller channel. The
decrease in selling expenses as a percent of revenues during the quarter ended
June 30, 2000 resulted from the increase in OEM channel sales, for which
advertising costs are negligible.
Liquidity and Capital Resources
Our principal sources of liquidity have been cash provided by operations and
borrowings under our various credit facilities. Our principal uses of cash have
been to finance working capital, facility expansions, capital expenditures and
debt service requirements. We anticipate these uses will continue to be our
principal uses of cash in the future.
20
<PAGE>
Net cash provided by (used in) operating activities was $16.2 million in
1999, ($1.4) million in 1998 and $21.3 million in 1997. Fluctuations in net
cash provided by (used in) operating activities were attributable to increases
and decreases in our net income, increased working capital needs due to our
expanded customer base and rapid growth in sales.
Net cash used in investing activities was $3.1 million in 1999, $0.3 million
in 1998 and $4.2 million in 1997. Our cash used in investing activities
consisted primarily of acquiring property and equipment and purchases of short-
term securities.
Net cash used in financing activities totaled $7.7 million in 1999, $0.1
million in 1998 and $17.3 million in 1997. Our principal uses of cash for
financing activities related to the repayment of long-term debt.
At June 30, 2000, December 31, 1999 and December 31, 1998, we had
outstanding borrowings under our U.S. revolving credit facility of $41.1
million, $23.9 million and $29.4 million, respectively. We may borrow a maximum
of $50.0 million under this facility. Availability under the facility is based
on specified percentages of accounts receivable and inventories. Interest is
payable on average amounts outstanding under the revolving credit facility at a
rate of either the prime rate plus 1.0% or the eurodollar rate plus 2.25%, at
our option. The blended interest rate under the loan agreement relating to the
revolving credit agreement was 8.85% at December 31, 1999 and 9.48% at June 30,
2000. The loan agreement contains a number of restrictive covenants, including
a prohibition on related party transactions, additional indebtedness and
dividend payments, as well as minimum net worth and interest coverage
requirements. This facility is secured by our accounts receivable and
inventory.
PNY Technologies Europe, our wholly-owned European subsidiary, also has
available lines of credit with foreign banks totaling $8.0 million, which
expire June 30, 2001. At June 30, 2000, December 31, 1999 and December 31,
1998, aggregate borrowings outstanding under these lines totaled $2.9 million,
$1.4 million, and $3.6 million, respectively, with interest rates ranging from
3.9% to 7.5% and maturities ranging from June 1, 2001 to February 2, 2007.
We have capital leases for manufacturing and test equipment, with terms of
36 and 48 months. Operating leases are primarily for manufacturing, test,
engineering and computer equipment. Leases are typically for 48 months and
provide for the option to buy at fair-market value, renew the lease or return
the equipment at lease end.
Our capital expenditures budget for 2000 is approximately $7.5 million. We
made capital expenditures of $2.7 million in the six months ended June 30,
2000. Capital expenditures for the current year are primarily for equipment
upgrades, facility expansions and acquisitions. Our capital requirements depend
on a number of factors, including changes in memory architecture, demand and
volume.
We believe that our current cash balances, together with existing credit
lines, the net proceeds from this offering and expected cash flow from
operations will be sufficient to fund our current operations for at least the
next 18 months. Thereafter, we may require additional sources of funds to
continue to support our business. Additional funds, if needed, may not be
available at all or on terms acceptable to us.
Backlog
We sell our memory products under short-term cancelable purchase orders. We
include in our backlog only those customer orders for which we have accepted
purchase orders and to which we have assigned shipment dates within the
upcoming three to six months. Our backlog was approximately $348.1 million as
of September 30, 2000 and $10.4 million as of September 30, 1999. Since orders
constituting our backlog are subject to change due to, among other things,
customer cancellations and reschedulings, and our ability to procure necessary
components, backlog is not necessarily an indication of future revenues.
21
<PAGE>
Impact of Inflation
We do not believe that general price inflation has a material adverse effect
on our financial condition or results of operations.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to interest rate risk arises principally from the variable
rates associated with our credit facilities. On June 30, 2000, we had total
borrowings of $44.0 million under our credit facilities, with a blended rate of
9.19%. An adverse change of 1% in the interest rate of all borrowings
outstanding at June 30, 2000, which bear interest at variable rates would cause
us to incur an increase in interest expense of approximately $0.4 million on an
annual basis at June 30, 2000.
Foreign Currency Rate Fluctuations
Fluctuations in the rate of exchange between the U.S. dollar and foreign
currencies could adversely affect our financial results. Except for sales in
western Europe, our sales are principally denominated in U.S. dollars. Costs
related to these sales are largely denominated in their respective currencies,
thereby limiting our transaction risk exposures. However, for sales not
denominated in U.S. dollars, if there is an increase in the rate at which a
foreign currency is exchanged for U.S. dollars, it will require more of the
foreign currency to equal a specified amount of U.S. dollars than before the
rate increase. In such cases, and if we price our products and services in the
foreign currency, we will receive less in U.S. dollars than we did before the
rate increase went into effect. If we price our products and services in U.S.
dollars and competitors price their products in local currency, an increase in
the relative strength of the U.S. dollar could result in our prices being
uncompetitive in a market where business is transacted in the local currency.
We currently do not hedge our exposure to foreign currency exchange rate
fluctuations; we may, however, hedge such exposures in the future.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133"). This statement, which is
effective for fiscal years beginning after June 15, 2000, requires the
recognition of all derivative financial instruments as either assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. Management is in the process of determining the
effect, if any, SFAS 133 will have on our financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101 addresses revenue
recognition for transactions not addressed by existing rules and the basic
criteria that must be met before registrants can record revenue under existing
rules. Our accounting policies are in compliance with the provisions of SAB
101.
In March 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 44, "Accounting for Certain Transactions
Involving Stock Compensation." The Interpretation provides guidance for certain
issues that arose in the application of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." The provisions of this
interpretation are effective prospectively after July 1, 2000.
22
<PAGE>
BUSINESS
Company Overview
We are a leading manufacturer of standard and custom memory modules and a
provider of related engineering and supply-chain management services to OEMs,
retailers and other memory module resellers. Our supply-chain management
services include coordination and planning, inventory management and materials
procurement. Our memory modules use all major memory technologies based on
random access memory, which is a key component in determining the speed and
efficiency of many electronic devices. These technologies include dynamic
random access memory, or DRAM, which is the most common variety of memory
integrated circuit device, static random access memory, or SRAM, and flash
technology. Memory modules are compact circuit board assemblies of memory
semiconductors and related circuitry. Our OEM channel customers use our memory
modules in a wide range of applications, from high-end computing and Internet
and telecommunications infrastructure equipment, to various consumer and
commercial applications. Our reseller channel customers sell our products to
consumers and businesses, who use them to improve the speed and performance of
their computers, work stations, printers and other electronic devices.
In our OEM channel, we primarily sell to electronics original equipment
manufacturers, contract electronics manufacturers, who provide manufacturing
services to OEMs on an outsourced basis, and semiconductor manufacturers,
primarily in the United States and western Europe. OEMs design, build, market
and sell products to end users and distributors. We provide a full complement
of manufacturing and logistics services to our customers. These services
include design engineering, inventory forecasting, materials procurement,
component assembly and testing, product packaging and distribution. Our OEM
channel customers include industry leaders such as Cisco Systems, Jabil, NEC,
Network Appliance and Oki. We believe that our OEM channel customers rely on us
for our superior service, flexibility and responsiveness, as well as our
engineering and logistics expertise. Cisco Systems, our largest customer,
recently recognized our superior service when it awarded us one of its
principal supplier awards in 1999. For the six months ended June 30, 2000,
sales to our OEM channel customers accounted for approximately 55% of our total
revenues, compared to 26% for the six months ended June 30, 1999. We believe
that the OEM sales channel represents a significant growth opportunity for our
business over the next several years.
We are the leading manufacturer of memory modules for the U.S. retail
market. Sales of our memory products accounted for approximately 60% of retail
sales for the twelve months ended August 31, 2000, according to PC Data. Our
memory modules are the primary memory modules sold at several of the largest
domestic and international consumer electronics and office supply chains
including Best Buy, CompUSA, Dixons, Office Depot and Staples. Many of our
retail customers have recognized us for providing excellent service and product
quality. For example, CompUSA designated us as its "Vendor of the Year' in
1999. In addition to the retail channel, we sell our products through other
reseller channels, such as mail-order companies, electronic component
distributors and e-commerce companies. The retail market represents the largest
part of our reseller channel. We believe that our 15 years of experience
selling in the reseller channel and our reputation for product quality and
availability have generated strong brand recognition among many retail memory
module customers. We have recently begun to capitalize on our brand name and
our relationships with our large reseller customers to enter into other product
areas. These include recordable compact discs and flash memory accessories for
devices such as digital cameras and MP3 players.
Industry Overview
The demand for memory modules in electronic systems is growing rapidly.
Dataquest forecasts that the worldwide market for DRAM memory modules will
increase from $20.8 billion in 1999 to $69.4 billion in 2002, which represents
a 49.6% compound annual growth rate. Although Dataquest is forecasting DRAM
memory module revenue declines in 2003 and 2004 as a result of decreasing DRAM
component prices, it is
23
<PAGE>
forecasting increasing unit sales in both years. Several factors contribute to
the increasing use of memory, including:
. the development of high-performance computers and servers,
. the greater complexity of software,
. the development of high-bandwidth and graphics-intensive applications,
and
. evolving Internet and telecommunications infrastructure requirements.
These factors result in the need for faster, more powerful memory products to
meet demand for greater capabilities in the storage, manipulation, transfer and
management of digital data. In addition, digital computing and processing have
extended beyond traditional applications, like computers and servers, to
include a wide array of sophisticated electronic equipment. These new
applications include routers, switches, hubs, digital cameras, personal digital
assistants and "smart" appliances.
Memory Technologies
Memory modules typically incorporate some form of random access memory.
Random access memory is a key component in determining the speed and efficiency
of many electronic devices, shortening processing times and allowing multiple
applications to run efficiently at the same time. Dynamic random access memory,
or DRAM, and static random access memory are similar types of memory, which
require constant power to preserve the stored information in an electronic
device. Flash memory has similar capabilities as DRAM, except that it does not
require a constant power supply to retain data.
DRAM, which accounted for approximately 64% of the total memory
semiconductor market by revenue in 1999, according to the Semiconductor
Industry Association, can be divided into several architectures. Extended data
output, known in the electronics industry as EDO, and fast page, known in the
electronics industry as FP, are trailing-edge DRAM technologies. Synchronous
DRAM is the basic DRAM technology currently used in most computers. Double data
rate, known in the electronics industry as DDR, and Rambus are leading-edge
DRAM technologies that offer a significant increase in performance over
standard synchronous DRAM. Each memory type has unique characteristics that
make it appropriate for a particular application. Memory modules are compact
circuit board assemblies of DRAM, static random access memory or flash memory
components and related circuitry.
Industry Dynamics
There are two types of memory module manufacturers: (1) memory semiconductor
manufacturers, who produce their own silicon chips and assemble them into
memory modules, and (2) independent manufacturers like us, who purchase memory
semiconductors from third parties and then assemble those semiconductors into
memory modules. The memory semiconductor industry is highly concentrated, with
a small number of large participants. The independent memory module
manufacturer segment, in contrast, is highly fragmented, with numerous
participants. Memory semiconductor manufacturers generally focus on high-volume
standard memory modules and require long lead times. Independent memory module
manufacturers typically are smaller in size and seek to distinguish themselves
by reducing lead times and by being more responsive and flexible in the types
of products and services they provide.
Independent memory module manufacturers sell to original equipment
manufacturers, contract electronics manufacturers and distributors and to large
memory semiconductor manufacturers, who have chosen to outsource the
manufacture of memory modules that incorporate their own semiconductors. In
addition, unlike most memory semiconductor manufacturers, independent memory
module manufacturers sell directly into the reseller channel. Dataquest expects
independent memory module revenues to grow at a compound annual rate of 53.8%
from 1999 through 2002, compared to 47.9% for memory module revenues of
semiconductor manufacturers over the same period. We believe that the growth in
the independent memory module manufacturer market will disproportionately
benefit participants like ourselves, who have the scale, geographic scope and
full range of services required by many customers.
24
<PAGE>
The memory module market consists of the OEM sales channel and the reseller
sales channel. Sales to the OEM channel typically include both custom and
standard memory modules. In contrast, sales to the reseller channel are
typically standard DRAM memory modules for sale as upgrades to end users. OEM
channel participants typically look to memory module manufacturers to provide a
broad range of memory modules to be utilized in their portfolio of products.
OEM customers generally require comprehensive engineering, logistics and
supply-chain management services, as well as a high level of flexibility and
responsiveness. Reseller channel customers require a high level of customer
service and reliable, fast and flexible delivery of memory modules. In
addition, resellers strongly consider the memory product manufacturer's brand
reputation for quality, as well as price.
Many OEMs, their contract electronics manufacturers and large memory
semiconductor manufacturers are increasingly outsourcing the production of
memory modules to specialized memory module manufacturers like ourselves. We
believe that the outsourcing trend in the OEM sales channel is driven by the
following factors:
. Focus on core product design, development and marketing
competencies. Faced with increasing competitive pressures, OEM channel
participants are increasingly focusing their resources on those areas
where they believe they can achieve the greatest competitive advantages.
By relying on independent memory module manufacturers, OEM channel
participants can take advantage of the latest memory manufacturing
technologies without diverting resources from their core competencies of
product design, development and marketing. Many contract electronics
manufacturers, in turn, are focusing on managing their entire supply
chain. These manufacturers often seek to develop external solutions for
specialized subassemblies such as memory modules. Semiconductor
manufacturers are focusing on developing new technologies to address new
applications that require faster, more complex and more diverse memory
semiconductor technologies.
. Reduce time-to-market for new products and increase manufacturing
flexibility. Success for OEM channel participants is increasingly
dependent on the ability to rapidly introduce new products and ramp
production in times of surging demand. As a result, time-to-market and
time-to-volume capabilities throughout the supply-chain are critical.
OEMs and their contract electronics manufacturers are increasingly
looking to independent memory module manufacturers to provide active
design, engineering support and to provide the manufacturing flexibility
necessary to enable OEMs to deliver their products in volume. Memory
semiconductor manufacturers look to independent memory module
manufacturers to supplement their production and enable them to become
more flexible and responsive in the service they provide to their OEM
customers.
. Maintain a broad range of memory module technologies. Because of the
pace of technological change and because some OEMs commit to service and
maintain the equipment they sell for over ten years, OEMs are
increasingly required to carry a wide variety of memory modules. We
believe that specialized memory module manufacturers are more capable of
efficiently maintaining a broad range of design, engineering,
procurement, manufacturing and testing capabilities than OEMs and
contract electronics manufacturers.
. Manage inventory costs. The market for mass produced memory
semiconductor components has historically been extremely volatile,
characterized by periods of oversupply and rapidly declining prices, as
well as by periods of shortages and dramatically increasing prices.
Accurately monitoring the memory component market, forecasting memory
module demand and managing inventories to minimize exposure to price
volatility requires significant expertise, focus, flexibility and strong
supplier relationships. OEMs and contract electronics manufacturers are
increasingly choosing to rely on memory module manufacturers to perform
these demanding functions.
25
<PAGE>
The PNY Solution
We have established strong relationships with numerous OEMs, contract
electronics manufacturers and resellers, many of which are leaders in their
respective markets. These relationships are a result of our ability to provide
superior service to our customers, based on the following strengths:
Strong supply-chain management capabilities. We assist our customers in
procuring memory modules, managing their inventory levels and reducing the
volatility of their inventory costs. We regularly consult with our major
customers and provide them with market forecasts. Using our forecasts and
insight, we work with our customers to develop a purchasing program that seeks
to satisfy their memory module requirements and minimize their costs. Through
our strong relationships with memory semiconductor manufacturers, we are
usually able to maintain a source of memory components in periods of market
shortage, minimizing disruptions of product deliveries to our customers. We
offer competitive and innovative pricing for our customers, including a cost-
plus pricing model that we use with some of our OEM customers.
Responsiveness and flexible customer service. We provide quick turnaround
solutions and just-in-time delivery for our customers so they can maximize
production efficiencies. We are able to often process, manufacture and ship
orders in the same day. We operate four facilities in the United States and
western Europe that are strategically located near many of our largest
customers. Our facilities operate under the same manufacturing processes and
procedures. This allows us to transfer production from one of our facilities to
another to maximize capacity utilization and efficiently meet customer demand.
Comprehensive engineering and testing services. We offer our customers
integrated engineering and design capabilities. In consultation with our
customers, our engineers design and qualify customized memory modules for their
specialized needs, emphasizing quality, cost and efficiency. We have field
engineers dedicated to our major OEM channel customers and, if business
warrants, we staff an engineer on-site to assist our customer in meeting their
design requirements and in qualifying our products to meet their
specifications. We subject 100% of the products that we manufacture to a
comprehensive testing program to ensure that our customers receive top-quality
memory modules.
Broad range of products. We engineer, manufacture and test both older,
trailing-edge and newer, leading-edge memory modules ranging in densities from
1 megabyte to 1 gigabyte or higher. Our modules incorporate DRAM, static random
access memory and flash memory technologies. Our broad range of products is
particularly important to our OEM customers, who often commit to service and
maintain the equipment they sell for over ten years. Our DRAM-based memory
modules employ a full range of technologies. These range from older
technologies, such as extended data output and fast page, to newer
technologies, such as double data rate and Rambus. Our staff of experienced
engineering personnel allows us to rapidly qualify our memory modules, whether
including new or old technologies, for our customers' product applications,
increasing the breadth of products we can provide.
Our Strategy
We intend to further our position as a leading manufacturer of standard and
custom memory modules and provider of related engineering and supply-chain
management services to OEMs, retailers and other resellers. In addition, we
intend to enter new product categories in the retail channel by capitalizing on
our widely-recognized brand name. Our strategy is to:
Expand sales to rapidly growing OEMs. We seek to expand our sales to the OEM
channel by targeting industry leaders in high-growth sectors within the
electronics and high-end computing industries, such as leading providers of
networking, telecommunications and Internet infrastructure equipment. We
currently serve some of the leaders in these markets, such as Cisco Systems,
Lucent and Network Appliance. Sales to our OEM channel customers represents the
fastest-growing part of our business, with a growth rate of 176% in the year
ended December 31, 1999 and 241% in the six months ended June 30, 2000 over the
comparable prior-year periods. We believe that the OEM sales channel will
continue to be a significant growth opportunity in the future.
