<PAGE>
As filed with the Securities and Exchange Commission on August 7, 2000
Registration No. 333-37162
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
under
The Securities Act of 1933
---------------
PEMSTAR INC.
(Exact name of registrant as specified in its charter)
3672 41-1771227
Minnesota (Primary Standard (I.R.S. Employer
(State or other Industrial Identification Number)
jurisdiction of Classification Code
incorporation or Number)
organization)
3535 Technology Drive N.W.
Rochester, Minnesota 55901
(507) 288-6720
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Allen J. Berning
Pemstar Inc.
3535 Technology Drive N.W.
Rochester, Minnesota 55901
(507) 288-6720
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
---------------
Copies to:
Jonathan B. Abram Dennis M. Myers
Dorsey & Whitney LLP Kirkland & Ellis
220 South Sixth Street 200 East Randolph Drive
Minneapolis, Minnesota 55402-1498 Chicago, Illinois 60601
(612) 340-2600 (312) 861-2000
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
---------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [_]
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, other than securities offered only in connection with dividend or
interest reinvestment plans, 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, please 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 earliest effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
---------------
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.
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--------------------------------------------------------------------------------
<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 jurisdiction where the offer or sale in not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated August 7, 2000
PROSPECTUS
8,400,000 Shares
PEMSTAR
Common Stock
--------------------------------------------------------------------------------
This is our initial public offering of common stock. We are offering up to
8,400,000 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 "PMTR." The anticipated price range is $11.00 to $13.00 per share.
Investing in the shares involves risks. "Risk Factors" begin on page 9.
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price............................................... $ $
Underwriting Discount...............................................
Proceeds to Pemstar.................................................
</TABLE>
We and our selling shareholders have granted the underwriters a 30-day option
to purchase up to 880,000 and 380,000 additional shares of common stock,
respectively, 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
Chase H&Q
CIBC World Markets
Fidelity Capital Markets
a division of National Financial Services Corporation
, 2000
<PAGE>
[LOGO]
3 photographs with accompanying text placed above each photograph as
follows:
Engineering--photograph of hands holding pencil and small (unidentified)
object, partial overlay of graph paper
Manufacturing--cropped photograph containing partial images of a CPU,
fiber optic fillaments and electronic components (unidentified)
Fulfillment--night shot--front arial of commercial jet (unidentified) on
the runway with staircase and scissor truck
Bottom right corner--line drawing of partial globe with latitude and
longitude lines
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 9
Use of Proceeds..................... 16
Dividend Policy..................... 16
Capitalization...................... 17
Dilution............................ 18
Unaudited Pro Forma Consolidated
Financial Data..................... 19
Selected Consolidated Financial
Data............................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 23
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 31
Management....................... 44
Related Party Transactions....... 51
Principal Shareholders........... 53
Description of Capital Stock..... 55
Shares Eligible for Future Sale.. 59
Underwriting..................... 61
Legal Matters.................... 64
Experts.......................... 64
Where You Can Find More
Information..................... 64
Index to Financial Statements.... F-1
</TABLE>
ABOUT THIS PROSPECTUS
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. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it
is unlawful. The information contained 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 common stock.
This preliminary prospectus is subject to completion prior to this offering.
Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are forward-looking statements. These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"anticipates," "believe," "continue," "could," "estimate," "expects,"
"intends," "may," "plans," "seeks," "should," or "will" or the negative of
these terms or similar expressions are generally intended to identify forward-
looking statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including the factors discussed under "Risk Factors."
PEMSTAR(R) is a registered trademark of Pemstar Inc. Other trademarks and
trade names appearing in this prospectus are the property of their respective
holders.
Until , 2000, all dealers selling shares of our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information we present in greater detail elsewhere
in this prospectus. This prospectus contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from those discussed in the forward-looking statements as a result of factors
described under "Risk Factors" and elsewhere in this prospectus.
Pemstar Inc.
We are a rapidly growing provider of electronics manufacturing services to
original equipment manufacturers in the communications, computing, data
storage, industrial and medical equipment markets. Electronics manufacturing
services include:
. manufacturing services, including the assembly of electrical and
mechanical components and products;
. engineering, design and test services, including the development of
product specifications, manufacturing processes and equipment, and
product testing systems;
. materials procurement, including the identification of suppliers and
inventory management; and
. fulfillment services, including delivery of completed products and
components to end users and repair and replacement services for
manufactured products and components.
Original equipment manufacturers design, build, market and sell new products to
end users of these products. These manufacturers may outsource one or more of
these functions.
We provide a comprehensive range of electronics manufacturing services,
including engineering, manufacturing and fulfillment services to our customers
on a global basis through nine facilities strategically located in the United
States, Mexico, Asia and Europe. Our comprehensive service offerings support
our customers' needs from product development and design through manufacturing
to worldwide distribution and aftermarket support. We offer our communications
industry customers substantial expertise and experience in the wireless and
optical systems markets that are experiencing rapidly growing demand for
specialized engineering and manufacturing services. Since our founding in 1994,
we have experienced strong financial growth and consistent profitability, with
Manufacturing Market Insider ranking our revenue growth rate of 110% in fiscal
2000 the highest among the top twenty domestic electronics manufacturing
services companies for their most recent fiscal years. Our pro forma net sales
for fiscal 2000 were $436.9 million.
The electronics manufacturing services industry is experiencing dramatic
growth primarily driven by the overall growth of the electronics industry,
increased use of outsourcing among original equipment manufacturers and
frequent asset divestitures by these manufacturers to electronics manufacturing
services businesses. By outsourcing electronics manufacturing services,
original equipment manufacturers are able to focus on their core competencies,
such as product development, sales, marketing and customer service, while
utilizing the expertise of electronics manufacturing services providers in
assembly and test operations and supply chain management. These manufacturers
are increasingly outsourcing a broad spectrum of design services, including
product definition, design for manufacturability and design for test.
Technology Forecasters, Inc. projects that the global electronics manufacturing
services industry will grow at an average annual rate of 20%, from $60 billion
of revenues in 1998 to $149 billion in 2003. Technology Forecasters also
projects that the communications segment, which represented $19 billion of
revenues in 1998, will be the fastest growing electronics manufacturing
services market through 2003. Additionally, the electronics manufacturing
services industry is highly fragmented, with over 3,000 independent electronics
manufacturing services companies in existence and the twenty largest companies
accounting for only 56% of the worldwide market in 1998 based on revenues.
3
<PAGE>
Our customers include industry leading original equipment manufacturers such
as 3M, Efficient Networks, Electronics For Imaging, Fluke Corporation, Fujitsu,
Honeywell, IBM, Motorola, Pinnacle, RSA, Seagate and Sony. We also have
capitalized on our expertise in the wireless and optical systems markets to
develop strong relationships with a number of emerging wireless and optical
systems original equipment manufacturers, including Ancor Communications,
Interwave, Optical Networks, Optical Solutions, Repeater Technologies and
Western Multiplex.
Over the past several years, we have completed a number of acquisitions and
established new operations in order to expand our geographic presence, enhance
our product and service offerings, diversify our customer base and increase our
production capacity. In June 2000, we signed an agreement to acquire Turtle
Mountain Corporation, an electronics manufacturing services provider located in
Dunseith, North Dakota. In June 1999, we acquired Quadrus Manufacturing, a
division of Bell Microproducts, located in San Jose, California, which
primarily serves the communications sector in North America. In May 1999, we
also acquired a division of Fluke Corporation located in Almelo, the
Netherlands, which primarily serves the industrial equipment sector in Europe
and North America. Since 1994, we have established operations in Guadalajara,
Mexico; Tianjin, China; Singapore and Bangkok, Thailand, which have expanded
our manufacturing and distribution capabilities and further broadened our
customer base. We continue to actively pursue potential acquisitions to
complement our internal growth and to expand our business.
Our business is built on several specific characteristics, including the
following:
. We provide our customers with worldwide engineering and product design
services by utilizing over 400 engineering professionals across all of
our locations.
. We focus substantial resources on the rapidly expanding communications
industry and have developed specific expertise in the high growth
wireless and optical systems market segments.
. We complement our engineering capabilities with a comprehensive range of
manufacturing, value-added component assembly, customized final system
assembly and fulfillment services, such as worldwide distribution and
aftermarket services.
. We have established a network of facilities in the world's major
electronics markets--North America, Europe and Asia--to serve the
increasing outsourcing needs of both multinational and regional original
equipment manufacturers.
Among the challenges we face and the risks inherent in investing in our
business are the intense competition and significant fluctuation in product
demand which characterize our industry. A significant portion of our net sales
are made to a small number of customers with whom we do not have firm long-term
purchase orders or commitments. We compete with a number of other providers of
electronics manufacturing services, many of which have global operations and
greater resources than we do. In addition, we have experienced rapid growth in
a short period of time and we may face challenges in managing our expansion and
integrating acquired businesses.
4
<PAGE>
Our Strategy
Our objective is to enhance our position as a provider of electronics
manufacturing services to original equipment manufacturers worldwide. We intend
to achieve this objective by continuing to employ the following strategies:
. Capitalize on our worldwide engineering services;
. Provide comprehensive engineering, manufacturing and fulfillment service
offerings;
. Focus on high growth market segments;
. Expand our global scale and infrastructure;
. Pursue selective acquisitions;
. Focus on quality management; and
. Provide superior supply chain management.
Recent Developments
On June 20, 2000, we entered into an agreement to acquire Turtle Mountain
Corporation, an electronics manufacturing services provider located in
Dunseith, North Dakota. We completed this acquisition on August 1, 2000. Turtle
Mountain is a manufacturer of electronics components and assemblies primarily
for the computing and industrial industries. Turtle Mountain had total revenues
of approximately $27.1 million in its last completed fiscal year. The principal
end users of Turtle Mountain's products are IBM, Honeywell and 3M. Under our
agreement, we agreed to purchase all of the outstanding stock of Turtle
Mountain for approximately $18.3 million, including assumed debt, subject to
adjustment based on Turtle Mountain's outstanding indebtedness and net asset
value as of the closing date. The purchase price on August 1, 2000 was $20.0
million, including $3.7 million of assumed Turtle Mountain indebtedness. At
closing, we repaid Turtle Mountain's outstanding indebtedness. We believe this
acquisition will expand our business opportunities with important common
customers due to Turtle Mountain's designation as a preferred vendor to these
customers, which will qualify us to bid on additional projects with these
customers. The acquisition will also provide us with additional manufacturing
capacity through the addition of Turtle Mountain's 65,000 square foot facility.
Recent Operating Results
Net sales increased $54.0 million, or 79.0%, to $122.6 million for the three
months ended June 30, 2000, from $68.6 million for the comparable three months
of the prior fiscal year. Internal growth, which excludes net sales from
operations acquired in the preceding twelve months, accounted for 39.0% of this
growth and 61.0% of this growth in net sales was the result of operations
acquired in fiscal 2000. For the quarter ended June 30, 2000, our gross profit
as a percentage of net sales was 8.1% compared to 9.0% in the comparable
quarter of the prior fiscal year. This decrease was a result of the anticipated
phase-out and ultimate completion in June 2000 of a higher margin manufacturing
program for a component no longer used by a customer.
Our operating income was $2.0 million for the quarter ended June 30, 2000
compared to $2.0 million for the comparable quarter of the prior fiscal year.
As a percentage of net sales, operating income decreased to 1.7% for the
quarter ended June 30, 2000, compared to 3.0% in the comparable quarter of the
prior fiscal year. This decrease was a result of our lower gross profit as a
percentage of sales, increased selling, general and administrative expenses
from the acquisitions in fiscal 2000, increased staffing in the selling,
general and administrative area and increased amortization expense due to the
acquisitions. For the quarter ended June 30, 2000, our net income was $0.1
million compared to $0.9 million for the corresponding period of the prior
fiscal year. This decrease in net income was a result of the reduced gross
profit and operating income percentages of sales, and increased interest
expense for the quarter ended June 30, 2000 associated with the additional debt
incurred to fund our acquisitions and increased working capital needs.
5
<PAGE>
----------------
Pemstar is a Minnesota corporation incorporated in 1994. Our principal
executive office is located at 3535 Technology Drive N.W., Rochester, Minnesota
55901. Our telephone number is (507) 288-6720. We maintain a website on the
Internet at www.pemstar.com. Our website, and the information contained
therein, is not a part of this prospectus.
The Offering
Common stock offered by Pemstar..... 8,400,000 shares
Common stock to be outstanding
after the offering.................
26,929,158 shares
Use of proceeds..................... We intend to use the net proceeds from
this offering to repay existing
indebtedness, to fund the acquisition
of Turtle Mountain and for general
corporate purposes, including working
capital, capital expenditures and
possible acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market "PMTR"
symbol..............................
The number of shares that will be outstanding after the offering is based on
the number of shares outstanding as of March 31, 2000, and excludes:
. 3,845,232 shares of common stock issuable upon exercise of stock options
outstanding as of March 31, 2000, with a weighted average exercise price
of $4.35 per share;
. 850,000 shares of common stock issuable upon exercise of stock options
to be granted concurrently with this offering with an exercise price
equal to the initial public offering price per share; and
. 477,362 additional shares reserved for issuance under our stock option
plans.
Our fiscal year ends on March 31 of each year and fiscal years are
identified in this prospectus according to the calendar year in which they end.
For example, the fiscal year ended March 31, 2000, is referred to as "fiscal
2000." Except as otherwise indicated, all information in this prospectus
assumes that the underwriters do not exercise the option granted by us and
certain selling shareholders to purchase additional shares in this offering and
that all of our outstanding preferred stock is converted into common stock upon
the consummation of this offering and reflects a 3-for-1 stock split, which was
effective in May 2000.
6
<PAGE>
Summary Consolidated Financial Data
The following table summarizes financial data regarding our business and
should be read together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," our consolidated financial statements and
the related notes included elsewhere in this prospectus. The unaudited pro
forma consolidated data for the fiscal year ended March 31, 2000, gives effect
to the acquisitions of Quadrus Manufacturing and Turtle Mountain, as if each
had occurred on April 1, 1999.
<TABLE>
<CAPTION>
Year Ended
Year Ended March 31, March 31,
---------------------------------------------- 2000
1996 1997 1998 1999 2000 Pro Forma
------- ------- -------- -------- -------- -----------
(in thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Income Data:
Net sales............... $22,021 $31,895 $165,049 $187,381 $393,842 $436,891
Costs of goods sold..... 18,724 27,347 147,962 172,219 363,974 405,891
------- ------- -------- -------- -------- --------
Gross profit............ 3,297 4,548 17,087 15,162 29,868 31,000
Selling, general and
administrative
expenses............... 2,309 2,976 8,328 10,955 21,576 23,878
Amortization............ -- -- 54 190 1,281 1,839
------- ------- -------- -------- -------- --------
Operating income........ 988 1,572 8,705 4,017 7,011 5,283
Other income (expense) -
net.................... 187 247 455 (438) (74) 28
Interest expense........ (255) (315) (746) (640) (3,588) (4,158)
------- ------- -------- -------- -------- --------
Income before income
taxes.................. 920 1,504 8,414 2,939 3,349 1,153
Income tax expense...... 289 554 3,097 1,273 698 (149)
------- ------- -------- -------- -------- --------
Net income.............. $ 631 $ 950 $ 5,317 $ 1,666 $ 2,651 $ 1,302
======= ======= ======== ======== ======== ========
Net income per share:
Basic................. $ 0.08 $ 0.12 $ 0.55 $ 0.15 $ 0.23 $ 0.11
Diluted............... 0.08 0.12 0.49 0.12 0.15 0.08
Weighted average number
of common shares
outstanding (1):
Basic................. 7,645 8,009 9,653 10,897 11,503 11,503
Diluted............... 7,758 8,039 10,874 14,143 17,167 17,167
Other Financial Data:
Depreciation............ $ 600 $ 911 $ 1,929 $ 3,331 $ 7,455
Capital expenditures.... 1,587 2,887 8,393 8,657 13,415
Supplemental Data:
EBITDA (2).............. $ 1,775 $ 2,730 $ 11,143 $ 7,100 $ 15,673
Net cash provided by
(used in) operating
activities............. 150 776 (1,374) 65 (20,225)
Net cash provided by
(used in) investing
activities............. (1,576) (2,938) (10,126) (5,545) (53,489)
Net cash provided by
(used in) financing
activities............. 1,343 2,133 14,661 3,112 75,612
</TABLE>
7
<PAGE>
The pro forma consolidated balance sheet data gives effect to the
acquisition of Turtle Mountain, as if it had occurred on March 31, 2000. The
pro forma consolidated as adjusted balance sheet data gives further effect to
the automatic conversion of all of our outstanding shares of preferred stock
into shares of common stock upon consummation of this offering and the
consummation of this offering and the application of the net proceeds as
described under "Use of Proceeds," as if each had occurred on March 31, 2000.
<TABLE>
<CAPTION>
As of March 31, 2000
------------------------------------
Pro Forma
Pro Forma As Adjusted (3)
Actual (unaudited) (unaudited)
-------- ----------- ---------------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Unrestricted cash and cash equivalents... $ 2,727 $ 2,061 $ 16,757
Working capital.......................... 49,649 53,569 78,441
Total assets............................. 190,451 211,986 226,682
Long-term debt and capital lease
obligations less current maturities..... 55,181 72,486 20,362
Redeemable preferred stock............... 26,549 26,549 --
Total shareholders' equity............... 22,673 22,673 142,218
</TABLE>
--------
(1) For an explanation of the determination of the weighted average number of
common shares outstanding used in computing net income per share, see Note
1 of the notes to consolidated financial statements.
(2) EBITDA means earnings before net interest expense, income taxes,
depreciation and amortization. EBITDA is presented because we believe it
is an indicator of our ability to incur and service debt and a similar
formula is used by our lenders in determining compliance with financial
covenants. However, EBITDA should not be considered as an alternative to
cash flow from operating activities, as a measure of liquidity or as an
alternative to net income as a measure of operating results in accordance
with generally accepted accounting principles.
(3) We intend to use approximately $69.6 million of the net proceeds from this
offering to repay existing indebtedness and $8.7 million of the $15.8
million of additional indebtedness incurred to fund the acquisition of
Turtle Mountain. The table above reflects the repayment of $53.6 million,
the amount of our indebtedness outstanding as of March 31, 2000.
Subsequently, we incurred additional indebtedness under our credit
facilities of $16.0 million as of July 14, 2000. See "Use of Proceeds."
8
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy our shares. If any of the following risks actually occur, our
business could be harmed. In that event, the trading price of our shares might
decline, and you could lose all or part of your investment. You should also
refer to the other information set forth in this prospectus, including our
consolidated financial statements and related notes.
Risks Relating to Our Business and Industry
A downturn in the markets we serve would likely negatively affect our net
sales.
The communications, computing, data storage, industrial and medical
equipment markets of the electronics manufacturing services industry are
characterized by intense competition, relatively short product life-cycles and
significant fluctuations in product demand. In addition, these markets are
generally subject to rapid technological change and product obsolescence. If
any of these factors or other factors reduce demand for specific products or
components that we design or manufacture for our customers, our net sales would
likely be negatively affected. Furthermore, these industries are subject to
economic cycles and have in the past experienced, and are likely in the future
to experience, recessionary periods. A recession or any other event leading to
excess capacity or a downturn in the markets we serve would likely negatively
affect our net sales.
We depend on a small number of customers for a significant portion of our net
sales and the loss of any of our major customers would harm us.
We depend on a relatively small number of customers for a significant
portion of our net sales. Our two largest customers in fiscal 2000 were IBM and
Motorola, which represented approximately 37% and 15% of our total net sales.
In addition, our five largest customers in fiscal 2000 accounted for
approximately 75% of our net sales. We expect to continue to depend upon a
relatively small number of customers for a significant percentage of our net
sales. Because our major customers represent such a large part of our business,
the loss of any of our major customers could negatively impact our business.
Our major customers may not continue to purchase products and services from
us at current levels or at all. In the past, we have lost customers due to the
acquisition of our customers, product discontinuation and customers' shifting
production of products to internal facilities. We may lose customers in the
future for similar reasons. We may not be able to expand our customer base to
make up any sales shortfalls if we lose a major customer. Our attempts to
diversify our customer base and reduce our reliance on particular customers may
not be successful.
Our business is not typified by long-term contracts, and cancellations,
reductions or delays in customer orders would adversely affect our
profitability.
We do not typically obtain firm long-term purchase orders or commitments
from our customers. We work closely with our customers to develop forecasts for
future orders, but these forecasts are not binding. Customers may cancel their
orders, change production quantities from forecast volumes or delay production
for a number of reasons beyond our control. Any material delay, cancellation or
reduction of orders from our largest customers could cause our net sales to
decline significantly. In addition, as many of our costs and operating expenses
are relatively fixed, a reduction in customer demand can decrease our gross
margins and adversely affect our business, financial condition and results of
operations.
Shortages or price fluctuations in component parts specified by our customers
could delay product shipments and adversely affect our profitability.
Many of the products we manufacture require one or more components that we
order from sole-source suppliers. Supply shortages for a particular component
can delay production of all products using that component or cause cost
increases in the services we provide. In the past, some of the materials we
use, such
9
<PAGE>
as capacitors and memory and logic devices, have been subject to industry-wide
shortages. As a result, suppliers have been forced to allocate available
quantities among their customers and we have not been able to obtain all of the
materials desired. Our inability to obtain these needed materials could slow
production or assembly, delay shipments to our customers, increase costs and
reduce operating income. In certain circumstances, we may bear the risk of
periodic component price increases. Accordingly, some component price increases
could increase costs and reduce our operating income.
In addition, if we fail to manage our inventory effectively, we may bear the
risk of fluctuations in materials costs, scrap and excess inventory, all of
which adversely affect our business, financial condition and results of
operations. We are required to forecast our future inventory needs based upon
the anticipated demand of our customers. Inaccuracies in making these forecasts
or estimates could result in a shortage or an excess of materials. A shortage
of materials could lengthen production schedules and increase costs. An excess
of materials may increase the costs of maintaining inventory and may increase
the risk of inventory obsolescence, both of which may increase expenses and
decrease our profit margins and operating income.
We have experienced significant growth in a short period of time and we may
have trouble managing our expansion and integrating acquired businesses.
We have grown rapidly in recent years due to acquisitions and internal
growth. Since 1994, we have completed two acquisitions and began operations at
two new facilities. As a result, we have a limited history of owning and
operating our acquired businesses on a consolidated basis. We cannot assure you
that we will be able to meet performance expectations or successfully integrate
our acquired businesses on a timely basis without disrupting the quality and
reliability of service to our customers or diverting management resources. Our
rapid growth has placed and will continue to place a significant strain on our
management, financial resources and on our information, operations and
financial systems. If we are unable to manage our growth effectively, it may
have an adverse effect on our business, financial condition and results of
operations. We cannot assure you that we will manage our growth effectively,
and we expect that our annual growth rate of net sales will decrease in the
future due to our increased size.
We expect to continue to expand our operations through acquisitions and
opening new facilities. These activities involve numerous risks, including:
. Difficulty in integrating operations, technologies, systems, and
products and services of these acquired companies;
. Diversion of management's attention;
. A disruption of operations;
. Increases in expenses and working capital requirements;
. Failure to enter effectively markets in which we have limited or no
prior experience and where competitors in such markets have stronger
market positions; and
. Potential loss of key employees and customers of acquired companies.
In addition, acquisitions may involve financial risks, such as:
. the potential liabilities of the acquired businesses;
. the dilutive effect of the issuance of additional equity securities;
. the incurrence of additional debt;
. the financial impact of transaction expenses; and
. the amortization of goodwill and other intangible assets involved in any
transactions that are accounted for using the purchase method of
accounting, and possible adverse tax and accounting effects.
We may have difficulty integrating and managing the business acquired from
Turtle Mountain, which may adversely affect our results of operations.
To integrate Turtle Mountain's operations, we must implement our management
and operations systems and assimilate and manage personnel acquired form Turtle
Mountain. If we are unable to successfully integrate
10
<PAGE>
Turtle Mountain's operations, or there is a delay in successful integration, we
may be unable to achieve anticipated levels of profitability for Turtle
Mountain or realize other anticipated benefits of the acquisition. In addition,
our inability to successfully integrate Turtle Mountain could divert
management's resources, resulting in a disruption of our business.
Increased competition may result in decreased demand or prices for our
services.
The electronics manufacturing services industry is highly competitive and
characterized by low margins. We compete against numerous U.S. and foreign
service providers with global operations, as well as those who operate on a
local or regional basis. In addition, current and prospective customers
continually evaluate the merits of manufacturing products internally.
Consolidation in the electronics manufacturing services industry results in a
continually changing competitive landscape. The consolidation trend in the
industry also results in larger and more geographically diverse competitors who
have significant combined resources with which to compete against us. Some of
our competitors have substantially greater managerial, manufacturing,
engineering, technical, financial, systems, sales and marketing resources than
we do. These competitors may:
. Respond more quickly to new or emerging technologies;
. Have greater name recognition, critical mass and geographic and market
presence;
. Be better able to take advantage of acquisition opportunities;
. Adapt more quickly to changes in customer requirements; and
. Devote greater resources to the development, promotion and sale of their
services.
We also may be operating at a cost disadvantage as compared to competitors
who have greater direct buying power from component suppliers, distributors and
raw material suppliers or who have lower cost structures. Increased competition
from existing or potential competitors could result in price reductions,
reduced margins or loss of market share.
We anticipate that our net sales and operating results will fluctuate which
could affect the price of our common stock.
