<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED September 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE PERIOD From ___________ to ___________.
Commission file number 005-59473
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PEMSTAR INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1771227
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3535 TECHNOLOGY DRIVE N.W.
ROCHESTER, MN 55901
(Address of principal executive officers)
(Zip Code)
(507) 288-6720
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date.
Common Stock, $0.01 Par Value--28,146,580 shares as of November 6, 2000.
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Index
Pemstar Inc.
Part I. Condensed Consolidated Financial Information Page
Item 1. Financial Statements
Condensed consolidated balance sheets - September 30, 2000
(unaudited) and March 31, 2000.................................. 3
Condensed consolidated statements of income (unaudited)-
Three months ended September 30, 2000 and 1999 and six
months ended September 30, 2000 and 1999........................ 4
Condensed consolidated statements of cash flows (unaudited)-
Six months ended September 30, 2000 and 1999.................... 5
Notes to condensed consolidated financial statements
(unaudited)- September 30, 2000................................. 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................9-11
Item 3. Quantitative and Qualitative Disclosure of Market Risk............. 11
Part II. Other Information
Item 1. Legal Proceedings.................................................. 12
Item 2. Changes in Securities and Use of Proceeds.......................... 12
Item 3. Defaults upon Senior Securities.................................... 12
Item 4. Submission of Matters to a Vote of Security Holders................ 12
Item 5. Other Information.................................................. 12
Item 6. Exhibits and Reports on Form 8-K................................... 12
Signatures.................................................................. 13
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Part I. Financial Information
Pemstar Inc.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
--------- ---------
(Unaudited) (Note A)
<S> <C> <C>
Assets
Current assets
Cash and equivalents $ 8,773 $ 2,727
Accounts receivable, net 90,520 60,061
Inventories - Note B 109,759 64,437
Other current assets 11,682 6,218
--------- ---------
Total current assets 220,734 133,443
Property, plant and equipment 81,223 48,954
Less accumulated depreciation (18,157) (14,021)
--------- ---------
63,066 34,933
Other assets 31,051 22,075
--------- ---------
Total assets $ 314,851 $ 190,451
========= =========
Liabilities and shareholders' equity
Current liabilities
Bank overdraft $ 12,464 $ 10,213
Accounts payable 81,586 47,138
Current maturities of long-term debt 6,578 12,930
Current maturities of capitalized lease obligations 3,479 2,299
Other current liabilities 14,014 11,214
--------- ---------
Total current liabilities 118,121 83,794
Long-term debt 41,916 51,114
Capital lease obligations 8,193 4,067
Other non-current liabilities 2,233 2,254
Redeemable preferred stock 26,549
Shareholders' equity
Common stock, par value $0.01 per share--authorized
150,000 shares, issued and outstanding 28,030 at
September 30, 2000 and 13,819 at March 31, 2000 280 138
Additional paid-in capital 135,869 15,395
Accumulated other comprehensive loss (2,018) (772)
Retained earnings 12,425 11,170
Loans to shareholders (2,168) (3,258)
--------- ---------
144,388 22,673
--------- ---------
Total liabilities and shareholders' equity $ 314,851 $ 190,451
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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Pemstar Inc.
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 143,902 $ 97,560 $ 266,506 $ 166,158
Costs of goods sold 132,535 90,157 245,231 152,586
--------- --------- --------- ---------
Gross profit 11,367 7,403 21,275 13,572
Selling, general and administrative expenses 8,062 5,075 15,582 9,011
Amortization 503 271 846 476
--------- --------- --------- ---------
Operating income 2,802 2,057 4,847 4,085
Other (income) expense--net (275) 542 (39) 576
Interest expense 1,622 776 3,485 1,117
--------- --------- --------- ---------
Income before income taxes 1,455 739 1,401 2,392
Income tax expense 349 351 146 1,089
--------- --------- --------- ---------
Net income $ 1,106 $ 388 $ 1,255 $ 1,303
========= ========= ========= =========
Net income per common share:
Basic $ 0.05 $ 0.04 $ 0.07 $ 0.12
Diluted 0.04 0.02 0.05 0.08
Shares used in computing net income per common share:
Basic 21,813 11,311 17,874 11,300
Diluted 25,932 17,560 23,207 16,423
</TABLE>
See notes to condensed consolidated financial statements.