26
<PAGE>
Continue to focus on both leading-edge and trailing-edge technologies. We
expect the diversity of memory modules required by OEMs to continue expanding
as OEMs are increasingly required to support and service older technology
products and equipment. We intend to provide both leading-edge and trailing-
edge memory modules to meet all of our OEM customers' demands. We are capable
of providing a full range of leading-edge memory modules, including Rambus,
double data rate and other next-generation memory technologies. We also
continue to produce 8 megabyte and 16 megabyte and other low-density memory
modules, to support our OEM channel customers' legacy products and for
commercial, industrial and other applications. Because many memory
semiconductor manufacturers discontinue production of these trailing-edge
products, we face less competition in this product sector.
Maintain our core market-leading customer base. We intend to pursue
strategic relationships with a core group of customers that we believe have the
potential to generate significant revenue. By focusing our resources and
expertise on providing superior quality and service to a core group who are
market-leaders, we believe that we can become their preferred source for memory
solutions and become deeply embedded in their businesses. In our OEM business,
it is our goal to become qualified in 100% of our customers' new memory modules
and in a significant portion of their older technologies. In the reseller
channel, we intend to focus on servicing the largest and fastest-growing retail
chains.
Maintain strong vendor relationships. We maintain strong relationships with
many of the largest memory semiconductor manufacturers in the world. To foster
these relationships with our suppliers, we have a policy of purchasing at least
80% of our semiconductors from direct suppliers, rather than through the spot
market. For the six months ended June 30, 2000, we purchased 91% of our memory
semiconductors directly from semiconductor manufacturers. We provide our
primary semiconductor manufacturers with rolling three-month forecasts of our
orders. We have a policy of purchasing at least these forecasted quantities. We
believe this is important because semiconductor manufacturers take into
consideration the purchasing history of their customers when they make product
allocation decisions in times of semiconductor shortages. We believe that these
strategies increase vendor loyalty and assist us in reducing our exposure to
memory semiconductor price volatility because we are not dependent, to any
significant degree, on spot market purchases.
Capitalize on our brand name to expand into other retail product lines. We
believe that our retail channel leadership results from our reputation for
quality products, service and logistics. We believe that we have created a
brand name that is well known and highly regarded by end users of memory
modules. This brand recognition should allow us to sell additional products to
our loyal retail customer base. For example, we have recently begun selling
PNY-branded writeable and recordable compact discs and flash card readers for
digital cameras. We expect that our retail relationships and brand recognition
will allow us to generate incremental revenues from these and other new retail
product lines without expending significant capital on these product line
extensions.
Pursue acquisitions of complementary businesses and facilities. We intend to
make acquisitions to strengthen our position in our targeted markets, enhance
our technology base, increase our production capacity and expand our geographic
presence. For example, we recently purchased our Ballivor, Ireland, facility
from NEC to strengthen our presence in western Europe and service NEC's memory
business in this market. We currently have no commitments or agreements and are
not involved in any negotiations to acquire any business or manufacturing
facility.
Products
Memory Modules
We sell a wide array of memory modules, ranging from densities of 1 megabyte
to 1 gigabyte, or higher, based on DRAM, static random access memory and flash
technologies. Memory modules are compact circuit board assemblies of
semiconductor memory components and related circuitry. In 1999, approximately
95% of our memory module revenues were based on DRAM technology. We expect to
increase our sales of flash
27
<PAGE>
memory modules in the future. We sell memory modules primarily using extended
data output, fast page and synchronous DRAM technology, but we also produce
Rambus memory modules and are capable of producing double data rate memory
modules when the market develops.
Our memory modules include dual in-line memory modules, single in-line
memory modules, small outline dual in-line memory modules and Rambus in-line
memory modules. The primary differences among these memory modules are the
module size, memory semiconductor technology used and their applications.
In the OEM sales channel, we sell memory modules with densities ranging from
1 megabyte to 1 gigabyte or higher. In the reseller channel, we sell memory
modules with densities ranging from 4 megabytes to 512 megabytes. The large
majority of our memory modules in both sales channels have 32, 64 or 128
megabyte densities. We sell our reseller channel memory modules under our own
PNY label, as well as under private labels.
Other Products
We recently began to utilize our reseller channel leadership to sell media
products under the PNY label. We began selling recordable and writeable compact
discs to our reseller channel customers in January 2000. Recently, we also
began selling flash memory accessories for such devices as digital cameras and
MP3 players. We purchase these products from manufacturers and sell them to our
reseller channel customers under either the PNY label or under private labels.
Supply-Chain Management
We assist our customers in procuring memory modules, maintaining their
inventory levels and reducing the volatility of their inventory costs.
We provide quick turnaround solutions and just-in-time delivery for our
customers to maximize production efficiencies. We regularly consult with our
OEM channel customers, sharing our DRAM market insights and forecasts so they
can more efficiently manage their memory module inventories. We maintain safety
reserve inventories that enable us to process, manufacture and ship some orders
in the same day. We also work with some of our customers in managing their
surplus inventory by selling their excess memory modules through our
distribution network.
For our reseller channel customers, we have developed comprehensive
integrated inventory management systems. We typically receive weekly, and in
some cases daily, on-hand inventory reports from our largest customers. We are
also connected to several of our largest customers' electronic data interchange
systems. These systems notify us as soon as our customers' inventories need to
be replenished. Once an order is placed, we can either ship to a customer's
warehouse or directly to its stores to reduce turnaround time and storage
costs. We also maintain small inventories of memory modules that we can ship
overnight to our customers in case of unexpected demand.
Engineering, Manufacturing and Testing
Engineering
We provide comprehensive engineering services to our OEM channel customers.
In consultation with a customer, we review their memory module requirements and
recommend cost effective and efficient module solutions. We often provide our
OEM customers with design assistance, either helping them develop new memory
interfaces to work with existing memory modules or to design new memory modules
to work with existing memory interfaces.
OEMs require all memory modules to undergo a rigorous qualification process
before they can be used in an application. In the qualification process, every
aspect of the memory module, including the semiconductor
28
<PAGE>
device itself, must be tested in each possible application before it is
approved by the OEM. This process can take between several days and several
months, depending on the complexity of the memory module and the number of
applications that use it. We offer our OEM customers the services of our field
engineers, who provide on-site engineering and qualification assistance.
As a member of the Joint Electronic Device Engineering Council and as a
participant in two of its key standard-setting committees, we participate in
the industry design and standard-setting processes for memory modules.
Manufacturing
We employ highly automated manufacturing processes that involve the use of
surface mount equipment that has been optimized for the production of memory
modules. Due to our flexible manufacturing setup, we can offer our customers
rapid manufacturing and test cycles on small and large projects. We employ
rigorous quality control procedures in each facility and perform statistical
process control at various steps of the manufacturing process. In addition, we
conduct quality assurance through a process audit to ensure that the final
product meets required specifications. We believe that we adhere to the highest
quality control standards in every aspect of our operations.
We have received ISO registrations for all our facilities. ISO is an
international series of quality standards that can improve quality,
productivity and customer satisfaction, and reduce waste. Many of our OEM
customers require their memory module providers to be ISO registered. To comply
with ISO registrations, we continuously monitor and work to improve the design,
development, production and testing of our memory modules. We have received
NEC's electronics qualification for dual in-line memory module and single in-
line memory module manufacturing.
Testing
We test 100% of the products that we manufacture. We use sophisticated test
systems to confirm that our memory modules function properly and meet or exceed
our customers' requirements.
Customers, Sales and Marketing
We currently sell our products and provide our services to a wide range of
customers in the OEM and reseller channels, including some of the largest and
best known OEMs and consumer electronics and office supply retailers.
OEM Sales Channel
We sell our products and provide our services directly to OEMs, contract
electronics manufacturers, electronics component distributors and memory
semiconductor manufacturers. In the six months ended June 30, 2000, we sold our
products to more than 20 direct OEM and contract electronics manufacturer
customers. We indirectly provide our products to over an additional 50 OEMs and
electronics component distributors. We have working relationships with many of
our indirect OEM customers, such as Lucent. These indirect customers often
direct their contract electronics manufacturers to purchase memory modules from
us.
29
<PAGE>
Set forth below are our five largest OEM channel customers for the year
ended December 31, 1999 and the markets in which they primarily compete:
<TABLE>
<CAPTION>
Customer Primary Fields
-------- --------------
<S> <C>
Arrow Electronics................ Electronic components distribution
Cisco Systems.................... Networking and communications equipment
Jabil............................ Contract electronics manufacturing
NEC.............................. Semiconductors and high-end computing
Network Appliance................ Network-attached data storage
</TABLE>
Our OEM business unit uses an internal direct sales force of eight
individuals. This sales force is complemented by an external sales force of
nine manufacturers' representatives. We believe these combined sales forces
have the local presence, market knowledge and strategic insight to allow us to
effectively market our products to our OEM channel customers.
Reseller Sales Channel
In the year ended December 31, 1999, we sold our products to over 40
reseller channel customers through a variety of distribution channels. Our key
customers include leading consumer electronics and office supply retail chains
such as BestBuy, CompUSA, Dixons, Office Depot and Staples. Our products are
sold in over 3,000 retail locations nationwide. In addition to the retail
market, we also sell our products through mail-order companies, electronics
component distributors, value-added resellers and e-commerce companies.
Our reseller channel business unit uses in-house sales representatives and
manufacturers' representatives. Some of our reseller channel customers feature
our products in their advertisements in exchange for a fee. On our website, our
memory configurator software helps customers in the memory module selection
process by matching their needs to the right PNY memory module. We offer a
toll-free, 24-hour technical support hotline that provides customers with
direct access to knowledgeable memory specialists.
Suppliers
In excess of 95% of our memory modules are based on DRAM technology. We
purchase our DRAM semiconductors from a small number of suppliers. These
suppliers collectively provide us with a full range of memory semiconductors to
support both newer, leading-edge and older, trailing-edge memory modules. Our
primary suppliers are Infineon, Micron, Toshiba and Vanguard.
We maintain close working relationships with large memory semiconductor
manufacturers in the United States, Asia and Europe. Our vendor base represents
a cross-section of price leaders, technology leaders, mainstream and trailing-
edge product suppliers. We believe that our relationships help us secure
allocations in times of semiconductor shortages. In addition to our traditional
memory semiconductor suppliers, we also purchase a limited amount of memory
semiconductors through the spot market. Our procurement organization operates
from offices located near many of our suppliers to help ensure competitive
pricing and a dependable supply of materials for our products.
Competition
We conduct business in a market characterized by intense competition, rapid
technological change, evolving industry standards and price volatility. We
compete in this market on the basis of service, quality and price.
Some of our significant suppliers, such as Infineon, Micron and Toshiba, are
also our competitors. Many have the ability to manufacture competitive products
at lower costs as a result of their vertical integration. We also face
competition from current and prospective OEM customers that evaluate our
capabilities against the
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<PAGE>
merits of manufacturing products internally. We also compete for OEM business
with independent manufacturers such as Celestica, Inc., Kingston Technology
Company, Smart Modular, a division of Solectron Corporation, and Viking
Components, Inc. We believe that our primary competitors in the reseller sector
include Centon Electronics, Inc., K-byte, a division of Reptron Electronics,
Inc., Kingston and Viking.
Facilities
We occupy four modern manufacturing facilities that have a combined 260,200
square feet of floor space. These facilities are strategically positioned on
both coasts of the United States and in Europe to address the global demand for
high-quality memory module solutions.
<TABLE>
<CAPTION>
Location Square Footage Lease/Own ISO Status
-------- -------------- ------------- ----------
<S> <C> <C> <C>
Parsippany, New Jersey................ 153,500 Lease 9001
(expires 2007)
Santa Clara, California............... 46,700 Lease 9002
(expires 2007)
Bordeaux, France...................... 41,000 Own 9002
Ballivor, Ireland..................... 19,000 Lease 9002
(expires 2000)*
</TABLE>
--------
* This lease expires on December 31, 2000 and we intend to extend the lease
term for at least one additional year.
In addition to these facilities, we have a sales office in London and a
purchasing representative in Tokyo. We believe that our existing facilities are
adequate for our current operations. We are capable of significantly increasing
production at each facility by either purchasing additional production lines or
increasing the number of shifts.
Employees
As of June 30, 2000, we had approximately 440 full-time employees. We added
approximately 70 employees in Europe when we acquired our Ireland facility in
July 2000. In addition to our full-time employees, we regularly employ
temporary and part-time employees at all of our facilities. Our employees in
the United States are not represented by any collective bargaining agreements.
Two employees in France and all of our employees in Ireland are represented by
unions. We have never experienced a work stoppage at any of our facilities. We
consider our relationship with our employees to be good.
Legal Proceedings
As of the date of this prospectus, we are not involved in any material legal
proceedings.
31
<PAGE>
MANAGEMENT
Executive Officers and Directors
Set forth below is information concerning our executive officers and
directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gadi Cohen.............. 41 Chairman of the Board, President and Chief Executive Officer
Jean-Pierre Pucheu...... 53 President of PNY Technologies Europe and Director
Mark J. Ciano........... 33 Vice President of Finance and Administrative Services
Anthony G. Gomez........ 37 Vice President of Sales and Marketing-Reseller
Julian C. Hawkins....... 35 Vice President of Worldwide Sales-OEM
John P. Hughes.......... 44 Vice President of Operations and Procurement
Mark A. Sawyer.......... 40 Vice President and General Manager of the Santa Clara Facility
Robert J. Stone......... 35 Vice President of Manufacturing and Engineering
Joseph P. DiSabato...... 33 Director
Michael W. Goroff....... 40 Director
Igal Lichtman........... 48 Director
</TABLE>
Gadi Cohen has served as our Chairman of the Board, President and Chief
Executive Officer since he founded PNY in 1985. Prior to founding PNY,
Mr. Cohen served for seven years as an officer in the Israeli army.
Jean-Pierre Pucheu has served as President of PNY Technologies Europe since
1994 and as a Director since 1998. Mr. Pucheu supervises PNY's European
operations from our manufacturing facility in Bordeaux, France. Prior to
joining PNY, Mr. Pucheu spent 23 years with IBM, where he attained the position
of Director of European Component Purchasing. Mr. Pucheu earned the equivalent
of an M.B.A. from L'Ecole Superieure de Commerce et D'Administration in
Bordeaux, France.
Mark J. Ciano has served as Vice President of Finance and Administrative
Services since February 2000. Mr. Ciano is responsible for overseeing all
financial, human resources and administrative affairs of the company. Formerly
a Senior Auditor with KPMG Peat Marwick, Mr. Ciano joined PNY in 1995 as
Assistant Controller, became Controller in 1997 and assumed his present
position in February 2000. He has 10 years of finance experience and holds a
B.A. in Accounting from William Patterson University.
Anthony G. Gomez has served as Vice President of Sales and Marketing--
Reseller since June 2000. Mr. Gomez is responsible for managing and directing
PNY's reseller channel sales. Prior to joining PNY, Mr. Gomez was the Vice
President of Sales, Media Solutions at Sony Electronics, Inc., where he was
responsible for a $300 million strategic business unit, with primary
responsibility for managing the sale of consumer analog audio, video and
camcorder media. Mr. Gomez has an M.B.A. in Finance from Fairleigh Dickinson
University.
Julian C. Hawkins has served as Vice President of Worldwide Sales--OEM since
August 2000. Mr. Hawkins is responsible for managing and directing PNY's
business with OEMs. Prior to joining PNY, Mr. Hawkins held the position of Vice
President of Marketing and Vice President of Worldwide Corporation Accounts at
Samsung Semiconductor, Inc., where he was responsible for marketing and sales
of memory and flat panel display products. During eight years at Samsung,
Mr. Hawkins led sales and marketing activities in all three major semiconductor
regions--North America, Europe and Asia. Mr. Hawkins has a B.Sc. in Computer
Science from the Victoria University of Manchester.
John P. Hughes has served as Vice President of Operations and Procurement
since 1996. Mr. Hughes oversees PNY's purchasing, packaging and warehouse
operations. Formerly Product Manager at Quad Systems Corporation, Mr. Hughes
joined PNY in 1991 as Director of Manufacturing, became Director of Operations
in 1994 and assumed his present position in 1996. He has approximately 12 years
of technology product manufacturing experience and earned a B.S. in Electrical
Engineering from Lehigh University.
32
<PAGE>
Mark A. Sawyer has served as Vice President and General Manager of our Santa
Clara Facility since April 2000. Mr. Sawyer is responsible for managing and
directing PNY's manufacturing operations in Santa Clara. Prior to joining PNY,
Mr. Sawyer was Vice President of Operations at Digital Microwave Corporation
for seven years, where he was responsible for production, materials management,
manufacturing engineering and test engineering. Previously, Mr. Sawyer was
Director of Total Quality Management and Business Process Re-engineering at
Applied Materials Corporation.
Robert J. Stone has served as Vice President of Manufacturing and
Engineering since 1997. Mr. Stone is responsible for engineering and all
aspects of manufacturing, including production management, process development
and factory integration. Formerly Vice President of Product Development and
Integration at Quad Systems Corporation, Mr. Stone joined PNY in 1994 as
Manufacturing Manager, was promoted to Director of Manufacturing in 1996, and
to his present position in 1997. He has over 15 years of experience in surface
mount technology manufacturing and holds a B.S. degree in Electrical
Engineering from the University of Rhode Island.
Joseph P. DiSabato has served as a director since 1998. Mr. DiSabato is a
Vice President of Goldman, Sachs & Co., in its Merchant Banking Division.
Mr. DiSabato holds an M.B.A. from the Anderson Graduate School of Management at
the University of California at Los Angeles. He serves on the Board of
Directors of numerous portfolio companies on behalf of Goldman, Sachs,
including Amscan Holdings, Inc., and Madison River Communications.
Michael W. Goroff has served as a director since late 1995. From late 1995
to early 1997, Mr. Goroff served as our Vice President and Chief Operating
Officer. He is currently a partner of the law firm Milbank, Tweed, Hadley &
McCloy LLP, where he was a partner prior to his joining us as an employee in
late 1995. Mr. Goroff holds a B.A. from Harvard College and a J.D. from Harvard
Law School.
Igal Lichtman has served as a director since 1998. Mr. Lichtman was the
founder, Chairman and Chief Executive Officer of Magic Solutions International,
a software company which he sold in 1998. He also established a franchise of
MicroAge, Inc., a computer local area network business, which he sold in 1997.