Our net sales and operating results have fluctuated and may continue to
fluctuate significantly from quarter to quarter. A substantial portion of our
net sales in any given quarter may depend on obtaining and fulfilling orders
for assemblies to be manufactured and shipped in the same quarter in which
those orders are received. Further, a significant portion of our net sales in a
given quarter may depend on assemblies configured, completed, packaged and
shipped in the final weeks of such quarter. Our operating results may fluctuate
in the future as a result of many factors, including:
. Variations in customer orders relative to our manufacturing capacity;
. Variations in the timing of shipment of products to customers;
. Introduction and market acceptance of our customers' new products;
. Changes in competitive and economic conditions generally or in our
customers' markets;
. Effectiveness of our manufacturing processes, including controlling
costs;
. Changes in cost and availability of components or skilled labor; and
. The timing and price we pay for acquisitions and related acquisition
costs.
Our operating expenses are based on anticipated revenue levels and a high
percentage of our operating expenses are relatively fixed in the short term. As
a result, any unanticipated shortfall in revenue in a quarter would likely
adversely affect our operating results for that quarter. Also, changes in our
product assembly mix may cause our margins to fluctuate which could negatively
impact our results of operations for that period. Results in any period should
not be considered indicative of the results to be expected in any future
period. It is
11
<PAGE>
possible that in one or more future periods our results of operations will fail
to meet the expectations of securities analysts or investors, and the price of
our common stock could decline significantly.
If we are unable to respond to rapidly changing technologies and process
developments, we may not be able to compete effectively.
The market for our products and services is characterized by rapidly
changing technologies and continuing process developments. The future success
of our business will depend in large part upon our ability to maintain and
enhance our technological capabilities, to develop and market products and
services that meet changing customer needs and to successfully anticipate or
respond to technological changes on a cost-effective and timely basis. Our core
technologies could in the future encounter competition from new or revised
technologies that render existing technology less competitive or obsolete or
that reduce the demand for our services. We cannot assure you that we will
effectively respond to the technological requirements of the changing market.
If we determine that new technologies and equipment are required to remain
competitive, the development, acquisition and implementation of these
technologies may require us to make significant capital investments. We cannot
assure you that we will be able to obtain capital for these purposes in the
future or that investments in new technologies will result in commercially
viable technological processes. The loss of revenue and earnings to us from
these changing technologies and process developments could adversely affect us.
If we are unable to obtain additional financing, we may not be able to support
our future growth.
We expect to continue to make substantial capital expenditures to expand our
operations and remain competitive in the rapidly changing electronics
manufacturing services industry. Our future success depends on our ability to
obtain additional financing and capital to support our future growth, if any.
We may not be able to obtain additional capital when we want or need it, and
capital may not be available on satisfactory terms. If we issue additional
equity securities or convertible debt to raise capital, it may be dilutive to
your ownership interest. In addition, any additional capital may have terms and
conditions that adversely affect our business, such as financial or operating
covenants.
Operating in foreign countries exposes us to increased risks which could
adversely affect our results of operations.
We currently have foreign operations in China, Mexico, the Netherlands,
Singapore and Thailand. We may in the future expand into other international
regions. We have limited experience in managing geographically dispersed
operations and in operating in Europe, Mexico or Asia. We also purchase a
significant number of components manufactured in foreign countries. Because of
the scope of our international operations, we are subject to the following
risks which could adversely impact our results of operations:
. Economic or political instability;
. Transportation delays and interruptions;
. Foreign currency exchange rate fluctuations;
. Increased employee turnover and labor unrest;
. Longer payment cycles;
. Greater difficulty in collecting accounts receivable;
. Incompatibility of systems and equipment used in foreign operations;
. Difficulties in staffing and managing foreign personnel and diverse
cultures; and
. Less developed infrastructures.
In addition, changes in policies by the United States or foreign governments
could negatively affect our operating results due to increased duties,
increased regulatory requirements, higher taxation, currency conversion
limitations, restrictions on the transfer of funds, the imposition of or
increase in tariffs and
12
<PAGE>
limitations on imports or exports. Also, we could be negatively affected if our
host countries revise their policies away from encouraging foreign investment
or foreign trade, including tax holidays.
Our acquisition strategy may not succeed.
As part of our business strategy, we expect to continue to grow by pursuing
acquisitions of other companies, assets or product lines that complement or
expand our existing business. Competition for attractive companies in our
industry is substantial. We cannot assure you that we will be able to identify
suitable acquisition candidates or finance and complete transactions that we
select. Failure to execute our acquisition strategy may adversely affect our
business, financial condition and results of operations.
We may be unable to protect our intellectual property, which would negatively
affect our ability to compete.
We rely on our proprietary technology, and we expect that future
technological advances made by us will be critical to remain competitive.
Therefore, we believe that the protection of our intellectual property rights
is, and will continue to be, important to the success of our business. We rely
on a combination of patent, trademark and trade secret laws and restrictions on
disclosure to protect our intellectual property rights. Despite these
protections, unauthorized parties may attempt to copy or otherwise obtain and
use our proprietary technology. We cannot be certain that patents we have or
that may be issued as a result of our pending patent applications will protect
or benefit us or give us adequate protection from competing technologies. We
also cannot be certain that others will not develop our unpatented proprietary
technology or effective competing technologies on their own. We believe that
our proprietary technology does not infringe on the proprietary rights of
others. However, if others assert valid infringement claims against us with
respect to our past, current or future designs or processes, we could be
required to enter into expensive royalty arrangements, develop non-infringing
technologies or engage in costly litigation, which could negatively affect our
business, financial condition and results of operations.
Our inability to expand our Web-based supply chain management system could
negatively impact our future competitiveness.
Our future success depends in part on our ability to rapidly respond to
changing customer needs by scaling operations to meet customers' requirements,
shift capacity in response to product demand fluctuations, procure materials at
advantageous prices, manage inventory and effectively distribute products to
our customers. In order to continue to meet these customer requirements, we
have developed a Web-based supply chain management system that enables us to
collaborate with our customers on product content and to process engineering
changes. We are currently implementing an enhanced version of our existing
system, which will include real-time communications between our customers
across all of our facilities. Our inability to expand this Web-based system, or
delays or defects in such expansion could negatively impact our ability to
manage our supply chain in an efficient and timely manner to meet customer
demands, which could adversely affect our competitive position and negatively
affect our ability to be competitive in the electronics manufacturing services
industry.
Our business could suffer if we lose the services of, or fail to attract, key
personnel.
Our future success largely depends on the skills and efforts of our
executive management and our engineering, manufacturing and sales employees. We
do not have employment contracts or non-competition agreements with any of our
executive management or other key employees. The loss of services of any of our
executives or other key personnel could negatively affect our business. Our
continued growth will also require us to attract, motivate, train and retain
additional skilled and experienced managerial, engineering, manufacturing and
sales personnel. We face intense competition for such personnel. We may not be
able to attract, motivate and retain personnel with the skills and experience
needed to successfully manage our business and operations.
13
<PAGE>
We are subject to a variety of environmental laws which expose us to potential
financial liability.
Our operations are regulated under a number of federal, state, provincial,
local and foreign environmental laws and regulations, which govern, among other
things, the discharge of hazardous materials into the air and water as well as
the handling, storage and disposal of such materials. Compliance with these
environmental laws is a significant consideration for us because we use metals
and other hazardous materials in our manufacturing processes. We may be liable
under environmental laws for the cost of cleaning up properties we own or
operate if they are or become contaminated by the release of hazardous
materials, regardless of whether we caused the release. In addition, we, along
with any other person who arranges for the disposal of our wastes, may be
liable for costs associated with an investigation and remediation of sites at
which we have arranged for the disposal of hazardous wastes, if such sites
become contaminated, even if we fully comply with applicable environmental
laws. In the event of contamination or violation of environmental laws, we
could be held liable for damages including fines, penalties and the costs of
remedial actions and could also be subject to revocation of our discharge
permits. Any such penalties or revocations could require us to cease or limit
production at one or more of our facilities, thereby harming our business.
Risks Relating to this Offering
The initial public offering price is significantly higher than the book value
of our common stock, and you will experience immediate and substantial dilution
in the book value of your investment.
Prior investors paid a lower per share price than the price in this
offering. The initial public offering price is substantially higher than the
net book value per share of the outstanding common stock immediately after this
offering. Accordingly, if you purchase common stock in this offering, you will
incur immediate and substantial dilution of $7.89 per share. In addition, we
have issued options to acquire common stock at prices significantly below the
initial public offering price. To the extent these outstanding options are
exercised, there will be further dilution to investors in this offering. See
"Dilution."
Future sales of our common stock, including the shares purchased in this
offering, may depress our stock price.
Sales of a substantial number of shares of our common stock in the public
market by our shareholders after this offering, or the perception that such
sales are likely to occur, could depress the market price of our common stock
and could impair our ability to raise capital through the sale of additional
equity securities. Based on shares outstanding as of March 31, 2000, upon
completion of this offering we will have outstanding 26,929,158 shares of
common stock, assuming no exercise of the underwriters' overallotment option.
Of these shares, the 8,400,000 shares of common stock sold in this offering and
350,101 shares held by existing shareholders will be freely tradable, without
restriction, in the public market. An additional 180,828 shares held by
existing shareholders will be available for sale in the public market 90 days
from the date of this prospectus. After the lockup agreements pertaining to
this offering expire 180 days from the date of this prospectus, an additional
18.0 million shares will be eligible for sale in the public market. In
addition, 3.0 million of the shares subject to outstanding options will be
exercisable, and if exercised, available for sale 180 days after the date of
this prospectus. See "Shares Eligible for Future Sale."
An active public market for our common stock may not develop, which could
impede your ability to sell your shares and depress our stock price.
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 depress the market price of your shares. The market price of your
shares may fall below the initial public offering price.
14
<PAGE>
Provisions in our charter documents and Minnesota law may delay or prevent an
unsolicited takeover effort to acquire our company, which could inhibit your
ability to receive an acquisition premium for your shares.
Provisions of our amended articles of incorporation and our amended and
restated bylaws and provisions of Minnesota law may delay or prevent an
unsolicited takeover effort to acquire our company on terms that you may
consider to be favorable. These provisions include the following:
. No cumulative voting by shareholders for directors;
. A classified board of directors with three-year staggered terms;
. The ability of our board to set the size of the board of directors, to
create new directorships and to fill vacancies;
. The ability of our board, without shareholder approval, to issue
preferred stock, which may have rights and preferences that are superior
to our common stock;
. The ability of our board to amend the bylaws;
. A shareholder rights plan, which discourages the unauthorized
acquisition of 15% or more of our common stock or an unauthorized
exchange or tender offer;
. Restrictions under Minnesota law on mergers or other business
combinations between us and any holder of 10% or more of our outstanding
common stock; and
. A requirement that at least two-thirds of our shareholders and at least
two-thirds of our directors approve amendments of our articles of
incorporation.
15
<PAGE>
USE OF PROCEEDS
We estimate the net proceeds from this offering to be approximately $93.0
million or approximately $102.8 million if the underwriters exercise their
over-allotment option in full based on an assumed public offering price of
$12.00 per share and after deducting our estimated underwriting and offering
expenses.
We intend to use approximately $78.3 million of the net proceeds from this
offering to repay existing indebtedness, which includes $69.6 million of
indebtedness as of July 14, 2000, and $8.7 million of the $15.8 million of
additional indebtedness that we incurred on August 1, 2000 to fund the
acquisition of Turtle Mountain. The $8.7 million repayment consists of
repayment of $2.4 million on a new term loan from IBM to fund a portion of the
acquisition and repayment of a $6.3 million draw on our existing IBM credit
facility. This new term loan bears interest at the prime rate plus 2%, for a
current rate of 11.5%. We intend to use approximately $14.7 million of the net
proceeds from this offering for general corporate purposes, which may include
the funding of working capital, capital expenditures and internal expansion and
repayment of the remaining $7.1 million we incurred to fund the acquisition of
Turtle Mountain. To the extent we use net proceeds from this offering for
capital expenditures, we expect that capital expenditures would consist
primarily of equipment upgrades, acquisition of optical technology equipment,
acquisition and upgrading of information technology systems and expansion of
our facilities. In addition, we may acquire companies, assets or product lines
that are complementary to ours, and a portion of the net proceeds may be used
for these acquisitions. We do not currently have any agreements for any
acquisitions, but we have had, and will continue to have, discussions with
companies regarding potential acquisitions. While we engage from time to time
in discussions with respect to potential acquisitions, we cannot assure you
that any acquisitions will be made. Pending use of the net proceeds of this
offering, we intend to invest the net proceeds in short-term, interest bearing,
investment-grade marketable securities.
As of July 14, 2000, the $69.6 million of existing indebtedness to be repaid
from a portion of the net proceeds from this offering consisted of the
following:
. Approximately $38.4 million under our two revolving credit facilities
with US Bank, excluding accrued interest, with an effective interest
rate of 11.0% and a final maturity date of August 2002;
. Approximately $31.0 million under our credit facility with IBM Credit
Corporation, excluding accrued interest, with an interest rate of 10.0%
and a final maturity date of May 2001; and
. Approximately $0.2 million under non-interest bearing notes issued to
Rochester Area Economic Development, Inc. in connection with a
development assistance package offered to us by the City of Rochester,
which are due and payable in the event we complete an initial public
offering.
We used borrowings under our US Bank revolving credit facilities to fund a
portion of the purchase price for Quadrus Manufacturing and all of the purchase
price of our Almelo, the Netherlands facility. In addition, on August 1, 2000
we entered into an agreement amending our existing credit facility with IBM to
provide a term loan to fund a portion of the purchase price for the acquisition
of Turtle Mountain.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings to fund the development and growth
of our business.
16
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
. on an actual basis; and
. on a pro forma as adjusted basis to reflect (1) the acquisition of
Turtle Mountain, (2) the automatic conversion of all of our outstanding
preferred stock into common stock upon the consummation of this
offering, and (3) the application of the net proceeds from this offering
upon the consummation of this offering, assuming an initial public
offering price of $12.00 per share after deducting our estimated
underwriting and offering expenses.
<TABLE>
<CAPTION>
As of March 31, 2000
-------------------------
Pro Forma
As Adjusted (2)
Actual (unaudited)
-------- ---------------
(in thousands, except
share data)
<S> <C> <C>
Unrestricted cash and cash equivalents............... $ 2,727 $ 16,757
======== ========
Current maturities of long-term obligations.......... $ 15,229 $ 6,829
======== ========
Long-term obligations, net of current maturities:
Revolving credit facility.......................... $ 45,000 $ --
Industrial revenue bonds........................... 4,990 4,990
Other total long-term obligations, net of current
maturities........................................ 5,191 15,372
-------- --------
Total long-term obligations, net of current
maturities...................................... 55,181 20,362
Redeemable preferred stock (1)....................... 26,549 --
Shareholders' equity:
Preferred stock, $0.01 par value, 3,333,000 shares
authorized and undesignated; none issued and
outstanding on an actual and pro forma as adjusted
basis............................................. -- --
Common stock, $0.01 par value, 150,000,000 shares
authorized; 13,819,260 shares issued and
outstanding on an actual basis; and 26,929,158
issued and outstanding on a pro forma adjusted
basis............................................. 138 269
Additional paid-in capital......................... 15,395 134,809
Accumulated other comprehensive loss............... (772) (772)
Retained earnings.................................. 11,170 11,170
Loans to stockholders.............................. (3,258) (3,258)
-------- --------
Total shareholders' equity....................... 22,673 142,218
-------- --------
Total capitalization............................. $104,403 $162,580
======== ========
</TABLE>
--------
(1) The Series A and Series B preferred stock is subject to mandatory
redemption rights and automatically converts into shares of common stock
upon the consummation of this offering.
The number of shares that will be outstanding after this offering is based
on the number of shares outstanding as of March 31, 2000, and excludes:
. 3,845,232 shares of common stock issuable upon exercise of stock options
outstanding as of March 31, 2000, with a weighted average exercise price
of $4.35 per share;
. 850,000 shares of common stock issuable upon exercise of stock options
to be granted concurrently with this offering with an exercise price
equal to the initial public offering price per share; and
. 477,362 additional shares reserved for issuance under our stock option
plans.
See "Management--Stock Option Plans."
17
<PAGE>
(2) We intend to use approximately $78.3 million of the net proceeds from this
offering to repay existing indebtedness, which includes $69.6 million of
indebtedness as of July 14, 2000, and $8.7 million of the $15.8 million of
additional indebtedness incurred on August 1, 2000 to fund the acquisition
of Turtle Mountain. The table above reflects the repayment of $53.6
million, the amount of such indebtedness outstanding as of March 31, 2000.
Subsequent to March 31, 2000, we incurred additional net indebtedness of
$16.0 million as of July 14, 2000, which is being repaid with the proceeds
from this offering and has been reflected in the pro forma as adjusted cash
balance of $16.8 million. See "Use of Proceeds."
DILUTION
Our pro forma net tangible book value as of March 31, 2000, was $17.6
million or $0.95 per share of common stock. Pro forma net tangible book value
per share represents the amount of our total tangible assets, less our total
liabilities, divided by the pro forma number of shares of common stock
outstanding, after giving effect to the acquisition of Turtle Mountain and the
conversion of all outstanding shares of preferred stock into common stock.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by investors in this offering and
the pro forma net tangible book value per share of our common stock immediately
after this offering. After giving effect to our sale of the 8.4 million shares
of common stock in this offering, based upon an assumed initial public offering
price of $12.00 per share, our pro forma net tangible book value as of March
31, 2000 would have been approximately $110.6 million or $4.11 per share of
common stock. This represents an immediate increase in pro forma net tangible
book value to existing shareholders of $3.16 per share and an immediate
dilution to new investors in this offering of $7.89 per share. The following
table illustrates the per share dilution in pro forma net tangible book value
to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $12.00
Pro forma net tangible book value per share as of March 31,
2000....................................................... $0.95
Increase in pro forma net tangible book value per share
attributable to new investors.............................. 3.16
-----
Pro forma net tangible book value per share as of March 31,
2000 after the offering...................................... 4.11
------
Pro forma net tangible book value dilution per share to new
investors.................................................... $ 7.89
======
</TABLE>
The following table summarizes, on a pro forma basis, as of March 31, 2000,
the differences between the number of shares of common stock purchased from us,
the aggregate cash consideration paid to us and the average price per share
paid by existing shareholders since our inception and new investors purchasing
shares of common stock in this offering. The calculation below is based on an
offering price of $12.00 per share, before deducting estimated underwriting and
offering expenses payable by us:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 18,529,158 68.8% $ 42,060,922 29.4% $ 2.27
New public investors
(1).................... 8,400,000 31.2 100,800,000 70.6 12.00
---------- ----- ------------ -----
Total................. 26,929,158 100.0% $142,860,922 100.0%
========== ===== ============ =====
</TABLE>
--------
(1) The above discussion and the table does not include 3,845,232 shares of
common stock issuable pursuant to the exercise of stock options under our
stock option plans at a weighted average exercise price of $4.35 per
share. To the extent that outstanding options are exercised in the future,
there will be further dilution to investors. See "Capitalization" and
"Management--Stock Option Plans."
18
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The unaudited pro forma consolidated statement of operations for the fiscal
year ended March 31, 2000 gives effect to the acquisitions of Quadrus
Manufacturing and Turtle Mountain, as if each had occurred on April 1, 1999.
Operating activity for Quadrus Manufacturing from the date of acquisition, June
8, 1999, through March 31, 2000, is included in our statement of operations
data for the year ended March 31, 2000. The consolidated statement of
operations for Turtle Mountain for the year ended March 31, 2000, has been
calculated by adding the five months ended March 30, 2000 to Turtle Mountain's
year ended October 30, 1999 results of operations and subtracting the five
months ended March 27, 1999.
The unaudited pro forma consolidated balance sheet includes our balance
sheet at March 31, 2000 and the balance sheet of Turtle Mountain at April 1,
2000.
Our unaudited pro forma consolidated financial data should be read in
conjunction with our audited consolidated financial statements for the fiscal
year ended March 31, 2000, and the related notes thereto, which statements have
been audited by Ernst & Young LLP, independent auditors, whose report is
included elsewhere herein, the audited financial statements of Quadrus
Manufacturing and the related notes thereto, which statements have been audited
by McGladrey & Pullen, LLP, independent auditors, whose report is included
elsewhere herein, and the audited financial statements of Turtle Mountain and
the related notes thereto, which statements have been audited by Ernst & Young
LLP, independent auditors, whose report is included elsewhere herein.
Our unaudited pro forma consolidated financial data has been prepared to
illustrate the effects of the Quadrus Manufacturing and Turtle Mountain
acquisitions. Our unaudited pro forma consolidated financial data does not
necessarily present our financial position or results of operations as they
would have been if the companies involved had constituted one entity for the
period presented and is not necessarily indicative of our future results of
operations or the results that might have occurred if the forgoing transactions
had been consummated on the indicated dates.
19
<PAGE>
Pemstar Inc.
Unaudited Pro Forma Consolidated Statement of Operations
Fiscal Year Ended March 31, 2000
(in thousands, except per share data)
<TABLE>
<CAPTION>
Quadrus Turtle
Pemstar Inc. Manufacturing Mountain
Year Ended From April 1, Year Ended
March 31, 1999, to March 31, Acquisition Pro Forma
2000 June 7, 1999 2000 Adjustments Pro Forma Adjustments As Adjusted
------------ ------------- ----------- ----------- ----------- ----------- -----------
(audited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $393,842 $14,130 $28,919 $ -- $436,891 $ -- $436,891
Costs of goods sold..... 363,974 16,810 25,107 -- 405,891 -- 405,891
-------- ------- ------- ------- -------- ------ --------
Gross profit............ 29,868 (2,680) 3,812 -- 31,000 -- 31,000
Selling, general and
administrative
expenses............... 21,576 627 1,675 23,878 -- 23,878
Amortization............ 1,281 -- -- 558 (a) 1,839 -- 1,839
-------- ------- ------- ------- -------- ------ --------
Operating income
(loss)................. 7,011 (3,307) 2,137 (558) 5,283 -- 5,283
Other income (expense) -
net.................... (74) (7) 109 28 -- 28
Interest expense........ (3,588) (81) (197) (1,891)(b) (5,757) 1,599 (d) (4,158)
-------- ------- ------- ------- -------- ------ --------
Income (loss) before
income taxes........... 3,349 (3,395) 2,049 (2,449) (446) 1,599 1,153
Income tax expense
(benefit).............. 698 (1,307) 788 (943)(c) (764)(c) 615 (c) (149)
-------- ------- ------- ------- -------- ------ --------
Net income (loss)....... $ 2,651 $(2,088) $ 1,261 $(1,506) $ 318 $ 984 $ 1,302 (e)
======== ======= ======= ======= ======== ====== ========
Net income (loss) per
share:
Basic.................. $ 0.23 $ 0.11
Diluted................ 0.15 0.08
Weighted average number
of common shares
outstanding:
Basic.................. 11,503 11,503
Diluted................ 17,167 17,167
</TABLE>
--------
(a) Reflects the additional amortization expense related to the allocation of
the purchase price to goodwill for the acquisitions. The amortization is
based on the estimated useful life of twenty years for the goodwill.
(b) Reflects the additional interest expense related to the borrowings
required by us to complete the acquisitions using borrowing capacity
available under our credit facility with US Bank. The additional interest
charges represent two months of incremental borrowings for Quadrus
Manufacturing totaling $16,966 and twelve months of incremenetal
borrowings for Turtle Mountain totaling $16,209. The interest rate used
for the pro forma was 10.4%, which approximates our current borrowing
rate.
(c) Reflects the income tax effect of adjustments (a), (b) and (d) at a 38.5%
effective tax rate.
(d) Adjustments represent the removal of the pro forma interest expense
adjustment relating to the incremental borrowings for the Turtle Mountain
acquisition because the acquisition is intended to be funded with proceeds
from this offering.
(e) The proceeds of the offering are further intended to be used for repayment
of certain outstanding debt consisting primarily of the revolving credit
facility. The interest expense reduction related to this further repayment
of debt equals $2,979, including $2,409 of interest expense in the Pemstar
Inc. year ended March 31, 2000, the Quadrus Manufacturing interest expense
and pro forma related interest expense of $373 and the Turtle Mountain
interest expense of $197. As a result, the net income pro forma as
adjusted from the table above, adjusted further for this further repayment
of certain outstanding debt, would be as follows:
<TABLE>
<S> <C>
Net income pro forma as adjusted................................. $ 1,302
Reduction of interest expense.................................... 2,979
Tax effect of reduction of interest expense...................... (1,147)
-------
Net income as adjusted for repayment of outstanding debt......... $ 3,134
=======
</TABLE>
20
<PAGE>
Pemstar Inc.