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Pemstar Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,255 $ 1,303
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation 5,601 3,290
Amortization 846 449
Deferred revenue (133) (372)
Other (225) 233
Change in operating assets and liabilities:
Accounts receivable (25,456) (10,880)
Inventories (39,391) (10,707)
Prepaid expenses and other (5,870) (749)
Accounts payable 33,228 17,376
Accrued expenses and other 627 (911)
-------- --------
Net cash used in operating activities (29,518) (968)
Cash flows from investing activities:
Decrease in restricted cash 345 231
Business acquisitions, net of cash acquired (20,159) (39,385)
Purchases of property and equipment (24,795) (2,023)
Other 146 49
-------- --------
Net cash used in investing activities (44,463) (41,128)
Cash flows from financing activities:
Bank overdrafts 2,261 3,372
Proceeds from stock sale/exercise of stock
options 95,157 26
Proceeds from private placement offering 18,000
Principal payments on long-term borrowings (71,493) (1,724)
Proceeds from long-term borrowings 54,424 24,599
Increase of intangibles (463) (750)
Other (34) (31)
-------- --------
Net cash provided by financing
activities 79,852 43,492
Effect of exchange rate changes on cash 175 7
-------- --------
Net increase in cash and cash equivalents 6,046 1,403
Cash and cash equivalents:
Beginning of period 2,727 827
-------- --------
End of period $ 8,773 $ 2,230
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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Pemstar Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2000
(In thousands, except per share data)
Note A--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended September 30,
2000, are not necessarily indicative of the results that may be expected for the
year ending March 31, 2001.
The balance sheet at March 31, 2000 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Pemstar Inc. Registration Statement on Form
S-1, effective on August 7, 2000.
Note B--Inventories
The components of inventory consist of the following:
September 30, March 31,
2000 2000
------------- ---------
In Thousands
Raw materials $ 86,797 $ 49,948
Work in process 18,486 8,675
Finished goods 5,716 6,387
Less allowance for inventory obsolescence (1,240) (573)
--------- ---------
$ 109,759 $ 64,437
========= =========
Note C--Acquisitions
In June 1999, the Company acquired Quadrus, Inc., a division of Bell
Microproducts, Inc. Quadrus is a provider of electronic manufacturing services
to original equipment manufacturers. The purchase price of $34,966 was funded
through the issuance of Series B redeemable preferred stock in the aggregate of
$18,000 to certain of the Company's existing investors, with the remaining
amount funded by borrowings under the Company's operating line of credit.
On August 1, 2000 the Company purchased the common stock and business of Turtle
Mountain Corporation (a provider of electronic manufacturing services to
original equipment manufacturers) for $20,400, including assumed debt of $3,819,
financed by borrowings on bank facilities. The transaction was accounted for as
a purchase, resulting in additional goodwill of $9,438, which is being amortized
over an estimated useful life of 20 years.
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The pro forma unaudited results of operations for the six months ended September
30, 2000 and 1999, assuming consummation of the purchases of Quadrus and Turtle
Mountain Corporation and existence of the additional related indebtedness as of
April 1, 1999, are as follows:
Six Months Ended
September 30,
-----------------------
2000 1999
---- ----
In Thousands, except
per share data
Net sales $282,102 $193,838
Net income (loss) 1,517 (882)
Per share data:
Basic earnings $ 0.08 $ (0.08)
Diluted earnings 0.07 (0.08)
Note D--Comprehensive Income
Total comprehensive income was $26 and $137 for the three months ended September
30, 2000 and 1999, respectively, and $9 and $1,094 for the six months ended
September 30, 2000 and 1999, respectively. Comprehensive income differs from net
income due to unrecognized foreign currency gains and losses.
Note E--Financing Arrangements
In August, 2000, the Company completed it's initial public offering of common
stock raising $93,704 in net proceeds for the issuance of 9,280 new common
shares from the offering and the exercise of over-allotment rights. Concurrent
with this offering, all of the outstanding Series A and B preferred stock
automatically convert to 4,710 shares of common stock.
The cash proceeds were used to repay borrowings under the USBank and IBM
facilities outstanding at that time. As a result of this offering and
negotiations supporting requirements for the Turtle Mountain Corporation
acquisition, the Company has amended its borrowing arrangements for its working
capital lines of credit. In addition, the Company has set up a new term loan
agreement with IBM Credit Corporation, providing $9.5 million, to be repaid on a
four year quarterly payment schedule. The term loan bears interest at prime plus
2% and is collateralized by assets of Turtle Mountain Corporation. Changes to
the USBank line of credit, related to the completion of the public offering,
include the reduction of available credit to $45 million, lowering of the
interest rate spread above the applicable base rates by 1.5% and resetting of
the covenant restrictions to reflect the proceeds of the stock offering.