Mr. Lichtman holds a B.S.E.E degree from Technion Israel Institute of
Technology.
Board of Directors
Following the completion of this offering, our board of directors will have
five members, including three directors who are not employees and who are
otherwise independent. Our directors will be divided into three classes. Each
class will be elected for terms of three years. The initial terms of the
Class I, Class II and Class III directors are expected to end at our annual
stockholders meeting held in 2001, 2002 and 2003, respectively. In addition,
our amended and restated bylaws will provide that the authorized number of
directors will be between four and seven, with the exact number to be
determined by a majority of our board of directors.
Committees of the Board of Directors
Following completion of this offering, our board of directors will have an
audit committee, a compensation committee and a nominating committee. The board
may also establish other committees to assist in the discharge of its
responsibilities.
The functions of the audit committee, which is expected to consist of
Messrs. DiSabato, Goroff and Lichtman, each a non-employee director, include:
. reviewing the adequacy of our system of internal accounting controls;
. reviewing the results of the independent auditor's annual audit,
including any significant adjustments, management judgments and
estimates, new accounting policies and disagreements with management;
33
<PAGE>
. reviewing our audited financial statements and discussing them with
management;
. reviewing the audit reports submitted by the independent auditors;
. reviewing the disclosures by independent auditors concerning the
relationships with our company and the performance of our independent
auditors and annually recommending independent auditors;
. adopting and annually assessing its charter; and
. preparing such reports or statements as may be required by the Nasdaq
National Market and applicable securities laws.
The compensation committee will provide a general review of our compensation
and benefit plans to ensure that they meet corporate objectives. The
compensation committee will review our management recommendations on
compensation for all our officers and major compensation policies and
practices, and then report its recommendations to the full board of directors
for approval and authorization. The compensation committee will administer our
stock plan and is expected to consist of Messrs. DiSabato, Goroff and Lichtman.
Board Compensation
Directors are not separately compensated for serving on the board of
directors, other than reimbursement for out-of-pocket expenses related to
attendance at board and committee meetings. Directors are eligible to receive
discretionary option grants pursuant to our employee stock option plan.
Compensation Committee Interlocks and Insider Participation
We did not have a compensation committee or other board committee performing
equivalent functions in 1999. We anticipate that no member of our compensation
committee, once established, will serve as a member of the board of directors
or compensation committee of any other company that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
Employment Agreements
We currently do not have employment agreements with any of our executive
officers. Each of our executive officers has entered into a severance agreement
that provides for the payment of six months of salary upon termination of
employment and contains a one-year non-competition provision.
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<PAGE>
Executive Compensation
The following table sets forth information concerning the compensation for
the year ended December 31, 1999 for our Chief Executive Officer and our four
other most highly compensated executive officers at such date. Annual
compensation amounts set forth on the table exclude perquisites and other
personal benefits because such compensation did not exceed either $50,000 or
10% of the total annual salary and bonus for any of the named executive
officers. All other compensation consists of discretionary matching
contributions to our 401(k) plan on behalf of each named executive officer and
applicable car allowances.
1999 Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------------- ---------------------
Restricted Securities
Stock Underlying All Other
Name and Principal Salary Bonus Awards Options Compensation
Position ($) ($) ($) (#) ($)
------------------ ------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Gadi Cohen............... 300,000 189,000 -- -- 8,000
President and Chief
Executive Officer
Jean-Pierre Pucheu....... 147,000(1) 100,920 -- -- 23,380
President of PNY
Technologies Europe
John P. Hughes........... 157,400 97,650 -- 300,000 12,800
Vice President of
Operations and
Procurement
Robert J. Stone ......... 157,400 127,650 -- 300,000 10,661
Vice President of
Manufacturing and
Engineering
Michael Williamson (2)... 170,000 97,650 -- 150,000 12,270
Vice President of Sales
and Marketing
</TABLE>
--------
(1) Represents a salary of 960,000 French francs converted at the December 31,
1999 exchange rate of 6.5295 francs per U.S. dollar.
(2) Mr. Williamson was employed by us between April 1998 and June 2000.
All executive officers are eligible to participate in our employee stock
option plan and may participate in other employee benefit plans and programs,
such as health insurance plans, that we offer to our other employees.
Option Grants in Last Fiscal Year
The following table sets forth information regarding grants of stock options
to purchase shares of our common stock made to the named executive officers
during the year ended December 31, 1999. These options were granted with an
exercise price equal to the fair market value of our common stock on the date
of grant as determined by our board of directors on the date of grant and are
33.3% vested as of June 30, 2000. Potential realizable values are net of
exercise price, but before taxes associated with exercise. Amounts representing
hypothetical gains are those that could be achieved for the options if
exercised at the end of the option term.
Potential realizable value amounts represent hypothetical gains that could
be achieved for the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock price appreciation of 5%
and 10% compounded annually from the date the respective options were granted
to their expiration dates based upon an assumed initial public offering price
of $14.00 per share, the midpoint of the offering price range on the cover of
this prospectus. These assumptions are not intended to forecast future
appreciation of our stock price. The potential realizable value computation
does not take into account federal or state income tax consequences of option
exercises or sales of appreciated stock.
35
<PAGE>
Option Grants in Fiscal Year Ended December 31, 1999
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------
Potential Realizable
Potential Value at Assumed
Percent Realizable Annual Rates of
Number of of Total Exercise Value at Stock Price
Securities Options Price Assumed IPO Appreciation for
Underlying Granted to Per Share Price Option Term
Options Employees in Base Price Expiration ----------- --------------------
Name Granted Fiscal Year (%) ($) Date 0% ($) 5% ($) 10% ($)
---- ---------- --------------- ---------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Gadi Cohen.............. -- -- -- -- -- -- --
Jean-Pierre Pucheu...... -- -- -- -- -- -- --
John P. Hughes.......... 300,000 17.1% 1.00 6/30/09 3,900,000 6,352,689 10,115,596
Robert J. Stone......... 300,000 17.1% 1.00 6/30/09 3,900,000 6,352,689 10,115,596
Michael Williamson (1).. 150,000 8.6% 1.00 7/05/00 -- -- --
</TABLE>
--------
(1) Mr. Williamson's options were forfeited, before they vested, upon
termination of his employment in June 2000.
Aggregate Year-End Option Values
The table below sets forth the value and number of shares of common stock
subject to exercisable and unexercisable options held as of December 31, 1999
by each of the executive officers named in the 1999 Summary Compensation Table.
No named executive officer exercised any options in 1999. The value of the
unexercised in-the-money options at year end assumes a deemed value for
financial reporting purposes at year end of $3.51 per share minus the exercise
price.
Aggregate Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Shares of
Common Stock Underlying Value of Unexercised
Unexercised Options In-The-Money Options
at Year End At Year-End (1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gadi Cohen................. -- -- $ -- $ --
Jean-Pierre Pucheu......... 600,000 300,000 2,088,000 1,044,000
John P. Hughes............. -- 300,000 -- 754,000
Robert J. Stone............ -- 300,000 -- 754,000
Michael Williamson (1)..... -- 150,000 -- --
</TABLE>
--------
(1) Mr. Williamson's options were forfeited upon termination of his employment
in June 2000.
Stock Option and Other Benefit Plans
Stock Option Plan
In June 1999, we adopted a stock option plan, which will be amended in
October 2000, for directors, officers, employees, consultants and other
individuals or entities selected by our board of directors or compensation
committee, which provides for nonqualified stock option and incentive stock
option grants to our employees and directors. At June 30, 2000, adjusted to
reflect the 3-for-1 stock split effected in October 2000, options for 2,357,250
shares were issued, 50,250 were cancelled and 693,000 shares were available for
future grants under the plan. The October 2000 amendment will increase the
number of shares of common stock available for award under the plan from
3,000,000 shares to 7,500,000 shares. Options granted under our plan currently
vest over four years. In connection with the consummation of this offering, we
intend to grant options to purchase up to 324,600 shares at an exercise price
equal to $7.00 per share to existing employees who currently do not hold stock
options. We expect to incur a stock-based compensation charge of $2.3 million
in connection with this option grant over their four-year vesting period. We
also intend to grant options to purchase up to 284,000 shares to new employees
in connection with the consummation of this offering at an exercise price equal
to the public offering price.
36
<PAGE>
Options under the plan generally expire ten years from the date of grant. If
a participant's employment or provision of services is terminated for a reason
other than as a result of death, disability or retirement, the options expire
30 days after termination, unless extended in accordance with the plan. If a
participant's employment is terminated as a result of death, disability or
retirement, the options expire 90 days from the date of termination. All shares
issued pursuant to the plan are subject to transfer restrictions.
401(k) Profit Sharing Plan
We adopted a tax-deferred 401(k) profit sharing plan in September 1996. The
plan covers substantially all full-time U.S. employees on our payroll who are
at least 21 years of age. Employees become eligible to participate in the first
quarterly enrollment date after hire. The plan provides for voluntary employee
contributions up to 15% of their annual pre-tax compensation, subject to the
maximum limit allowed by the Internal Revenue Service guidelines, which is
currently $10,500 annually. The plan is intended to qualify under Section 401
of the Internal Revenue Code so that contributions to the plan, and income
earned on the plan contributions, are not taxable to employees until withdrawn
from the plan, and contributions by us will be deductible by us when made. The
trustee under the plan, at the discretion of each participant, invests the
employee contributions to the plan in selected investment options.
At our discretion, we make matching contributions to each participating
employee based on his or her voluntary contributions to the plan. We currently
match one-half of an employee's matchable contributions to the plan, which
cannot exceed 3% of their compensation. We may also make, in our discretion,
annual profit sharing contributions on behalf of eligible employees. Each
employee who is a plan participant on the last day of the plan year and has
completed at least 1,000 hours of service during the year is entitled to a
share of any profit sharing contribution we make for the plan year. Our
matching contribution and profit sharing contributions vest at the rate of 20%
per year beginning after the employee's second year of employment with us.
Restricted Stock Awards
During 1997 and 1998, we granted to specified employees and in one case to a
former employee for no consideration the right to receive 1,335,300 shares of
common stock, which will be delivered to them when the restriction period
described below terminates. These shares are subject to forfeiture upon
termination of employment. These shares are also subject to certain
restrictions on transfer which terminate in part at the end of a restriction
period that ends on the earliest to occur of (1) 180 days following the
consummation of our initial public offering, (2) immediately prior to a change
in control, and (3) ten years after the date of grant. Gadi Cohen has agreed to
transfer to us as a contribution of capital, upon the termination of the
restriction period, a number of shares of common stock equal to the number of
shares of common stock that we have agreed to deliver to the specified
employees. As of June 30, 2000 and after giving effect to shares to be issued
and shares forfeited during the period beginning in 1997 and ending on June 30,
2000, each of Mr. Cohen and then, in turn, PNY, expects to deliver 603,300
shares to the specified employees upon the termination of the restriction
period.
Limitation of Directors and Officers Liability
Our certificate of incorporation provides that no director will be liable
for monetary damages for breach of the director's fiduciary duty to us or our
stockholders, except for liability arising from:
. breach of the director's duty of loyalty to us or our stockholders,
. acts or omissions not in good faith or involving intentional misconduct
or owing violations of law,
. improper distributions to stockholders and improper purchases or
redemptions of stock, and
. transactions from which the director derived an improper personal
benefit.
37
<PAGE>
This provision of our certificate of incorporation does not eliminate the
directors' fiduciary duties, and in appropriate circumstances, equitable
remedies including an injunction or other forms of non-monetary relief would
remain available under Delaware law. This provision also does not affect a
director's responsibilities under any other laws, including federal securities
laws or state or federal environmental laws.
In addition, our bylaws provide that we will indemnify our directors and
officers to the fullest extent permitted by Delaware law. We are also empowered
under our bylaws to enter into indemnification contracts with our directors and
officers and to purchase insurance on behalf of any person we are required or
permitted to indemnify. We have obtained directors and officers liability
insurance coverage, which covers, among other things, liabilities arising under
the Securities Act.
38
<PAGE>
RELATED PARTY TRANSACTIONS
In August 1995, we entered into a Preferred Stock and Warrant Purchase
Agreement with certain affiliates of Goldman, Sachs & Co. and Gadi Cohen. As
part of that agreement, we sold 13,000 shares of Series A preferred stock,
convertible into 3,900,000 shares of common stock, and warrants to purchase
1,462,500 shares of common stock for an aggregate purchase price of $15.0
million, to affiliates of Goldman, Sachs & Co. Assuming an offering price of
$14.00 per share of common stock, the value of the Series A preferred stock
held by certain affiliates of Goldman, Sachs & Co. would be $54.6 million. Upon
the automatic conversion of the Series A preferred stock upon consummation of
this offering and the cashless exercise of these warrants, the affiliates of
Goldman, Sachs & Co. will be the beneficial owners of more than 5% of our
outstanding shares of common stock. Joseph P. DiSabato, one of our non-employee
directors, is employed by Goldman, Sachs & Co. See "Principal Stockholders" for
information relating to the beneficial ownership of shares and identification
of affiliates of Goldman, Sachs & Co.
Pursuant to a Preferred Stock and Warrant Purchase Agreement entered into
with Gadi Cohen in August 1995, we issued Mr. Cohen two promissory notes for
$18.1 million representing a return of capital originally invested by Mr. Cohen
in our Company in 1995. Mr. Cohen subsequently gifted these notes to his
spouse, Ruth Cohen. Pursuant to exchange agreements entered into in 1996 and
1997, respectively, we cancelled the notes and issued 15 shares of our Series B
preferred stock and 3 shares of our Series C preferred stock, with an aggregate
redemption price of $18.1 million. We intend to redeem the Series B and the
Series C preferred stock with a portion of the proceeds of this offering. When
we do so, we will net the $18.1 million redemption amount against amounts owing
under the $2.3 million of notes described in the following paragraph.
We loaned Ruth Cohen, spouse of Mr. Cohen, $2.3 million in nine separate
loans between November 27, 1998 and February 5, 2000. These loans bear interest
at a rate of 7.0% per annum and mature three years after their disbursement.
The notes evidencing these loans will be repaid with the proceeds of the
redemption of preferred stock described above.
We believe that each of the transactions described above was made on terms
that were no less favorable to us than could be obtained from unaffiliated
parties.
39
<PAGE>
PRINCIPAL STOCKHOLDERS
The table below sets forth information known to us regarding the beneficial
ownership of our common stock as of June 30, 2000, as adjusted to reflect the
automatic conversion of outstanding shares of Series A preferred stock into
common stock and the cashless exercise of warrants to purchase 1,462,500 shares
of common stock prior to the closing of this offering, resulting in the
issuance an aggregate of 5,131,328 shares of our common stock, and to reflect
the sale of the common stock offered by this prospectus, by:
. each stockholder known by us to be the beneficial owner of more than 5%
of our outstanding common stock,
. each of our executive officers listed in the 1999 Summary Compensation
Table under "Management,"
. each of our directors, and
. all executive officers and directors as a group.
Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and generally includes voting power and/or
investment power with respect to securities. Shares of common stock subject to
options currently exercisable or exercisable within sixty days of the date of
this prospectus are deemed outstanding for purposes of computing the beneficial
ownership by the person holding such options, but are not deemed outstanding
for purposes of computing the percentage beneficially owned by any other
person. Except as otherwise noted, the persons or entities named have sole
voting and investment power with respect to all shares shown as beneficially
owned by them. Unless otherwise indicated, the principal address of each of the
stockholders below is c/o PNY Technologies, Inc., 299 Webro Road, Parsippany,
NJ 07054.
<TABLE>
<CAPTION>
Percentage of Shares
Number of Shares Beneficially Owned
Beneficially ------------------------------
Beneficial Owner Owned Before Offering After Offering
---------------- ---------------- --------------- --------------
<S> <C> <C> <C>
Executive Officers and
Directors:
Gadi Cohen (1)................. 25,800,000 79.0% 60.6%
Jean-Pierre Pucheu (2)......... 644,100 2.0 1.7
Mark J. Ciano (3).............. 50,000 * *
Anthony G. Gomez............... -- -- --
Julian C. Hawkins.............. -- -- --
John P. Hughes (4)............. 123,700 * *
Mark A. Sawyer................. -- -- --
Robert J. Stone (5)............ 107,800 * *
Joseph P. DiSabato (6)......... -- -- --
Michael W. Goroff (7).......... 195,600 * *
Igal Lichtman.................. -- -- --
All executive officers and
directors as a group
(11 persons).................. 26,921,200 82.5% 63.8%
Other stockholders:
The Goldman Sachs Group, Inc.
(8)........................... 4,933,929 15.1 11.9
</TABLE>
--------
* Less than 1%.
(1) Includes 603,300 shares of common stock that will be transferred to PNY
employees 180 days following the consummation of this offering.
(2) Includes 147 shares of Series A preferred stock, which will automatically
convert into 44,100 shares upon consummation of this offering and 600,000
shares that can be acquired upon the exercise of outstanding warrants.
(3) Includes 50,000 shares of common stock that can be acquired upon the
exercise of outstanding options.
40
<PAGE>
(4) Includes 79 shares of Series A preferred stock, which will automatically
convert into 23,700 shares of common stock upon consummation of this
offering, and 100,000 shares of common stock that can be acquired upon the
exercise of outstanding options.
(5) Includes 26 shares of Series A preferred stock, which automatically convert
into 7,800 shares upon consummation of this offering, and 100,000 shares of
common stock that can be acquired upon the exercise of outstanding options.
(6) Mr. DiSabato is a Vice President of Goldman, Sachs & Co. and disclaims
beneficial ownership of any of our securities except to the extent of his
pecuniary interest therein, if any.
(7) Includes 87 shares of Series A preferred stock, which automatically convert
into 26,100 shares upon consummation of this offering, and 169,500 shares
of common stock that can be acquired upon the exercise of outstanding
warrants.