Unaudited Pro Forma Consolidated Balance Sheet
March 31, 2000
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Turtle Acquisition
Pemstar Inc. Mountain Adjustments Pro Forma
------------ ----------- ----------- -----------
(audited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents............... $ 2,727 $ 59 $(725) $ 2,061
Restricted cash............ 528 -- -- 528
Accounts receivable, net... 60,061 4,166 -- 64,227
Inventories, net........... 64,437 4,444 -- 68,881
Deferred income taxes...... 2,232 34 -- 2,266
Prepaid expenses and
other..................... 3,458 35 -- 3,493
-------- ------- ------- --------
Total current assets..... 133,443 8,738 (725) 141,456
Property, plant, and
equipment, net............. 34,933 2,477 -- 37,410
Goodwill, net............... 20,691 -- 10,884 31,575
Other assets, net........... 1,384 161 -- 1,545
-------- ------- ------- --------
Total assets............. $190,451 $11,376 $10,159 $211,986
======== ======= ======= ========
Liabilities and
Shareholders' Equity
Current liabilities:
Line of credit............. $ -- $ 1,200 $ -- $ 1,200
Bank overdrafts............ 10,213 -- -- 10,213
Accounts payable........... 47,138 1,745 -- 48,883
Accrued expenses and
other..................... 9,740 325 -- 10,065
Income taxes payable....... 1,474 247 -- 1,721
Current maturities of
long-term debt............ 12,930 576 -- 13,506
Current maturities of
capital lease
obligations............... 2,299 -- -- 2,299
-------- ------- ------- --------
Total current
liabilities............. 83,794 4,093 -- 87,887
Long-term debt, less current
maturities................. 51,114 1,096 16,209 (a) 68,419
Capital lease obligations,
less current maturities.... 4,067 -- -- 4,067
Deferred grant income....... 1,713 -- -- 1,713
Deferred revenue............ 350 -- -- 350
Deferred income taxes....... 17 137 -- 154
Minority interest in
consolidated subsidiaries.. 174 -- -- 174
Redeemable stock:
Series A preferred stock,
$0.01 par value; 570
shares issued and
outstanding............... 8,549 -- -- 8,549
Series B preferred stock,
$0.01 per share; 1,000
shares issued and
outstanding............... 18,000 -- -- 18,000
Shareholders' Equity:
Common stock, $0.01 par
value; shares issued and
outstanding--13,819
shares.................... 138 37 (37) 138
Additional paid-in
capital................... 15,395 -- -- 15,395
Accumulated other
comprehensive loss........ (772) -- -- (772)
Retained earnings.......... 11,170 6,013 (6,013) 11,170
Loans to shareholders...... (3,258) -- -- (3,258)
-------- ------- ------- --------
Total shareholders'
equity.................. 22,673 6,050 (6,050) 22,673
-------- ------- ------- --------
Total liabilities and
shareholders' equity.... $190,451 $11,376 $10,159 $211,986
======== ======= ======= ========
</TABLE>
--------
(a) The pro forma adjustments include indebtedness incurred to fund the
acquisition of Turtle Mountain. The pro forma statement of operations
provides an adjustment for removal of the interest expense related to this
borrowing. Purchase price in excess of the net book value of assets
acquired has been allocated to goodwill, pending completion of our
valuation of the fair market value of the assets acquired and the
liabilities assumed.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for the dates
and periods indicated have been derived from our audited consolidated financial
statements. The selected consolidated statements of income data for the fiscal
year ended March 31, 2000, and the historical consolidated balance sheet data
as of March 31, 2000, were derived from consolidated financial statements
audited by Ernst & Young LLP, whose report appears elsewhere in this
prospectus. The selected historical consolidated statements of income data for
the fiscal years ended March 31, 1998 and 1999, and the historical balance
sheet data as of March 31, 1999, were derived from consolidated financial
statements audited by McGladrey & Pullen, LLP, whose report appears elsewhere
in this prospectus. You should read the 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
thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- --------
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Income Data:
Net sales...................... $22,021 $31,895 $165,049 $187,381 $393,842
Costs of goods sold............ 18,724 27,347 147,962 172,219 363,974
------- ------- -------- -------- --------
Gross profit................... 3,297 4,548 17,087 15,162 29,868
Selling, general and
administrative expenses....... 2,309 2,976 8,328 10,955 21,576
Amortization................... -- -- 54 190 1,281
------- ------- -------- -------- --------
Operating income............... 988 1,572 8,705 4,017 7,011
Other income (expense) - net... 187 247 455 (438) (74)
Interest expense............... (255) (315) (746) (640) (3,588)
------- ------- -------- -------- --------
Income before income taxes..... 920 1,504 8,414 2,939 3,349
Income tax expense............. 289 554 3,097 1,273 698
------- ------- -------- -------- --------
Net income..................... $ 631 $ 950 $ 5,317 $ 1,666 $ 2,651
======= ======= ======== ======== ========
Net income per share:
Basic......................... $ 0.08 $ 0.12 $ 0.55 $ 0.15 $ 0.23
Diluted....................... 0.08 0.12 0.49 0.12 0.15
Weighted average number of
common shares outstanding (1):
Basic......................... 7,645 8,009 9,653 10,897 11,503
Diluted....................... 7,758 8,039 10,874 14,143 17,167
Other Financial Data:
Depreciation................... $ 600 $ 911 $ 1,929 $ 3,331 $ 7,455
Capital expenditures........... 1,587 2,887 8,393 8,657 13,415
Supplemental Data:
EBITDA (2)..................... $ 1,775 $ 2,730 $ 11,143 $ 7,100 $ 15,673
Net cash provided by (used in)
operating activities.......... 150 776 (1,374) 65 (20,225)
Net cash provided by (used in)
investing activities.......... (1,576) (2,938) (10,126) (5,545) (53,489)
Net cash provided by (used in)
financing activities.......... 1,343 2,133 14,661 3,112 75,612
<CAPTION>
March 31,
----------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Unrestricted cash and cash
equivalents................... $ 64 $ 34 $ 3,195 $ 827 $ 2,727
Working capital................ 719 525 12,873 12,783 49,649
Total assets................... 9,398 16,334 61,121 64,983 190,451
Long-term debt and capital
lease obligations less current
maturities.................... 1,713 2,251 6,340 7,090 55,181
Redeemable preferred stock..... -- -- 8,549 8,549 26,549
Total shareholders' equity..... 1,901 3,009 19,544 16,555 22,673
</TABLE>
--------
(1) For an explanation of the determination of the weighted average number of
common shares outstanding used in computing net income per share see Note
1 of notes to consolidated financial statements.
(2) EBITDA means earnings before net interest expense, income taxes,
depreciation and amortization. EBITDA is presented because we believe it
is an indicator of our ability to incur and service debt and a similar
formula is used by our lenders in determining compliance with financial
covenants. However, EBITDA should not be considered as an alternative to
cash flow from operating activities, as a measure of liquidity or as an
alternative to net income as a measure of operating results in accordance
with generally accepted accounting principles.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the "Selected
Consolidated Financial Data" section of this prospectus and our consolidated
financial statements and notes to those statements included elsewhere in this
prospectus. The forward-looking statements in this discussion regarding the
electronics manufacturing services industry, our expectations regarding our
future performance, liquidity and capital resources and other non-historical
statements in this discussion include numerous risks and uncertainties,
including the factors as described in the "Risk Factors" section of this
prospectus. Our actual results may differ materially from those contained in
any forward-looking statements.
Overview
We are a rapidly growing provider of electronics manufacturing services to
original equipment manufacturers in the communications, computing, data
storage, industrial and medical equipment markets. We provide these
manufacturers with a comprehensive range of engineering, manufacturing and
fulfillment services on a global basis through nine facilities strategically
located in the United States, Mexico, Asia and Europe. Our comprehensive
service offerings support our customers' products from initial development and
design through manufacturing to worldwide distribution and aftermarket support.
We were founded in January 1994 by a group of eight senior IBM managers who
had led the storage product operations at IBM's Rochester, Minnesota facility.
We have maintained a significant relationship with IBM, which remains one of
our major customers. Since our inception, we have diversified our customer base
to include industry leading communications and computing original equipment
manufacturers. We have also expanded our geographic presence, enhanced our
product and service offerings and increased our volume production capabilities.
Our key growth initiatives have been:
. In June 1997, we established a manufacturing facility to produce storage
product components and assemblies in Bangkok, Thailand. This facility
provides us with cost-effective manufacturing capabilities and a
facility strategically located in Asia's growing communications and
computing markets.
. In September 1997, we opened a new facility located in Guadalajara,
Mexico, which enhanced our cost-effective manufacturing capabilities in
close proximity to Mexico's emerging communications and computing
markets.
. In June 1998, we opened a new facility located in Tianjin, China, which
we believe made us one of the first independent electronics
manufacturing services companies in northern China. Our facility in
China has further enhanced our cost-effective manufacturing capabilities
while giving us access to new customers in the communications, computing
and data storage industries.
. In October 1998, we entered into a joint venture with Honguan
Technologies, a Singapore mechanical fabrication company. We own a 51%
controlling interest in this joint venture, Pemstar-Honguan Pte. Ltd.
located in Singapore. This joint venture enables us to target data
storage industry original equipment manufacturers by adding specialized
test and process equipment design, manufacturing and service
capabilities and has further strengthened our presence in southeast
Asia.
. In May 1999, we acquired a facility located in Almelo, the Netherlands,
from Fluke Corporation, a manufacturer of precision test equipment,
scopes and meters. In connection with this acquisition, we entered into
a long-term supply agreement to provide manufacturing and design
services to Fluke. In addition to adding Fluke as a key customer, the
acquisition increased our engineering and design capabilities,
particularly in the areas of electrical and industrial design and
enabled us to expand into Europe.
. In June 1999, we acquired Quadrus Manufacturing, located in San Jose,
California. Quadrus Manufacturing was a division of Bell Microproducts,
a distributor of storage and semiconductor products. This acquisition
further strengthened our relationships with original equipment
manufacturers in the communications market, including such industry
leaders as Efficient Networks and Electronics For Imaging.
23
<PAGE>
On June 20, 2000, we entered into an agreement to acquire Turtle Mountain
Corporation, an electronics manufacturing services provider located in
Dunseith, North Dakota. We completed this acquisition on August 1, 2000. In
1999 and 1998, Turtle Mountain made approximately 80% of its net sales through
Turtle Mountain Chiptronics, Inc., a company in which two officers of Turtle
Mountain owned 37% of the outstanding common stock during those years. Upon
completion of the acquisition, one employee of Turtle Mountain will own
approximately 11% of Turtle Mountain Chiptronics' common stock. We will not own
any of Turtle Mountain Chiptronics' stock. We anticipate that we will continue
to distribute a majority of Turtle Mountain's products through Turtle Mountain
Chiptronics following the acquisition.
Under our agreement with Turtle Mountain, we agreed to purchase all of the
outstanding stock of Turtle Mountain for approximately $18.3 million, including
assumed debt. At closing, the purchase price was adjusted downward to reflect
the amount of indebtedness assumed by us and one-half of the Hart-Scott-Rodino
filing fee paid by us. The purchase price was also subject to an upward
adjustment in an amount equal to the amount of Turtle Mountain's cash and cash
equivalents on hand at closing, and an additional adjustment to reflect the
change in Turtle Mountain's net asset value since April 1, 2000, excluding
cash, cash equivalents and indebtedness. After these adjustments, the purchase
price on August 1, 2000 was $20.0 million including $3.7 million of assumed
indebtedness.
During fiscal 2000, we approved a plan to reduce the workforce at our
Almelo, the Netherlands facility. This reduction in workforce is attributable
to new supply chain management software installed by us, which eliminated the
need for 18 out of 250 positions at that facility. Costs associated with the
planned workforce reductions totaling $1.4 million were recorded as liabilities
in the purchase price allocation. The plan contemplates completion of the
workforce reduction by March 2001.
We derive most of our net sales from customer purchase orders. We recognize
sales, net of product returns and warranty costs, typically at the time of
product shipment or as services are rendered. Our net sales and margins from
period to period are affected by the volume of turnkey manufacturing
transactions as compared to consignment transactions. In turnkey manufacturing,
we purchase the materials and components necessary to produce the products we
are manufacturing, resulting in generally higher net sales and cost of goods
sold and generally lower margins. In consignment sales, the customer purchases
all or a portion of the materials and components necessary for production,
resulting in generally lower net sales and generally higher margins, since we
record only the value-added portion as revenue. Currently, substantially all of
our revenue is generated from turnkey transactions, which is consistent with an
industry trend towards turnkey manufacturing. Turnkey manufacturing accounted
for 96.1%, 97.0% and 99.2% of our total net sales in fiscal 1998, 1999 and
2000, respectively. In addition, our net sales and margins are affected by the
mix of projects between engineering and manufacturing and the complexity of
those projects. For example, manufacturing projects typically generate lower
margins than engineering projects because of the high material content of a
manufacturing project as a percentage of revenue and the lower value-added
content. Our engineering services accounted for 5.1%, 4.3% and 4.2% of our
total net sales in fiscal 1998, 1999 and 2000, respectively, while
manufacturing services accounted for 94.9%, 95.7% and 95.8% of our total net
sales in fiscal 1998, 1999 and 2000, respectively. Our cost of goods sold
includes the cost of components and materials, labor costs and manufacturing
overhead. The procurement of raw materials and components requires us to commit
significant working capital to our operations and to manage the purchasing,
receiving, inspection and stocking of these items.
Our operating results are also impacted by the level of capacity utilization
of our manufacturing facilities, indirect labor, and selling, general and
administrative expense. During periods of high capacity utilization, our gross
margins and operating margins generally improve while during periods of lower
capacity utilization our gross margins and operating margins generally decline.
As our capacity has grown in recent years both through the opening of new
facilities and acquisitions, our selling, general and administrative expenses
have increased to support this growth.
Our production volumes are based on purchase orders for the delivery of
products. These orders typically do not commit firm production schedules for
more than thirty to ninety days in advance. We work to minimize the risk
relative to our inventory by ordering materials and components only to the
extent necessary to satisfy
24
<PAGE>
existing customer orders. To the extent our orders of materials and components
for specific jobs exceed our customers' orders, we may incur a charge for
inventory obsolescence for a portion of the inventory cost, which in most
cases, we negotiate with the customer to recover some or all of this inventory
cost. In fiscal 2000, inventory obsolescence revenues increased by $0.6
million. We believe we are largely protected from the risk of inventory cost
fluctuations because we generally pass these costs through to our customers.
Results of Operations
The table below sets forth certain operating data expressed as a percentage
of our net sales for the years indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended
March 31,
-------------------
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
Net sales.................................................. 100.0% 100.0% 100.0%
Cost of goods sold......................................... 89.7 91.9 92.4
----- ----- -----
Gross profit............................................... 10.3 8.1 7.6
Selling, general and administrative expenses............... 5.0 5.9 5.5
Amortization............................................... 0.0 0.1 0.3
----- ----- -----
Operating income........................................... 5.3 2.1 1.8
Other income (expense)-net................................. 0.3 (0.2) (0.0)
Interest expense........................................... (0.5) (0.3) (0.9)
----- ----- -----
Income before income taxes................................. 5.1 1.6 0.9
Income tax expense......................................... 1.9 0.7 0.2
----- ----- -----
Net income................................................. 3.2% 0.9% 0.7%
===== ===== =====
</TABLE>
Fiscal Year Ended March 31, 2000 Compared to Fiscal Year Ended March 31, 1999
Net Sales. Our net sales increased $206.4 million, or 110.1%, to $393.8
million in fiscal 2000 from $187.4 million in fiscal 1999. This increase
resulted from both internal growth and strategic acquisitions. In fiscal 2000,
our internal growth, which excludes net sales increases from operations
acquired in the preceding twelve months, accounted for $61.9 million, or 30.0%,
of total year-to-year growth and was driven by new projects with existing and
new customers in North America and Asia. Our acquisitions of Quadrus
Manufacturing and a European division of Fluke Corporation accounted for $144.5
million, or 70.0% of total year-to-year growth.
Gross Profit. Our gross profit increased $14.7 million to $29.9 million in
fiscal 2000 from $15.2 million in fiscal 1999. This increase in gross profit
reflects the year-to-year growth in net sales. Gross margins decreased to 7.6%
of net sales in fiscal 2000 from 8.1% in fiscal 1999. This lower gross profit
in fiscal 2000 was primarily due to initially lower gross margins of acquired
businesses in fiscal 2000, which represented approximately 50% of the decline
in gross profit, and less than full utilization of assets at our Thailand
facility and set up costs related to new product introductions, each of which
factors represented approximately 25% of the decline in gross profits.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses increased $10.6 million to $21.6 million in fiscal 2000
from $11.0 million in fiscal 1999. Approximately $5.2 million of this increase
consisted of our assumption of existing selling, general and administrative
expenses from acquired businesses. Approximately $5.4 million of this increase
was a result of increased staffing levels and higher selling and administrative
costs to support our growth. As a percentage of net sales, our selling, general
and administrative expenses decreased to 5.5% in fiscal 2000 from 5.9% in
fiscal 1999, due to our leveraging these expenses over an increased revenue
base.
25
<PAGE>
Amortization. Amortization increased $1.1 million to $1.3 million in fiscal
2000 from $0.2 million in fiscal 1999, primarily as a result of amortization of
goodwill arising out of our fiscal 2000 acquisitions.
Other Income (Expense)-Net. Our other expense decreased $0.3 million to $0.1
million in fiscal 2000 from $0.4 million in fiscal 1999. Fiscal 1999 includes a
$0.4 million loss on the sale of property and equipment.
Interest Expense. Our interest expense increased $3.0 million to $3.6
million in fiscal 2000 from $0.6 million in fiscal 1999. This increase reflects
increased borrowings required to fund acquisitions and opening of new
facilities as well as increased working capital requirements driven by growth
in business with new and existing customers.
Income Tax Expense. In fiscal 2000, our effective tax rate decreased to
20.8% from 43.3% in fiscal 1999. This decrease resulted from the mix of
domestic versus international income from operations and the benefit of state
tax credits generated by the acquisition of Quadrus Manufacturing. In general,
our international operations are being taxed at a lower rate than our domestic
operations due to tax holidays and incentives.
Fiscal Year Ended March 31, 1999 Compared to Fiscal Year Ended March 31, 1998
Net Sales. Our net sales increased $22.3 million, or 13.5%, to $187.4
million in fiscal 1999 from $165.0 million in fiscal 1998 due entirely to
internal growth. This growth was offset in part by a $41.6 million decline in
net sales to a customer that discontinued manufacturing a product that had
accounted for $43.7 million of our net sales in fiscal 1998. The internal
growth was the result of new programs with both new and existing customers as
well as the transition of a major project from a consignment to a turnkey
basis.
Gross Profit. Our gross profit decreased $1.9 million to $15.2 million in
fiscal 1999 from $17.1 in fiscal 1998. Gross margins decreased to 8.1% of net
sales in fiscal 1999 from 10.3% in fiscal 1998. These decreases resulted from
start-up expenses associated with our new facilities in Mexico and China.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses increased $2.6 million to $11.0 million in fiscal 1999
from $8.3 million in fiscal 1998. Selling, general and administrative expenses
increased to 5.9% of net sales in fiscal 1999 from 5.0% in fiscal 1998. These
increases reflect increased staffing and expenses added to support anticipated
growth.
Amortization. Amortization increased $0.1 million to $0.2 million in fiscal
1999 from $0.1 million in fiscal 1998.
Other Income (Expense)-Net. Our other income and expense was $0.4 million of
expense in fiscal 1999 compared to $0.5 million of income in fiscal 1998. This
decrease principally reflects recognition of minority interest in our net
income of consolidated subsidiaries and a loss on sales of property and
equipment in fiscal 1999.
Interest Expense. Our interest expense decreased $0.1 million to $0.6
million in fiscal 1999 from $0.7 million in fiscal 1998. This decrease reflects
reduced borrowings under our bank agreement as a result of using the proceeds
from the sale of approximately $9.9 million of equity in fiscal 1998 to repay
indebtedness.
Income Tax Expense. In fiscal 1999, our effective tax rate increased to
43.3% from 36.8% in fiscal 1998. This increase resulted from an increased
percentage of revenue derived from higher tax jurisdictions in fiscal 1999
versus fiscal 1998.
Quarterly Results of Operations
The following table sets forth unaudited quarterly financial information of
Pemstar for the eight quarters ended fiscal 1999 and 2000. Historically, we
have experienced some seasonal variation in net sales, with net
26
<PAGE>
sales typically being highest in the quarter ended December 31 and lowest in
the quarter ended March 31. This seasonal variation reflects the order patterns
of our largest customers, who typically order a higher proportion of their
annual production in their final fiscal quarter. This variation may be offset
in part by internal growth and acquisitions. This information has been derived
from our monthly consolidated financial statements which are unaudited, but, in
the opinion of management, fairly represent our financial performance. This
information should be read in conjunction with the consolidated financial
statements and the related notes contained elsewhere in this prospectus. The
operating results for any previous quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1998 1998 1998 1999 1999 1999 1999 2000
-------- --------- -------- -------- -------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $42,551 $44,641 $50,677 $49,512 $68,598 $97,560 $111,745 $115,939
Cost of goods sold...... 38,507 41,250 46,439 46,023 62,429 90,157 103,351 108,037
------- ------- ------- ------- ------- ------- -------- --------
Gross profit............ 4,044 3,391 4,238 3,489 6,169 7,403 8,394 7,902
Selling, general and
administrative
expenses............... 2,238 2,368 3,015 3,334 3,936 5,075 5,749 6,816
Amortization............ 16 16 75 83 205 271 277 528
------- ------- ------- ------- ------- ------- -------- --------
Operating income........ 1,790 1,007 1,148 72 2,028 2,057 2,368 558
Other income (expense)-
net................... (315) (282) (172) 331 (34) (542) (329) 831
Interest expense........ 125 135 152 228 341 776 986 1,485
------- ------- ------- ------- ------- ------- -------- --------
Income (loss) before
income taxes........... 1,350 590 824 175 1,653 739 1,053 (96)
Income tax expense
(benefit).............. 556 277 379 61 738 351 62 (453)
------- ------- ------- ------- ------- ------- -------- --------
Net income.............. $ 794 $ 313 $ 445 $ 114 $ 915 $ 388 $ 991 $ 357
======= ======= ======= ======= ======= ======= ======== ========
</TABLE>
Liquidity and Capital Resources
Our principle sources of liquidity are cash provided by operations,
borrowings under our various credit facilities and debt instruments and private
sales of equity. Our principal uses of cash have been to finance working
capital, acquisitions, new operations, capital expenditures and debt service
requirements. We anticipate these uses will continue to be our principal uses
of cash in the future.
Net cash provided by (used in) operating activities for fiscal year 2000,
1999 and 1998 was ($20.2 million), $0.1 million and ($1.4 million),
respectively. Fluctuations in net cash 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 longer collection periods
and lower inventory turns at businesses acquired in fiscal 2000. For example,
during fiscal 2000, these acquired businesses had approximately 48% longer
collection periods and 66% lower inventory turns than our established business.
Net cash used in investing activities for fiscal 2000, 1999 and 1998 was
$53.5 million, $5.5 million and $10.1 million, respectively. In fiscal 2000,
our cash used in investing activities consisted primarily of $35.0 million used
in the acquisition of Quadrus Manufacturing, $13.4 million used for capital
expenditures and $4.5 million used in the acquisition of a European division of
Fluke Corporation.
Net cash provided by financing activities for fiscal 2000, 1999 and 1998 was
$75.6 million, $3.1 million and $14.7 million, respectively. Our principal
sources of cash from financing activities in fiscal 2000 included proceeds of
approximately $18.0 million from the sale of private equity and proceeds from
long-term debt. Net
27
<PAGE>
cash provided by financing activities for fiscal 1999 consisted primarily of
proceeds from long-term debt, offset in part by payments of long-term debt, and
net cash provided by financing activities for fiscal 1998 included proceeds of
approximately $9.9 million from the sale of private equity and proceeds from
long-term debt offset in part by payments of short-term and long-term debt.
Our capital expenditures in fiscal 2000 consisted of $5.4 million of printed
circuit board assembly equipment purchased for our Tianjin, China facility and
an investment of $8.0 million in general equipment and information technology
upgrades across all of our facilities. We estimate our capital expenditures for
fiscal 2001 will increase over fiscal 2000 and will be used primarily for
equipment upgrades, optical technology equipment, information technology
systems and expansion of our facilities.
As of March 31, 2000, we had unrestricted cash and cash equivalents of $2.7
million and total borrowings of approximately $70.4 million. Of these total
borrowings, we had approximately $53.4 million outstanding under our US Bank
revolving credit facility at an effective interest rate of 10.3%. On May 5,
2000, we entered into a new credit facility with IBM Credit Corporation, which
provides for borrowings up to $40.0 million, and amended our US Bank credit
facility to reduce our available borrowings from $65.0 million to $55.0
million. Borrowings under each credit facility is limited to the lesser of the
facility amount or the available borrowing base calculated as a percentage of
accounts receivable and inventory balances, which limits may restrict our
ability to access the full amount of available borrowings. As of July 14, 2000,
we had $38.4 million outstanding under the US Bank credit facility, $31.0
million outstanding under our IBM facility and our aggregate borrowing base
under the credit facilities was $80.0 million. Our increase in borrowings from
March 31, 2000 was primarily due to increased working capital requirements to
support higher sales and to pay the final installment of the purchase price for
the acquisition of our Almelo, the Netherlands facility. We also have a
$3.2 million credit facility serving our Netherlands operations. As of March
31, 2000, we had $3.1 million outstanding under our Netherlands credit
facility. Each credit facility bears interest on outstanding borrowings at
variable interest rates, which as of May 15, 2000, were 11.0% for the US Bank
facility, 10.0% for the IBM facility and 5.75% for the Netherlands facility.
On August 1, 2000 we amended our credit facility with IBM to permit
additional borrowings to fund a portion of our acquisition of Turtle Mountain.
Under the terms of the amendment, IBM provided us with a term loan of
$9.5 million due June 30, 2004, and we funded the balance of the purchase price
for Turtle Mountain with $4.2 million in cash and by making a draw of $6.3
million on our existing revolver with IBM. As a result of this acquisition, we
incurred additional indebtedness of $15.8 million. Under the IBM term loan
agreement, we are obligated to repay 25% of the loan amount, or $2.4 million,
within three days after the consummation of the offering. This term loan bears
interest at the prime rate plus 2%, for a current rate of 11.5%.
All of these credit facilities are secured by substantially all of our
assets. We are also required to meet financial covenants under these facilities
relating to the ratio of our indebtedness to our earnings before net interest
expense, income taxes, depreciation and amortization, or EBITDA, the ratio of
our EBITDA, less specified expenditures, to our principal and interest
payments, the ratio of the value of our current assets to current liabilities,
our tangible net worth and capital expenditures. On July 31, 2000, we were not
in compliance with monthly financial covenant tests relating to our current
assets to current liabilities ratio, our cash flow leverage ratio and our
capital expenditures under our US Bank credit facility, which if not cured or
waived, could have resulted in an event of default. On July 31, 2000, we
obtained a one time 30 day waiver of our compliance with these financial
covenant tests from US Bank. Our non-compliance was the result of internal
growth and increased working capital needs to fund new programs with new
customers. As we continue to grow, we may require additional waivers of
compliance with these financial covenant tests to accomodate our growth.