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Note F--Earnings Per Share Data
The following table set forth the computation of basic and diluted earnings per
share for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
In Thousands, except In Thousands, except
per share data per share data
<S> <C> <C> <C> <C>
Basic:
Net income $ 1,106 $ 388 $ 1,255 $ 1,303
Average shares outstanding 21,813 11,311 17,874 11,300
Basic EPS $ 0.05 $ 0.04 $ 0.07 $ 0.12
======= ======= ======= =======
Diluted:
Net income $ 1,106 $ 388 $ 1,255 $ 1,303
Average shares outstanding 21,813 11,311 17,874 11,300
Net effect of dilutive stock options--
based on the treasury stock method 2,122 1,539 1,987 1,545
Assumed conversion of redeemable
preferred stock 1,997 4,710 3,346 3,578
------- ------- ------- -------
Totals 25,932 17,560 23,207 16,423
======= ======= ======= =======
Diluted EPS $ 0.04 $ 0.02 $ 0.05 $ 0.08
======= ======= ======= =======
</TABLE>
During the first three and six months of fiscal 2001, employees exercised stock
options to acquire 91,050 and 129,750 shares at an average exercise price of
$0.91 and $1.64 per share, respectively.
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Item 2--Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net sales for the second quarter of fiscal 2001 increased 48% to $143.9 million
from $97.6 million for the second quarter of fiscal 2000. Net sales for the six
months ended September 30, 2000 increased 60% to $266.5 million from $166.2
million for the same period of fiscal 2000. The increase in net sales was due to
increased sales volume to existing customers, primarily in the communications
industry. Net sales to communication customers for the second quarter and first
half of fiscal 2001 were 54 percent and 55 percent of net sales, respectively,
increased from 36 percent for the second quarter and 31 percent for the first
half of fiscal 2000. The Company's five largest customers in the first three and
six month periods of fiscal 2001 accounted for approximately 65% of net sales
with no single customer exceeding 26% of net sales.
Gross profit increased $4.0 million to $11.4 million in the second quarter of
fiscal 2001 from $7.4 million in the same quarter of fiscal 2000. Gross profit
increased $7.7 million to $21.3 million during the first six months of fiscal
2001 from $13.6 million in the same period of fiscal 2000. The increase in gross
profit was due primarily to the higher sales volume.
Selling, general and administrative expenses were $8.1 million in the second
quarter of fiscal 2001, an increase of $3.0 million from $5.1 million for the
same quarter of fiscal 2000. Selling, general and administrative expenses were
$15.6 million during the first six months of fiscal 2001, an increase of $6.6
million from $9.0 million for the same period of fiscal 2000. The increase in
selling, general and administrative expenses during the three and six-month
periods ended September 30, 2000 reflects the continued increase in staffing to
build our global selling and administrative support infrastructure.
Amortization for the three and six-month periods ended September 30, 2000 was
$0.5 million and $0.8 million respectively compared to $0.3 million and $0.5
million respectively for the same periods of fiscal 2000. The increase was due
to the amortization of goodwill arising out of the prior year acquisitions
included for the full reporting period in the current fiscal year and the recent
acquisition of Turtle Mountain Corporation.
Other income (expense), net was $0.3 million income for the second quarter of
fiscal 2001 compared to ($0.5) million expense for the same period of fiscal
2000. Other income (expense), net increased from ($0.6) million expense in
fiscal 2000 to $0.0 million income for the six months ended September 30, 2000.
This net change in the quarter and six month periods ended September 30, 2000,
was a result of gains on sales of assets regarded as excess to specific projects
at second quarter end, decreased exchange losses in certain international
operations, and reduced earnings allocated to minority shareholders in a
subsidiary, whose interest was bought out at January 1, 2000.
Our interest expense increased $0.8 million to $1.6 million for the second
quarter of fiscal 2001 from $0.8 million for the same period of fiscal 2000.
Interest expense for the six months ended September 30, 2000, increased $2.4
million to $3.5 million from $1.1 million for the comparable period of the prior
fiscal year. This increase was primarily a result of increased borrowings
required to fund working capital requirements from growth in business with
existing customers and to fund the Turtle Mountain acquisition.
Income tax expense of $0.1 million represented an effective tax rate of 10.4%
for the six-month period ended September 30, 2000 compared with an effective tax
rate of 45.5% for the six-month period ended
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September 30, 1999. This decrease was due primarily to lower foreign tax rates
applicable to an increased foreign portion of pretax income.
Liquidity and Capital Resources
The Company has funded its operations from the proceeds of bank debt, private
offerings of debt, private and public offerings of equity, cash generated from
operations and lease financing of capital equipment. August 7, 2000, the Company
completed it's initial public offering of it's common stock, raising $93.7
million in net aggregate proceeds. As of September 30, 2000, the Company had
cash and cash equivalents balances of $8.8 million, total bank and other
interest bearing debt totaling $60.2 million and $29.0 million available for
future borrowing under its credit facilities subject to compliance with certain
financial covenants.
Net cash used in operating activities for the six months ended September 30,
2000 was $29.5 million compared to $1.0 million for the comparable period of the
prior fiscal year. Fluctuations in net cash used in operating activities were
attributable to increases in accounts receivable and inventory balances due to
current and projected sales volume growth, which was partially offset by
increased accounts payable and depreciation.