(8) Includes 3,095,877 shares held by GS Capital Partners II, L.P., 1,230,498
shares held by GS Capital Partners II Offshore, L.P., 114,267 shares held
by Goldman, Sachs & Co. Verwaltungs GmbH, 232,167 shares held by Stone
Street Fund 1995, L.P., and 261,120 shares held by Bridge Street Fund 1995,
L.P. Goldman, Sachs and Co. is an indirect wholly-owned subsidiary of The
Goldman Sachs Group, Inc. The Goldman Sachs Group, Inc. and Goldman, Sachs
& Co. may be deemed to own beneficially and indirectly an aggregate of
4,933,929 shares held by the limited partnerships listed above. Affiliates
of Goldman, Sachs & Co. and The Goldman Sachs Group, Inc. are the general
partner, managing general partner or investment manager of those
partnerships, and an investment committee of Goldman, Sachs & Co., which
consists of 15 members, has voting and dispositive authority over the
shares held by the limited partnerships. The Goldman Sachs Group, Inc. and
Goldman, Sachs & Co. each disclaim beneficial ownership of the shares owned
by the limited partnerships to the extent that those shares are
attributable to partnership interests therein held by persons other than
The Goldman Sachs Group, Inc. and its affiliates.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
After giving effect to the filing of our amended and restated certificate of
incorporation and the 3-for-1 stock split, which took place in October 2000,
the total amount of our authorized capital stock will consist of 125,000,000
shares of common stock, par value $0.01 per share, and 10,000,000 shares of
preferred stock.
After giving effect to this offering, the 3-for-1 stock split, which was
effected in October 2000, the conversion of preferred stock and the exercise of
warrants described below, assuming an offering of price of $14.00 per share and
no exercise of the underwriters' overallotment option, we will have 40,081,378
shares of common stock outstanding. At the closing of this offering, all of our
currently outstanding shares of Series A preferred stock will automatically
convert into 4,097,400 shares of common stock and all of our currently
outstanding shares of Series B preferred stock and Series C preferred stock
will be redeemed with a portion of the proceeds of this offering. After giving
effect to these transactions, we will have no shares of any series of preferred
stock outstanding.
The following summary of provisions of our capital stock describes all
material provisions of, but does not purport to be complete and is subject to,
and qualified in its entirety by, our amended and restated certificate of
incorporation and our bylaws, and by the provisions of applicable law.
Common Stock
The holders of our common stock are entitled to:
. one vote per share on all matters submitted to a vote of our
stockholders,
. the payment of any dividends declared by the board of directors out of
legally available funds, after the superior rights of any preferred
stock holders have been satisfied, and
. share ratably in company assets available for distribution to them in
the event of our liquidation, dissolution, distribution of assets or
winding up.
The holders of common stock do not have cumulative voting rights. As a
result, the holders of a majority of the outstanding common stock can elect all
our directors. The remaining common stock holders will not be able to elect any
directors. The holders of common stock have no preemptive or other subscription
rights, and there are no conversion, redemption or sinking fund provisions with
respect to the common stock. All outstanding shares of common stock are, and
all shares of common stock to be outstanding upon completion of this offering
will be, fully paid and non-assessable. There are provisions in our certificate
of incorporation and bylaws that would have the effect of delaying, deterring
or preventing a change in control of our management in the case of a hostile
takeover or other acquisition. See "Description of Capital Stock--Anti-Takeover
Provisions of Delaware Law and Our Charter."
Preferred Stock
Our board of directors will have the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, any of
which may be greater than the rights of the common stock. It is not possible to
state the actual effect of the issuance of any shares of preferred stock on the
rights of holders of common stock until the board of directors determines the
specific rights of the preferred stock. However, the effects might include,
among other things, restricting dividends on the common stock, diluting the
power of the common stock, impairing liquidation rights of the common stock and
delaying or preventing a change of control or the removal of our existing
management without further action by the shareholders. We have no present plans
to issue any shares of preferred stock.
42
<PAGE>
Warrants
We have issued warrants to purchase shares of our common stock to members of
senior management and the Board of Directors. We issued to a former director a
warrant on April 22, 1996 to purchase 360,000 shares of common stock at a
current exercise price of $4.23 per share. This director forfeited a portion of
his warrant equal to 216,000 shares when he resigned in 1998. We issued to
another of our directors a warrant to purchase 150,000 shares of common stock
on March 4, 1997 at a current exercise price of $4.23 per share. On May 1,
1998, we also issued to this director a second warrant to purchase 49,500
shares of our common stock, at an exercise price of $0.03 a share. On May 1,
1998, we issued to another one of our directors, a warrant for the purchase of
900,000 shares of common stock at an exercise price of $0.03 per share. We have
reserved 1,243,500 shares of common stock for the exercise of these warrants.
No warrants have been exercised through June 30, 2000.
On August 4, 1995, we issued warrants to purchase 917,700 shares of our
common stock to GS Capital Partners II, L.P., warrants to purchase 364,800
shares of our common stock to GS Capital Partners II Offshore, L.P., warrants
to purchase 33,900 shares of our common stock to Goldman, Sachs & Co.
Verwaltungs GmbH, warrants to purchase 68,700 shares of our common stock to
Stone Street Fund 1995, L.P. and 77,400 shares of our common stock to Bridge
Street Fund 1995, L.P. These warrants have an exercise price of $4.10 per
share. These Goldman, Sachs affiliates who hold warrants have agreed to
exercise their warrants in full, pursuant to a cashless exercise, immediately
prior to the effectiveness of this registration statement of which this
prospectus forms a part, which will result in the issuance of shares of our
common stock.
Registration Rights
As of the completion of this offering, the holders of an aggregate of
6,404,400 shares of common stock will be entitled to registration rights. These
rights are provided under the terms of a registration rights agreement,
management stockholders agreement and employee stock option plan between us and
the holders of registrable securities, who include the affiliates of Goldman,
Sachs mentioned above, current and former members of management and employees
who purchased stock under the option plan. This agreement provides demand
registration rights to the holders of registrable securities. In addition, the
holders of all of the registrable securities are entitled under these
agreements, subject to limitations, to require us to include their registrable
securities in future registration statements filed by us.
The demand registration rights provide that stockholders may request
registration of their shares at our expense 180 days after the effective date
of the registration statement of which this prospectus is a part, subject to a
minimum amount of the requesting stockholder's shares per requested
registration, and subject to our right to register our own shares or shares of
other requesting stockholders, which may limit the total number of shares that
may be sold in a single offering. These rights are being waived in connection
with this offering.
Holders of registrable securities are entitled to request us to register
their securities when we propose or are required to register equity securities
under the Securities Act of 1933. We are obligated to provide notice of the
registration and the holders of registrable securities may request registration
of their shares within 15 days of receipt of the notice. These rights are being
waived in connection with this offering.
Registration of shares of common stock pursuant to the rights granted in
these agreements will result in such shares becoming freely tradeable without
restriction under the Securities Act of 1933. However, these agreements provide
us the right to delay any registration request until 90 days after the
effective date of this prospectus. All registration expenses incurred in
connection with the above registrations will be borne by us.
43
<PAGE>
Anti-Takeover Provisions of Delaware Law and Our Charter
Delaware Law. In general, Section 203 of the Delaware General Corporation
Law prohibits a publicly held Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three
years following the date that the stockholder became an interested stockholder
unless:
. before that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder,
. on consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held under the plan will be tendered in a tender or
exchange offer, or
. on or after that date, the business combination is approved by the board
of directors and authorized at a meeting of stockholders, and not by
written consent, by the affirmative vote of at least two-thirds of the
outstanding voting stock not owned by the interested stockholder.
Section 203 defines "business combination" to include:
. any merger or consolidation involving the corporation and the interested
stockholder,
. any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation,
. in general, any transaction that results in the issuance or transfer by
the corporation of any stock of the corporation to the interested
stockholder, or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Charter Provisions. Our certificate of incorporation and bylaws include a
number of provisions that may have the effect of deterring hostile takeovers or
delaying or preventing changes in control of our management. First, our
certificate of incorporation provides that all stockholder actions upon
completion of this offering must be effected at a duly called meeting of
holders and not by a consent in writing. Second, our bylaws provide that
special meetings of the holders may be called only by the chairman of the board
of directors, the chief executive officer or our board of directors under a
resolution adopted by a majority of the total number of authorized directors.
Third, our certificate of incorporation and bylaws provide for a classified
board of directors in which approximately one-third of the directors would be
elected each year. Consequently, any potential acquirer would need to
successfully complete two proxy contests in order to take control of the board
of directors. As a result of the provisions of the certificate of incorporation
and Delaware law, stockholders will not be able to cumulate votes for
directors. Finally, our bylaws establish procedures, including advance notice
procedures, with regard to the nomination of candidates for election as
directors and stockholder proposals. These provisions of our certificate of
incorporation and bylaws could discourage potential acquisition proposals and
could delay or prevent a change in control of our management.
Transfer Agent and Registrar
American Stock Transfer and Trust Corp. has been appointed as the transfer
agent and registrar for our common stock.
44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial amount of our shares in the public market after
this offering could adversely affect the prevailing market price of our shares.
Furthermore, the sale of a substantial amount of shares in the public market
after the contractual and legal restrictions on resale described below lapse
could adversely affect the prevailing market price of our shares and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
40,081,378 shares, assuming the exercise of the warrants held by affiliates of
Goldman, Sachs and Co., assuming no exercise of the underwriters' over-
allotment option, a 3-for-1 stock split and no exercise of outstanding options.
Of these shares, all of the shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless the shares are purchased by our "affiliates" as that term is defined in
Rule 144 under the Securities Act. Any shares purchased by an affiliate may not
be resold except pursuant to an effective registration statement or an
applicable exemption from registration, including an exemption under Rule 144
of the Securities Act. The remaining shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act. These restricted securities may be sold in the public
market only if they are registered or if they qualify for an exemption from
registration under Rule 144 or Rule 701 under the Securities Act. These rules
are summarized below.
Upon the expiration of the lock-up agreements described below and subject to
the provisions of Rule 144 and Rule 701, restricted shares totaling 33,001,874
will be available for sale in the public market 180 days after the date of this
prospectus. The sale of these restricted securities is subject to the volume
restrictions contained in those rules. Some of these restricted shares,
described as not being eligible for sale until 180 days after the date of this
prospectus, may become eligible for sale at an earlier date, as described in
"Underwriting."
Lock-up Agreements
We, our directors and executive officers and substantially all of our
significant stockholders, who own in the aggregate 34,731,878 shares of our
common stock, have entered into lock-up agreements with the underwriters. Under
those agreements, subject to limited exceptions, neither we nor any of our
directors or executive officers nor any of those stockholders may dispose of or
hedge any shares of common stock or securities convertible into or exchangeable
for shares of common stock. These restrictions will be in effect for a period
of 180 days after the date of this prospectus. At any time and without notice,
Lehman Brothers may release all or some of the securities from these lock-up
agreements. See "Underwriting."
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year from the later of the date those shares of
common stock were acquired from us or from an affiliate of ours would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
. one percent of the number of shares of common stock then outstanding,
which will equal approximately 400,814 shares immediately after this
offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to the sale of any shares of common
stock.
The sales of any shares of common stock under Rule 144 are also subject to
manner of sale provisions and notice requirements and to the availability of
current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years from the later of
45
<PAGE>
the date such shares of common stock were acquired from us or from an affiliate
of ours, including the holding period of any prior owner other than an
affiliate, is entitled to sell those shares without complying with the manner
of sale, public information, volume limitation or notice provisions of
Rule 144. Immediately upon completion of this offering, 6,325,328 shares will
be eligible for sale under Rule 144(k).
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchased shares from us in
connection with a compensatory stock plan or other written agreement is
eligible to resell those shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with some of the
restrictions, including the holding period, contained in Rule 144.
No precise prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price of our common stock prevailing from time to time. We are unable to
estimate the number of our shares that may be sold in the public market
pursuant to Rule 144 or Rule 701 because this will depend on the market price
of our common stock, the personal circumstances of the sellers and other
factors. After this offering, there will be 577,000 shares available for sale
under Rule 701. Nevertheless, sales of significant amounts of our common stock
in the public market could adversely affect the market price of our common
stock.
Stock Plans
We intend to file a registration statement under the Securities Act covering
7,500,000 shares of common stock reserved for issuance under our stock option
plan. This registration statement is expected to be filed as soon as
practicable after the effective date of this offering.
Currently, there are options to purchase 2,307,000 shares of our common
stock outstanding under our stock option plan. In connection with the
consummation of this offering, we intend to grant options to purchase up to
324,600 shares at an exercise price equal to $7.00 per share to existing
employees who currently do not hold stock options. Also, in connection with the
consummation of this offering, we intend to grant options to purchase an
additional 284,000 shares of our common stock to new employees at an exercise
price equal to the public offering price. All of these shares will be eligible
for sale in the public market from time to time, subject to vesting provisions,
Rule 144 volume limitations applicable to our affiliates and, in the case of
some of the options, the expiration of lock-up agreements.
46
<PAGE>
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
TO NON-U.S. HOLDERS
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of common stock
applicable to non-U.S. holders of our common stock who acquire and own it as a
capital asset within the meaning of Section 1221 of the Internal Revenue Code.
A "non-U.S. holder" is any person other than:
. a citizen or resident of the United States,
. a corporation or partnership created or organized in the United States
or under the laws of the United States or of any state,
. an estate whose income is includable in gross income for United States
federal income tax purposes regardless of its source, or
. a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions
of the trust.
This discussion does not consider specific facts and circumstances that may
be relevant to a particular non-U.S. holder's tax position, including the fact
that in the case of a non-U.S. holder that is a partnership, the U.S. tax
consequences of holding and disposing of shares of common stock may be affected
by certain determinations made at the partner level. Further, it does not
consider U.S. state and local or non-U.S. tax consequences, nor does it
consider non-U.S. holders subject to special tax treatment under the federal
income tax laws, including banks and insurance companies, dealers in
securities, and holders of securities held as part of a "straddle," "hedge" or
"conversion transaction". In addition, persons that hold the common stock
through "hybrid entities" may be subject to special rules and may not be
entitled to the benefits of their country's income tax treaty, if any, with the
United States. The following discussion is based on provisions of the Internal
Revenue Code and administrative and judicial interpretations as of the date
hereof, all of which are subject to change, possibly on a retroactive basis,
and any change could affect the continuing validity of this discussion. The
following summary is included herein for general information. Accordingly, if
you are a non-U.S. holder, we urge you to consult a tax advisor with respect to
the United States federal tax consequences of holding and disposing of our
common stock, as well as any tax consequences that may arise under the laws of
any U.S. state, local or non-U.S. taxing jurisdiction.
Dividends. In general, assuming we have, and to the extent of, tax earnings
and profits at the time of any dividends, dividends paid to a non-U.S. holder
will be subject to withholding of U.S. federal income tax at a 30% rate unless
this rate is reduced by an applicable income tax treaty with the United States.
Dividends that are effectively connected with the holder's conduct of a trade
or business in the United States, or, if a tax treaty applies, attributable to
a permanent establishment or in the case of an individual a "fixed base," in
the United States ("U.S. trade or business income") are generally subject to
U.S. federal income tax at regular rates and are not generally subject to
withholding if the non-U.S. holder files the appropriate form (currently
Internal Revenue Service Form W-8ECI) with the payor. Any U.S. trade or
business income received by a non-U.S. corporation may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate,
or any lower rate that may be applicable under an income tax treaty.
Under current law, dividends paid to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
that country for purposes of the withholding discussed above, and under the
current interpretation of U.S. Treasury regulations, for purposes of
determining the applicability of a tax treaty rate. Under final U.S. Treasury
regulations, effective January 1, 2001, however, a non-U.S. holder of common
stock who wishes to claim the benefit of an applicable treaty rate would be
required to satisfy applicable certification and other requirements, which
would include the requirement that the non-U.S. holder file a Form W-8 BEN
which contains the holder's name and address.
47
<PAGE>
A non-U.S. holder of common stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for a
refund with the U.S. Internal Revenue Service.
Disposition of Common Stock. Except as described below, a non-U.S. holder
generally will not be subject to U.S. federal income tax in respect of gain
recognized on a disposition of common stock provided that:
. the gain is not U.S. trade or business income,
. the non-U.S. holder is not an individual who is present in the United
States for 183 or more days in the taxable year of the disposition and
who meets certain other requirements,
. the non-U.S. holder is not subject to tax pursuant to the provisions of
U.S. tax law applicable to certain United States expatriates, and
. PNY has not been and does not become a "United States real property
holding corporation" for U.S. federal income tax purposes.
We believe that we have not been, are not currently, and are not likely to
become, a United States real property holding corporation. However, we cannot
assure you that we will not be a United States real property corporation when a
non-U.S. holder sells its shares of our common stock. If we were to be treated
as a United States real property holding corporation, a non-U.S. holder who
holds, directly or indirectly, more than 5% of our stock generally will be
subject to U.S. federal income taxation on any gain realized from the sale or
exchange of the stock, unless an exemption is provided under an applicable
treaty.
Federal Estate Taxes. In general, an individual who is a non-U.S. holder for
U.S. estate tax purposes will incur liability for U.S. federal estate tax if
the fair market value of property included in the individual's taxable estate
for U.S. federal estate tax purposes exceeds the statutory threshold amount.
For these purposes, common stock owned, or treated as owned, by an individual
who is a non-U.S. holder at the time of death will be included in the
individual's gross estate for U.S. federal tax purposes, unless an applicable
estate tax treaty provides otherwise.
U.S. Information Reporting Requirements and Backup Withholding Tax. We are
required to report annually to the Internal Revenue Service and to each non-
U.S. holder the amount of dividends paid to, and the tax withheld with respect
to, each non-U.S. holder. These reporting requirements apply regardless of
whether withholding was reduced or eliminated by an applicable tax treaty.
Copies of these information returns may also be made available under the
provisions of a specific treaty or agreement to the tax authorities in the
country in which the non-U.S. holder resides. Under current regulations, the
U.S. backup withholding tax, which generally is a withholding tax imposed at
the rate of 31% on certain payments to persons that fail to satisfy
the information reporting requirements, will generally not apply to dividends
paid on the common stock to a non-U.S. holder at an address outside the United
States. Under final Treasury regulations, effective January 1, 2001, a non-U.S.
holder generally would not be subject to backup withholding at a 31% rate if
the beneficial owner certifies to that owner's foreign status on a valid Form
W-8 BEN.
Non-U.S. holders will not be subject to information reporting or backup
withholding with respect to the payment of proceeds from the disposition of
common stock effected by a foreign office of a foreign broker provided however
that if the broker is a U.S. person or a "U.S. related person," information
reporting but not backup withholding would apply unless the broker receives a
statement from the owner, signed under penalties of perjury, certifying its
foreign status or otherwise establishing an exemption or the broker has
documentary evidence in its files as to the non-U.S. holder's foreign status
and the broker has no actual knowledge to the contrary. For this purpose, a
"U.S. related person" is:
. a "controlled foreign corporation" for U.S. federal income tax
purposes,
48
<PAGE>
. a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year
preceding the payment (or for the part of the period that the broker
has been in existence) is derived from activities that are effectively
connected with the conduct of a U.S. trade or business,
. a foreign partnership that is either engaged in a U.S. trade or
business or in which U.S. persons hold more than 50% of the income or
capital interest, or
. certain U.S. branches of foreign banks or insurance companies.