In addition to our credit facilities we had other debt obligations totaling
$17.0 million as of March 31, 2000. See Notes 8 and 11 to our consolidated
financial statements. We intend to use a portion of the net proceeds from this
offering to repay indebtedness under our credit facilities. Subsequent to this
offering, we intend to revise our existing credit facilities to increase our
borrowing capacity.
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We believe that cash flows from operating activities, borrowings available
in our current financing agreements and the proceeds from this offering will be
sufficient to fund our currently anticipated working capital, planned capital
expenditures and debt service requirements for the next twelve months. However,
we regularly review acquisition and additional new operations opportunities as
well as major new program opportunities with new or existing customers, any of
which may require us to sell additional equity or secure additional financing
during this period. Beyond the current twelve month period, we believe we will
have sufficient funds to support our current operations. However, we will need
to raise additional capital to fund potential growth and make capital
expenditures associated with this growth. The sale of additional equity could
result in additional dilution to our shareholders. We cannot assure you that
any financing arrangements will be available in amounts or on terms acceptable
to us.
Quantitative and Qualitative Disclosures About Market Risks
Interest Rate Risk
Our exposure to interest rate risk arises principally from the variable
rates associated with our primary revolving line of credit. On March 31, 2000,
we had total borrowings of $53.4 million under this line of credit, which
accrued interest at an effective rate of 10.3%. An adverse change of one
percent in the interest rate of all borrowings which bear interest at variable
rates would cause us to incur a change in interest expense of approximately
$605,000 on an annual basis. As of March 31, 1999 an adverse change of one
percent in the interest rate would cause us to incur a change in interest
expense of approximately $103,000 on an annual basis for all borrowings
outstanding bearing interest at variable rates at March 31, 1999.
Foreign Currency Exchange Risk
Fluctuations in the rate of exchange between the U.S. dollar and the
currencies of countries other than the U.S. in which we conduct business could
adversely affect our financial results. Except for sales in the Netherlands and
China, our sales are principally denominated in U.S. dollars. As a result, we
have relatively limited exposure to foreign currency exchange risk on our
sales. For fiscal 2000, sales denominated in Dutch Guilders totalled $30.9
million and sales denominated in Chinese Renminbi totalled $14.9 million. 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.
The reported results of our foreign operations will be influenced during
their translation into U.S. dollars by currency movements against the U.S.
dollar. The result of a uniform 10% strengthening in the value of the U.S.
dollar from March 31, 2000 and 1999 levels relative to each of the currencies
in which our revenues and expenses are denominated would result in a decrease
in operating income of approximately $148,000 and $110,000, respectively, for
the fiscal years ended March 31, 2000 and 1999.
For the fiscal year ended March 31, 2000, the amount we consider permanently
invested in foreign subsidiaries and translated into dollars using the year end
exchange rate is $8,343,000 and the potential loss in fair value resulting from
a hypothetical 10% adverse change in foreign currency exchange rate amounts to
$758,000. For the fiscal year ended March 31, 1999, we did not have any amounts
permanently in foreign subsidiaries. Actual amounts may differ.
We currently do not hedge our exposure to foreign currency exchange rate
fluctuations, however we may hedge such exposures in the future.
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Impact of Inflation
We believe that our results of operations are not dependent upon moderate
changes in the inflation rate.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
(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 that an entity
recognize all derivatives as either assets or instruments at fair value. This
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000 and is therefore applicable to us beginning with our fiscal
quarter ending June 30, 2001. Based upon the nature of our financial
instruments and hedging activities in effect as of the date of this filing,
this pronouncement would not have a material impact on our financial position
or results of operations. We will adopt SFAS No. 133 effective April 1, 2001.
In fiscal 2000, we adopted the American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
provides guidance on accounting for the costs of computer software developed
or obtained for internal use and for determining when specific costs should be
capitalized and when they should be expensed. The impact of adopting SOP 98-1
did not have a material impact on our financial position, results of
operations or cash flows.
In fiscal 2000, we adopted AICPA SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires that all start-up costs related to new
operations be expensed as incurred. The impact of adopting SOP 98-5 did not
have a material impact on our financial position, results of operations or
cash flows.
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BUSINESS
Overview
We are a rapidly growing provider of electronics manufacturing services to
original equipment manufacturers in the communications, computing, data
storage, industrial and medical equipment markets. We offer our communications
industry customers substantial expertise and experience in wireless and optical
systems markets that are experiencing rapidly growing demand for specialized
engineering and manufacturing services. We provide a comprehensive range of
engineering, manufacturing and fulfillment services to our customers on a
global basis through nine facilities strategically located in the United
States, Mexico, Asia and Europe. Our comprehensive service offerings support
our customers' needs from product development and design through manufacturing
to worldwide distribution and aftermarket support. Since our founding in 1994,
we have experienced strong financial growth and consistent profitability, with
Manufacturing Market Insider ranking our revenue growth rate of 110% in fiscal
2000 the highest among the top twenty domestic electronics manufacturing
services companies for their most recent fiscal years.
Industry Background
Electronics manufacturing services companies provide a broad range of
engineering, manufacturing and fulfillment services to original equipment
manufacturers worldwide. Growth in the electronics manufacturing services
industry is primarily being driven by the overall growth of the electronics
industry, the increased use of outsourcing among original equipment
manufacturers and the frequency of asset divestitures by those manufacturers to
electronics manufacturing services businesses. By outsourcing electronics
manufacturing services, original equipment manufacturers are able to focus on
their core competencies, including product development, sales, marketing and
customer service, while leveraging the expertise of electronics manufacturing
services providers for design, procurement, assembly and test operations and
supply chain management. Original equipment manufacturers use electronics
manufacturing services providers to enhance their competitive position by:
. Accessing leading engineering technologies;
. Accessing advanced manufacturing and processing technologies;
. Reducing time to market;
. Reducing operating costs and invested capital;
. Improving supply chain management; and
. Improving access to global markets.
According to Technology Forecasters, the global electronics manufacturing
services industry is expected to grow at an average annual rate of 20% from $60
billion in revenues in 1998 to $149 billion in 2003. Technology Forecasters
estimates that the percentage of cost of goods sold in the electronics industry
that is outsourced for manufacture by original equipment manufacturers will
increase from 9.5% in 1998 to 17.1% by 2003. We believe that original equipment
manufacturers will continue to increase their use of outsourcing due to rapidly
changing product technologies, shortening product lifecycles and the increasing
capability of electronics manufacturing services companies to manufacture more
complex products. A summary of the historical and projected growth of the
electronics manufacturing services industry is provided below.
[Bar Chart]
Historical and Projected Industry Growth
(BILLIONS) % Outsourced
---------- ------------
1998 $60 9.5%
1999 $73 10.9%
2000E $88 12.4%
2001E $106 14.0%
2002E $126 15.5%
2003E $149 17.1%
Source: Technology Forecasters, Inc., Contract Manufacturing from a Global
Perspective-1999 Update.
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According to Technology Forecasters, the electronics manufacturing services
industry is extremely fragmented, with over 3,000 independent electronics
manufacturing services companies in existence today. Additionally, the twenty
largest companies represented approximately 56% of the worldwide electronics
manufacturing services market in 1998, with the largest company in the industry
representing 11.3% of total industry revenues. The industry has experienced and
is anticipated to continue to experience significant consolidation.
Technology Forecasters indicates that original equipment manufacturers of
all sizes are embracing the outsourcing model, with smaller original equipment
manufacturers, those with less than $1.0 billion of revenue in 1998, just as
likely to outsource as manufacture products in-house. This is due in part to
the advent of the "virtual corporation," in which companies evolve without
performing any manufacturing in-house, relying instead on long term
relationships with electronics manufacturing services companies. In addition,
according to Technology Forecasters, medium size companies, those with $1.0
billion to $9.9 billion of revenue in 1998, are expected to increase their use
of outsourcing from approximately 10% of their total cost of goods sold in 1998
to approximately 45% by 2003. As a result, small and medium size original
equipment manufacturers have represented and will continue to represent a large
market opportunity for the electronics manufacturing services industry going
forward.
The electronics manufacturing services industry is highly diverse with
companies serving original equipment manufacturers in a broad array of industry
segments. Communications and computing are currently the largest electronics
manufacturing services markets based on 1998 total revenues having accounted
for 32% and 38% of total electronics manufacturing services revenues in 1998,
respectively. Technology Forecasters also forecasts that the communications
segment, which represented $19.2 billion of revenues in 1998, will be the
fastest growing electronics manufacturing services market through 2003. We also
believe that certain segments of the communications sector offer particularly
strong growth opportunities, including the wireless and optical systems
markets.
As this outsourcing trend continues, many original equipment manufacturers
are increasingly evaluating whether to outsource additional aspects of their
business functions, including design, logistics, procurement and test. For
example, in a 1999 Technology Forecasters survey, original equipment
manufacturers indicated an increased willingness to outsource a broad spectrum
of design services, including product definition, product design, design for
manufacturability and design for test services. As a result, we believe
electronics manufacturing services companies that have core competencies in
providing advanced engineering services and in serving the communications
markets are well positioned to benefit from original equipment manufacturers'
accelerating demand for electronics manufacturing services.
Our Competitive Strengths
We have established strong, long-term relationships with numerous original
equipment manufacturers, many of which are leaders in their respective markets.
These relationships depend on our continuing to provide superior performance
for our customers rather than long-term contracts. Our relationships with
original equipment manufacturers are built on several specific strengths,
including the following:
Worldwide Engineering Capabilities. Utilizing over 400 engineering
professionals across all of our locations, we differentiate ourselves in the
electronics manufacturing services marketplace by providing our customers with
worldwide engineering and product design services. We believe our engineering
staff is one of the largest in the industry. Our engineering capabilities
enable us to conceptualize, create specifications, design, prototype, validate
and ramp our customers' products to volume production. We offer our customers
expertise in a variety of design applications, including mechanical and
electromechanical engineering, software, firmware, application specific
integrated circuit design, printed circuit board design, industrial design and
systems engineering and integration. In addition, we offer extensive custom
test and automation equipment design and build services. These product design,
custom test equipment and automation capabilities enhance the
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design and manufacturability of our customers' products, reduce time to market
and allow us to provide customers with a seamless transition to commercial
volume production.
Communications Focus with Specific Wireless and Optical Systems
Expertise. We focus substantial resources on the rapidly expanding
communications industry and have developed specific expertise in the high
growth wireless and optical market segments. We use our wireless and optical
capabilities to build a wide variety of advanced optical components and optical
subsystems for existing and emerging original equipment manufacturers. Our
focus and expertise in wireless and optical systems has enabled us to establish
strong relationships with wireless and optical systems original equipment
manufacturers, including Ancor Communications, Interwave, Optical Networks,
Optical Solutions, Repeater Technologies and Western Multiplex. We believe that
this expertise and our early entry into the wireless and optical systems
markets makes us one of the few electronics manufacturing services providers
that can offer original equipment manufacturers advanced wireless and optical
design and manufacturing services and will enable us to continue to attract new
customers and increase our sales to existing customers in the communications
marketplace.
Comprehensive Manufacturing and Fulfillment Services. We complement our
engineering capabilities with a comprehensive range of manufacturing and
fulfillment services that support our customers' products from initial design
and development through prototyping, assembly, test equipment build and
automation, customized final system assembly and fulfillment services, such as
supply chain management, product packaging, worldwide distribution, and
aftermarket support. These capabilities enable us to provide original equipment
manufacturers with a complete solution for all of their electronics
manufacturing services needs, which streamlines and simplifies the development,
manufacture and delivery of products through a single supplier, thereby
reducing overall costs to our customers.
Global Scale and Infrastructure. We operate engineering and manufacturing
facilities in the United States, China, Mexico, the Netherlands, Singapore and
Thailand, all of which are in close proximity to the world's major electronics
markets. Our global presence allows us to shift manufacturing efforts to the
areas where our customers and their end markets are located, reduce the time
and cost required to bring our customers' products to market and simultaneously
introduce our customers' products in major global markets. We believe our
global capabilities allow us to better serve the multinational needs of our
larger customers and differentiate us from regional competitors.
Strategy
Our objective is to enhance our position as an electronics manufacturing
services provider to original equipment manufacturers worldwide. We intend to
achieve this objective by continuing to employ the following strategies:
Leverage Our Worldwide Engineering Services. We are committed to providing
worldwide engineering services to meet original equipment manufacturers'
increasing requirements to outsource front-end product design, prototyping and
test services. We intend to leverage our engineering services to establish
relationships with original equipment manufacturers early in the new product
design and development process to give us an opportunity to also provide
integrated engineering, manufacturing and fulfillment services for these new
products. In addition, we provide engineering expertise in the design and build
of custom test equipment systems, which original equipment manufacturers have
traditionally been unable to outsource. Our custom equipment design and build
services provide us with another opportunity to attract new customers and to
introduce other components of our comprehensive electronics manufacturing
services solution to existing customers. We intend to continue developing new
advanced engineering, custom test equipment and process automation services to
meet the changing needs of our customers in a cost efficient and timely manner.
Provide Comprehensive Engineering, Manufacturing and Fulfillment Service
Offerings. We will continue to expand our service offerings to meet the
evolving needs of our customers who are increasingly requiring a wider range of
advanced services from electronics manufacturing services companies. We have
developed the
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engineering, manufacturing and fulfillment capabilities to provide
comprehensive electronics manufacturing services solutions that support our
customers' products from initial product design and development through
prototyping, testing, manufacture and world-wide distribution. We intend to use
these capabilities to increase our services to our existing customers and to
expand the scope of services we provide to original equipment manufacturers
launching new product programs.
Focus on High Growth Market Segments. We focus on establishing profitable
and strategic relationships with industry leaders in high growth markets such
as the wireless and optical segments of the communications industry. We will
continue to capitalize on our engineering and manufacturing capabilities to
develop relationships with established and emerging original equipment
manufacturers in high growth markets to increase our customer base and increase
our sales to existing customers as they expand into new markets.
Expand Our Global Scale and Infrastructure. Over the last several years, we
have expanded from one facility in North America to nine facilities across
North America, Europe and Asia. We intend to continue to expand our presence in
strategic locations to provide our customers with services in close proximity
to their own operations or their end customers. This strategy enhances our
ability to offer our customers timely delivery of products and cost effective
manufacturing solutions worldwide.
Pursue Selective Acquisitions. We completed two acquisitions in fiscal 2000
and we will continue to pursue strategic acquisitions that enable us to expand
our geographic reach, add manufacturing capacity, secure key new customers,
diversify into complementary product markets and broaden our technological
capabilities and value-added service offerings. As part of our overall
strategy, we intend to capitalize on the growth opportunities presented by
original equipment manufacturers' divestitures of their own engineering and
manufacturing operations as well as the consolidation of electronics
manufacturing services companies, thereby maximizing our ability to increase
our service capabilities in strategic markets and locations.
Focus on Quality Management. We are committed to excellence in the
engineering and manufacturing of our customers' products and have adopted an
extensive quality management system that focuses on continual process
improvement and achieving high customer satisfaction. We have obtained
certifications of our quality systems such as ISO 9001 and ISO 9002 from
independent organizations to ensure quality in all aspects of our design and
manufacturing processes. We believe these quality systems are a requirement to
attract and retain our customers. We will continue to utilize advanced
statistical engineering and metrics control techniques to achieve our high
quality standards and customer satisfaction objectives.
Provide Superior Supply Chain Management. We are committed to maintaining a
leadership position in supply chain management to reduce our customers' total
costs and time to market and increase our flexibility to respond to changing
customer requirements. We are currently implementing Web-based supply chain
software products from AGILE Software Corporation and i2 Technologies that will
allow us to communicate with our supply chain partners to provide them real-
time information on specific orders, product demand, inventory and component
lead times. We will continue to utilize and develop advanced electronic data
interchange and Web-based e-business systems to manage all aspects of the
engineering, manufacturing and fulfillment processes and streamline the supply
chain system for our customers.
Services
We offer a comprehensive range of engineering, manufacturing and fulfillment
services that support our customers' products from initial design through
prototyping, design validation, testing, ramp to volume production, worldwide
distribution and aftermarket support. We support all of our service offerings
with a comprehensive supply chain management system, superior quality
management program and sophisticated information technology systems. Our
comprehensive service offerings enable us to provide a complete and solution
for our customers' outsourcing requirements.
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Our Engineering Services
New Product Design, Engineering, Prototype & Test. We offer a full spectrum
of new product design, prototype, test and related engineering services that
shorten product development cycles, resulting in faster time to market and
reduced costs for our customers. Our multi-disciplined engineering teams
provide expertise in a number of core competencies critical to serving original
equipment manufacturers in our target markets, including industrial design,
mechanical and electrical hardware, firmware, software and systems integration
and support. We create specifications, design, prototype, validate and ramp our
customers' products into high volume manufacturing. Our technical expertise
includes electronic circuit design for analog, digital, radio frequency and
microwave printed circuit boards and application specific integrated circuits.
Custom Test and Automation Equipment Design & Build Services. We provide our
customers with a comprehensive range of custom functional test equipment,
process automation and replication services. We have substantial expertise in
tooling, testers, equipment control, systems planning, automation, floor
control, systems integration, replication and programming. Our custom
functional test equipment, process automation and replication services are
available to original equipment manufacturers as part of our full service
product design and manufacturing services package or on a stand-alone basis for
products designed and manufactured elsewhere. Our ability to provide these
services allows us to capitalize on original equipment manufacturers'
increasing needs for custom manufacturing solutions and provide an additional
opportunity to introduce customers to our comprehensive engineering and
manufacturing services.
Revenues from our engineering services were 4.2%, 4.3% and 5.1% of our total
net sales in fiscal 2000, 1999 and 1998, respectively.
Our Manufacturing Services
Printed Circuit Board Assembly & Test. We offer a wide range of printed
circuit board assembly and test services, including printed circuit board
assembly, assembly of subsystems, circuitry and functionality testing of
printed assemblies, environmental and stress testing and component reliability
testing.
Flex Circuit Assembly & Test. We provide original equipment manufacturers
with a wide range of flexible circuit assembly and test services. We utilize
specialized tooling strategies and advanced procedures to minimize circuit
handling and ensure that consistent processing parameters are maintained
throughout the assembly process. All of our manufacturing activities are
monitored to comply with strict environmental controls and to maintain our
product quality standards.
Systems Assembly & Test. We offer a wide range of systems assembly and test
services that enhance product quality and product life cycles. Our
manufacturing capabilities include the design, development and building of test
strategies and equipment for our customers' products which utilize manual,
mechanized or fully automated production lines to improve product quality,
reduce costs and improve delivery time to customers. As original equipment
manufacturers seek to provide greater functionality in smaller products, they
require more sophisticated systems assembly technologies and processes. Our
expertise in advanced precision and electromechanical technologies and our
continued investment in technology enables us to meet our customers' changing
needs and gives our customers access to a wide variety of advanced
manufacturing solutions without having to make substantial capital investments.
In order to meet our customers' demand for systems assembly and test services,
we offer subassembly build, final assembly, functionality testing,
configuration and software installation and final packaging services.
Precision Electromechanical Assembly & Test. We offer a full spectrum of
precision electromechanical assembly and test services that can be utilized in
a variety of advanced applications. We design, develop and build product
specific manufacturing processes utilizing manual, mechanized or fully
automated lines to meet our customers' product volume and quality requirements.
All of our assembly and test processes are developed according to customer
specifications and replicated within our facilities.
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Plastic Injection Molding. We offer our customers plastic injection molding
services. Currently, we provide plastic injection molding services for a disk
drive component for the data storage industry. All of our molding services can
be performed with hands-free robotic systems in a humidity and temperature
controlled environment to maximize product quality.
Revenues from manufacturing services were 95.8%, 95.7% and 94.9% of our
total net sales in fiscal 2000, 1999 and 1998, respectively.
Our Fulfillment Services
Product Configuration and Distribution. We provide our customers with
product configuration and global distribution services that complement our
engineering and manufacturing services and enable our customers to be
responsive to changing market demands and reduce time to market. We utilize
sophisticated software that allows us to customize product runs to configure
the products made to the specifications in our customers' orders. Our global
distribution capabilities allow us to distribute products to customers,
distributors and end-users around the world. We provide inventory programs
that allow our customers to manage the shipment and delivery of products. As
part of these inventory programs, a customer may request that its inventory be
stored at a site closer to the customer prior to distribution, which
streamlines the distribution process and decreases delivery times.
Aftermarket Services. All of our products carry a 90 day warranty. In
addition, we provide our largest customer with a range of aftermarket
services, including repair, replacement, refurbishment, remanufacturing,
exchange, systems upgrade and spare part manufacturing for storage subsystems.
We intend to expand these aftermarket services to additional customers on an
as-requested basis. These services are tracked and supported by specific
information technology systems that can be tailored to meet our customers'
individual requirements.
Our fulfillment services are not billed separately, but are provided as
part of our manufacturing services.
Our Value-Added Support Systems
We support our engineering, manufacturing, distribution and aftermarket
support services with an efficient supply chain management system and a
superior quality management program. All of our value-added support services
are implemented and managed through sophisticated information technology
systems, which enable us to collaborate with our customers throughout all
stages of the engineering, manufacturing and order fulfillment processes.
Supply Chain Management
Our supply chain management system reduces our customers' total costs by
assisting them in the selection of components during the product design stage
to ensure advantageous sourcing and pricing from preferred suppliers and
distributors. We employ a supplier certification process to ensure that
suppliers of key components have predictable and stable manufacturing
processes capable of supplying components that meet or exceed our quality
requirements. We have strong relationships with a broad range of materials and
component suppliers and distributors based on our committment to use them on a
preferred basis. In addition, our product design and volume procurement
capabilities enhance our ability to secure supplies of materials and
components at advantageous pricing.
We utilize a full complement of electronic data interchange transactions,
or EDI, with our suppliers to coordinate forecasts, orders, reschedules,
inventory and component lead times. At our engineering facilities, we also
utilize Web-based products from AGILE Software Corporation to collaborate with
our supply chain partners in real-time on product content and engineering
change management. We are in the process of expanding our Web-based system by
implementing a suite of real-time supply chain management software products
from i2 Technologies across all of our facilities to enhance our ability to
rapidly scale operations to
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meet customer needs, shift capacity in response to product demand fluctuations,
reduce materials costs and effectively distribute products to our customers or
their end-customers.
Quality Management
We believe quality management is paramount to providing quality engineering
and manufacturing services to our customers. We employ several quality
management systems, which ensure the highest quality services and customer
satisfaction. All of our assembly and test activities are supported by advanced
statistical engineering and metrics control techniques, including yield
management and failure analysis, which improve product and service quality.
Statistical information is regularly reviewed by each facility's management
team to ensure we are achieving our quality goals and customer satisfaction.
Our customers can access our quality data information through our Web-based
program management system and monitor our commitment to quality assurance.
Our facilities in Rochester, Minnesota; San Jose, California; and Almelo,
the Netherlands are ISO 9001 certified, and our manufacturing facilities in
Mexico and Thailand are ISO 9002 certified. ISO 9001 is a certification process
comprised of 20 quality system requirements to ensure quality in the areas of
design, development, production, installation and servicing of products. ISO
9002 is a certification process similar to the ISO 9001 requirements. ISO 9001
applies to engineering services, while ISO 9002 applies to manufacturing
services. In addition, all of our facilities engaged in medical product design
and manufacture are FDA/QSR compliant, and our Rochester, Minnesota facilites
are QS 9000 certified. QS 9000 is a certification process from the nation's
major automakers that focuses on continuous improvement, defect reduction,
variation reduction and elimination of waste. We are currently pursuing an ISO
14000 environment certification for all of our facilites which applies to
environmental aspects of product management systems and life cycle impacts.
Information Systems
Information systems are a critical element for achieving our business
objectives. We believe that our significant investment in sophisticated
information systems will deliver competitive advantages for our customers by
improving product quality and operational flexibility. Our enterprise resource
planning systems, or ERP systems, provide product and production information to
our supply chain management and engineering change management systems. These
ERP systems also provide us with real-time financial and materials management
data. Our information systems also control serialization and quality data for
all of our facilities around the world utilizing state-of-the-art statistical
process control techniques for continuous process improvements. We will
continue to make significant investments in Web-based collaboration tools that
will leverage the speed and technology of the Internet to facilitate the flow
of information, both within Pemstar and with our customers and suppliers,
resulting in superior quality products, quicker response time for our clients
and reduced time to market.
Manufacturing Technologies
We offer original equipment manufacturers expertise in a wide variety of
traditional and advanced manufacturing technologies. Our technical expertise
supports standard printed circuit board assembly as well as increasingly
complex products that require advanced engineering skills and equipment. We
intend to continue to maintain our technical expertise in traditional methods
and processes and to continue developing and maintaining our expertise in
advanced and emerging technologies and processes.
Our technology expertise includes the following areas applicable to both
printed circuit board assembly and application specific flexible circuits:
. Surface Mount Technology. Utilizing this technology, component leads are
attached to a circuit board by soldering to a circuit board without any
holes or leads protruding through the board. This
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technology is used for higher density products because both sides of the
board can be used and can be automated for high volume production.
. Fine Pitch. Fine pitch technology also involves the attachment of a
component onto a circuit board by soldering. Pitch refers to the spacing
of component leads and patterns. With fine pitch and ultra fine pitch
technology, the distance between the individual component leads is much
smaller, making this technology useful for products requiring smaller
packaging and higher board densities.