Net cash used in investing activities for the six months ended September 30,
2000 was $44.4 million compared to $41.1 million for the comparable period of
the prior fiscal year. Capital expenditures increased $22.6 million in the six
months ended September 30, 2000 compared to the prior fiscal year. This increase
in capital expenditures was incurred principally for printed circuit board
assembly equipment, buildings and general equipment and information technology
upgrades across several of our facilities.
Net cash provided by financing activities for the six months ended September 30,
2000 was $79.9 million compared to $43.5 million for the comparable period of
the prior fiscal year. Our principal source of cash from financing activities in
the six months ended September 30, 2000 was net proceeds of $95.2 million from
the initial public offering, the exercise of employee stock options, and
collection of loans to shareholders and proceeds of $54.4 million from borrowing
on existing and additional bank credit facilities offset by debt payments
totaling $71.5 million.
The Company anticipates that its working capital requirements will increase in
order to support anticipated increases in its business. In addition, the Company
anticipates incurring significant capital expenditures in order to support the
anticipated expansions of its facilities. Future liquidity needs will depend on
fluctuations in inventory levels, the timing of expenditures by the Company on
new equipment, the extent to which the Company utilizes leases to finance
facilities and equipment, levels of shipments by the Company and changes in
volumes of customer orders. The Company believes that its existing cash
balances, together with cash flows from operations and amounts available under
its credit facilities, will be sufficient to fund operations at its current
level of business. To the extent the Company finances its working capital and
capital expenditures through increased borrowings, its interest expense may
increase.
As a part of normal business practice, we regularly review potential
acquisitions and additional new operations opportunities, as well as major new
manufacturing program opportunities with new or existing customers, any of which
may require us to sell additional equity or secure additional financing during
that period. As such, situations may occur, wherein, financing arrangements may
not be available in amounts or on terms acceptable to us.
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Forward-looking Statements: This discussion contains certain "forward-looking"
statements. These forward-looking statements are based on management's
expectations and beliefs concerning future events. Forward-looking statements
are necessarily subject to risks, uncertainties and other factors, many of which
are outside the control of the Company, that could cause actual results to
differ materially from such statements. These uncertainties and other factors
include such things as: dependence of internal earnings growth on economic
conditions and growth in the domestic and international electronics
manufacturing services industry; changes in the Company's relationships with
customers and suppliers, including short notices of changes in required
production volumes; increases in costs of or market shortages in key raw
materials, exposure to market risk from changes in interest rates and foreign
currency exchange rates; and other risks and uncertainties. The foregoing list
is not exhaustive and the Company disclaims any obligation to subsequently
revise any forward-looking statements to reflect events or circumstances after
the date of such statements.
Item 3--Quantitative and Qualitative Disclosure of Market Risk
Not applicable.
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Part II. Other Information
Item 1--Legal Proceedings
During the period covered by this report, there were no legal proceedings
instituted that are reportable.
Item 2--Changes in Securities and Use of Proceeds
During the period covered by this report, as previously disclosed in the
Company's Registration Statement on Form S-1, effective August 7, 2000, the
company sold 9,280,000 of its common shares in its initial public offering. That
sale also triggered the automatic conversion of all outstanding classes of
preferred shares into 4,709,898 common shares. Proceeds of the offering were
used to pay down the USBank facility by $53.1 million, the IBM Credit
Corporation facility by $36.5 million, and approximately $0.2 million under a
non-interest bearing note issued to Rochester Area Economic Development, Inc.
Item3--Default on Senior Securities
There have been no events of default on the Company's senior securities
agreements.
Item 4--Submission of Matters to a Vote of Security Holders
There have been no new matters submitted to a vote of security holders.
Item 5--Other Information
No information is required in response to this requirement.
Item 6--Exhibits and Reports on Form 8-K
(a) Exhibit 10--Material contracts
i. Promissory Note dated October 4, 2000--General Electric
Capital Corporation
ii. Land and Factory Lease Agreement dated April 27, 2000--Thai
Factory Development Public Company
iii. Master Lease Agreement dated November 1, 2000--GE Capital
(Thailand) Ltd.
iv. Lease Agreement dated August, 2000--Guadalajara Industrial
Tecnologico, S.A. de C.V.
v. Rental Agreement dated October, 2000--GE Capital BV
vi. Multi-Tenant Industrial Triple Net Lease dated March 12,
2000--Senter Road, LLC.
(b) Exhibit 27--Financial Data Schedule (submitted in electronic format for
use of Commission only)
(c) The registrant did not file any reports on Form 8-K during the six
months ended September 30, 2000.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pemstar Inc.
Date: November 14, 2000 \s\ Allen J. Berning
-------------------------- ----------------------------------------------
Allen J. Berning
Chairman and Chief Executive Officer
Date: November 14, 2000 \s\ William J. Kullback
-------------------------- ----------------------------------------------
William J. Kullback
Vice President and Chief Financial Officer