Non-U.S. holders will be subject to information reporting and backup
withholding at a rate of 31% with respect to the payment of proceeds from the
disposition of common stock effected by to or through the United States office
of a broker, U.S. or foreign, unless the non-U.S. holder certifies as to its
foreign status under penalties of perjury or otherwise establishes an
exemption. Any amounts withheld under the backup withholding rules from a
payment to a non-U.S. holder will be allowed as a credit against the non-U.S.
holder's U.S. federal income tax, and any amounts withheld in excess of the
non-U.S. holder's federal income tax liability will be refunded, provided that
the required information is furnished to the Internal Revenue Service.
49
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, Lehman Brothers Inc.,
Robertson Stephens, Inc., Needham & Company, Inc. and Fidelity Capital Markets,
a division of National Financial Services LLC, are acting as representatives of
each of the underwriters named below. Under the underwriting agreement, each of
the underwriters has agreed to purchase from us the respective number of shares
of common stock shown opposite its name below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Lehman Brothers Inc. ...............................................
Robertson Stephens, Inc. ...........................................
Needham & Company, Inc. ............................................
Fidelity Capital Markets, a division of National Financial Services
LLC................................................................
---------
Total............................................................. 8,900,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement and that, if any of the shares of
common stock are purchased by the underwriters under the underwriting
agreement, all of the shares of common stock that the underwriters have agreed
to purchase under the underwriting agreement must be purchased. The conditions
contained in the underwriting agreement include the requirement that the
representations and warranties we make to the underwriters are true, that there
is no material adverse change in the financial markets and that we deliver to
the underwriters customary closing documents.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares described below. The underwriting fee is the
difference between the public offering price and the amount the underwriters
pay to us to purchase the shares from us. On a per share basis, the
underwriting fee is % of the initial public offering price.
<TABLE>
<CAPTION>
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Per share.............................................. $ $
Total.................................................. $ $
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the initial public
offering price set forth on the cover page of this prospectus, and to dealers,
who may include the underwriters, at this public offering price less a selling
concession not in excess of $ per share. The underwriters may allow, and
the dealers may re-allow, a concession not in excess of $ per share to
brokers and dealers. After the offering, the underwriters may change the
offering price and other selling terms.
We estimate that the total expenses of this offering, including
registration, filing and listing fees, printing fees and legal and accounting
expenses, but excluding underwriting discounts, will be approximately $1.25
million.
We have granted to the underwriters an option to purchase up to 1,335,000
additional shares of common stock, exercisable to cover over-allotments, if
any, at the initial public offering price less the underwriting discounts shown
on the cover page of this prospectus. The underwriters may exercise this option
at any time until thirty days after the date of the underwriting agreement. If
this option is exercised, each underwriter will be committed, so long as the
conditions of the underwriting agreement are satisfied, to purchase a number of
additional shares of common stock proportionate to the underwriter's initial
commitment as indicated in the
50
<PAGE>
table above and we will be obligated, under the over-allotment option, to sell
the shares of common stock to the underwriters. If the over-allotment option is
less than fully exercised, the underwriters may, in their discretion, purchase
the over-allotment shares either solely from us, subject to the aggregate
number of shares offered.
We have agreed that, without the consent of Lehman Brothers Inc., we will
not, directly or indirectly, offer, sell or otherwise dispose of any shares of
common stock or any securities that may be converted into or exchanged for any
shares of common stock for a period of 180 days from the date of this
prospectus. All of our executive officers and directors and substantially all
of our material shareholders and option holders have agreed under lock-up
agreements that, without the prior written consent of Lehman Brothers Inc.,
they will not, directly or indirectly, offer, sell or otherwise dispose of any
shares of common stock or any securities that may be converted into or
exchanged for any shares of common stock for the period ending 180 days after
the date of this prospectus, including through hedging transactions. The 180-
day restriction relating to shares beneficially owned by our non-employee
shareholders will expire as to 33 1/3% of those shares, or 1,644,643 shares in
the aggregate, if the last bid price of our common stock reported on the Nasdaq
National Market during normal trading hours has, at any time after the later of
(1) the 90th day after the date of this prospectus, and (2) the second trading
day after we have made public our earnings results for the year ending December
31, 2000, exceeded twice the initial public offering price per share for 20 of
30 consecutive trading days.
Before the offering, there has been no public market for the shares of our
common stock. The initial public offering price has been negotiated between the
representatives and us. The material factors considered in determining the
initial public offering price of the common stock, in addition to prevailing
market conditions, were:
. our historical performance and capital structure,
. estimates of our business potential and earning prospects,
. an overall assessment of our management, and
. the above factors in relation to market valuation of companies in
related businesses.
Fidelity Capital Markets, a division of National Financial Services LLC, is
acting as an underwriter of this offering and will be facilitating electronic
distribution through the Internet.
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "PNYT."
We have agreed to indemnify the underwriters against liabilities under the
Securities Act and liabilities arising from breaches of the representations and
warranties contained in the underwriting agreement, and to contribute to
payments that the underwriters may be required to make for these liabilities.
Until the distribution of the common stock is completed, rules of the
Commission may limit the ability of the underwriters and selling group members
to bid for and purchase shares of common stock. As an exception these rules,
the representatives are permitted to engage in transactions that stabilize the
price of the common stock. These transactions may consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the common
stock.
The underwriters may purchase and sell shares of common stock in the open
market. These transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Short sales involve
the sale by the underwriters of a greater number of shares than they are
required to purchase in the offering. "Covered" short sales are sales made in
an amount not greater than the underwriters' option to purchase additional
shares from the issuer in the offering. The underwriters may close out any
covered short position by either exercising their option to purchase additional
shares or purchasing shares in the open market.
51
<PAGE>
In determining the source of shares to close out the covered short position,
the underwriters will consider, among other things, the price of shares
available for purchase in the open market as compared to the price at which
they may purchase shares through the over-allotment option. "Naked" short sales
are any sales in excess of the overallotment option. The underwriters must
close out any naked short position by purchasing shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the common stock
in the open market after pricing that could adversely affect investors who
purchase in the offering. Stabilizing transactions consist of various bids for
or purchases of common stock made by the underwriters in the open market before
the completion of the offering.
Similar to other purchase transactions, the underwriters' purchases to cover
the syndicate short sales may have the effect of raising or maintaining the
market price of the common stock or preventing or retarding a decline in the
market price of the common stock. As a result, the price of the common stock
may be higher than the price that might otherwise exist in the open market.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of that underwriter in stabilizing or short covering
transactions.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor
the underwriters make any representation that the representatives will engage
in these transactions or that these transactions, once commenced, will not be
discontinued without notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
page of this prospectus. Accordingly, we urge you to consult a tax advisor with
respect to whether you may be required to pay such taxes or charges, as well as
any other tax consequences that may arise under the laws of the country of
purchase.
The representatives have informed us that they do not intend to confirm the
sales of shares of common stock offered by this prospectus to any accounts over
which they exercise discretionary authority in excess of 5% of shares offered
by them.
At our request, the underwriters have reserved up to 890,000 shares or 10%
of the common stock offered by this prospectus for sale to our directors,
employees, existing stockholders and other persons having an established
business relationship with us at the initial public offering price set forth on
the cover page of this prospectus. These persons must commit to purchase no
later than the close of business on the day following the date of this
prospectus. The number of shares available for sale to the general public will
be reduced to the extent these persons purchase the reserved shares.
52
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Milbank, Tweed, Hadley & McCloy LLP, New York, New York. Legal matters in
connection with this offering will be passed upon for the underwriters by Weil,
Gotshal & Manges LLP, New York, New York. Michael W. Goroff, a partner of
Milbank, Tweed, Hadley & McCloy LLP and one of our directors, beneficially owns
87 shares of Series A preferred stock, convertible into 26,100 shares of our
common stock, and warrants to purchase 195,500 shares of our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as of December 31, 1998 and 1999 and for each of the three
years in the period ended December 31, 1999 as set forth in their report. We
have included our financial statements in this prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report given on their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Commission a registration statement on Form S-1 under
the Securities Act of 1933 with respect to the common stock offered by this
prospectus. This prospectus, which is part of the registration statement, does
not contain all of the information set forth in the registration statement and
its exhibits which has been omitted in accordance with the rules and
regulations of the Commission. For further information with respect to our
Company and the common stock offered by this prospectus, we refer you to the
registration statement and to the exhibits. The exhibits to the registration
statement include the full text of contracts, agreements and other documents
described in this prospectus. You should refer to these exhibits when reading
the descriptions of these documents contained in this prospectus. You should be
aware that when we discuss these contracts or documents in this prospectus we
are assuming that you will read the exhibits to the registration statement for
a more complete understanding of the contract or document.
Following the offering we will become subject to the reporting requirements
of the Securities Exchange Act. In accordance with that law, we will be
required to file reports and other information with the Commission. The
registration statement and exhibits, as well as those reports and other
information when so filed, may be inspected without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for
further information on the operation of the public reference facilities. Copies
of all or any part of the registration statement may be obtained from the
Commission's offices on payment of fees prescribed by the Commission. The
Commission maintains a World Wide Website that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov.
We will furnish our shareholders annual reports and unaudited quarterly
reports for the first three quarters of each fiscal year. Annual reports will
include audited consolidated financial statements prepared in accordance with
generally accepted accounting principles. The consolidated financial statements
included in the annual reports will be examined and reported on, with an
opinion expressed, by our independent auditors.
53
<PAGE>
PNY TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors .......... . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999
and June 30, 2000 (unaudited) .................................... . . . . F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 and for the six-month periods
ended June 30, 1999 and 2000 (unaudited) ....... . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' (Deficiency) Equity
for the years ended December 31, 1997, 1998 and 1999 and for the
six-month period ended June 30, 2000 (unaudited) ..... . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 and for the six-month periods
ended June 30, 2000 and 1999 (unaudited) ......... . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements ...... . . . . . . . . . . . . . F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of PNY Technologies, Inc.
We have audited the accompanying consolidated balance sheets of PNY
Technologies, Inc. as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' (deficiency) equity and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of PNY Technologies, Inc. at December 31, 1998 and 1999 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
MetroPark, New Jersey
March 31, 2000
The foregoing report is in the form that will be signed upon the completion
of the restatement of capital accounts described in note 18 to the consolidated
financial statements.
/s/ Ernst & Young LLP
MetroPark, New Jersey
October 3, 2000
F-2
<PAGE>
PNY TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, Pro Forma
----------------- June 30,
June 30, 2000
1998 1999 2000 (Note 1)
-------- ------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ........ $ 1,675 $ 6,496 $ 5,325 $ 5,325
Accounts receivable, less
allowance for doubtful accounts
of $916, $1,059 and $1,057 at
December 31, 1998 and 1999, and
June 30, 2000, respectively ..... 31,214 28,035 58,036 58,036
Inventories, net ................. 21,817 34,805 63,639 63,639
Refundable income taxes .......... 78 39 53 53
Prepaid expenses and other........ 549 719 2,040 2,040
-------- ------- -------- --------
Total current assets .............. 55,333 70,094 129,093 129,093
Property, plant and equipment, net
.................................. 10,203 9,129 9,733 9,733
Notes due from related party ...... 250 1,318 2,390 2,390
Deferred income taxes ............. -- -- 565 565
Deposits and other ................ 144 602 454 454
-------- ------- -------- --------
$ 65,930 $81,143 $142,235 $142,235
======== ======= ======== ========
Liabilities and stockholders'
(deficiency) equity
Current liabilities:
Current portion of long-term debt
................................. $ 31,914 $24,585 $ 43,405 $ 43,405
Current portion of capital lease
obligations ..................... 749 545 733 733
Accounts payable ................. 21,721 24,671 46,870 46,870
Bank overdrafts .................. 1,564 4,179 9,895 9,895
Accrued expenses ................. 4,503 5,861 8,510 8,510
Customer allowances .............. 4,850 8,326 9,064 9,064
Income taxes payable ............. 125 1,079 1,204 1,204
Other ............................ 304 588 506 18,566
-------- ------- -------- --------
Total current liabilities ......... 65,730 69,834 120,187 138,247
Long-term debt .................... 1,081 741 597 597
Capital lease obligations ......... 1,230 755 874 874
Other long-term liabilities ....... 388 300 264 264
Redeemable preferred stock:
Series B preferred stock,
cumulative, par value $.01 per
share; 15 shares issued and
outstanding (liquidation
preference of $15,000)........... 15,000 15,000 15,000 --
Series C preferred stock,
cumulative, par value $.01 per
share; 3 shares issued and
outstanding (liquidation
preference of $3,060)............ 3,060 3,060 3,060 --
Stockholders' (deficiency) equity:
Convertible Series A preferred
stock cumulative, participating,
par value $.01 per share; issued
and outstanding, 13,841 shares in
1998, 13,658 shares in 1999 and
2000, none on a pro forma basis
(liquidation preference of
$15,759 at June 30, 2000) ....... -- -- -- --
Common stock--par value $.01 per
share; authorized 125,000,000
shares, issued and outstanding
26,050,050 shares in 1998, 1999
and 2000, and 31,181,378 shares
on a pro forma basis ............ 261 261 261 312
Deferred stock compensation ...... -- -- (6,577) (6,577)
Additional paid-in capital ....... 1,644 1,644 11,349 11,298
Treasury stock, at cost--544
shares in 1998 and 727 shares in
1999 and 2000 of Series A
preferred stock, and 218,100
shares of common stock on a pro
forma basis ..................... (622) (683) (683) (683)
Accumulated deficit .............. (22,146) (9,772) (1,355) (1,355)
Accumulated other comprehensive
income (loss) ................... 522 96 (649) (649)
-------- ------- -------- --------
(20,341) (8,454) 2,346 2,346
Notes receivable ................. (218) (93) (93) (93)
-------- ------- -------- --------
Total stockholders' (deficiency)
equity ........................... (20,559) (8,547) 2,253 2,253
-------- ------- -------- --------
$ 65,930 $81,143 $142,235 $142,235
======== ======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
PNY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales .............. $ 270,924 $ 204,576 $ 273,571 $ 122,457 $ 198,556
Cost of sales .......... 250,306 177,577 233,035 105,476 168,727
----------- ----------- ----------- ------------ ------------
Gross profit ........... 20,618 26,999 40,536 16,981 29,829
Operating expenses:
Selling .............. 15,109 13,491 15,082 6,793 9,916
Shipping and
warehouse............ 1,662 1,709 1,538 729 787
General and
administrative ...... 8,948 7,247 7,701 3,692 8,011
----------- ----------- ----------- ------------ ------------
25,719 22,447 24,321 11,214 18,714
----------- ----------- ----------- ------------ ------------
Operating (loss) income
....................... (5,101) 4,552 16,215 5,767 11,115
Other (expense) income:
Interest income ...... 88 33 90 46 78
Interest expense ..... (3,766) (2,476) (2,738) (1,207) (1,691)
Other income, net .... 97 77 171 (40) 299
Foreign exchange
(loss) gain ......... (64) (22) -- 103 596
----------- ----------- ----------- ------------ ------------
(3,645) (2,388) (2,477) (1,098) (718)
----------- ----------- ----------- ------------ ------------
(Loss) income before
income taxes........... (8,746) 2,164 13,738 4,669 10,397
Income taxes ........... 2 120 1,364 475 1,980
----------- ----------- ----------- ------------ ------------
Net (loss) income ...... $ (8,748) $ 2,044 $ 12,374 $ 4,194 $ 8,417
=========== =========== =========== ============ ============
Net (loss) income per
common share:
Basic ................ $ (0.34) $ 0.08 $ 0.48 $ 0.16 $ 0.32
Diluted .............. (0.34) 0.07 0.39 0.13 0.25
Shares used in computing
net (loss) income per
common share:
Basic ................ 25,800,000 25,948,000 26,050,000 26,050,000 26,050,000
Diluted .............. 25,800,000 30,681,000 31,506,000 31,090,000 33,755,000
Unaudited pro forma net
income per common share
(Note 1):
Basic ................ $ 0.40 $ 0.27
Diluted .............. 0.38 0.25
Shares used in computing
unaudited pro forma net
income per common share
(Note 1):
Basic ................ 31,181,000 31,181,000
Diluted .............. 32,540,000 34,012,000
</TABLE>
See accompanying notes.
F-4
<PAGE>
PNY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Convertible
Series A
Preferred Treasury Stock Accumulated
Stock Common Stock Deferred Additional Preferred Series A Other
-------------- ----------------- Stock Paid-In --------------------- Accumulated Comprehensive
Shares Amount Shares Amount Compensation Capital Shares Amount Deficit Income (Loss)
------ ------ ---------- ------ ------------ ---------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997.. 14,385 $ -- 25,800,000 $258 $ -- $ 1,550 -- $ -- $(15,442) $ 338
Contributed
capital......... 96
Repurchase of
preferred
stock........... (544) 544 (622)
Repayments on
notes
receivable......
Net loss........ (8,748)
Currency
transaction
adjustment...... 39
Comprehensive
loss............
------ ----- ---------- ---- ------- ------- -------- ---------- -------- -----
Balance at
December 31,
1997............. 13,841 -- 25,800,000 258 -- 1,646 544 (622) (24,190) 377
Stock issued.... 250,050 3 (2)
Repayments of
notes
receivable......
Net income...... 2,044
Currency
translation
adjustment...... 145
Comprehensive
income..........
------ ----- ---------- ---- ------- ------- -------- ---------- -------- -----
Balance at
December 31,
1998............. 13,841 -- 26,050,050 261 -- 1,644 544 (622) (22,146) 522
Repurchase of
preferred
stock........... (183) 183 (61)
Cancellation of
notes receivable
charged to
compensation
expense.........
Net income...... 12,374
Currency
translation
adjustment...... (426)
Comprehensive
income..........
------ ----- ---------- ---- ------- ------- -------- ---------- -------- -----
Balance at
December 31,
1999............. 13,658 -- 26,050,050 261 -- 1,644 727 (683) (9,772) 96
Compensatory
stock option
grants.......... (6,932) 6,932
Stock-based
compensation.... 355 2,773
Net income...... 8,417
Currency
translation
adjustment...... (745)
Comprehensive
income..........