. Ball Grid Array. A ball grid array is a method of mounting an integrated
circuit or other component onto a printed circuit board. Rather than
using traditional leads, the component is attached directly to the
bottom of the package with small balls of solder. When assembled onto a
circuit board, these solder balls form an interconnect with conducive
pads on the surface of the board. This method allows for greater
component density and is used in printed circuit boards with higher
layer counts.
. Flip Chip. A flip chip is a structure that houses circuits which are
interconnected without leads. This technology involves mounting an
electronic device face down directly to a circuit board utilizing solder
balls attached to the device. The electrical interconnections are then
surrounded with an adhesive-type underfill for protection. Flip chips
are utilized to minimize printed circuit board surface area when compact
packaging and higher product performance is required.
. Chip On Board/Wirebonding. This technology involves the attachment of an
electronic device face-up directly to a circuit board and then making
individual electronic connections by bonding conducive wires to the
board and the device. The completed assembly is then encapsulated in a
polymer. This technology eliminates the need for packaging the circuit,
and allows for additional miniaturization of products.
. In-Circuit Test. This technology involves the verification of specific
portions of a circuit board for basic electronic properties associated
with manufacturing defects.
. Board Level Functional Test. This technology simulates the ultimate end-
use functionality of a completed circuit board assembly.
. Stress Testing. This technology verifies the functionality of a
completed printed circuit board assembly while intentionally introducing
adverse environmental conditions such as temperature extremes, humidity
and vibration to screen out potential problems or failures otherwise not
detectable until the product is in use.
We also provide original equipment manufacturers with expertise in
manufacturing technologies used in the production of wireless and optical
products and systems, including:
. Adhesives. Precision application of bonding agents to components.
. Conformal Coating. This technology involves applying a film coating to
printed circuit board assemblies and other assemblies to protect them
from environmental damage.
. Laser Welding. Utilizing lasers, we can conduct high-precision welding
of materials.
. Hybrid Optical/Electrical Printed Circuit Board Assembly and Test. We
have technology that enables us to assemble circuit board assemblies
containing both light or laser components and electrical components.
. Sub-micron Alignment of Optical Sub-Assemblies. We have technology that
enables us to align components within increments of less than one
millionth of a meter.
Customers
Our customers include established original equipment manufacturers,
including such industry leaders as 3M, Efficient Networks, Electronics For
Imaging, Fluke Corporation, Fujitsu, Honeywell, IBM, Motorola,
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<PAGE>
Pinnacle, RSA, Seagate and Sony. We also have relationships with a number of
emerging wireless and optical systems original equipment manufacturers,
including Ancor Communications, Interwave, Optical Networks, Optical Solutions,
Repeater Technologies and Western Multiplex. Our customers include established
and emerging original equipment manufacturers in the communications, computing,
data storage, industrial and medical equipment industries. The following table
shows the percentage of our sales in each of the markets we serve for the
fiscal years ended March 31, 1998, 1999 and 2000.
<TABLE>
<CAPTION>
Fiscal Year
Ended
March 31,
----------------
Markets 1998 1999 2000
------- ---- ---- ----
<S> <C> <C> <C>
Communications............................................ 15% 16% 40%
Computing................................................. 41 60 26
Data Storage.............................................. 39 18 20
Industrial Equipment...................................... 2 3 13
Medical Equipment......................................... 3 3 1
--- --- ---
Total................................................... 100% 100% 100%
=== === ===
</TABLE>
The following table indicates, for fiscal 2000, our ten largest customers in
terms of net sales, in alphabetical order and the primary products for which we
provided our services.
<TABLE>
<CAPTION>
OEM Customers End Products
------------- ------------
<S> <C>
Ancor Communications............. Communications switching equipment
Efficient Networks............... Broadband access devices
Electronics For Imaging.......... Networking equipment
Fluke Corporation................ Industrial instrumentation
IBM.............................. Computing, network and storage equipment
Interwave........................ Wireless communications equipment
Motorola......................... Wireless communications devices
Pinnacle......................... Computer video equipment
RSA.............................. Computer security devices
Sony............................. Industrial equipment
</TABLE>
In fiscal 2000, IBM represented approximately 37% of our net sales and
Motorola represented approximately 15% of our net sales.
Sales and Marketing
We market our engineering, manufacturing and fulfillment services through a
sales force of seventeen full-time senior sales professionals located in North
America, Europe and Asia. Our North American sales force is assisted by six
manufacturers representative organizations. Our direct sales efforts in North
America are organized into four regions, Eastern, Central, Rocky Mountain and
Western. Sales in each region are managed by an experienced director of sales
with the assistance of a director of technical sales who coordinates
engineering sales across all four regions. Our direct sales personnel have
knowledge of local markets, which we believe is critical to identifying new
customers and developing new business opportunities. In excess of 95% of our
net sales in fiscal 2000 were generated through our internal sales force. Our
executive management team is integral to our sales efforts, with each member
being assigned to a North American, European or Asian region in which the
executive interfaces with customers to ensure customer satisfaction and
generate additional business opportunities.
Our sales and marketing professionals target original equipment
manufacturers that require a comprehensive outsourcing solution in the
communications, computing, data storage, industrial and medical equipment
industries and whose outsourcing requirements will utilize our global
facilities and capabilities. Our
39
<PAGE>
marketing strategy focuses on developing close working relationships with our
customers early in the design phase and throughout the lifecycle of a product.
To facilitate these relationships, a customer support team is assigned to each
customer to service all of the customer's needs throughout the outsourcing
process. Each customer support team consists of a dedicated program manager,
project buyer, production control planner, manufacturing engineer and quality
engineer. The program manager serves as the customer's single point of contact
for all of the customer's requirements on a worldwide basis and, with the
support of the team, has responsibility for managing all aspects of the
customer's project.
Intellectual Property
We have developed proprietary processes and program management methodologies
that enable us to shorten time to market and to deliver high quality products
in a cost-effective manner. Our intellectual property portfolio of patents,
patent applications, trade secrets and other proprietary information consists
primarily of unique processes that enable us to develop and manufacture custom
test equipment solutions for our customers. We currently have one patent and
fourteen patent applications filed for technology and methodologies relating to
process automation, test equipment, product quality and reliability,
manufacturing processes, failure analysis, process control techniques and test
equipment. These proprietary processes are grouped into building blocks that
can be applied in a variety of applications.
Our multi-disciplined engineering teams continually seek to develop new
testing and manufacturing equipment and processes to meet our customers'
changing needs and provide custom solutions at an affordable cost. Our
engineers often incorporate custom built equipment into our own proprietary
manufacturing systems to maximize the equipment's functionality and optimize
manufacturability. Because these systems are based on our proprietary
technology, they can be quickly replicated in our facilities and provided to
our customers in a cost-efficient manner.
To protect our proprietary rights, we rely largely upon a combination of
patents, trade secret laws, non-disclosure agreements with our customers and
our internal confidentiality procedures and employee confidentiality
agreements. Although we take steps to protect our proprietary information and
trade secrets, misappropriation may still occur. We believe that our
proprietary design and manufacturing processes do not infringe on the
proprietary rights of others.
We license some technology from third parties that we use in providing
engineering and manufacturing services to our customers. We believe that these
licenses are generally available on commercial terms from a number of
licensors. Generally, the agreements governing this technology grant us non-
exclusive, worldwide licenses with respect to the subject technology and could
terminate upon a material breach by us.
Research and Development
The market for our services is characterized by rapidly changing technology
and continuing process development. Original equipment manufacturers are
demanding smaller, faster and higher performance products. These demands
require increasingly complex engineering and manufacturing capabilities. We are
committed to developing new design and manufacturing technologies and enhancing
our existing technologies. Since our formation in 1994, we have made
substantial investments in technology and equipment to meet our customers'
needs and maintain our competitive advantage. Our expenditures for research and
development in fiscal 2000 were $410,000, and our expenditures in fiscal 1999
and 1998 were $387,000 and $401,000, respectively.
Our close relationships with customers in the early stages of product design
allows us to develop new products that utilize innovative technology in a
variety of engineering disciplines. These close relationships assist us in
identifying emerging products and related technologies in target markets, which
allows us to develop and expand our existing technology, or to develop or
obtain new technology that will enable us to remain competitive in the
electronics manufacturing services industry. As a result of our commitment to
40
<PAGE>
maintaining advanced technological capabilities, we have developed substantial
expertise in communications, particularly in the areas of wireless and optical
technologies, which we believe gives us a competitive advantage over many other
electronics manufacturing services providers.
Employees
As of March 31, 2000, we had 2,715 full-time employees. On August 1, 2000,
we acquired Turtle Mountain Corporation, which has approximately 275 employees.
In addition to our full-time employees, we regularly hire part-time and
temporary (contract) employees. Given the variable nature of our project flow
and the quick response time required by our customers, it is critical that we
be able to quickly ramp-up and ramp-down our production capacities to maximize
efficiency. To achieve this, our strategy has been to employ a skilled
temporary labor force, as required. Except for our 218 employees located in
Almelo, the Netherlands, none of our employees are unionized. We believe our
employee relations are good, and we have not experienced any work stoppages at
any of our facilities.
International Operations
A key element in our business strategy is to expand our global presence to
provide engineering, manufacturing and fulfillment services in locations that
meet our customers' regional requirements. Consistent with this strategy, we
have established international design and manufacturing facilities in China,
Mexico, the Netherlands, Singapore and Thailand. We will continue to seek
strategic opportunities to acquire facilities throughout the world, especially
in low-cost regions, either through divestitures by original equipment
manufacturers or the acquisition of, or strategic partnering with, regional
engineering and manufacturing service companies.
In May 1999, we acquired a facility located in Almelo, the Netherlands from
Fluke Corporation. Acquisition of our Netherlands facility increased our
engineering design capabilities, particularly in the areas of electrical and
industrial design. This facility also gives us the ability to rapidly
distribute products for our European and North American customers. In
connection with this acquisition, we entered into a three-year supply agreement
to provide manufacturing and design services to Fluke Corporation, which
expires in 2002.
Our Mexican facility, located in Guadalajara, Mexico and our Chinese
facility located in Tianjin, China, represent new operations established in
September 1997 and June 1998, respectively. Establishment of these facilities
has enabled us to provide low-cost manufacturing and order fulfillment services
for our customers on a global basis. Our facility in Guadalajara is located in
Mexico's emerging communications and computing markets, and our expansion into
this region has provided us with the opportunity to attract new customers in
those industries. Similarly, our expansion into China has enabled us to reduce
our customers' manufacturing costs while giving us access to new customers in
the communications, computing and data storage industries.
Our Bangkok, Thailand facility was initially a strategic partnership with
Italade Technology Holdings, Ltd. This facility, Pemstar Limited, is now a
wholly-owned subsidiary of Pemstar. Our Thailand operations are strategically
situated in the rapidly expanding Asian communications, computing and data
storage markets, giving us access to new customers in those industries.
In October 1998, we formed a joint venture located in Singapore called
Pemstar-Honguan Pte. Ltd. with Honguan Technologies. Honguan Technologies is a
Singapore company that is engaged in fabrication of metal tools and components.
We own a controlling 51% interest in Pemstar-Honguan Pte. Ltd. Our facility in
Singapore has significantly enhanced our service capabilities in the data
storage industry by adding specialized disk drive design and manufacturing
capabilities. This facility also provides critical sales support for customers
in the United States, Southeast Asia, the Philippines, Japan and Korea.
41
<PAGE>
Facilities
Our executive offices are located in Rochester, Minnesota, where we also
have engineering and manufacturing facilities. We also have two other U.S.
facilities located in San Jose, California as well as facilities in China,
Mexico, the Netherlands, Singapore and Thailand. Information about these
facilities is set forth below:
<TABLE>
<CAPTION>
Leased/Owned
Location Square Feet (expiration date) Principal Services(1)
-------- ----------- ------------------- -------------------------
<S> <C> <C> <C>
Rochester, Minnesota (2 225,000 Owned & Leased headquarters, engineering
facilities)............ (June 30, 2012) and manufacturing
San Jose, California (2 179,000 Leased engineering and
facilities)............ (February 28, 2006) manufacturing
Almelo, the 132,000 Leased engineering and
Netherlands............ (May 1, 2003) manufacturing
Guadalajara, Mexico..... 60,000 Leased manufacturing
(June 30, 2009)
Bangkok, Thailand....... 52,000 Leased manufacturing
(June 4, 2001)
Tianjin, China.......... 40,000 Leased manufacturing
(December 1, 2010)
Singapore............... 8,000 Leased engineering and
(February 3, 2001) manufacturing
</TABLE>
--------
(1) All of our facilities offer fulfillment services.
Turtle Mountain operates a 65,000 square foot manufacturing facility in
Dunseith, North Dakota, of which approximately 30,000 square feet is owned and
35,000 square feet is leased through 2007.
We are currently negotiating a lease for a 27,000 square foot facility
located in Navan, Ireland, outside of Dublin. If we are successful in securing
a lease for this facility, we anticipate that we could employ up to 390
employees as this facility becomes operational over the next three years.
We believe our facilities are well maintained and suitable for their
respective operations. We anticipate that as our business grows, we will need
to acquire, lease or build additional facilities. We may encounter unforeseen
difficulties, costs or delays in expanding our facilities.
Competition
The electronics manufacturing services industry is highly competitive and we
compete against numerous domestic and foreign engineering and manufacturing
service companies. We believe that the principal competitive factors in our
industry are:
. Service offerings;
. Technological capabilities;
. Scale of operations and financial strength;
. Geographic location and coverage;
. Pricing;
. Product quality;
. Meeting product delivery schedules; and
. Flexible and timely response to design and schedule changes.
42
<PAGE>
We believe that large, publicly-traded original equipment manufacturers
prefer to enter into outsourcing relationships with other public electronics
manufacturing services companies that present them with the opportunity to
build a long-term relationship because of their greater access to capital and
resulting financial stability. Many of our competitors are substantially larger
and have greater financial, operating, manufacturing and marketing resources
than we do. Some of our competitors have broader geographic breadth and range
of services than we do. In addition, some of our competitors may have stronger
relationships with our existing customers than we do. We believe that we are
well positioned to compete against these larger competitors due to our
worldwide engineering, product quality, flexibility and timeliness in
responding to design and schedule changes, reliability in meeting product
delivery schedules, pricing, the provision of value-added services and
geographic location.
We also face competition from the manufacturing operations of our current
and potential customers, who continually evaluate the relative benefits of
internal manufacturing compared to outsourcing. As more original equipment
manufacturers dispose of their manufacturing assets and increase their use of
outsourcing, we face increasing competitive pressure to grow our business in
order to maintain our competitive position.
Governmental Regulation
Our operations are subject to federal, state and local regulatory
requirements relating to environmental, waste management and health and safety
measures relating to the use, release, storage, treatment, transportation,
discharge, disposal and clean-up of hazardous substances and wastes, as well as
practices and procedures applicable to the construction and operation of our
plants. In addition, we are required to register with the United States Food
and Drug Administration as a medical device manufacturer. The FDA and various
state agencies inspect our facilities from time to time to determine whether we
are in compliance with the FDA's Quality Systems Regulation relating to medical
device manufacturing companies, including regulations concerning manufacturing,
testing, quality control and product labeling practices. The current costs of
compliance are not material to us, and we are not presently aware of any facts
or circumstances that would cause us to incur significant costs or liabilities
in the future related to environmental, health and safety law compliance.
Legal Proceedings
To the best of our knowledge, there are no legal proceedings pending or
threatened against us.
43
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth our directors and executive officers, their
ages as of May 15, 2000 and the positions currently held by them:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Allen J. Berning........ 45 Chairman, Chief Executive Officer and Director
William J. Kullback..... 40 Vice President--Finance and Chief Financial
Officer
William B. Leary........ 58 Executive Vice President--Rochester Site
Operations and Director
David L. Sippel(1)...... 56 Executive Vice President--Engineering Services
and Chief Technology Officer and Director
Robert R. Murphy(1)..... 56 Executive Vice President--Corporate Operations
Treasurer and Director
Gary L. Lingbeck........ 54 Executive Vice President--North American Sales,
Secretary and Director
Steve V. Petracca....... 44 Executive Vice President--Business Development
and Director
Karl D. Shurson(1)...... 60 Executive Vice President--Quality and Director
Hargopal (Paul) Singh... 50 Executive Vice President--International
Operations and Director
Robert J. Legendre...... 43 Vice President--Worldwide Materials
Robert D. Ahmann........ 44 Executive Vice President--Manufacturing Systems
and Director
Thomas A. Burton(1)(2).. 63 Director
Michael J. 36
Odrich(1)(2)........... Director
Bruce M. Jaffe(1)(2).... 56 Director
</TABLE>
--------
(1)Member of our executive compensation committee.
(2)Member of our audit committee.
Allen J. Berning has served as our Chief Executive Officer, director and
Chairman of our Board since the founding of Pemstar in 1994. Prior to founding
Pemstar, Mr. Berning was employed by IBM for fifteen years, where he held
several engineering and management positions in process engineering,
manufacturing, cost engineering and resource planning, including most recently
as Operations Manager for IBM's Rochester Storage Systems facility. Mr. Berning
received a B.S.I.E. and an M.B.A. from St. Cloud State University. He is
currently serving as board member and past chair of the Greater Rochester Area
University Center. In 1999, Mr. Berning received the national Ernst & Young
Entrepreneur of the Year Award.
William J. Kullback has served as our Vice President--Finance and Chief
Financial Officer since joining Pemstar in 2000. Prior to joining Pemstar, Mr.
Kullback served for five years as Chief Financial Officer of Crenlo, Inc., a
manufacturer of fabricated metal products. Prior to joining Crenlo, Mr.
Kullback worked in various positions with the Stant Corporation, a manufacturer
of automotive parts and tools, including Corporate Controller and Vice
President of Finance of Stant's Plews Tool subsidiary. From 1987 to 1990, Mr.
Kullback served as a consultant in the audit and manufacturing consulting
practices of Price Waterhouse. Mr. Kullback received a B.A. in Economics and
English and an M.B.A. in Accounting from the State University of New York at
Buffalo.
William B. Leary has served as our Executive Vice President--Rochester Site
Operations and as a director since 1994. Prior to joining Pemstar, Mr. Leary
was employed by IBM from 1965 until 1994, where he held a variety of
engineering and management positions, including most recently as engineering
manager of storage production. Mr. Leary holds a B.S.E.E. from Marquette
University.
David L. Sippel has served as our Executive Vice President--Engineering
Services and Chief Technology Officer and as a director since 1994. From 1970
until 1994, Dr. Sippel was employed by IBM, where he held
44
<PAGE>
several engineering and management positions, including most recently as the
manager of IBM's thin-film disk development and manufacturing operations. Dr.
Sippel holds a B.S. in Aeronautics and Engineering Mechanics, an M.S. in
Mechanics and Materials and a Ph.D. in Mechanics and Materials from the
University of Minnesota.
Robert R. Murphy has served as Executive Vice President--Corporate
Operations since 2000 and as Treasurer and a director since 1994. Prior to
serving as our Executive Vice President--Corporate Operations, Mr. Murphy
served as our Chief Financial Officer from 1994 to 2000. From June 1962 to
1994, Mr. Murphy was employed by IBM, where he held several engineering and
management positions, including most recently as manager of magnetic head
development and production. Mr. Murphy holds a B.S. degree in Mathematics from
Winona State University.
Gary L. Lingbeck has served as our Executive Vice President--North American
Sales since 1999, and as Secretary and a director since 1994. Prior to serving
as our Executive Vice President--North American Sales, Mr. Lingbeck served as
our Executive Vice President--World Wide Sales from 1994 to 1999. From 1964 to
1993, Mr. Lingbeck was employed by IBM in various technical and management
positions, including establishing OEM sales and marketing groups for IBM's
storage products and midrange systems groups.
Steve V. Petracca has served as our Executive Vice President--Business
Development and as a director since joining Pemstar in 1999. From 1998 to 1999,
Mr. Petracca served as the Executive Vice President and General Manager of
Quadrus Manufacturing, a division of Bell Microproducts. From 1988 to 1997,
Mr. Petracca served as the Chief Executive Officer and President of Reply
Corporation, a venture backed computer start-up company that he founded, and
after acquisition of Reply Corporation by Radius Inc. in 1997, as its Senior
Vice President of engineering and operations until 1998. Prior to founding
Reply Corporation, Mr. Petracca worked in various positions with IBM. Mr.
Petracca holds a B.A. from the University of Colorado and an M.B.A. from Nova
University.
Karl D. Shurson has served as our Executive Vice President--Operations and
Quality since 1998 and as a director since 1994. Mr. Shurson has also served as
our Corporate Manager of Human Resources since 1994 and as the site executive
for our Bangkok, Thailand operations since 1998. From 1962 to 1994, Mr. Shurson
was employed by IBM where he held several technical and management positions,
including most recently as production facility manager for storage products at
IBM's Rochester, Minnesota facility.
Hargopal (Paul) Singh has served as our Executive Vice President--
International Operations and Wireless Communications since 1999 and as a
director since 1998. Mr. Singh has been employed by us since 1995 and also
serves as President of our Chinese and Mexican subsidiaries. From 1994 to 1995,
Mr. Singh was employed by Microsoft as a Director of Business Planning, Tools
and Technology in Microsoft's product support services division. From 1979 to
1994, Mr. Singh was employed by IBM in various technical and management
positions, including plant manager for printed circuit board assembly and test.
Mr. Singh holds a B.E. in Mechanical Engineering from Osmania University in
India and an M.S. in Engineering Management from Oklahoma State University.
Robert J. Legendre has served as Vice President, World Wide Materials since
2000. Prior to joining Pemstar, Mr. Legendre was employed by Western Digital
Corporation from 1987 to 2000, most recently as Vice President of World Wide
Materials. Mr. Legendre holds a B.S. degree in Business from LaSalle
University.
Robert D. Ahmann has served as our Executive Vice President--Manufacturing
Systems and a director since August 1999. Mr. Ahmann has worked for us in
various capacities since 1994. From 1977 to 1994, Mr. Ahmann was employed by
IBM where he held several engineering and management positions, including most
recently as manager of test and process engineering for storage products. Mr.
Ahmann holds a B.S.E.E. from North Dakota State University and a M.S.E.E. from
the University of Minnesota.
Thomas A. Burton has served as a director since 1994. Mr. Burton has been an
independent consultant since 1995. Prior to joining Pemstar, Mr. Burton was
President and Chief Executive Officer of Waters
45
<PAGE>
Instruments Inc., a diversified manufacturer of medical and agricultural
products and a contract manufacturer for the computing and telecommunications
industries, from 1960 to 1990. From 1992 to 1997, Mr. Burton was appointed to
serve on the Minnesota Public Utilities Commission which regulates the electric
gas and telephone industries in Minnesota.
Michael J. Odrich has served as a director of Pemstar since 1998. Since
1995, Mr. Odrich has been a Managing Director and head of the Lehman Brothers'
Venture Capital Fund. Prior to joining Lehman Brothers Private Equity, he
served as assistant to Lehman Brothers' Chairman and Chief Executive Officer
from 1993 until 1995. Mr. Odrich joined the Investment Banking Division of
Lehman Brothers in 1986. He is currently a director of Active Software, Inc.
and Regeneration Technologies, Inc. Mr. Odrich holds a B.A. degree from
Stanford University and an M.B.A. from Columbia University.
Bruce M. Jaffe has served as a director of Pemstar since 2000. Mr. Jaffe,
currently a private investor, was Senior Vice President and Chief Financial
Officer of Bell Microproducts Inc., a distributor of storage and computer
products from 1997 to 1999. From 1967 to 1996, Mr. Jaffe was employed by Bell
Industries Inc., a distributor of electronic components, where he held several
management positions, most recently as President, Chief Operating Officer and a
member of the Board of Directors. From 1965 to 1967, Mr. Jaffe was employed as
an accountant by Price Waterhouse. Mr. Jaffe holds a B.S. in Business from the
University of Southern California and is a certified public accountant. Mr.
Jaffe currently serves on the Board of Advisors for the University of Southern
California School of Business.
Board of Directors
Following the offering, our board of directors will consist of twelve
directors divided into three classes with each class serving for a term of
three years. At each annual meeting of shareholders, directors will be elected
by the holders of common stock to succeed those directors whose terms are
expiring. Gary L. Lingbeck, Karl D. Shurson, Robert D. Ahman and Bruce M. Jaffe
will be Class I directors whose terms will expire in 2001; William B. Leary,
Robert R. Murphy, Hargopal (Paul) Singh and Thomas A. Burton will be Class II
directors whose terms will expire in 2002; and Allen J. Berning, David L.
Sippel, Steve V. Petracca and Michael J. Odrich will be Class III directors
whose terms will expire in 2003. Following the offering, our bylaws will
provide that the number of directors shall be fixed by the board of directors.
The number of directors on our board will be fixed at a maximum of fifteen.
Director Compensation
We pay our non-employee board members $1,000 for attendance at each board
meeting and $500 for attendance at each committee meeting. We also reimburse
our non-employee directors for reasonable expenses incurred in serving as a
director. All of our non-employee directors are entitled to participate in our
Stock Plans. The number of options granted to our non-employee directors is
determined by our Options Committee on an annual basis. In fiscal 2000, one of
our non-employee directors, Thomas A. Burton was awarded an option to purchase
3,000 shares of common stock under our 1999 Amended and Restated Option Plan.
See "Benefit Plans--Stock Option Plans."