------ ----- ---------- ---- ------- ------- -------- ---------- -------- -----
Balance at June
30, 2000
(unaudited)...... 13,658 $ -- 26,050,050 $261 $(6,577) $11,349 727 $(683) $ (1,355) $(649)
====== ===== ========== ==== ======= ======= ======== ========== ======== =====
<CAPTION>
Total
Stockholders'
Notes (Deficiency)
Receivable Equity
---------- -------------
<S> <C> <C>
Balance at
January 1, 1997.. $(651) $(13,947)
Contributed
capital......... 96
Repurchase of
preferred
stock........... 390 (232)
Repayments on
notes
receivable...... 5 5
Net loss........ (8,748)
Currency
transaction
adjustment...... 39
-------------
Comprehensive
loss............ (8,709)
---------- -------------
Balance at
December 31,
1997............. (256) (22,787)
Stock issued.... 1
Repayments of
notes
receivable...... 38 38
Net income...... 2,044
Currency
translation
adjustment...... 145
-------------
Comprehensive
income.......... 2,189
---------- -------------
Balance at
December 31,
1998............. (218) (20,559)
Repurchase of
preferred
stock........... 61 --
Cancellation of
notes receivable
charged to
compensation
expense......... 64 64
Net income...... 12,374
Currency
translation
adjustment...... (426)
-------------
Comprehensive
income.......... 11,948
---------- -------------
Balance at
December 31,
1999............. (93) (8,547)
Compensatory
stock option
grants.......... --
Stock-based
compensation.... 3,128
Net income...... 8,417
Currency
translation
adjustment...... (745)
-------------
Comprehensive
income.......... 7,672
---------- -------------
Balance at June
30, 2000
(unaudited)...... $ (93) $ 2,253
========== =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
PNY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------- ------------------
1997 1998 1999 1999 2000
-------- ------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net (loss) income ........... $ (8,748) $ 2,044 $ 12,374 $ 4,194 $ 8,417
Adjustments to reconcile net
(loss) income to net cash
provided by (used in)
operating activities:
Depreciation and
amortization .............. 2,279 2,703 2,776 1,272 1,587
Stock-based compensation ... -- 1 -- -- 3,128
Non-cash compensation....... -- -- 64 -- --
Interest receivable from
stockholder................ -- -- (68) (40) (111)
Deferred taxes ............. -- -- -- -- (565)
Purchases of marketable
securities ................ -- -- (1,424) (1,424) (3,021)
Proceeds from sales of
marketable securities ..... -- -- 1,437 509 3,250
(Gain) loss on sales of
marketable securities...... -- -- (13) 97 (229)
Loss (gain) on disposal of
assets .................... 137 272 74 (1) 59
Changes in operating assets
and liabilities:
Accounts receivable ...... 23,618 1,733 198 (1,491) (31,117)
Inventories .............. 10,157 (4,482) (13,491) (11,746) (30,994)
Refundable income taxes .. 1,895 39 40 53 (14)
Prepaid expenses and other
......................... 778 172 (646) (58) (1,186)
Accounts payable.......... (8,199) (2,248) 5,902 10,842 23,657
Bank overdrafts .......... -- 1,564 2,615 (383) 5,716
Accrued expenses ......... (715) 517 1,590 (69) 3,074
Income taxes payable ..... -- (270) 3,476 948 300
Customer allowances ...... (67) (3,212) 1,023 4,695 738
Other current liabilities
......................... 142 (200) 274 (286) (65)
-------- ------- -------- -------- --------
Net cash provided by (used
in) operating activities.... 21,277 (1,367) 16,201 7,112 (17,376)
Cash flows from investing
activities
Acquisition of property and
equipment .................. (4,177) (3,254) (2,105) (524) (2,667)
Proceeds from disposal of
assets ..................... -- 3,119 6 6 249
Payments of notes receivable
............................ 5 38 -- -- --
Advances to stockholder ..... -- (250) (1,000) (1,000) (1,000)
-------- ------- -------- -------- --------
Net cash used in investing
activities ................. (4,172) (347) (3,099) (1,518) (3,418)
Cash flows from financing
activities
(Repayment) proceeds of loans
payable .................... (17,033) (109) (6,926) (4,675) 19,092
Paydown of capital lease
obligations ................ (219) -- (755) (421) (215)
-------- ------- -------- -------- --------
Net cash (used in) provided
by financing activities..... (17,252) (109) (7,681) (5,096) 18,877
Effect of exchange rate
changes on cash and cash
equivalents ................ 916 (25) (600) 134 746
-------- ------- -------- -------- --------
Net increase (decrease) in
cash and cash equivalents... 769 (1,848) 4,821 632 (1,171)
Cash and cash equivalents at
beginning of period ........ 2,754 3,523 1,675 1,675 6,496
-------- ------- -------- -------- --------
Cash and cash equivalents at
end of period .............. $ 3,523 $ 1,675 $ 6,496 $ 2,307 $ 5,325
======== ======= ======== ======== ========
Supplemental disclosure of
cash flow information
Cash paid for:
Interest ................... $ 3,795 $ 2,477 $ 2,790 $ 1,207 $ 1,691
======== ======= ======== ======== ========
Income taxes ............... $ 35 $ -- $ 377 $ 36 $ 1,964
======== ======= ======== ======== ========
Noncash financing activities
Acquisition of machinery
under capital leases ....... $ -- $ 1,870 $ 346 $ 346 $ 842
======== ======= ======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
PNY Technologies, Inc. (the "Company") and its majority-owned subsidiary P.N.Y.
Technologies Europe, S.A.S. ("PNY Europe"). PNY Europe has two wholly-owned
subsidiaries, PNY Technologies GmbH ("PNY Germany") and PNY Technologies (UK)
Limited ("PNY UK"). PNY Europe, PNY Germany and PNY UK are referred to
collectively as the "Subsidiaries." All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Interim Financial Statements
The accompanying unaudited interim financial statements as of June 30, 2000
and for each of the six-month periods ended June 30, 1999 and 2000 include all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the Company's financial position, results of operations and
cash flows for the periods presented. All such adjustments are of a normal
recurring nature. The results of the Company's operations for the six months
ended June 30, 1999 and 2000 are not necessarily indicative of the results of
operations for a full fiscal year.
Revenue Recognition
Sales are recognized upon shipment of goods to customers. The Company
accrues for rebate arrangements and estimated future returns at the time of
sale.
Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash, accounts
receivable and accounts payable. The carrying amounts of these financial
instruments approximate fair value due to their short-term nature. The carrying
amounts of long-term debt and capital lease obligations are estimated to
approximate their fair values as the stated rates approximate current rates.
Redeemable preferred stock is carried at redemption value.
Cash and Cash Equivalents
Cash and cash equivalents consist of liquid investments with original
maturities of three months or less. Cash and cash equivalents in excess of
Federal Deposit Insurance Corporation's insurance limits were approximately
$1,500, $6,300 and $5,100 at December 31, 1998 and 1999, and June 30, 2000,
respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The Company provides reserves for excess and obsolete inventories in
the period in which excess/obsolescence is determined.
F-7
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
Marketable Securities
Marketable securities consist of marketable equity securities acquired and
generally held for a short period of time to make a profit from short-term
movements in market prices. In accordance with Statement of Financial
Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," management determines the appropriate
classification of marketable securities at the time of purchase and reevaluates
such designations as of each balance sheet date. These investments are
classified as trading securities and carried at fair value, with unrealized
holding gains and losses included in earnings.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation and
amortization is computed using straight-line and accelerated methods over the
estimated useful lives of the related assets as follows:
<TABLE>
<CAPTION>
Number of
Years
---------
<S> <C>
Building and improvements............................................. 20 years
Machinery and equipment .............................................. 3-7 years
Computer equipment and software ...................................... 3-5 years
Furniture and fixtures ............................................... 7 years
</TABLE>
Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the estimated cash flows to be generated by such assets are less
than their book values.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries have been
translated in accordance with SFAS No. 52, "Foreign Currency Translation." The
subsidiaries' assets and liabilities are translated into U.S. Dollars at the
rate of exchange at the balance sheet date. Monthly income and expense items
are translated at the average exchange rate for the month. The resulting
foreign currency translation adjustment is included in stockholders' equity as
accumulated other comprehensive income (loss).
Income Taxes
Deferred income taxes are provided for differences between financial
statement and income tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
The Company periodically reviews the adequacy of the valuation allowance and
recognizes these benefits only as reassessment indicates that it is more likely
than not that the benefits will be realized.
Stock-Based Compensation
As permitted by Financial Accounting Standards Board ("FASB") Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which establishes
a fair value based method of accounting for stock-based compensation plans, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), for recognizing stock-
based compensation expense for financial statement purposes.
F-8
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
Advertising Costs
Advertising costs are expensed as incurred. In 1997, 1998 and 1999
advertising expense was approximately $5,029, $4,934 and $6,437, respectively.
Segment Information
The Company follows the provisions of SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131 replaces the
"industry segment" approach with the "management" approach of reporting segment
information. The management approach designates the internal information used
by management for making operating decisions and assessing performance as the
source of the Company's reportable segments. The Company derives its revenue
solely from the sale of memory products produced in two geographic areas, the
United States and Europe. The Company reports its segment information on the
basis of these two geographic areas.
Comprehensive Income (Loss)
The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting and display of comprehensive
income and its components. Comprehensive income reflects the change in equity
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. For the Company, comprehensive income
represents net income adjusted for foreign currency translation adjustments. In
accordance with SFAS No. 130, the Company has chosen to disclose comprehensive
income (loss) in the consolidated statement of stockholders' (deficiency)
equity.
Earnings (Loss) Per Share
The Company computes net income (loss) per share under the provisions of
SFAS No. 128 "Earnings per Share" and Securities and Exchange Commission
("SEC") Staff Accounting Bulletin ("SAB") No. 98.
Under the provisions of SFAS 128 and SAB 98, basic and diluted net income
(loss) per share is computed by dividing the net income (loss) available to
common stockholders for the period by the weighted-average number of shares of
common stock outstanding during the period. The calculation of diluted net
income (loss) per share excludes potential common shares if the effect is anti-
dilutive. Basic earnings per share is computed by dividing income or loss
applicable to common stockholders by the weighted-average number of shares of
common stock outstanding during the period.
Diluted earnings per share is determined in the same manner as basic
earnings per share except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method
and assuming conversion of the Company's preferred stock.
Unaudited Pro Forma Information
The Company is planning to file a registration statement with the SEC that
would permit the Company to sell shares of common stock in the offering. All
outstanding Series A preferred stock will convert into common stock on a one
hundred-to-one basis upon the closing of this offering. In addition, the
holders of warrants to purchase 1,462,500 common shares at an exercise price of
$4.10 have indicated their intent to exercise, on a cashless basis, these
warrants prior to the consummation of the offering.
F-9
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
The unaudited pro forma balance sheet information at June 30, 2000 and the
unaudited pro forma net income per share reflect the effect of the automatic
conversion of the Series A preferred stock of the Company to common stock, the
cashless exercise of the warrants upon the closing of the offering based upon
the deemed fair value of the common stock at June 30, 2000 and the current
obligation to redeem the Series B and C preferred stock upon consummation of
the offering.
Unaudited Pro Forma Net Income Per Share
Unaudited pro forma basic net income per share is computed using the
weighted-average number of common shares outstanding, including the unaudited
pro forma effects of the automatic conversion of the Company's Series A
Preferred Stock into shares of the Company's common stock and the cashless
exercise of the warrants as if such conversion and such exercise occurred at
the date of original issuance. The resulting unaudited pro forma adjustment is
an increase in the weighted-average shares used to compute basic earnings per
share of 5,131,328 shares for the periods ended December 31, 1999 and June 30,
2000.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires an entity recognize all derivatives as either assets or liabilities at
fair value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 and is therefore effective for the Company
beginning January 1, 2001. Based upon the nature of the financial instruments
and hedging activities in effect as of June 30, 2000, this pronouncement would
not have a material impact on the Company's financial position or results of
operations.
In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in
Financial Statements." The SAB explains how the SEC staff believes revenue
should be recognized for transactions not addressed by existing rules and the
basic criteria that must be met before registrants can record revenue under
existing rules. The Company's accounting policies are in compliance with SAB
101.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation." The Interpretation provides
guidance for certain issues that arose in the application of APB Opinion No.
25, "Accounting for Stock Issued to Employees." In general, the provisions of
this interpretation are effective prospectively after July 1, 2000.
Reclassifications
Certain prior amounts have been reclassified to conform with the current
year's presentation.
2. Accounts Receivable and Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade receivables. Sales of the Company's
products are concentrated among specific customers in the same industry. The
Company generally does not require collateral or other security with regard to
balances due from customers. The Company extends credit to its customers in the
normal course of business and performs periodic credit evaluations of its
customers, maintaining allowances for potential credit losses. The Company
considers concentrations of credit risk in establishing the allowance for
doubtful accounts and believes the recorded amount is adequate.
F-10
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
Certain customers accounted for more than 10% of consolidated net sales as
follows:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------- -----------------
1997 1998 1999 1999 2000
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Customer A....................... 16% 25% 24% 29% 11%
Customer B....................... 12 9 10 11 9
Customer C....................... -- -- 14 5 37
-------- ------- -------- -------- --------
28% 34% 48% 45% 57%
======== ======= ======== ======== ========
</TABLE>
Aggregate accounts receivable from these customers represented 48%, 51% and 54%
of total accounts receivable as of December 31, 1998 and 1999, and June 30,
2000, respectively.
3. Inventories
Inventories consist of:
<TABLE>
<CAPTION>
December 31,
----------------- June 30,
1998 1999 2000
------- -------- -------------
<S> <C> <C> <C> <C>
Raw materials and components.............. $12,729 $21,114 $36,635
Work in process........................... 1,010 3,392 6,707
Finished goods............................ 11,740 12,396 22,478
------- -------- --------
25,479 36,902 65,820
Reserves.................................. (3,662) (2,097) (2,181)
------- -------- --------
$21,817 $34,805 $63,639
======= ======== ========
4. Property, Plant and Equipment
Property, plant and equipment consists of:
<CAPTION>
December 31,
----------------- June 30,
1998 1999 2000
------- -------- --------
<S> <C> <C> <C> <C>
Land...................................... $ 50 $ 43 $ 39
Building and improvements................. 3,632 3,645 3,601
Machinery and equipment................... 8,871 9,819 10,049
Machinery and equipment under capital
lease.................................... 2,630 2,342 2,945
Computer equipment and software........... 1,791 1,971 2,064
Furniture and fixtures.................... 1,383 1,433 1,611
------- -------- --------
18,357 19,253 20,309
Less accumulated depreciation and
amortization............................. (8,154) (10,124) (10,576)
------- -------- --------
$10,203 $ 9,129 $ 9,733
======= ======== ========
</TABLE>
Accumulated depreciation and amortization above includes amortization of
property under capital leases of $650, $1,042 and $1,338 at December 31, 1998
and 1999, and June 30, 2000, respectively.
F-11
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
5. Government Grants
The French Government provided monetary grants totaling approximately $1,100
to PNY Europe based on employment and investment requirements. At December 31,
1998 and 1999, approximately $315 and $227 of the grants, respectively, have
been deferred and will be recognized as income over the useful lives of the
related assets.
6. Long-Term Debt and Capital Leases
The Company has a U.S. bank financing agreement (the "Agreement") originally
dated February 23, 1996, as amended and restated through July 24, 2000. The
maximum amount available under the line, as amended, is $50,000 and the term of
the Agreement extends to February 23, 2002. The agreement specifies interest
rates, at the option of the Company, of prime rate plus 1.00% and eurodollar
rate plus 2.25%. The blended interest rate under this Agreement was 8.85% at
December 31, 1999 and 9.48% at June 30, 2000. At December 31, 1998 and 1999,
and June 30, 2000, $29,384, $23,887 and $41,107, respectively, was outstanding
under the Agreement. Availability under the Agreement is based on defined
percentages of eligible accounts receivable and inventories. Amounts
outstanding under the Agreement are collateralized by accounts receivable and
inventories.
The Agreement contains certain restrictive covenants, the most significant
of which pertain to related party transactions, additional indebtedness,
dividend payments and minimum net worth and interest coverage requirements.
Although the Agreement expires in February 2002, generally accepted accounting
principles require borrowings under the Agreement to be classified as current.
PNY Europe also has available lines of credit as of June 30, 2000 with
foreign banks totaling approximately $7,958, which expire through June 30,
2001. As of December 31, 1999, borrowings outstanding under these lines totaled
$507, with interest rates at the average monthly money market rate plus 1.0%
(4.4% at December 31, 1999). In addition, PNY Europe has various loans payable
to foreign banks, aggregating $932 at December 31, 1999, at interest rates
ranging between 7.5% and 8.7% and maturing between July 1, 2001 and February 2,
2007.
Annual maturities of long-term debt, excluding capital leases at December
31, 1999, are as follows:
<TABLE>
<S> <C>
2000........................................... $24,585
2001........................................... 179
2002........................................... 104
2003........................................... 103
2004........................................... 105
Thereafter..................................... 250
-------
$25,326
=======
</TABLE>
F-12
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
The following is a schedule as of December 31, 1999 of future minimum lease
payments under capital leases together with the present value of net minimum
lease payments:
<TABLE>
<S> <C>
2000............................................ $ 634
2001............................................ 506
2002............................................ 285
2003............................................ 7
------
Total minimum lease payments ................... 1,432
Less amounts representing interest ............. (132)
------
Present value of minimum lease payments......... $1,300
======
</TABLE>
7. Employee Benefit Plan
The Company has a tax deferred savings plan covering substantially all U.S.
employees of the Company under Section 401(k) of the Internal Revenue Code. The
Company matches one-half of the first 6% of employee contributions and makes
additional contributions to the Plan annually at the discretion of the Board of
Directors. Contributions to the tax deferred savings plan were $340, $322 and
$352 for the years ended December 31, 1997, 1998 and 1999, respectively.
8. Redeemable Preferred Stock
Each share of Series B preferred stock has a liquidation preference of
$1,000,000, plus accrued and unpaid dividends, if any. The Series B preferred
stock, which may be redeemed at any time at the Company's option, is required
to be redeemed on August 3, 2005, and upon consummation of a qualified initial
public offering ("IPO") by the Company.