Committees
Our board of directors has authority to appoint committees to perform
certain management and administrative functions. We currently have two board-
appointed committees:
Audit Committee
The functions of the audit committee, which consists of Thomas A. Burton,
Michael J. Odrich and Bruce M. Jaffe, each a non-employee director, include:
reviewing the adequacy of our system of internal accounting controls; reviewing
the results of the independent auditors' annual audit, including any
significant
46
<PAGE>
adjustments, management judgments and estimates, new accounting policies and
disagreements with management; reviewing our audited financial statements and
discussing them with management; reviewing the audit reports submitted by the
independent auditors; reviewing disclosures by independent auditors concerning
relationships with our company and the performance of our independent auditors
and annually recommending independent auditors; adopting and annually assessing
our charter; and preparing such reports or statements as may be required by
Nasdaq or the securities laws.
Executive Compensation Committee
The executive compensation committee consists of Thomas A. Burton, Michael
J. Odrich and Bruce M. Jaffe, each a non-employee director, and Robert R.
Murphy, Karl D. Shurson and David L. Sippel, each of whom is also a director.
The functions of the executive compensation committee currently include making
promotion and compensation recommendations for our executive officers and vice
presidents and reviewing our general compensation strategy.
Executive Compensation Committee Interlocks and Insider Participation
During fiscal 2000, Robert R. Murphy, David L. Sippel and Karl D. Shurson,
each an executive officer of Pemstar, served on our executive compensation
committee. Mr. Murphy recently repaid an outstanding loan from us in the
principal amount of $67,650, excluding accrued interest. See "Related Party
Transactions."
No interlocking relationship exists between the board of directors or the
executive compensation committee and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past.
Employment Agreements
We currently do not have employment agreements with any of our executive
officers, although the terms of our change of control agreements with each
executive officer impose limitations on our ability to terminate an executive
officer. See "Executive Compensation--Change in Control Arrangements."
Change in Control Arrangements
We have entered into change in control arrangements with each of our
executive officers. These agreements are designed to diminish the distractions
that could be caused by personal uncertainties and risks associated with
changes in control and other significant business combinations involving our
company by providing these individuals with assurances regarding their
compensation and benefits expectations under such circumstances.
Under these agreements, we agree not to terminate any of these individuals
during the six month period prior to a "change in control" involving our
company and for the two year period following any change in control. If, during
the applicable period, we terminate any individual other than for "cause" or
"disability" or the individual terminates his employment for "good reason," the
individual is entitled to receive a severance payment from us in the amount of
110% of the individual's annual base salary in effect at the time of
termination or immediately prior to the change in control, whichever is
earlier. We may pay the severance payment in one lump sum or in twelve
consecutive monthly installments.
Limitation on Liability and Indemnification Matters
Minnesota law and our articles of incorporation and bylaws provide that we
shall indemnify any person made or threatened to be made a party to a
proceeding by reason of that person's former or present official capacity with
us against judgments, penalties, fines, settlements and reasonable expenses
unless the person's conduct being challenged does not meet the standards of
conduct for acting in an official capacity under
47
<PAGE>
Minnesota law. Any such person also is entitled, to payment or reimbursement of
reasonable expenses in advance of the final disposition of the proceeding
unless the articles of incorporation or bylaws limit payment or reimbursement
of expenses consistent with Minnesota law.
Pursuant to provisions of the Minnesota Business Corporation Act, we have
adopted provisions in our articles of incorporation which provide that our
directors shall not be personally liable to us or our shareholders for monetary
damages for a breach of fiduciary duty as a director, unless such liability is
the result of:
. A breach of the director's duty of loyalty;
. An act or omission not in good faith or involving knowing or intentional
misconduct;
. A director's consent to, or failure to object to, an illegal
distribution;
. A violation of Minnesota's securities' laws; or
. Participation in any transaction from which the director received an
improper personal benefit.
At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for indemnification.
Executive Compensation
The following table sets forth information regarding compensation received
during the fiscal year ended March 31, 2000 by our Chief Executive Officer and
the other four most highly compensated executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation(1) Compensation
-----------------------------
Securities All Other
Salary Bonus Underlying Compensation
Name and Principal Position ($) ($) Options (#) ($)(2)
--------------------------- ------ ------------------- ------------
<S> <C> <C> <C> <C>
Allen J. Berning.................... 156,346 -- 216,000 4,656
Chief Executive Officer
Steve V. Petracca................... 182,948 -- 210,000 5,192
Executive Vice President--Business
Development
William B. Leary.................... 126,154 -- 135,000 2,360
Executive Vice President--Rochester
Site Operations
Hargopal (Paul) Singh............... 126,154 -- 135,000 2,360
Executive Vice President--
International Operations
David L. Sippel..................... 126,154 -- 135,000 2,390
Executive Vice President--
Engineering Services and Chief
Technology Officer
</TABLE>
--------
(1) With respect to each of the named executive officers, the aggregate amount
of prerequisites and other personal benefits, securities or property
received was less than either $50,000 or 10% of the total annual salary and
bonus reported for such named executive officer.
(2) All other compensation consists of discretionary matching contributions to
our 401(k) plan on behalf of each named executive officer. See "Benefits--
401(k) Plan."
48
<PAGE>
Stock Option Grants in Last Fiscal Year
The following table sets forth information regarding grants of stock options
to each of the executive officers named in the Summary Compensation Table
during fiscal 2000. The percentage of total options set forth below is based on
an aggregate of 3,269,775 options granted to employees during fiscal 2000. All
options were granted at the fair market value of our common stock, as
determined by our board of directors, on the date of grant. 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. The
assumed 5% and 10% rates of stock price appreciation are provided in accordance
with rules of the Securities and Exchange Commission based on a deemed common
stock value of $5.00 at the time of option grant, and do not represent our
estimate or projection of the future stock price.
<TABLE>
<CAPTION>
Potential
Individual Grants Realizable Value
-------------------------------------------- at Assumed Annual
Number of % of Total Rate Of Stock
Shares of Options Price
Common Stock Granted to Appreciation For
Underlying Employees Exercise Option Term
Options in FY 2000 Price Per Expiration -----------------
Name Granted(1) (%) Share ($) Date 5% ($) 10% ($)
---- ------------ ---------- --------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Allen J. Berning........ 216,000 6.6 5.00 08/02/09 679,206 1,721,242
Steve V. Petracca....... 210,000 6.4 5.00 08/02/09 660,339 1,673,429
William B. Leary........ 135,000 4.1 5.00 08/02/09 424,504 1,075,776
Hargopal (Paul) Singh... 135,000 4.1 5.00 08/02/09 424,504 1,075,776
David L. Sippel......... 135,000 4.1 5.00 08/02/09 424,504 1,075,776
</TABLE>
Option Grants in Fiscal Year Ended March 31, 2000
--------
(1) All options granted to the named executive officers in fiscal 2000 are
fully vested and exercisable.
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The table below sets forth the number of shares of common stock acquired
upon the exercise of options in the fiscal year ended March 31, 2000 and the
value and the number of shares of common stock subject to exercisable and
unexercisable options held as of March 31, 2000, by each of the executive
officers named in the Summary Compensation Table.
Aggregate Option Exercises in Fiscal 2000
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised In-
Underlying Unexercised the-Money Options at
Number of Options at Year-End(2) Year-End(3)
Shares Value ------------------------- -------------------------
Name Acquired Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---- --------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allen J. Berning........ 187,500 $470,250 150,000 -- $ -- $ --
Steve V. Petracca....... -- -- 210,000 -- -- --
William B. Leary........ 82,500 344,850 135,000 -- -- --
Hargopal (Paul) Singh... 285,000 670,800 -- -- -- --
David L. Sippel......... 82,500 344,850 143,100 -- -- --
</TABLE>
--------
(1) Based on an estimated fair market value of $5.00 per share of our common
stock.
(2) As of March 31, 2000, all outstanding options are exercisable as a result
of a board action accelerating the vesting dates of all options granted
prior to December 13, 1999.
(3) There is no value of the unexercised in-the-money options at year end
because the exercise price of all outstanding options is equal to the fair
market value of the shares, determined by the board of directors to be
$5.00 per share as of March 31, 2000.
49
<PAGE>
Benefit Plans
Stock Option Plans
We currently maintain five stock option plans: (1) the Pemstar Inc. 1994
Stock Option Plan, (2) the Pemstar Inc. 1995 Stock Option Plan, (3) the Pemstar
Inc. 1997 Stock Option Plan, (4) the Pemstar Inc. Amended and Restated 1999
Stock Option Plan and (5) the Pemstar Inc. 2000 Stock Option Plan. For ease of
reference, all of these plans are collectively referred to as the "Option
Plans." Our Option Plans provide for the grant of options to purchase shares of
our common stock to any of our full or part-time employees, including officers
and directors who are also employees, and any of our subsidiaries. Such options
may qualify as incentive stock options under the Internal Revenue Code of 1986.
Members of our board of directors, consultants or independent contractors
providing valuable services to us or one of our subsidiaries who are not
employees are eligible to receive options which do not qualify as incentive
stock options.
We have reserved 900,000 shares of common stock for issuance under our 1994
Option Plan, 600,000 shares of common stock under our 1995 Option Plan,
1,500,000 shares of common stock under the 1997 Option Plan, 3,000,000 shares
of common stock under our 1999 Amended and Restated Option Plan and 1,500,000
shares of common stock under our 2000 Option Plan.
Our Option Plans are administered by our options committee. Our options
committee has the discretion to determine the purchase price of the common
shares covered by each option, select the people to whom options are granted
and to establish the terms and conditions of each stock option, subject to the
provisions of our Option Plans and the approval of our board of directors.
Our 1999 Amended and Restated Option Plan and our 2000 Option Plan allow our
options committee to establish special rules for employees located in our
foreign subsidiaries. Such rules may not increase the number of shares that may
be issued under our 1999 Amended and Restated Option Plan.
The exercise price of an incentive stock option granted under our Option
Plans must not be less than 100% of fair market value of the common stock on
the date the option is granted. In the event that a proposed optionee owns more
than 10% of our common stock, any incentive stock option granted must have an
exercise price not less than 110% of the fair market value of our common stock
on the grant date.
The term of each option is determined by our options committee, but in any
event the term of an incentive stock option may not exceed 10 years from the
date of grant and the term of a non-qualified stock option may not exceed 15
years from the date of grant. In the case of an incentive stock option granted
to an owner of more than 10% of our common stock, the term may not exceed five
years from the date of grant.
The Option Plans are subject to amendment or discontinuance by our board of
directors, except that the board may not, without the approval of our
shareholders, increase the number of shares that may be issued under our plans,
decrease the minimum exercise price, extend the maximum option term or
materially modify the eligibility requirements for participation.
Employee Stock Purchase Plan
On June 14, 2000, our board of directors and shareholders approved an
employee stock purchase plan covering an aggregate of 500,000 shares of common
stock. The purchase plan provides a means by which employees may purchase our
common stock through payroll deductions. The purchase plan is intended to
qualify as an employee stock purchase plan within the meaning of Section 423 of
the Internal Revenue Code of 1986, as amended. Employees whose customary
employment is at least 20 hours per week and who have been employed by us for
at least 90 days on the first day of a purchase period are eligible to
participate in the plan. Eligible employees may purchase shares of common stock
during each monthly purchase period at a price per share equal to 85% of the
fair market value of the shares on the last day of the purchase period. No
participant may purchase more than 10,000 shares of common stock in any
purchase period or more than $25,000 worth of shares under the plan in any
calendar year. The plan will terminate when all of the shares reserved under
the plan have been purchased or at any earlier date determined by our board of
directors.
50
<PAGE>
401(k) Plan
In 1995, we adopted a 401(k) plan to provide eligible employees with a tax
preferential savings and investment program. Employees become eligible to
participate in the 401(k) plan on the first day of the first month after they
become employed by us, at which point we classify them as participants.
Employees may elect to reduce their current compensation by not less than 1%
nor more than 15% of eligible compensation or the statutorily prescribed annual
limit, currently $10,500, and have this reduction contributed to the 401(k)
plan. Our board of directors may change the minimum and maximum contribution
levels, subject to the statutorily prescribed limit. The 401(k) plan permits,
but does not require, us to make discretionary matching contributions and
discretionary profit sharing contributions to the 401(k) plan on behalf of
eligible participants. In 1997, our board approved a discretionary matching
contribution of 3% of an employee's contributions to the plan. All
contributions made by and on behalf of participants are subject to a maximum
contribution limitation currently equal to the lesser of 25% of their
compensation or $30,000 per year. At the direction of each participant, the
trustee of the 401(k) plan invests the assets of the 401(k) plan in selected
investment options. Contributions by participants or by us to the 401(k) plan
and income earned on plan contributions, are generally not taxable to the
participants until withdrawn, and contributions by us, if any, are generally
deductible by us when made. In fiscal 2000, we made $412,800 in matching
contributions to the plan on behalf of participants.
RELATED PARTY TRANSACTIONS
Loans to Executive Officers
In connection with the purchase of shares of common stock and exercise of
options in fiscal 2000, we accepted as payment from executive officers, notes
bearing interest at 6.5% per annum and maturing on either June 30, 2000 or
March 31, 2002. These notes are secured by a security interest in the shares
purchased or issued upon exercise of the options. The executive officers listed
below had outstanding notes due and payable on June 30, 2000, in the following
amounts, which represent the largest amounts outstanding during our last fiscal
year:
90 day Notes
<TABLE>
<CAPTION>
Name Principal Amount
---- ----------------
<S> <C>
Allen J. Berning......................................... $ 75,030
William B. Leary......................................... $ 67,650
Gary L. Lingbeck......................................... $ 77,650
Robert R. Murphy......................................... $ 67,650
Hargopal (Paul) Singh.................................... $379,200
</TABLE>
All of these notes in the table were repaid in full on June 30, 2000.
The executive officers listed below have outstanding notes due and payable
on March 31, 2002, in the following amounts, which represent the largest
amounts outstanding during our last fiscal year:
2 year Notes
<TABLE>
<CAPTION>
Name Principal Amount
---- ----------------
<S> <C>
Allen J. Berning......................................... $375,000
William J. Kullback (1).................................. $225,000
Robert J. Legendre....................................... $150,000
Steve V. Petracca........................................ $450,000
Hargopal (Paul) Singh.................................... $375,000
</TABLE>
--------
(1) Note matures March 14, 2002.
51
<PAGE>
Financing Transactions
In fiscal 1998, we sold 569,966 shares of Series A preferred stock
convertible into 1,709,898 shares of common stock for an aggregate purchase
price of $8.5 million, or $15.00 per share, to affiliates of Lehman Brothers
Inc. In fiscal 2000, we sold 1,000,000 shares of Series B preferred stock
convertible into 3,000,000 shares of common stock for an aggregate purchase
price of $18.0 million, or $18.00 per share, to affiliates of Lehman Brothers
Inc. Upon the automatic conversion of the Series A and Series B preferred stock
upon consummation of this offering, Lehman Brothers Inc. will be the beneficial
owner of more than 5% of our outstanding shares of common stock. Michael
Odrich, one of our non-employee directors, is an affiliate of Lehman Brothers
Inc. See "Principal Shareholders" for information relating to the beneficial
ownership of shares and identification of affiliates of Lehman Brothers Inc.
52
<PAGE>
PRINCIPAL SHAREHOLDERS
The table below sets forth information known to us regarding the beneficial
ownership of our common stock as of March 31, 2000, as adjusted to reflect the
automatic conversion of outstanding shares of preferred stock into common
stock, and to reflect the sale of the common stock offered by this prospectus,
by:
. Each shareholder known by us to be the owner of more than 5% of our
outstanding common stock;
. Each of our executive officers listed on the 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 includes generally 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 March 31,
2000 are deemed outstanding for purposes of computing the percentage
beneficially owned 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 shareholders below is c/o Pemstar Inc., 3535 Technology Drive
N.W., Rochester, Minnesota 55901.
<TABLE>
<CAPTION>
Number of Percentage of Shares
Shares Beneficially Owned
Beneficially ------------------------------
Beneficial Owner Owned Before Offering After Offering
---------------- ------------ --------------- --------------
<S> <C> <C> <C>
5% Shareholders:
Lehman Brothers Inc.(1)........... 4,959,903 26.77% 18.42%
Chi Ming Gabriel Yu(2)............ 1,235,091 6.67 4.59
Chan Lai Ngor(2).................. 1,235,091 6.67 4.59
Executive Officers and Directors:
Allen J. Berning(3)............... 1,110,900 5.95 4.10
Steve V. Petracca(4).............. 300,000 1.60 1.10
William B. Leary(5)............... 682,500 3.66 2.52
David L. Sippel(6)................ 995,640 5.33 3.68
Robert R. Murphy(7)............... 1,003,500 5.38 3.71
Gary L. Lingbeck(8)............... 592,500 3.17 2.19
Karl D. Shurson(9)................ 510,300 2.73 1.89
Hargopal Singh(10)................ 491,400 2.65 1.82
Robert D. Ahmann(11).............. 462,000 2.47 1.71
Thomas A. Burton.................. 6,000 * *
Michael J. Odrich(12)............. 4,959,903 26.77 18.42
Bruce M. Jaffe.................... -- -- --
All directors and executive
officers as a group (13
persons)(13)..................... 11,189,613 56.74% 41.16%
</TABLE>
--------
* Shares represent less than 1% of total shares outstanding.
(1) Shares beneficially owned by Lehman Brothers Inc. include shares held by
the following wholly-owned subsidiaries of Lehman Brothers Inc.:
<TABLE>
<CAPTION>
Name Number of Shares
---- ----------------
<S> <C>
LB I Group Inc. ....................................... 2,547,084
Lehman Brothers Venture Capital Partners I, L.P. ...... 366,906
Lehman Brothers Venture Partners L.P. ................. 613,158
Lehman Brothers VC Partners L.P. ...................... 1,333,332
Lehman Brothers MBG Venture Capital Partners 1998 (A)
L.P. ................................................. 87,807
Lehman Brothers MBG Venture Capital Partners 1998 (B)
L.P. ................................................. 1,620
Lehman Brothers MBG Venture Capital Partners 1998 (C)
L.P. ................................................. 9,996
</TABLE>
The shares beneficially owned by Lehman Brothers Inc. and its wholly-owned
subsidiaries include 553,301 shares of our Series A preferred stock and
1,000,000 shares of our Series B preferred stock,
53
<PAGE>
which shares automatically convert into shares of our common stock upon
consummation of this offering. The address of Lehman Brothers Inc. is 3
World Financial Center, New York, New York 10285.
(2) The shares of common stock included in this table includes 635,091 shares
held by Rose Beauty Limited, a company co-owned by Ching Ming Gabriel Yu
and Chan Lai Ngor. The address for Rose Beauty Limited, Chi Ming Gabriel
Yu, and Chan Lai Ngor is c/o Italade Technology Holdings Limited, 29/F The
Center, 99 Queen's Road Central, Hong Kong.
(3) The shares of common stock included in this table include 764,400 shares
held jointly by Mr. Berning and his spouse and 150,000 shares that can be
acquired upon the exercise of outstanding options.
(4) The shares of common stock included in this table include 210,000 shares
that can be acquired upon the exercise of outstanding options.
(5) The shares of common stock included in this table include 240,000 shares
held by Mr. Leary's spouse and 135,000 shares that can be acquired upon
the exercise of outstanding options.
(6) The shares of common stock included in this table include 385,020 shares
held by Mr. Sippel's spouse and 143,100 shares that can be acquired upon
the exercise of outstanding options.
(7) The shares of common stock included in this table include 777,000 shares
held jointly by Mr. Murphy and his spouse and 135,000 shares that can be
acquired upon the exercise of outstanding options.
(8) The shares of common stock included in this table include 135,000 shares
that can be acquired upon the exercise of outstanding options.
(9) The shares of common stock included in this table include 316,200 shares
held jointly by Mr. Shurson and his spouse and 141,600 shares that can be
acquired upon the exercise of outstanding options.
(10) Includes 75,000 shares held by Mr. Singh's spouse.
(11) The shares of common stock included in this table include 141,000 shares
that can be acquired upon the exercise of outstanding options.
(12) Mr. Odrich is a Managing Director of Lehman Brothers Inc. and may be
considered to have beneficial ownership of Lehman Brothers Inc.'s
interest in us. Mr. Odrich disclaims beneficial ownership of all such
shares. The address of Mr. Odrich is c/o Lehman Brothers Inc., is 3
World Financial Center, New York, New York 10285.
(13) See Notes (2) through (11). Includes an aggregate of 1,190,700 shares
issuable upon the exercise of currently exercisable options held by our
executive officers and directors.
We have granted the underwriters an option to purchase up to an aggregate
of 880,000 shares of our common stock to cover over-allotments, if any. The
following selling shareholders have also granted the underwriters an option to
purchase up to an aggregate of 380,000 shares of common stock to cover over-
allotments, if any:
<TABLE>
<CAPTION>
Shares
Shares Beneficially Beneficially Owned
Owned Prior After
to the Offering Shares Offered in the Offering(1)
-------------------- Over-Allotment ------------------
Name Number Percentage Option Number Percentage
---- --------- ---------- ----------------- ------- ----------
<S> <C> <C> <C> <C> <C>
William B. Leary........ 682,500 3.66% 57,692 624,808 2.31%
Gary L. Lingbeck........ 592,500 3.17 57,692 534,808 1.98
Daniel R. Hughes........ 434,100 2.34 57,692 376,408 1.40
Robert R. Murphy........ 1,003,500 5.40 57,692 945,808 3.49
Karl D. Shurson......... 510,300 2.73 57,692 452,608 1.67
David L. Sippel......... 995,640 5.36 57,692 937,948 3.46
Michael M. Haider....... 335,502 1.81 33,848 301,654 1.12
</TABLE>
--------
(1) Assumes the underwriters' over-allotment option is exercised in
full.
Mr. Hughes and Mr. Haider are former directors and employees of Pemstar.
Mr. Hughes is currently a consultant to Pemstar.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General Matters
Our authorized capital stock consists of 150,000,000 shares of common stock,
par value $0.01 per share, and 5,000,000 shares of preferred stock, par value
$0.01 per share.
The following is a summary of the material terms of our common stock. Please
see our articles of incorporation filed as an exhibit to the registration
statement of which this prospectus is a part.
Common Stock
As of March 31, 2000, there were 13,819,260 shares of common stock
outstanding, held by approximately 293 shareholders of record.
Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders, including the
election of directors, and do not have cumulative voting rights. Subject to
preferences that may be applicable to any then outstanding preferred stock,
holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared by the board of directors out of funds legally available
therefore. See "Dividend Policy." Upon a liquidation, dissolution or winding up
of Pemstar, the holders of common stock will be entitled to share ratably in
the net assets legally available for distribution to shareholders after the
payment of all of our debts and other liabilities, subject to the prior rights
of any preferred stock then outstanding. Holders of common stock have no
preemptive or conversion rights or other subscription rights and there are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and the common stock to be outstanding
upon completion of this offering will be, fully paid and nonassessable.
Preferred Stock
We currently have two classes of preferred stock, Series A preferred stock
and Series B preferred stock. As of March 31, 2000, there were 569,966 shares
of Series A preferred stock outstanding and 1,000,000 shares of Series B
preferred stock outstanding. Upon closing of this offering, all of the
outstanding shares of preferred stock will automatically convert into 4,709,898
shares of common stock and no shares of preferred stock will be outstanding.
Our board of directors has the authority, without action by the shareholders,
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.
Registration Rights
As of March 31, 2000, the holders of common stock issuable upon conversion
of the preferred shares of our outstanding shares of preferred stock are
entitled to rights with respect to the registration of 4,709,898 shares under
the Securities Act. The holders of registration rights are those investors that
purchased shares of our mandatorily redeemable, convertible Series A and Series
B preferred stock. Under the terms of the agreement between us and the holders
of these registrable securities, the holders of at least 35% of the registrable
securities may require that we file a registration statement under the
Securities Act with respect to their shares of common stock after the earlier
of February 12, 2001, or the six month anniversary of the effective date of
this offering, so long as the total offering price of the shares to the public
under such registration statement is at least $10 million. We will only be
required to file two registration statements in
55
<PAGE>
response to a request for registration by the holders of registrable
securities. We may postpone the filing of a registration statement for up to
ninety days in any twelve month period if we determine that the filing would be
seriously detrimental to us and our shareholders. Further, holders of the
registrable securities may require us on two occasions within any twelve month
period to file additional registration statements on Form S-3 at our expense.
In addition, in the event that we decide to register our securities, we are
required to include in our registration statement the registrable securities of
any holder who so requests. These rights are subject to the right of the
underwriters of an offering to limit the number of shares included in that
registration under certain circumstances. The expenses incurred in such
registrations will be borne by us.
The registration rights described above will expire with respect to any
holder of registrable securities if such holder can sell all of its shares in a
three month period under Rule 144 of the Securities Act. In any event, the
registration rights described above will expire five years after this offering
is completed. Holders of registrable securities have agreed not to exercise
their registration rights for a period of 180 days following the date of this
prospectus.
Shareholder Rights Plan
On May 9, 2000, our Board of Directors adopted a shareholder rights plan
designed to encourage parties seeking to acquire our company to negotiate with,
and seek the approval of, our Board of Directors. Investors purchasing shares
of our common stock in this offering will be issued these preferred purchase
rights.
Prior to completion of this offering, the board of directors will declare a
dividend of one preferred share purchase right for each outstanding share of
common stock outstanding on the business day immediately preceding the date of
this prospectus to the shareholders of record on that date. Each right entitles
the registered holder to purchase one one-hundredth of a share of Series A
junior participating preferred stock, par value $0.01 per share, at a price of
$ per one one-hundredth of a preferred share, subject to adjustment. The
description and terms of the share purchase rights will be set forth in a
rights agreement between Pemstar and a rights agent, a copy of the form of
which is filed as an exhibit to the registration statement of which this
prospectus is a part.
Initially, the certificates for shares of common stock then outstanding will
evidence the rights and we will not distribute separate rights certificates.