During 1997, a $3,060 note payable to a stockholder was exchanged for three
shares of Series C preferred stock. Each share of Series C preferred stock has
a liquidation preference of $1,020,000, plus accrued and unpaid dividends, if
any. The Series C preferred stock, which may be redeemed at any time at the
Company's option, is required to be redeemed on August 3, 2002, and upon
consummation of a qualified IPO by the Company. The Series B and Series C
preferred stock are owned by the spouse of the principal stockholder. The
Series B and Series C preferred stock are not convertible into common stock and
are generally not entitled to vote on matters presented to stockholders. The
Series B and Series C preferred stock are entitled to cumulative dividends,
payable semi-annually at a rate equal to 7.5% of the liquidation preference,
which dividend rate increases to 8.0% following a public offering by the
Company. The holder of all outstanding shares of Series B and C preferred stock
has irrevocably waived the rights to all dividends through December 31, 2000.
The Series B and Series C preferred stock rank pari passu with the Preferred
Stock Series A.
9. Stockholders' Equity
Capital Stock
During 1997 the Company amended its certificate of incorporation. The
amendment authorized the Company to issue 75,025,000 shares of all classes of
capital stock, 75,000,000 as common. The Company has authorized 25,000 shares
of preferred stock, of which 15,000 shares are designated Series A, 15 shares
are designated Series B, and 3 shares are designated Series C. In October 2000,
the Company amended and restated its capital accounts. See Note 18, "Subsequent
Events".
F-13
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
Each share of common stock is entitled to one vote and each share of
Preferred Stock Series A entitles the stockholder to votes equal to the number
of shares of common stock into which the shares of Series A preferred stock is
convertible. Each share of Series A preferred stock is convertible at the
option of the holder, at any time, into fully paid and nonassessable shares of
common stock, at a three hundred-to-one conversion ratio. Such conversion ratio
is subject to adjustment based on future dilution of common stock. In the event
the Company completes a public offering for at least $15,000 in common stock,
the Series A preferred stock automatically converts into common stock at the
then existing conversion ratio. Each share of Series A preferred stock has a
preference in liquidation equal to the original price per share ($1,153.85 per
share), plus accrued and unpaid dividends, if any. The Series A preferred stock
stockholders are entitled to participate in dividends declared and paid to
common stockholders, on the basis of the number of shares of common stock into
which the Series A preferred stock is convertible. In addition, commencing on
January 1, 2000, the Series A preferred stock stockholders are entitled to
cumulative dividends, payable ratably as and when dividends are paid to the
Series B and C preferred stock stockholders at the rate equal to 7.5% of the
per share liquidation preference of the Series A preferred stock.
Warrants
In connection with the issuance of Series A preferred stock to certain
investors, the Company issued warrants exercisable through August 4, 2002 to
purchase 1,462,500 shares of common stock at a price per share of $4.10, as
adjusted. At time of issuance, the fair value of these warrants was not
material and therefore no allocation of any of the proceeds from the Series A
preferred stock was made to these warrants. The warrants may be exercised, in
whole or in part, at the warrantholder's option: (1) in cash, (2) by surrender
of a number of shares of preferred stock or common stock or a combination
thereof with an aggregate fair market value equal to the exercise price or
(3) a combination of (1) and (2). The warrantholders may also exercise their
warrants, without the payment of any cash or the surrender of shares of
preferred stock or common stock, by surrender of warrants for a number of
shares equal to the product of a fraction, the numerator of which shall be the
excess of the fair market value of a share of common stock on the date
preceding the date of such exercise of the warrant over the then exercise price
per warrant share and the denominator of which shall be the fair market value
of a share of common stock on such date, times the number of warrant shares as
to which the warrant is being exercised.
The holders of the Series A preferred stock and related warrants have
certain registration rights.
Certain members of senior management and the Board of Directors have been
issued warrants to purchase shares of common stock of the Company. The first
such warrant was issued on November 1, 1995 and provides for the purchase of
240,000 shares of common stock at an exercise price of $3.85 per share, is
subject to pro rata vesting over a five year period and is exercisable through
November 1, 2005. This warrant to purchase common stock was exchanged on March
4, 1997 for a new warrant to purchase 150,000 shares of common stock at an
exercise price of $3.85 per share (which price automatically increases by 10%
as of April 22, 2000 and on each April 22 thereafter). The second such warrant
was issued as of April 22, 1996 and provides for the purchase of 360,000 shares
of common stock at an exercise price of $3.85 per share (which price
automatically increases by 10% as of April 22, 2000 and on each April 22
thereafter), is subject to pro rata vesting over a five year period and is
exercisable through April 22, 2006. Under APB 25, the accounting for these
warrants requires recognition of compensation expense for an amount equal to
the difference between the exercise price and fair market value of the
underlying shares. Compensation expense of $2,773 was recorded during the
period ended June 30, 2000 in connection with these warrants. No compensation
expense has been recorded for any period prior to January 1, 2000 since the
fair market value of the underlying shares was less than the
F-14
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
exercise price. During 1998, upon the resignation of a member of senior
management, a portion of the second warrant, representing 216,000 shares of
common stock (100% of non-vested shares under the warrant) was forfeited.
In May 1998 a member of senior management and a member of the Board of
Directors were issued warrants to purchase 949,500 shares of common stock of
the Company. The first such warrant provides for the purchase of 49,500 shares
of common stock at an exercise price of $0.03 per share. Shares under this
warrant were immediately vested. The second such warrant provides for the
purchase of 900,000 shares of common stock at an exercise price of $0.03 per
share and is subject to pro rata vesting over two and one-half years. Both
warrants issued in 1998 are exercisable through May 1, 2008. No compensation
expense has been recorded since the fair market value of the underlying shares
was less than the exercise price at the date of grant. No warrants have been
exercised through June 30, 2000.
Restricted Stock Awards
During 1997 and 1998, the Company granted for no consideration the right to
receive 1,335,300 shares of common stock to certain employees. Compensation
expense recorded in connection with these stock awards was not material. The
shares are subject to certain restrictions on transfer during a defined
restriction period. The restriction period terminates on the earliest to occur
of (1) 180 days following the consummation of an IPO, (2) immediately prior to
a change in control, and (3) ten years after the date of grant. The Company's
principal stockholder has agreed to transfer to the Company the number of
shares of common stock equal to the number of shares of common stock which are
no longer subject to restrictions. The following table summarizes the activity
related to these employee stock awards:
<TABLE>
<CAPTION>
Year Ended December 31, Six Months
-------------------------- Ended June 30,
1997 1998 1999 2000
------- -------- -------- --------------
<S> <C> <C> <C> <C>
Beginning of period............... -- 817,800 760,800 609,300
Shares granted.................. 817,800 517,500 -- --
Shares forfeited................ -- (574,500) (151,500) (6,000)
------- -------- -------- --------------
End of period..................... 817,800 760,800 609,300 603,300
======= ======== ======== ==============
</TABLE>
In January 1998, the Company granted, for no consideration, 900,000 shares
of common stock to a key employee. Compensation expense recorded in connection
with this stock grant was not material. During 1998 such employee resigned from
the Company and, at the time of his departure, 649,950 shares of common stock
(representing 100% of non-vested shares) were forfeited and retired.
Common Stock Reserved
At June 30, 2000, the Company has reserved shares of common stock as
follows:
<TABLE>
<S> <C>
Series A Preferred Stock.................... 4,500,000
Exercise of warrants........................ 2,706,000
Employee stock options...................... 3,000,000
----------
10,206,000
==========
</TABLE>
F-15
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
10. Notes Receivable--Related Parties
Notes receivable from various stockholders are due on demand with interest
at 8.0% per annum and represent loans to purchase Series A preferred stock. The
portion of such notes not repaid are reflected as a component of stockholders'
(deficiency) equity.
Notes due from related party consist of notes receivable and accrued
interest due from the holder of Series B and C preferred stock. Such notes
accrue interest at 7.0% per annum and mature in 2001 and 2003.
11. Management Stock Purchase Plan
In 1996, the Company adopted a Management Stock Purchase Plan (the "1996
Plan") whereby certain officers and key employees (i.e., "management
stockholders") of the Company were provided an opportunity to purchase shares
of the Company's Series A preferred stock at pre-determined prices. The shares
owned by the participants in the 1996 Plan have certain registration rights and
are subject to certain transfer restrictions (including a three year mandatory
holding period) and certain put and call rights which become effective in
connection with the participants' termination of employment. All sales of stock
are subject to the Company's right of first refusal. Should the Company's stock
be publicly traded subsequent to the expiration of the mandatory holding
period, all transfer restrictions and put and call rights cease to be
effective.
In June 1999 the Company repurchased 183 shares of Series A preferred stock
issued under the 1996 Plan. In exchange for the shares, the Company forgave
$125 of outstanding promissory notes. The treasury shares were recorded at
their fair market value of $61, and $64 was charged to general and
administrative expenses.
12. Employee Stock Option Plan
In June 1999 the Company adopted a Stock Option Plan for Directors, Officers
and Employees (the "1999 Plan") which provides for nonqualified stock option
grants. Options granted in June 1999 have an exercise price of $1.00 per share
and vest ratably over three years, provided the participant remains employed by
the Company. In the event of death, disability or retirement of a participant,
all shares vest immediately. At June 30, 2000, options for 2,307,000 shares
were issued and 693,000 shares were available for future grants under the 1999
Plan.
The options generally expire 10 years from the date of grant. However, in
the event a participant's employment is terminated without cause or for good
reason, as defined, the options expire 30 days after termination. If a
participant's employment is terminated as a result of death, disability or
retirement, the options expire 90 days from the date of termination. All shares
issued pursuant to the 1999 plan are subject to transfer restrictions and
certain put and call rights which become effective in connection with the
participant's termination of employment. These rights cease to be effective
when the Company's stock is publicly traded.
During the six months ended June 30, 2000, 576,000 options were granted. In
accordance with APB 25, the Company recorded compensation expense of
approximately $355 for the six months ended June 30, 2000 because the fair
market value of the underlying stock on the date of grant exceeded the exercise
price. Based on the vesting schedules of these grants, the Company will
recognize additional compensation expense of $794 in the second half of 2000,
and $1,735, $1,810, $1,649 and $589 in 2001, 2002, 2003 and 2004, respectively.
In accordance with APB 25, no compensation expense was recognized related to
grants issued prior to January 1, 2000 because the exercise price of the stock
options granted was equal to the fair value of the underlying stock on the date
of grant.
F-16
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
If the Company had recognized compensation expense based on the fair value
of the options at the grant date as prescribed by FAS 123, net income and
earnings per share would have been reduced to the pro forma amounts indicated
in the table below.
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
1999 2000
------------ --------------
<S> <C> <C>
Net income, as reported........................ $12,374 $8,417
Net income, pro forma.......................... 12,200 8,233
Basic earnings per share, as reported.......... $ 0.48 $ 0.32
Basic earnings per share, pro forma............ 0.47 0.32
Diluted earnings per share, as reported........ $ 0.39 $ 0.25
Diluted earnings per share, pro forma.......... 0.39 0.24
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
Expected dividend yield.................................. 0.00% 0.00%
Expected stock price volatility.......................... 0.78 0.78
Risk-free interest rate.................................. 5.90% 5.90%
Expected life of options................................. 4 years 4 years
</TABLE>
Activity under the 1999 Plan is as follows:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1999 June 30, 2000
-------------------- --------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of period -- $-- 1,751,250 $1.00
Granted ....................... 1,781,250 1.00 576,000 2.00
Exercised ..................... -- -- -- --
Cancelled ..................... (30,000) 1.00 (20,250) 1.00
--------- ---------
Outstanding, end of period .... 1,751,250 1.00 2,307,000 1.25
========= =========
Exercisable, end of period .... -- -- 577,000 1.00
========= =========
</TABLE>
At June 30, 2000, for each of the following classes of options as determined
by exercise price, the information regarding weighted-average exercise prices
and weighted-average remaining contractual lives of each said class is as
follows:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------------
Weighted-Average
Option Number Remaining Options
Price of Options Contractual Life Exercisable
------ ---------- ---------------- -----------
<S> <C> <C> <C>
$1.00 1,821,000 9.0 years 577,000
1.33 321,000 9.8 years --
3.85 165,000 10.0 years --
</TABLE>
F-17
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
13. Income Taxes
Income before income taxes consists of:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------- ------------------
1997 1998 1999 1999 2000
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
U.S....................... $(9,921) $ 465 $ 11,382 $ 3,980 $ 5,583
Foreign .................. 1,175 1,699 2,356 689 4,814
-------- ------- -------- -------- --------
$(8,746) $ 2,164 $ 13,738 $ 4,669 $ 10,397
======== ======= ======== ======== ========
Income taxes consist of:
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------- ------------------
1997 1998 1999 1999 2000
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Current:
Federal ................ $ -- $ -- $ 331 $ 164 $ 250
State .................. 2 -- 94 45 375
Foreign ................ -- 120 939 266 1,920
Deferred taxes:
Federal ................ -- -- -- -- (226)
State .................. -- -- -- -- (339)
-------- ------- -------- -------- --------
$ 2 $ 120 $ 1,364 $ 475 $ 1,980
======== ======= ======== ======== ========
Income taxes reconciled to the amount computed at federal statutory tax
rates are as follows:
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------- ------------------
1997 1998 1999 1999 2000
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Computed expected tax .... $ (3,373) $ 736 $ 4,812 $ 1,631 $ 3,535
Increase (decrease):
State income taxes, net
of federal benefit ..... (588) 20 475 161 248
Foreign tax rate
differential ........... -- -- -- -- 289
Alternative minimum tax
........................ -- -- -- -- 250
Utilization of foreign
net operating losses.... -- (458) -- -- --
Valuation allowance ..... 3,936 (120) (5,243) (1,777) (2,440)
Reduction of fully
reserved deferred
tax assets.............. -- -- 1,343 460 --
Other ................... 27 (58) (23) -- 98
-------- ------- -------- -------- --------
$ 2 $ 120 $ 1,364 $ 475 $ 1,980
======== ======= ======== ======== ========
</TABLE>
F-18
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
December 31, June
--------------------------- 30,
1997 1998 1999 2000
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ...... $10,119 $ 11,868 $ 5,263 $ 2,909
Inventory reserves .................... 1,405 1,439 798 816
Price protection and sales allowances
...................................... 3,027 1,206 2,286 1,832
Allowance for doubtful accounts . ..... 347 230 404 406
Asset impairment reserve .............. 281 -- -- --
Stock-based compensation .............. -- -- -- 1,248
Tax credits ........................... -- -- 439 439
Inventory capitalization .............. 20 20 54 108
Other ................................. 114 430 706 317
-------- -------- ------- -------
Total deferred tax assets ............... 15,313 15,193 9,950 8,075
Valuation allowance ..................... (15,313) (15,193) (9,950) (7,510)
-------- -------- ------- -------
-- -- -- 565
Total deferred tax liabilities .......... -- -- -- --
-------- -------- ------- -------
Net deferred tax assets ................. $ -- $ -- $ -- $ 565
======== ======== ======= =======
</TABLE>
At December 31, 1999, the Company had U.S. federal net operating loss
carryforwards of approximately $14,000, which expire between 2012 and 2018.
14. Commitments and Contingencies
Leases
The Company has entered into operating leases for equipment, manufacturing
and office facilities which expire on various dates through March 2007. The
future minimum annual rental commitments under non-cancelable operating
facilities leases, net of rental income at December 31, 1999, are as follows:
<TABLE>
<S> <C>
2000........................................... $ 1,654
2001........................................... 1,652
2002........................................... 1,707
2003........................................... 1,608
2004........................................... 1,293
Thereafter..................................... 3,650
-------
$11,564
=======
</TABLE>
Rent expense, net of rental income, for the years ended December 31, 1997, 1998
and 1999 was approximately $2,800, $3,200 and $3,536, respectively.
In February 1999, the Company entered into a non-cancelable sublease
agreement for office facilities. Rental income for the year ended December 31,
1999 was $87. The lease expires February 28, 2005 and provides for monthly
rental payments of $27. The lease may be extended through February 28, 2007 at
the lessee's option at terms comparable to the initial term of the lease.
F-19
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
Legal Matters
In the ordinary course of conducting business, the Company becomes involved
in lawsuits, administrative and other proceedings. Some of these proceedings
may result in fines, penalties or judgments being assessed against the Company
which, from time to time, may have an impact on its operations and financial
position. The Company does not believe these pending proceedings, individually,
or in the aggregate, would have a material adverse effect on its operations or
financial position.
15. Segment Information
The Company is a manufacturer of standard and custom memory products which
it sells to OEMs, retailers and other memory product resellers. The Company's
memory modules are used in computers, workstations, printers and other
electronic devices.
The Company has two reportable segments: U.S. operations and European
operations. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
The following is a summary of financial information concerning each of the
Company's reportable segments:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------
U.S. Europe Eliminations Consolidated
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales:
Sales to external
customers................ $226,605 $44,319 $ -- $270,924
Intersegment sales........ 4,311 1,848 (6,159) --
-------- ------- ------- --------
230,916 46,167 (6,159) 270,924
Cost of sales............... 217,282 39,183 (6,159) 250,306
-------- ------- ------- --------
Gross profit................ 13,634 6,984 -- 20,618
Operating expenses.......... 20,515 5,204 -- 25,719
-------- ------- ------- --------
Operating (loss) income..... (6,881) 1,780 -- (5,101)
Other income (expense):
Interest income........... 58 30 -- 88
Interest expense.......... (2,831) (935) -- (3,766)
Other income, net......... -- 97 -- 97
Foreign exchange loss..... (267) 203 -- (64)
-------- ------- ------- --------
(Loss) income before income
taxes...................... (9,921) 1,175 -- (8,746)
Income taxes................ 2 -- -- 2
-------- ------- ------- --------
Net (loss) income........... $ (9,923) $ 1,175 $ -- $ (8,748)
======== ======= ======= ========
Depreciation and
amortization............... $ 1,414 $ 865 $ -- $ 2,279
======== ======= ======= ========
Acquisition of property and
equipment.................. $ 3,242 $ 935 $ -- $ 4,177
======== ======= ======= ========
</TABLE>
F-20
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------
U.S. Europe Eliminations Consolidated
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales:
Sales to external
customers................ $167,653 $36,923 $ -- $204,576
Intersegment sales........ 2,588 723 (3,311) --
-------- ------- ------- --------
170,241 37,646 (3,311) 204,576
Cost of sales............... 150,447 30,441 (3,311) 177,577
-------- ------- ------- --------
Gross profit................ 19,794 7,205 -- 26,999
Operating expenses.......... 17,509 4,938 -- 22,447
-------- ------- ------- --------
Operating income............ 2,285 2,267 -- 4,552
Other income (expense):
Interest income........... 33 -- -- 33
Interest expense.......... (1,863) (613) -- (2,476)
Other income, net......... 10 67 -- 77
Foreign exchange loss..... -- (22) -- (22)
-------- ------- ------- --------
Income before income taxes.. 465 1,699 -- 2,164
Income taxes................ -- 120 -- 120
-------- ------- ------- --------
Net income.................. $ 465 $ 1,579 $ -- $ 2,044
======== ======= ======= ========
Assets...................... $ 54,917 $13,977 $(2,964) $ 65,930
======== ======= ======= ========
Depreciation and
amortization............... $ 1,233 $ 1,470 $ -- $ 2,703
======== ======= ======= ========
Acquisition of property and
equipment.................. $ 1,320 $ 1,934 $ -- $ 3,254
======== ======= ======= ========
</TABLE>
F-21
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------
U.S. Europe Eliminations Consolidated
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales:
Sales to external
customers................ $231,191 $42,380 $ -- $273,571
Intersegment sales........ 4,246 7,523 (11,769) --
-------- ------- -------- --------
235,437 49,903 (11,769) 273,571
Cost sales.................. 202,345 42,459 (11,769) 233,035
-------- ------- -------- --------
Gross profit................ 33,092 7,444 -- 40,536
Operating expenses.......... 19,454 4,867 -- 24,321
-------- ------- -------- --------
Operating income............ 13,638 2,577 -- 16,215
Other income (expense):
Interest income........... 90 -- -- 90
Interest expense.......... (2,448) (290) -- (2,738)
Other income, net......... 102 69 -- 171
-------- ------- -------- --------
Income before income taxes.. 11,382 2,356 -- 13,738
Income taxes................ 425 939 -- 1,364
-------- ------- -------- --------
Net income.................. $ 10,957 $ 1,417 $ -- $ 12,374
======== ======= ======== ========
Assets...................... $ 70,775 $16,507 $ (6,139) $ 81,143
======== ======= ======== ========
Depreciation and
amortization............... $ 1,367 $ 1,409 $ -- $ 2,776
======== ======= ======== ========
Acquisition of property and
equipment.................. $ 1,560 $ 545 $ -- $ 2,105
======== ======= ======== ========
</TABLE>
F-22
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------------------
U.S. Europe Eliminations Consolidated
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales:
Sales to external
customers................ $102,719 $19,738 $ -- $122,457
Intersegment sales........ 737 914 (1,651) --
-------- ------- ------- --------
103,456 20,652 (1,651) 122,457
Cost of sales............... 89,428 17,699 (1,651) 105,476
-------- ------- ------- --------
Gross profit................ 14,028 2,953 -- 16,981
Operating expenses.......... 8,954 2,260 -- 11,214
-------- ------- ------- --------
Operating income............ 5,074 693 -- 5,767
Other income (expense):
Interest income........... 46 -- -- 46
Interest expense.......... (1,064) (143) -- (1,207)
Other (expense) income,
net...................... (76) 36 -- (40)
Foreign exchange gain..... -- 103 -- 103
-------- ------- ------- --------
Income before income taxes.. 3,980 689 -- 4,669
Income taxes................ 209 266 -- 475
-------- ------- ------- --------
Net income.................. $ 3,771 $ 423 $ -- $ 4,194
======== ======= ======= ========
Depreciation and
amortization............... $ 648 $ 624 $ -- $ 1,272
======== ======= ======= ========
Acquisition of property and
equipment.................. $ 263 $ 261 $ -- $ 524
======== ======= ======= ========
</TABLE>
F-23
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
<TABLE>
<CAPTION>
June 30, 2000
--------------------------------------------
U.S. Europe Eliminations Consolidated
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales:
Sales to external
customers................ $175,379 $23,177 $ -- $198,556
Intersegment sales........ 438 23,580 (24,018) --
-------- ------- -------- --------
175,817 46,757 (24,018) 198,556
Cost of sales............... 153,010 39,735 (24,018) 168,727
-------- ------- -------- --------
Gross profit................ 22,807 7,022 -- 29,829
Operating expenses.......... 16,025 2,689 -- 18,714
-------- ------- -------- --------
Operating income............ 6,782 4,333 -- 11,115
Other income (expense):
Interest income........... 78 -- -- 78
Interest expense.......... (1,545) (146) -- (1,691)
Other income, net......... 268 31 -- 299
Foreign exchange gain..... -- 596 -- 596
-------- ------- -------- --------
Income before income taxes.. 5,583 4,814 -- 10,397
Income taxes................ 60 1,920 -- 1,980
-------- ------- -------- --------
Net income.................. $ 5,523 $ 2,894 $ -- $ 8,417
======== ======= ======== ========
Assets...................... $121,950 $28,213 $ (7,928) $142,235
======== ======= ======== ========
Depreciation and
amortization............... $ 793 $ 794 $ -- $ 1,587
======== ======= ======== ========
Stock-based compensation.... $ 3,128 $ -- $ -- $ 3,128
======== ======= ======== ========
Acquisition of property and
equipment.................. $ 583 $ 2,084 $ -- $ 2,667
======== ======= ======== ========
</TABLE>
For the six-month period ended June 30, 2000 and for the years ended
December 31, 1997, 1998 and 1999, international sales comprised 13%, 21%, 20%
and 17% of the Company's revenues, respectively. During these periods, no
single foreign country accounted for more than 10.0% of total revenues. Foreign
sales are shipped directly from the Company's foreign subsidiaries, while
export sales are shipped from the United States to the Company's foreign
customers. Financial information regarding the Company's international revenues
is shown in the following table:
<TABLE>
<CAPTION>
Year Ended December 31, Six Month
----------------------------------- Period Ended
1997 1998 1999 June 30, 2000
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Export................... $ 11,964 $ 4,878 $ 4,886 $ 1,822
Foreign.................. 44,319 36,923 42,380 23,176
----------- ----------- ----------- -------------
$ 56,283 $ 41,801 $ 47,266 $ 24,998
=========== =========== =========== =============
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ ----------
<S> <C> <C>
Property, plant and equipment, net:
United States................................... $ 5,428 $ 5,218
Europe, principally France...................... 3,701 4,515
---------- ----------
$ 9,129 $ 9,733
========== ==========
</TABLE>
F-24
<PAGE>
PNY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
16. Diluted Earnings Per Share
The reconciliation of shares used to calculate basic and diluted earnings
per common share consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------------- ---------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Weighted-average common
shares outstanding used
to calculate basic
earnings per share .... 25,800,000 25,948,000 26,050,000 26,050,000 26,050,000
Conversion of Series A
preferred stock ....... -- 4,151,000 4,134,000 4,153,000 4,097,000
Net effect of dilutive
warrants and employee
stock options based on
treasury stock method
using average fair val-
ue:
Warrants ............. -- -- 932,000 887,000 1,875,000
Employee Stock
Options.............. -- -- 390,000 -- 1,733,000
Restricted stock ..... -- 582,000 -- -- --
---------- ---------- ---------- ---------- ----------
Weighted average common
shares and common share
equivalents used to
calculate diluted
earnings per common
share ................. 25,800,000 30,681,000 31,506,000 31,090,000 33,755,000
========== ========== ========== ========== ==========
</TABLE>
In 1997, diluted net loss per share equals basic net loss per share because
the impact of the assumed conversion of Series A preferred stock of 4,206,000
weighted-average shares is anti-dilutive.
During the years 1997, 1998 and 1999, warrants to purchase 2,062,500,
2,706,000 and 1,756,500 common shares at weighted average prices of $4.04, 2.65
and 4.06, respectively, were not included in the computation of diluted
earnings per common share because the exercise price of the warrants was
greater than the fair value of the common shares and, therefore, the effect
would be anti-dilutive.
17. Supplemental Cash Flow Information
The Company purchased inventory from vendors valued at approximately $2,100,
$12,900 and $11,400 during 1997, 1998 and 1999, respectively, in exchange for
reductions in trade accounts receivable arising from sales transactions to
those same vendors.
18. Subsequent Events (Unaudited)
In July 2000, the Company purchased all equipment and inventories relating
to the memory module manufacturing operations of a semiconductor manufacturer
located in Ireland for approximately $4.0 million. No material amount of
goodwill is anticipated. The purchase price is subject to adjustment in the
event the seller fails to meet specified monthly minimum throughput targets.
The Company issued 330,000 options through August 15, 2000 under the 1999
Plan with an exercise price of $3.84 and a four year vesting schedule. Since
the exercise price is below the fair market value of the Company's common
stock, the Company will recognize additional compensation expense in the
aggregate of $3,352 over the vesting periods of the options.
In October 2000, the Company's stockholders approved a 3-for-1 common stock
split and increased the authorized shares of common stock to 125,000,000 shares
and preferred stock to 10,000,000 shares.
F-25
<PAGE>
Depicted in the center is a globe surrounded by pictures of our four
manufacturing facilities located in Parsippany, New Jersey, Bordeaux, France,
Santa Clara, California, and Ballivor, Ireland. Depicted in the center of the
globe is a picture of a person seated at a computer with the caption "World
Wide Support" underneath him.
<PAGE>
8,900,000 Shares
Common Stock
----------
PROSPECTUS
, 2000
----------
Lehman Brothers
Robertson Stephens
Needham & Company, Inc.
Fidelity Capital Markets
a division of National Financial Services LLC
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13: Other Expenses of Issuance and Distribution
The following table sets forth the expenses (other than the underwriting
discount and commissions) expected to be incurred by the Registrant while
issuing and distributing the securities registered pursuant to this
Registration Statement. All amounts other than the SEC registration fee, NASD
filing fee and Nasdaq National Market listing fee are estimates.
<TABLE>
<S> <C>
Registration fee............................................... $ 40,535
NASD filing fee................................................ 15,853
Nasdaq National Market listing fee............................. 90,000
Legal fees and expenses........................................ 800,000
Accounting fees and expenses................................... 450,000
Printing and engraving......................................... 150,000
Blue sky fees and expenses (including legal fees).............. 25,000
Transfer agent fees............................................ 15,000
Miscellaneous.................................................. 13,612
----------
Total........................................................ $1,600,000
==========
</TABLE>
--------
* To be provided by Amendment.
Item 14: Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits indemnification
of the Registrant's officers and directors under certain conditions and subject
to certain limitations. Section 145 of the Delaware General Corporation Law
also provides that a corporation has the power to purchase and maintain
insurance on behalf of its officers and directors against any liability
asserted against such person and incurred by him or her in such capacity, or
arising out of his or her status as such, whether or not the corporation would
have the power to indemnify him or her against such liability under the
provisions of Section 145 of the Delaware General Corporation Law.
Article V of the Registrant's Restated Bylaws provides that the Registrant
shall indemnify its directors and executive officers to the fullest extent
authorized by the Delaware General Corporation Law. The rights to indemnity
thereunder continue as to a person who has ceased to be a director, officer,
employee or agent and inure to the benefit of the heirs, executors and
administrators of the person. In addition, expenses incurred by a director or
executive officer in defending any civil, criminal, administrative or
investigative action, suit or proceeding by reason of the fact that he or she
is or was a director or officer of the Registrant (or was serving at the
Registrant's request as a director or officer of another corporation) shall be
paid by the Registrant in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such director
or officer to repay such amount if it shall ultimately be determined that he or
she is not entitled to be indemnified by the Registrant as authorized by the
relevant section of the Delaware General Corporation Law.
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
Article IX of the Registrant's Amended and Restated Certificate of
Incorporation provides that a director of the Registrant shall not be
personally liable for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not
in good faith or acts or omissions that involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived any
improper personal benefit.
II-1
<PAGE>
The Registrant has purchased directors' and officers' liability insurance.
The underwriting agreement (Exhibit 1.1 hereto) contains provisions by which
the underwriters have agreed to indemnify the Registrant, each person, if any,
who controls the Registrant within the meaning of Section 15 of the Securities
Act, each director of the Registrant, and each officer of the Registrant who
signs this registration statement, with respect to information furnished in
writing by or on behalf of the underwriters for use in the registration
statement.
Item 15: Recent Sales of Unregistered Securities
The following is a summary of transactions, adjusted to reflect a 3-1 stock
split effected in October 2000, by the Registrant during the past three years
involving sales and issuances of securities that were not registered under the
Securities Act of 1933.
In January 1998, the Registrant granted, for no consideration, 900,000
shares of common stock to a key employee. 649,950 shares of common stock
(representing 100% of non-vested shares) were forfeited and retired when this
employee resigned from the Registrant.
In May 1998, the Registrant issued warrants to purchase 949,500 shares of
its common stock, at an exercise price of $0.03 per share to two of our
directors. Neither of these warrants have been exercised.
From June 30, 1999 to December 31, 1999, the Registrant granted options to
purchase an aggregate of 1,781,250 shares of common stock to its employees at a
weighted average exercise price of $1.00 per share. None of these shares have
been exercised.
From January 1, 2000 to June 30, 2000, the Registrant granted options to
purchase an aggregate of 576,000 shares of common stock to its employees at a
weighted average price of $2.00 per share. None of these shares have been
exercised.
The sale and issuance of securities in the above transactions were deemed to
be exempt from registration under the Securities Act of 1933 by virtue of
Section 4(2) or Rule 701 thereof, as transactions by an issuer not involving a
public offering under the Securities Act of 1933. Appropriate legends have been
or will be affixed to the certificates issued in such transactions.
Prior to the closing of this offering, the Registrant intends to issue
unregistered securities as follows:
(1) The Registrant intends to consummate a 3-1 stock split. The issuance
will be exempt from registration by virtue of Section 3(a)(9) of the
Securities Act of 1933.
(2) The Registrant intends to issue and grant options to purchase an
aggregate of approximately 608,600 shares of common stock to employees
under its employee stock option plan. The issuance of these securities will
be deemed to be exempt from registration by virtue of Rule 701 under the
Securities Act of 1933.
II-2
<PAGE>
Item 16: Exhibits and Financial Statements; Schedules
(a) Exhibit Index
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Articles of Incorporation of the Registrant, as
currently in effect*
3.2 Amended and Restated Bylaws of the Registrant, as currently in effect*
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Ar-
ticles of Incorporation and Amended and Restated Bylaws for the Regis-
trant defining the rights of holders of Common Stock of the Registrant*
4.2 Specimen Stock Certificate
5.1 Opinion of Milbank, Tweed, Hadley & McCloy LLP with respect to the va-
lidity of the securities offered.
8.1 Tax Opinion of Milbank, Tweed, Hadley & McCloy LLP
10.1 Amended and Restated Loan Agreement, dated February 23, 1996, among
Corestates Bank, N.A. Congress Financial Corporation and the Registrant
10.2 Security Agreement, dated January 26, 1996, by the Registrant in favor
of Congress Financial Corporation.
10.3 Registration Rights Agreement, dated August 4, 1995, among the Regis-
trant, GS Capital Partners II, L.P. and Affiliated Parties and Gadi Co-
hen.
10.4 Amended Employee Stock Option Plan*
21.1 List of subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Counsel (included in Exhibits 5.1 and 8.1)
23.3 Consent of Gartner Group, Inc.
23.4 Consent of Semiconductor Industry Association
23.5 Consent of PC Data, Inc.
24.1 Power of Attorney (see page II-7)+
</TABLE>
--------
+ Previously filed.
* To be filed by amendment.
(b) Financial Statement Schedules:
Schedule II--Consolidated Valuation and Qualifying Accounts and Reserves
Schedules other than those referred to above have been omitted because they
are not applicable, are not required or because the information is included
elsewhere in the Consolidated Financial Statements or the notes thereto.
Item 17: Undertakings
The following undertakings correspond to the specified paragraph designation
from Item 512 of Regulation S-K.
(a) Equity Offering of Nonreporting Registrant. The undersigned
Registrant hereby undertakes to provide to the underwriter at the closing
specified in the underwriting agreements certificates in such denominations
and registered in such names as required by the underwriters to permit
prompt delivery to each purchaser.
(b) Acceleration of Effectiveness. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
II-3
<PAGE>
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) Rule 430A. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of
PNY Technologies, Inc.
We have audited the consolidated financial statements of PNY Technologies,
Inc. as of December 31, 1998 and 1999, and for each of the three years in the
period ended December 31, 1999, and have issued our report dated March 31, 2000
(included elsewhere in this Registration Statement). Our audits also included
the financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
MetroPark, New Jersey
March 31, 2000
II-5
<PAGE>
PNY TECHNOLOGIES, INC.
SCHEDULE II--CONSOLIDATED VALUATION AND
QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 1997, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
Accounts Inventory
Receivable Valuation
Allowance Allowance
---------- ---------
<S> <C> <C>
Balance, December 31, 1996................................. $ 1,024 $ 1,076
Charged to operations...................................... 1,241 2,359
Write-offs................................................. (1,349) (113)
------- -------
Balance, December 31, 1997................................. 916 3,322
Charged to operations...................................... 441 550
Write-offs................................................. (298) (210)
------- -------
Balance, December 31, 1998................................. 1,059 3,662
Charged to operations...................................... 20 555
Write-offs................................................. (22) (2,120)
------- -------
Balance, December 31, 1999................................. $ 1,057 $ 2,097
======= =======
</TABLE>
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Parsippany and State of
New Jersey on the 5th day of October, 2000.
<TABLE>
<S> <C>
PNY TECHNOLOGIES, INC.
/s/ Mark J. Ciano
By: _______________________________________
Mark J. Ciano
Vice President of Finance and
Administrative Services
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated as of the 5th day of October, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<C> <S>
* Chairman of the Board, Director,
___________________________________________ President and Chief Executive Officer
Gadi Cohen (Principal Executive Officer)
/s/ Mark J. Ciano Vice President of Finance and
___________________________________________ Administrative Services (Principal
Mark J. Ciano Financial Officer and Principal
Accounting Officer)
* Director
___________________________________________
Jean Pierre Pucheu
* Director
___________________________________________
Michael Goroff
* Director
___________________________________________
Igal Lichtman
* Director
___________________________________________
Joseph DiSabato
</TABLE>
/s/ Mark J. Ciano
*By: ___________________________
Mark J. Ciano
Attorney-in-Fact
II-7