The rights will separate from the common stock on the share purchase rights
distribution date, which is the earlier of:
. The first date of public announcement that a person or group of
affiliated or associated persons has become the beneficial owner of 15%
or more of the outstanding common stock, subject to certain exceptions;
and
. The close of business on the tenth day, or such later date as may be
determined by the board of directors prior to such time as any person
becomes the beneficial owner of 15% or more of the outstanding common
stock, following the commencement or public announcement of a tender
offer or exchange offer, the consummation of which would result in a
person or group of affiliated or associated persons becoming the
beneficial owner of 15% or more of the outstanding common stock.
The board of directors, after receiving such advice as it deems necessary
and giving due consideration to all relevant factors, may elect to approve a
tender offer or an exchange offer for all of our outstanding common stock if
the board determines the offer to be in our best interest and the best
interests of our stockholders. If the board does approve a tender offer or
exchange offer, the rights will expire.
Until the share purchase rights distribution date,
. The rights will be evidenced by the certificates for shares of common
stock and will be transferred with and only with the common stock;
56
<PAGE>
. Any common stock certificates issued after the business day immediately
preceding the date of this Prospectus upon transfer or new issuance of
the common stock will contain a notation incorporating the rights
agreement by reference; and
. The transfer of any common stock will also constitute the transfer of
the rights associated with the common stock.
As promptly as practicable following the share purchase rights distribution
date, we will mail separate certificates evidencing the share purchase rights
to holders of record of the common stock as of the close of business on that
date, and such separate certificates alone will evidence the share purchase
rights.
The holders of our common stock and the share purchase rights cannot
exercise the rights until the share purchase rights distribution date. The
rights will expire on the date that is ten years after the business day
immediately preceding the date of this prospectus, unless we extend or earlier
redeem or exchange the rights as described below. We will not issue fractions
of a preferred share, other than fractions in integral multiples of one one-
hundredth of a share, and, in lieu thereof, we will make a cash adjustment on
the closing price on the last trading date prior to the date of exercise.
We will adjust the purchase price payable and the number of preferred shares
issuable upon exercise of the rights from time to time to prevent dilution:
. In the event of a stock dividend on, or a subdivision, combination or
reclassification of, the preferred shares;
. Upon the grant to holders of the preferred shares of certain rights,
options or warrants to subscribe for or purchase preferred shares or
convertible securities at less than the then current market price of the
preferred shares; or
. Upon the distribution to holders of the preferred shares of any evidence
of indebtedness or assets, excluding regular periodic cash dividends or
dividends payable in preferred shares, or of subscription rights or
warrants, other than those described in clause (2) of this paragraph.
With certain exceptions, we are not required to adjust the purchase price
until cumulative adjustments require an adjustment of at least 1% in the
purchase price. We also will adjust the number of outstanding share purchase
rights and the number of preferred shares issuable upon exercise of the rights
in the event of a stock split of the common stock or a stock dividend on the
common stock payable in common stock or subdivisions, consolidations or
combinations of the common stock occurring, in any such case, prior to the
distribution date.
We cannot redeem the preferred shares purchasable upon exercise of the
rights. Each preferred share will be entitled to a minimum preferential
quarterly dividend payment of $ per share but will be entitled to an
aggregate dividend of 100 times the dividend declared per share of common
stock. In the event of liquidation, the holders of the preferred shares will be
entitled to a minimum preferential liquidation payment of $ per share
but will be entitled to an aggregate payment of 100 times the payment made per
share of common stock. Each preferred share will have 100 votes, voting
together with the common stock. Finally, in the event of any merger,
consolidation or other transaction in which common stock is exchanged, each
preferred share will be entitled to receive 100 times the amount received per
share of common stock. These rights are subject to adjustment in the event of a
stock dividend on the common stock or a subdivision, combination or
consolidation of the common stock.
In the event any person becomes the beneficial owner of 15% or more of the
outstanding common stock, each holder of a share purchase right shall
thereafter have a right to receive, upon exercise thereof at the then current
aggregate exercise price, in lieu of preferred shares, such number of shares of
our common stock having a current aggregate market price equal to twice the
current aggregate exercise price. In the event that at any time after there is
a beneficial owner of 15% or more of the outstanding common stock, we are
acquired in certain mergers or other business combination transactions or 50%
or more of our assets or earning power and our subsidiaries, taken as a whole,
are sold, holders of the rights will thereafter have the right to receive, upon
57
<PAGE>
exercise thereof at the then current aggregate exercise price, such number of
shares of common stock of the acquiring company or, in certain cases, one of
its affiliates, having a current aggregate market price equal to twice the
current aggregate exercise price.
At any time after a person becomes the beneficial owner of 15% or more of
the outstanding common stock, subject to certain exceptions, and prior to the
acquisition by a person of 50% or more of the outstanding common stock, the
board of directors may exchange all or part of the rights for common stock at
an exchange ratio of one share of common stock per right, subject to
adjustment.
At any time before a person has become the beneficial owner of 15% or more
of the outstanding common stock, the board of directors may redeem the rights
in whole, but not in part, at a price of $0.01 per right, subject to
adjustment. The redemption of the rights may be made effective at such time, on
such basis and with such conditions as the board of directors in its sole
discretion may establish.
Until a right is exercised, the holder thereof, as such, will have no rights
as a stockholder, including without limitation, the right to vote or to receive
dividends.
The rights have certain anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to acquire us pursuant
to an offer that is not approved by the board of directors, unless the rights
have been redeemed. However, the rights should not interfere with any tender
offer or merger approved by the board because the board of directors may redeem
the rights or approve an offer at any time prior to such time as any person
becomes the beneficial owner of 15% or more of the outstanding common stock.
Provisions of our Articles of Incorporation and Bylaws and State Law
Provisions with Potential Antitakeover Effects
Some provisions of our articles of incorporation and bylaws could make it
more difficult to acquire control of our company and to remove existing
management. These provisions include:
. Our articles of incorporation do not provide for cumulative voting for
directors, which makes it difficult for a minority shareholder seeking
to elect directors to the board;
. We have a classified board of directors with each class serving a
staggered three-year term, which could limit the ability of a potential
acquiror to gain control of our board;
. The board of directors fixes the size of the board of directors, may
create new directorships and may elect new directors to serve for the
full term of the class of directors in which the new directorship was
created, which may enable an incumbent board to maintain control by
adding directors;
. The board of directors may issue preferred stock without any vote or
further action by the shareholders, which may include rights and
preferences that would deter an unsolicitated takeover offer;
. The board of directors may adopt, amend, alter or repeal the bylaws
without a vote of the shareholders, which may enable the board to change
the bylaws to deter a proxy contest in connection with an unsolicitated
takeover offer;
. All shareholder actions must be taken at a regular or special meeting of
the shareholders and cannot be taken by written consent without a
meeting, which may delay a shareholder action in connection with a
takeover offer; and
. We require advance notice procedures with respect to shareholder
proposals and the nomination of candidates for election as directors,
which may restrict shareholder proposals and director nominations in
connection with a takeover offer.
These provisions are intended to discourage coercive takeover practices and
inadequate takeover bids. They are also designed to encourage persons seeking
to acquire control of us to first negotiate with our board.
58
<PAGE>
We believe that the benefits of increased protection give us the potential
ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure us and outweigh the disadvantages of
discouraging such proposals. Negotiating with the proponent could result in an
improvement of the terms of the proposal. These provisions of our articles of
incorporation and bylaws may delay or prevent the acquisition of our company on
terms you may consider to be favorable.
The Minnesota Business Corporation Act
Section 302A.671 of the Minnesota Business Corporation Act, or MBCA,
applies, with certain exceptions, to any acquisition of our voting stock (from
a person other than us and other than in connection with certain mergers and
exchanges to which we are a party) resulting in the acquiring person owning 20%
or more of our voting stock then outstanding. The MBCA requires approval of any
such acquisitions by a majority vote of our shareholders prior to its
consummation. In general, shares acquired without such approval lose their
voting rights and are redeemable by us at their then fair market value within
thirty days after the acquiring person failed to give us timely information
regarding the acquisition of the shares or the date the shareholders voted not
to grant voting rights to the acquiring person's shares.
Section 302A.673 of the MBCA generally prohibits us, or any of our
subsidiaries, from entering into any transaction with a shareholder under which
the shareholder purchases 10% or more of our voting shares (an "interested
shareholder") within four years following the date the person became an
interested shareholder, unless the transaction is approved by a committee of
all of the disinterested members of our board of directors before the
interested shareholder acquires the shares.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Norwest Shareowner
Services.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
the offering could cause the market price of our common stock to fall and could
affect our ability to raise equity capital in the future on terms favorable to
us.
Upon the closing of this offering, we will have 26,929,158 shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options to purchase common stock. Of
these shares, the 8,400,000 shares of common stock being sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act, except that any shares held by our "affiliates," as such term
is defined in Rule 144 under the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 described below.
The remaining shares that were issued and sold by us in private
transactions, are restricted securities and may be sold in the public market
only if registered under the Securities Act or if they qualify for an exemption
from registration under Rules 144, 144(k) or 701 under the Securities Act,
which rules are summarized below. Subject to the lock-up agreements described
below and the provisions of Rules 144, 144(k) and 701, additional shares will
be available for sale in the public market, subject in the case of shares held
by affiliates to compliance with certain volume restrictions, as follows:
. 350,101 shares will be available for immediate sale in the public market
on the date of this prospectus;
. 180,828 shares will be available for sale in the public market 90 days
from the date of this prospectus; and
. 17,998,229 shares will be available for sale at varying dates beginning
180 days after the date of this prospectus.
59
<PAGE>
Rule 144. In general, under Rule 144 as currently in effect, beginning
ninety days after the date of this prospectus, a person who has beneficially
owned shares of our common stock for at least one year is entitled to sell,
within any three-month period, a number of shares that is not more than the
greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately 269,291 shares immediately after this offering; or
. The average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the
sale on Form 144 is filed.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us.
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the three months before a sale, and who has beneficially owned the
restricted shares for at least two years, is entitled to sell the shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701. In general, under Rule 701 of the Securities Act as currently in
effect, any of our employees, consultants or advisors who purchase shares from
us under a stock option plan or other written agreement can resell those shares
90 days after the effective date of this offering in reliance on Rule 144, but
without complying with some of the restrictions, including the holding period,
contained in Rule 144.
We intend to file a Form S-8 registration statement under the Securities Act
shortly after the completion of the offering to register all shares of common
stock issuable under our stock option plans. See "Management--Stock Option
Plans." As of March 31, 2000, we had 3,845,232 shares of common stock issuable
upon the exercise of stock options. Such registration statement is expected to
become effective immediately upon filing and shares covered by that
registration statement will thereupon be eligible for sale in the public
markets, subject to the lock-up agreements described below and Rule 144
limitations applicable to affiliates.
Prior to this offering there has been no public market for our common stock,
and no predictions can be made regarding the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of our
common stock in the public market could adversely affect the prevailing market
price.
All of our directors, executive officers and substantially all of our other
shareholders and option holders have agreed that they will not, without the
prior written consent of the representatives of the underwriters, sell or
otherwise dispose of any shares of common stock or options to acquire shares of
common stock during the 180-day period following the closing of this offering.
See "Underwriting."
After the closing of this offering, the holders of shares of our common
stock will be entitled to certain rights with respect to the registration of
such shares under the Securities Act. See "Description of Capital Stock-
Registration Rights." Registration of such shares under the Securities Act
would result in such shares, except for shares purchased by affiliates,
becoming freely tradable without restriction under the Securities Act
immediately upon the effectiveness of such registration.
60
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, Lehman Brothers Inc.,
FleetBoston Robertson Stephens Inc., Chase Securities Inc., CIBC World Markets
Corp. and Fidelity Capital Markets, a division of National Financial Services
Corporation 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. ...............................................
FleetBoston Robertson Stephens Inc..................................
Chase Securities Inc................................................
CIBC World Markets Corp.............................................
Fidelity Capital Markets, a division of National Financial Services
Corporation........................................................
---------
Total............................................................. 8,400,000
=========
</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 made by us to the underwriters are true, that
there is no material 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. Assuming full exercise of the
underwriters' over-allotment option, $ of the underwriting fee will be paid
by us and $ will be paid by the selling shareholders. 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 reallow, 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 $1.0
million.
We and the selling shareholders have granted to the underwriters an option
to purchase up to 880,000 and 380,000 additional shares of common stock,
respectively, 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
61
<PAGE>
underwriters may exercise this option 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 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 Pemstar, solely from the selling
shareholders or from both Pemstar and the selling shareholders, subject in each
case to the aggregate number of shares offered by each.
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 other 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. See "Shares Eligible for Future Sale."
Prior to 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
Corporation, 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 "PMTR."
We and the selling shareholders 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
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to 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 underwrtiers' 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. 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
62
<PAGE>
which they may purchase shares through the over-allotment option. "Naked" short
sales are any sales in excess of such 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 prior to the
completion of the offering.
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 such underwriter in stabilizing or short covering
transactions.
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.
Neither we, nor the selling shareholders or any of the underwriters makes
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 any of the selling shareholders or the
underwriters makes 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.
Non-United States 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.
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 without the prior written approval
of the customer.
At our request, the underwriters have reserved up to 831,600 shares or 9.9%
of the common stock offered by this prospectus for sale to our directors,
employees, existing shareholders 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.
Affiliates of Lehman Brothers Inc., one of the representatives of the
underwriters will hold 4,959,903 shares of our common stock upon closing of
this offering. In addition, Michael J. Odrich, one of our directors, is a
Managing Director of Lehman Brothers Inc. Because of this relationship between
us and Lehman Brothers Inc., the offering is being conducted in accordance with
Rule 2720 of the National Association of Securities Dealers, or NASD. This rule
requires that the initial public offering price for our shares cannot be higher
than the price recommended by a "qualified independent underwriter," as defined
by the NASD. FleetBoston Robertson Stephens Inc. is serving as a qualified
independent underwriters and will perform the due diligence investigations and
review and participate in the preparation of the registration statement of
which this prospectus is a part.
63
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Dorsey & Whitney LLP, Minneapolis, Minnesota. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Kirkland & Ellis (a partnership that includes professional
corporations), Chicago, Illinois.
EXPERTS
Ernst & Young LLP, independent auditors have audited our consolidated
financial statements as of and for the year ended March 31, 2000, as set forth
in their report. McGladrey & Pullen, LLP, independent auditors, have audited
our consolidated financial statements as of March 31, 1999 and for the years
ended March 31, 1999 and 1998, as set forth in their report. We have included
our financial statements in the prospectus in reliance on the reports of Ernst
& Young LLP and McGladrey & Pullen, LLP, given on their authority as experts in
accounting and auditing.
McGladrey & Pullen, LLP, independent auditors, have audited the financial
statements of Quadrus Manufacturing, a division of Bell Microproducts, Inc., as
of and for the years ended December 31, 1998, 1997 and 1996, as set forth in
their report. We have included the Quadrus Manufacturing financial statements
in the registration statement in reliance on the report of McGladrey & Pullen,
LLP, given on their authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors have audited the financial
statements of Turtle Mountain Corporation as of October 30, 1999 and October
31, 1998 and for each of the three years in the period ended October 30, 1999,
as set forth in their report. We have included the Turtle Mountain Corporation
financial statements in the registration statement in reliance on the report of
Ernst & Young LLP, given in their authority as experts in accounting and
auditing.
On February 11, 2000, upon the recommendation of the audit committee, the
board of directors engaged Ernst & Young LLP to audit our consolidated
financial statements for the year ended March 31, 2000. There were no
disagreements between us and our prior accountants, McGladrey & Pullen, LLP, on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure up to and including February 11,
2000. The audit opinion of McGladrey & Pullen, LLP for the fiscal years March
31, 1999 and 1998 did not contain an adverse option or disclaimer of opinion,
nor were they qualified as to uncertainty, audit scope or accounting
principles.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 with respect
to the shares offered hereby. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information set forth in
the registration statement or the exhibits and schedules which are part of the
registration statement. For further information with respect to Pemstar and the
shares, reference is made to the registration statement and exhibits and
schedules thereto. You may read and copy any document we file at the SEC's
public reference room located at 450 Fifth Street N.W., in Washington, DC.
20549 and at the regional offices of the SEC located at Seven World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at 1-
800-SEC-0330 for further information on the public reference room. Our SEC
filings are also available to the public from the SEC's website at
http://www.sec.gov.
Upon completion of this offering, Pemstar will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
and, in accordance therewith, will file periodic reports, proxy statements and
other information with the SEC. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the SEC's
public reference rooms, Pemstar's website at www.pemstar.com and the website of
the SEC referred to above. Information on our website does not constitute a
part of this prospectus.
64
<PAGE>
PEMSTAR INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pemstar Inc.:
<S> <C>
Report of Independent Auditors--Ernst & Young LLP........................ F-2
Report of Independent Auditors--McGladrey & Pullen, LLP.................. F-3
Consolidated Balance Sheets as of March 31, 1999 and 2000................ F-4
Consolidated Statements of Income for the Years Ended March 31, 1998,
1999 and 2000........................................................... F-5
Consolidated Statements of Shareholders' Equity for the Years Ended March
31, 1998, 1999 and 2000................................................. F-6
Consolidated Statements of Cash Flows for the Years Ended March 31, 1998,
1999 and 2000........................................................... F-7
Notes to Consolidated Financial Statements............................... F-8
Quadrus Manufacturing, a Division of Bell Microproducts, Inc.:
Report of Independent Auditors--McGladrey & Pullen, LLP.................. F-22
Balance Sheets as of March 31, 1999 (unaudited), December 31, 1998, 1997
and 1996................................................................ F-23
Statements of Income and Divisional Equity for the Three Months Ended
March 31, 1999 (unaudited) and the Years Ended March 31, 1998, 1997 and
1996.................................................................... F-24
Statements of Cash Flows for the Three Months Ended March 31, 1999
(unaudited) and the Years Ended December 31, 1998, 1997 and 1996........ F-25
Notes to Financial Statements............................................ F-26
Turtle Mountain Corporation:
Report of Independent Auditors--Ernst & Young LLP........................ F-31
Balance Sheets as of October 31, 1998 and October 30, 1999 and April 1,
2000 (unaudited)........................................................ F-32
Statements of Income and Retained Earnings for the Years Ended November
1, 1997, October 31, 1998 and October 30, 1999, and the Five Months
Ended March 27, 1999 (unaudited) and April 1, 2000 (unaudited).......... F-33
Statements of Cash Flows for the Years Ended November 1, 1997, October
31, 1998 and October 30, 1999, and the Five Months Ended March 27, 1999
(unaudited) and April 1, 2000 (unaudited)............................... F-34
Notes to Financial Statements............................................ F-35
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Directors of Pemstar Inc.
We have audited the accompanying consolidated balance sheet of Pemstar Inc.
as of March 31, 2000, and the related consolidated statement of income,
shareholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pemstar Inc.
at March 31, 2000, and the consolidated results of their operations and their
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
May 5, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Directors of Pemstar Inc.
We have audited the accompanying consolidated balance sheet of Pemstar Inc.
as of March 31, 1999, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the two years in the period
ended March 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 generally accepted auditing
standards. 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 Pemstar Inc. as of March 31, 1999, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
March 31, 1999, in conformity with generally accepted accounting principles.
/s/ McGLADREY & PULLEN, LLP
Rochester, Minnesota
May 10, 1999
F-3
<PAGE>
PEMSTAR INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31,
-----------------
1999 2000
------- --------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................... $ 827 $ 2,727
Restricted cash.............................. 411 528
Accounts receivable, net..................... 21,681 60,061
Inventories, net............................. 16,449 64,437
Recoverable income taxes..................... 415 --
Deferred income taxes........................ -- 2,232
Prepaid expenses and other................... 2,116 3,458
------- --------
Total current assets....................... 41,899 133,443
Property and equipment, net.................. 17,561 34,933
Goodwill, net................................ 3,794 20,691
Other assets, net............................ 1,336 1,384
Deferred income taxes........................ 393 --
------- --------
Total Assets............................... $64,983 $190,451
======= ========
<CAPTION>
Pro Forma
March 31, Shareholders'
----------------- Equity March
1999 2000 31, 2000
------- -------- -------------
(See Note 1)
<S> <C> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Bank overdrafts.............................. $ 1,644 $ 10,213
Accounts payable............................. 19,935 47,138
Accrued expenses and other................... 2,208 9,740
Income taxes payable......................... 207 1,474
Deferred income taxes........................ 357 --
Current maturities of long-term debt......... 4,471 12,930
Current maturities of capital lease
obligations................................. 294 2,299
------- --------
Total current liabilities.................. 29,116 83,794
Long-term debt, less current maturities....... 7,000 51,114
Capital lease obligations, less current
maturities................................... 90 4,067
Deferred grant income......................... 1,808 1,713
Deferred revenue.............................. 1,017 350
Deferred income taxes......................... -- 17
Minority interest in consolidated
subsidiaries................................. 848 174
Redeemable stock:
Series A preferred stock, $0.01 par value;
570 shares issued and outstanding in 1999
and 2000; pro forma--none................... 8,549 8,549 $ --
Series B preferred stock, $0.01 per share;
2000--1,000 shares issued and outstanding;
pro forma--none............................. -- 18,000 --
Shareholders' equity:
Common stock, $0.01 par value; 150,000
shares authorized; shares issued and
outstanding--1999--11,270; 2000--13,819
shares; pro forma issued and outstanding--
18,529 shares............................... 113 138 185
Additional paid-in capital................... 7,949 15,395 41,897
Accumulated other comprehensive loss......... (32) (772) (772)
Retained earnings............................ 8,525 11,170 11,170
Loans to shareholders........................ -- (3,258) (3,258)
------- -------- -------
Total shareholders' equity................. 16,555 22,673 $49,222
------- -------- =======
Total liabilities and shareholders'
equity.................................... $64,983 $190,451
======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
PEMSTAR INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Net sales....................................... $165,049 $187,381 $393,842
Cost of goods sold.............................. 147,962 172,219 363,974
-------- -------- --------
Gross profit.................................... 17,087 15,162 29,868
Selling, general and administrative expenses.... 8,328 10,955 21,576
Amortization.................................... 54 190 1,281
-------- -------- --------
Operating income................................ 8,705 4,017 7,011
Other income (expense)--net..................... 455 (438) (74)
Interest expense................................ (746) (640) (3,588)
-------- -------- --------
Income before income taxes...................... 8,414 2,939 3,349
Income tax expense.............................. 3,097 1,273 698
-------- -------- --------
Net income...................................... $ 5,317 $ 1,666 $ 2,651
======== ======== ========
Net income per common share:
Basic......................................... $ 0.55 $ 0.15 $ 0.23
Diluted....................................... 0.49 0.12 0.15
Shares used in computing net income per common
share:
Basic......................................... 9,653 10,897 11,503
Diluted....................................... 10,874 14,143 17,167
Unaudited pro forma net income per share (see
Note 1):
Basic......................................... $ 0.17
Diluted....................................... 0.15
Shares used in computing unaudited pro forma net
income per share (see Note 1):
Basic......................................... 15,647
Diluted....................................... 17,167
</TABLE>
See accompanying notes.
F-5
<PAGE>
PEMSTAR INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
-------------- Paid-In Comprehensive Retained Loans to
Shares Amount Capital Loss Earnings Shareholders Total
------ ------ ---------- ------------- -------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1997................... 8,366 $ 84 $ 1,371 $ -- $ 1,554 $ -- $ 3,009
Issuance of common stock
upon exercise of stock
options................ 273 3 81 -- -- -- 84
Issuance of common
stock.................. 1,765 17 2,567 -- -- -- 2,584
Net income.............. -- -- -- -- 5,317 -- 5,317
------ ---- ------- ----- ------- ------- -------
Balance, March 31,
1998................... 10,404 104 4,019 -- 6,871 -- 10,994
Issuance of common stock
upon exercise of stock
options................ 111 1 45 -- -- -- 46
Issuance of common
stock.................. 783 8 3,907 -- -- -- 3,915
Repurchase of common
stock.................. (28) -- (22) -- (12) -- (34)
Comprehensive income:
Net income.............. -- -- -- -- 1,666 -- 1,666
Foreign currency
translation
adjustment............. -- -- -- (32) -- -- (32)
-------
Comprehensive income.... -- -- -- -- -- -- 1,634
------ ---- ------- ----- ------- ------- -------
Balance, March 31,
1999................... 11,270 113 7,949 (32) 8,525 -- 16,555
Issuance of common stock
upon exercise of stock
options................ 1,565 15 2,410 -- -- (1,855) 570
Issuance of common
stock.................. 985 10 4,913 -- -- (1,403) 3,520
Repurchase of common
stock.................. (1) -- -- -- (6) -- (6)
Comprehensive income:
Net income.............. -- -- -- -- 2,651 -- 2,651
Foreign currency
translation
adjustment............. -- -- -- (740) -- -- (740)
-------
Comprehensive income.... -- -- -- -- -- -- 1,911
Other................... -- -- 123 -- -- -- 123
------ ---- ------- ----- ------- ------- -------
Balance, March 31,
2000................... 13,819 $138 $15,395 $(772) $11,170 $(3,258) $22,673
====== ==== ======= ===== ======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
PEMSTAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------
1998 1999 2000
-------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 5,317 $ 1,666 $ 2,651
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation..................................... 1,929 3,331 7,455
Amortization..................................... 54 190 1,281
Deferred grant income recognized................. (193) (222) (95)
Deferred revenue................................. 962 (725) (667)
Deferred income taxes............................ (185) 151 (2,179)
(Gain) loss on sale of property and equipment.... -- 377 (42)
Equity in income of affiliate.................... (169) -- --
Minority interest................................ -- 277 191
Issuance of stock options for services........... -- -- 150
Changes in operating assets and liabilities:
Accounts receivable............................. (15,052) 439 (23,828)
Inventories..................................... (15,382) 2,418 (22,962)
Recoverable income taxes........................ 628 (1,214) 1,889
Prepaid expenses and other...................... (492) (1,127) (343)
Accounts payable................................ 20,516 (5,733) 15,404
Accrued expenses and other...................... 693 237 870
-------- ------- --------
Net cash (used in) provided by operating
activities.................................... (1,374) 65 (20,225)
Cash flows from investing activities:
(Increase) decrease in restricted cash........... (1,447) 583 155
Business acquisitions, net of cash acquired...... -- -- (39,473)
Increase of intangibles.......................... (286) (556) (878)
Proceeds from sale of property and equipment..... -- 3,085 122
Purchases of property and equipment.............. (8,393) (8,657) (13,415)
-------- ------- --------
Net cash used in investing activities.......... (10,126) (5,545) (53,489)
Cash flows from financing activities:
Bank overdrafts.................................. 2,364 (1,273) 8,569
Proceeds from grants............................. 836 -- --
Net (payments on) proceeds from short-term
borrowings...................................... (3,206) -- --
Proceeds from sale/exercise of stock options..... 335 46 802
Repurchase of common stock....................... -- (34) (6)
Proceeds from private placement offering......... 9,920 -- 18,000
Proceeds from minority interest shareholder...... -- 296 --
Principal payments on long-term borrowings....... (1,453) (1,879) (4,645)
Proceeds from long-term borrowings............... 5,865 5,956 52,892
-------- ------- --------
Net cash provided by financing activities...... 14,661 3,112 75,612
Effect of exchange rate changes on cash........... -- -- 2
-------- ------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 3,161 (2,368) 1,900
Cash and cash equivalents:
Beginning of year................................ 34 3,195 827
-------- ------- --------
End of year...................................... $ 3,195 $ 827 $ 2,727
======== ======= ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
PEMSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 1. Nature of Business and Significant Accounting Policies
Business--Pemstar Inc. (the "Company") is a leading provider of electronics
manufacturing services to original equipment manufacturers in the
communications, computing, data storage, industrial and medical equipment
sectors. The Company provides its services to customers on a global basis
through manufacturing facilities located in the United States, Mexico, Europe
and Asia. The Company considers its business activities as a single segment.
Basis of presentation--The accompanying financial statements include the
accounts of Pemstar Inc., its majority-owned subsidiaries and the Company's
share of net earnings or losses of fifty percent or less owned companies
accounted for using the equity method. All material intercompany accounts and
transactions are eliminated in the consolidated financial statements.
Revenue recognition--Revenue from the sale of products is recognized when
the product is shipped to the customer. Revenue from design, development and
engineering services is recognized when the services are performed and
collectibility is reasonably certain. The Company warrants a majority of its
products against defects for up to 90 days. Product warranty expenses are
recorded as products are returned and are not material to the Company's
financial statements.
Deferred revenue--The Company recognizes certain revenue from a major
customer over the life of the equipment purchased for specific production
purposes for that customer. The Company receives an amount per unit produced as
reimbursement for the equipment. Deferred revenue also includes the gain from
the sale-leaseback transaction discussed in Note 17.
Cash and cash equivalents--The Company considers all highly liquid debt
investments purchased with a maturity of three months or less to be cash
equivalents. Cash equivalents are recorded at cost which approximates market
value.
Inventories--Inventories are stated at the lower of cost (first-in, first-
out method) or market and include freight-in, materials, labor and
manufacturing overhead costs.
Property and equipment--Property and equipment is stated at cost.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION>
Number of
Years
---------
<S> <C>
Buildings and improvements......................................... 4 to 40
Machinery and equipment............................................ 4
Furniture and fixtures............................................. 2 to 10
Computer hardware and software..................................... 4
</TABLE>
Amortization of assets acquired under capital leases is included with
depreciation expense.
Goodwill and other intangible assets--Goodwill represents the excess of the
purchase price over the fair value of the net assets acquired and is being
amortized on a straight-line basis over 20 years. Other intangible assets
principally consist of debt financing costs that are being amortized over the
terms of the applicable agreement.
Long-lived assets--The Company follows Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-
lived assets, including goodwill, be reviewed for impairment whenever events or
circumstances indicate the carrying amount of an asset may not be recoverable.
The Company evaluates potential impairment by comparing the carrying amount of
the assets with the estimated undiscounted
F-8
<PAGE>
PEMSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
cash flows associated with them. If an impairment exists, the Company measures
the impairment utilizing discounted cash flows.
Estimated warranty claim--The Company sells its products with a warranty
that provides for repairs or replacements of any defective workmanship for a
three-month period after the sale. Based upon historical experience the accrual
for warranty claims is not material at March 31, 1999 and 2000.
Foreign currency--Foreign currency denominated assets and liabilities are
translated into United States dollars using the exchange rates in effect at the
balance sheet date. Results of operations are translated using the average
exchange rates throughout the period. The effect of exchange rate fluctuations
on translation of assets and liabilities is recorded as a component of
shareholders' equity. Gains and losses from foreign currency transactions are
included in net other income or expense.
Income taxes--The Company accounts for income taxes following the provisions
of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires that
deferred income taxes be recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end, based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount more likely than not to be realized. The
effect of changes in tax rates is recognized in the period in which the rate
change occurs.
Deferred grant income--The Company recognizes revenue related to grants
received from various sources over the life of the property and equipment to
which the funding relates or during the period in which the expense occurs for
which grants were received.
Research and development--Research and development costs are expensed when
incurred and totaled $401, $387 and $410 for the years ended March 31, 1998,
1999 and 2000, respectively.
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.
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
organization used by management for making operating decisions and assessing
performance as the source of the Company's reportable segments. The Company
derives its revenue from one industry segment, the electronics manufacturing
services industry. Until such time as the Company diversifies its operations,
this pronouncement has no significant impact on the reporting practices of the
Company. Refer to Note 15 for geographic and significant customer disclosures.
Comprehensive income--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 in the consolidated statement of
shareholders' equity.
Stock-based compensation--The Company accounts for stock options issued to
employees using the intrinsic value method of Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees."
Compensation expense is recorded on the date stock options are granted only if
the
F-9
<PAGE>
PEMSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
current fair value of the underlying stock exceeds the exercise price of the
option. The Company has provided the pro forma disclosures required by SFAS No.
123, "Accounting for Stock-Based Compensation."
Net income per common share--The Company follows the provisions of SFAS No.
128, "Earnings Per Share." Basic net income per share is computed based upon
the weighted average number of common shares issued and outstanding during each
year. Diluted net income per share amounts assume conversion, exercise or
issuance of all potential common stock instruments (stock options as discussed
in Note 16 and convertible preferred stock as discussed in Note 14). The
following table reflects the components of common shares outstanding in
accordance with SFAS No. 128:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Weighted average common shares outstanding--basic........ 9,653 10,897 11,503
Effect of dilutive securities:
Preferred stock conversion............................. 198 1,710 4,144
Stock options.......................................... 1,023 1,536 1,520
------ ------ ------
Shares used in computing net income per common share--
diluted................................................. 10,874 14,143 17,167
====== ====== ======
</TABLE>
Pro forma shareholders' equity--Upon the closing of an initial public
offering, all outstanding shares of Series A and Series B preferred stock will
automatically convert into 4,710 shares of common stock. The pro forma effects
of these transactions are unaudited and have been reflected in the accompanying
pro forma shareholders' equity section at March 31, 2000.
Pro forma net income per share--Pro forma basic net income per share is
computed using the weighted average number of common shares outstanding,
including the pro forma effects of the automatic conversion of the Company's
redeemable Series A and Series B preferred stock into shares of the Company's
common stock as if such conversion occurred at the date of original issuance.
The resulting pro forma adjustments include an increase in the weighted average
shares used to compute basic net income per share of 4,144 shares for the year
ended March 31, 2000. The pro forma effects of these transactions are
unaudited.
Stock split--In May 2000, the Company's Board of Directors declared a 3-for-
1 stock split payable in the form of a stock dividend. Accordingly, all share,
per share, weighted average share and stock option information for periods
prior to the split, have been restated to reflect the split.
New accounting pronouncements--In June 1998, the Financial Accounting
Standards Board ("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 April 1, 2001. Based upon the nature of the financial instruments and
hedging activities in effect as of March 31, 2000, this pronouncement would not
have a material impact on the Company's financial position or results of
operations.
In fiscal 2000, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position ("SOP") 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." The
Company capitalizes software development for internal use in accordance with
the guidance provided by SOP 98-1. The impact of adopting SOP 98-1 was not
significant to the Company's financial position, results of operations or cash
flows.
F-10
<PAGE>
PEMSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
In fiscal 2000, the Company adopted SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities," issued by the AICPA. SOP 98-5 requires costs associated
with certain start-up activities be expensed as incurred versus capitalizing
and expensing them over a period of time. The impact of adopting SOP 98-5 was
not significant to the Company's financial position, results of operations, or
cash flows.
Reclassification--Certain prior year amounts have been reclassified to
conform with the current year presentation.
Note 2. 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 preferred stock in the aggregate amount 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. The
transaction was accounted for as a purchase. Accordingly, the net assets and
operating results have been included in the Company's financial statements from
the date of acquisition. The excess of the purchase price over the estimated
fair value of the net assets acquired of $12,346 has been recorded as goodwill
and is being amortized over an estimated useful life of 20 years. The following
unaudited pro forma combined summary statement of income for the years ended
March 31, 1999 and 2000 was prepared in accordance with Accounting Principles
Board Opinion No. 16 and assumes the acquisition had occurred at the beginning
of the periods presented. The following pro forma data reflect adjustments for
interest expense, amortization of goodwill and depreciation of fixed assets.
The unaudited pro forma financial information is provided for informational
purposes only and does not purport to be indicative of the future results of
the Company.
Unaudited Pro Forma Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended March
31,
------------------
1999 2000
-------- --------
<S> <C> <C>
Revenue.................................................. $273,480 $407,972
Net income (loss)........................................ (2,591) 308
Net income per share--basic.............................. $ (0.24) $ 0.03
Net income per share--diluted............................ (0.24) 0.02
</TABLE>
In May 1999, the Company acquired a division of Fluke Corporation located in
Almelo, the Netherlands, which provides electronic manufacturing services to
the industrial equipment sector in Europe and North America. The purchase price
of $7,663 was funded through various credit facilities. The transaction was
accounted for as a purchase. Accordingly, the net assets and operating results
have been included in the Company's financial statements from the date of
acquisition. The excess of the purchase price, including certain employee
termination costs, over the estimated fair value of the net assets acquired of
$3,325 has been recorded as goodwill and is being amortized over an estimated
useful life of 20 years.
Pursuant to the acquisition, the Company assumed all assets and liabilities
associated with a pension plan administered by Fluke Corporation for the
acquired division. As of March 31, 2000, the fair value of plan assets and
projected benefit obligation were $3,997 and $3,932, respectively. Expense
associated with the plan totaled $62 for the year ended March 31, 2000.
F-11
<PAGE>
PEMSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
Note 3. Accounts Receivable
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
March 31,
----------------
1999 2000
------- -------
<S> <C> <C>
Accounts receivable........................................ $21,734 $60,614
Less allowance for doubtful accounts....................... (53) (553)
------- -------
$21,681 $60,061
======= =======
</TABLE>
Note 4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31,
---------------
1999 2000
------- -------
<S> <C> <C>
Raw materials............................................... $14,961 $49,948
Work in process............................................. 566 8,675
Finished goods.............................................. 922 6,387
Less allowance for inventory obsolescence................... -- (573)
------- -------
$16,449 $64,437
======= =======
</TABLE>
Note 5. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
March 31,
-----------------
1999 2000
------- --------
<S> <C> <C>
Land...................................................... $ 812 $ 1,022
Buildings and improvements................................ 7,451 11,818
Machinery and equipment................................... 13,733 27,388
Computer hardware and software............................ 2,351 7,595
Construction in progress.................................. 132 1,131
------- --------
24,479 48,954
Less accumulated depreciation............................. (6,918) (14,021)
------- --------
$17,561 $ 34,933
======= ========
</TABLE>
F-12
<PAGE>
PEMSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
Note 6. Goodwill
Goodwill consists of the following:
<TABLE>
<CAPTION>
March 31,
---------------
1999 2000
------ -------
<S> <C> <C>
Goodwill.................................................... $3,940 $21,717
Less accumulated amortization............................... (146) (1,026)
------ -------
$3,794 $20,691
====== =======
</TABLE>
Note 7. Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
March 31,
-------------
1999 2000
------ ------
<S> <C> <C>
Restricted cash................................................ $ 454 $ 182
Other intangible assets, net of accumulated amortization -
1999--$107; 2000--$299........................................ 882 1,055
Other.......................................................... -- 147
------ ------
$1,336 $1,384
====== ======
</TABLE>
Note 8. Financing Arrangements
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31,
---------------
1999 2000
------ -------
<S> <C> <C>
Revolving credit facilities................................ $3,957 $56,557
Notes payable, non-interest bearing, due in March 2007--
$200 and April 2007--$150. Notes totalling $200 are
collateralized by domestic equipment and real estate. In
the event of a public offering of the Company's common
stock, notes due March 2007 are due immediately........... 350 350
Notes payable bearing interest at 5.00%, due in monthly
payments of principal and interest of $75 through February
2001 and annual payments of principal and interest of $58
through July 2008. Notes are collateralized by domestic
property and equipment.................................... 1,164 1,627
Bonds payable to the City of Rochester with variable
interest rates ranging from 4.20% to 6.25% at March 31,
2000, interest due monthly. Annual principal payments
ranging from $75 to $285 are due through June 2018........ 6,000 5,510
------ -------
11,471 64,044
Less current maturities.................................... (4,471) (12,930)
------ -------
$7,000 $51,114
====== =======
</TABLE>
Payment of the bonds is secured by irrevocable letters of credit in favor of
the trustee in the amount of $5,609 expiring August 2003. The Company is
required to maintain letters of credit sufficient to pay all outstanding
principal and interest under the bonds. Interest on the bonds is variable and
is payable monthly until, at the option of the Company with the consent of US
Bank, the rate is fixed (conversion date). In the event the Company exercises
its option to convert the interest rate on the bonds from a variable rate to a
fixed
F-13
<PAGE>
PEMSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
rate, a remarketing agent, currently FBS Investment Services, Inc., shall
determine the fixed rate in accordance with a remarketing agreement. Upon
exercise of this option, a mandatory tender date shall occur on which date the
bonds are called and reissued. Prior to the conversion date, the holders of the
bonds may require the trustee to purchase the bonds at a price equal to the
principal amount thereof plus accrued interest thereon. Upon presentation for
redemption, the remarketing agent will attempt to resell the bonds at a price
that is not less than par. Proceeds from the bonds, to the extent unused, are
reported as restricted cash.
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending March 31:
<S> <C>
2001............................................................... $12,930
2002............................................................... 45,648
2003............................................................... 678
2004............................................................... 258
2005............................................................... 272
Thereafter......................................................... 4,258
-------
$64,044
=======
</TABLE>
The Company has two Revolving Credit Facilities totaling $65,000 ($55,000--
"Revolver A" and $10,000--"Revolver B") for revolving credit loans and letters
of credit which expire on Revolver A in August 2002 and Revolver B at the
earlier of October 2000 or the closing of an initial public offering. Advances
under the Revolving Credit Facilities, which is limited to the lesser of the
facility amount or the available borrowing base calculated as a percentage of
eligible accounts receivable and inventory balance, bear interest at the
Company's option at a rate equal to either (1) 3.75% per annum plus the
applicable LIBOR rate or (2) 2.00% per annum plus prime. In addition, the
Company is required to pay a fee of 0.25% on the average unused commitment
under the Revolving Credit Facilities. The Company had $500 reserved against
the Revolving Credit Facilities for letters of credit at March 31, 2000. As of
March 31, 2000, the Company had elected the LIBOR rate (6.20% at March 31,
2000) for advances totaling $37,400, and the prime rate (8.5% at March 31,
2000) for advances totaling $16,000.
On May 5, 2000, Revolver A was amended to reduce the available credit
facility from $55,000 to $45,000. In addition, the index rate for Revolver B
loans was amended to increase on a periodic basis to a maximum rate at October
1, 2000 of (1) 6.75% per annum plus the applicable LIBOR rate or (2) 5.00% per
annum plus the bank's reference rate. Concurrent with this amendment, the
Company entered into a new Revolving Credit Facility with another lender, who
is also a major customer of the Company, totaling $40,000. Advances under the
new Revolving Credit Facility, which is limited to the lesser of the facility
amount or the available borrowing base calculated as a percentage of eligible
accounts receivable and inventory balance, bear interest at prime plus 1.00%.
In addition, the Company is required to pay a monthly fee of 0.25% on the
unused portion of the facility. Borrowings under the new Revolving Credit
Facility and Revolver A are collateralized by substantially all domestic non-
real estate assets of the Company. Borrowings under Revolver B are unsecured.
The Company also has, through one of its subsidiaries, a separate line of
credit totaling $3,257. Advances under the line of credit bear interest at the
bank's base rate (4.25% at March 31, 2000) plus 1.5%. The line of credit is
secured by the inventory and receivables of the subsidiary and the corporate
guarantee of the Company.
Notes payable totaling $1,225 are subordinated to the Revolving Credit
Facilities. The financing arrangements are subject to certain covenants that
require the Company to maintain certain financial ratios, including minimum
liquidity and debt coverage, and limit investments and cash distributions.
F-14
<PAGE>
PEMSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
Note 9. Other Income (Expense)--Net
The other income and expense consists of the following:
<TABLE>
<CAPTION>
March 31,
----------------
1998 1999 2000
---- ----- ----
<S> <C> <C> <C>
Grant income............................................. $193 $ 222 $ 95
Equity in earnings of affiliate.......................... 170 -- --
Minority interest in net income of consolidated
subsidiaries............................................ -- (277) (191)
Net other income (expense)............................... 92 (383) 22
---- ----- ----
$455 $(438) $(74)
==== ===== ====
</TABLE>
Note 10. Fair Value of Financial Instruments
The carrying values of cash, accounts receivable and payable, and accrued
liabilities approximate fair value due to the short-term maturity of these
instruments. The carrying amount of the Company's revolving line of credit
approximates fair value because of the variability of the interest cost
associated with these instruments. The fair value of the Company's long-term
notes approximated fair value because the majority of the amounts outstanding
accrue interest at variable rates which approximate market. The fair value of
the Company's preferred stock approximated $23,550 at March 31, 2000. The fair
value assumes conversion of the Series A preferred stock totaling $8,549 into
1,710 shares of common stock (using a conversion price of $5.00 per share) and
conversion of the Series B preferred stock totaling $18,000 into 3,000 shares
of common stock (using a conversion price of $6.00 per share). The total
converted shares of 4,710 were then valued at the Company's estimated fair
value of the common stock of $5.00 per share or a total of $23,550.
Note 11. Commitments and Contingencies
The Company has various capital and operating leases which expire on various
dates through 2012. Future minimum payments under both capital leases and
operating leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Fiscal Year Ending March 31:
2001.................................................... $ 2,899 $ 3,753
2002.................................................... 1,932 3,394
2003.................................................... 1,451 2,936
2004.................................................... 901 2,701
2005.................................................... 18 2,734
Thereafter.............................................. -- 7,618
------- -------
Total minimum lease payments.............................. 7,201 $23,136
=======
Less amount representing interest......................... (835)
-------
Present value of minimum lease payment.................... 6,366
Less current portion...................................... (2,299)
-------
$ 4,067
=======
</TABLE>
F-15
<PAGE>
PEMSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
Property and equipment includes the following amounts for capitalized
leases:
<TABLE>
<CAPTION>
March 31,
------------
1999 2000
---- ------
<S> <C> <C>
Machinery and equipment........................................ $125 $5,189
Furniture and fixtures......................................... 84 84
Computer hardware and software................................. 644 2,019
---- ------
853 7,292
Less accumulated depreciation.................................. (269) (719)
---- ------
$584 $6,573
==== ======
</TABLE>
Total rent expense recognized under operating leases for the years ended
March 31, 1998, 1999 and 2000 totaled $579, $1,567 and $3,027, respectively.
Note 12. Income Taxes
Income before income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Domestic................................................ $8,206 $1,837 $2,485
Foreign................................................. 208 1,102 864
------ ------ ------
$8,414 $2,939 $3,349
====== ====== ======
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------
1998 1999 2000
------ ------ -------
<S> <C> <C> <C>
Current:
Domestic........................................... $3,282 $ 624 $ 2,378
Foreign............................................ -- 498 499
------ ------ -------
3,282 1,122 2,877
Deferred:
Domestic........................................... (185) 151 (1,678)
Foreign............................................ -- -- (501)
------ ------ -------
(185) 151 (2,179)
------ ------ -------
$3,097 $1,273 $ 698
====== ====== =======
</TABLE>
F-16
<PAGE>
PEMSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
A reconciliation of the provision for income taxes at the statutory rates to
the reported income tax provision is as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Computed "expected" tax rate....................... $2,861 $ 999 $1,139
Increase (decrease) in income taxes resulting from:
State taxes, net of credits and federal income
tax benefit..................................... 319 80 (289)
Permanent differences............................ (77) (46) 148
Foreign taxes.................................... (71) 108 (296)
Other............................................ 65 132 (4)
------ ------ ------
$3,097 $1,273 $ 698
====== ====== ======
</TABLE>
A summary of deferred tax assets (liabilities) is as follows:
<TABLE>
<CAPTION>
March 31,
---------------
1999 2000
------- ------
<S> <C> <C>
Deferred tax assets:
Deferred revenue......................................... $ 1,087 $ 794
Expenses accelerated for financial reporting purposes.... 94 1,135
Foreign net operating losses............................. -- 492
State tax credits........................................ -- 523
Other.................................................... 25 139
------- ------
Total deferred tax assets.................................. 1,206 3,083
Deferred tax liabilities:
Unbilled services........................................ (475) (495)
Accounting basis of assets in excess of tax basis........ (695) (373)
------- ------
Total deferred tax liabilities............................. (1,170) (868)
------- ------
Net deferred tax asset..................................... $ 36 $2,215
======= ======
</TABLE>
No provision has been made for U.S. income taxes related to undistributed
earnings of foreign subsidiaries that are intended to be permanently
reinvested. The Company had approximately $1,991 of foreign net operating loss
carryforwards, $1,539 of which expire in 2010, with the remaining amount having
an unlimited carryforward period. The state tax credit carryforwards of $792
expire at varying dates through 2015. The foreign tax expense was decreased in
fiscal 2000 by $231 ($0.02 and $0.01 per share on a basic and diluted basis,
respectively) as a result of the benefit of a tax holiday. This holiday will
continue at full relief of the normal income tax rate of 15% through December
31, 2000, and at half rate thereafter through December 31, 2002.
Note 13. Deferred Grant Income
The Company has received grant monies pursuant to certain Development
Assistance and Redevelopment Assistance Agreements (the Agreements) which
provide primarily for the funding of certain development costs associated
primarily with property and equipment acquisitions. The Agreements require,
among other things, that the Company maintain certain levels of employment. If
the Company does not maintain the levels of employment, the Company must repay
the grant monies plus accrued interest at various rates up to 5%, or pay
F-17
<PAGE>
PEMSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
a penalty of $8 per employee according to the terms of the Agreements. Deferred
grant income is being recognized over the life of the related property and
equipment acquired with the grant proceeds. Grant income for each of the years
ended March 31, 1998, 1999 and 2000 totaled $193, $222 and $95, respectively.
Note 14. Mandatory Redeemable and Convertible Preferred Stock
The Company has authorized 5,000 shares of $0.01 par value preferred stock,
667 shares of which are designated as Series A preferred stock (Series A) of
which 570 shares were issued in February, 1998 and outstanding as of March 31,
1999 and 2000. Additionally, 1,000 shares have been designated as Series B
preferred stock (Series B) of which 1,000 shares were issued in June, 1999 and
outstanding as of March 31, 2000. Dividends are $0.40 and $0.48 per share per
year, non-cumulative, for the Series A and Series B, respectively. After paying
the preferred dividend, the preferred shareholders share ratably with the
common shareholders in any additional dividends. The Series A and Series B
preferred shareholders are entitled to liquidation preferences of $5.00 and
$6.00 per share, respectively. Upon completion of the distribution of the
liquidation preferences, the Series A and Series B preferred shareholders are
entitled to receive ratable distributions with the common shareholders up to
$2.50 per share and up to $3.00 per share, respectively.
Any time after February 12 and September 15, 2002, the holders of a majority
of the Series A and Series B preferred stock, respectively, can demand
redemption. The purchase price is the original issue price plus declared unpaid
dividends payable in three equal annual installments. The amount of the
potential redemption requirement excluding dividends, subsequent to February
12, 2002 is $8,549 for the Series A preferred stock and subsequent to September
15, 2002 is $18,000 for the Series B preferred stock.
Each share of preferred stock is convertible into common stock at conversion
prices of $5.00 per share for Series A and $6.00 per share for Series B as of
March 31, 2000. The conversion ratio is adjusted upon the issuance of
additional common shares with certain exceptions.
Each share of preferred stock is automatically converted into shares of
common stock upon the earlier of (1) an initial public offering at not less
than $6.67 per share for Series A and $8.00 per share for Series B and $15,000
in the aggregate or (2) by written consent of two-thirds of the holders of the
outstanding Series A and Series B preferred shares.
In connection with the sale of the preferred stock, the founding
shareholders and preferred shareholders entered into a "Shareholders
Agreement." The agreement stipulates the Company has the right of first refusal
on the proposed transfer of stock by any founding shareholder with payment due
in ten days. In the event the Company does not exercise its right, the
preferred shareholders have the same right of first refusal.
In the event less than all of the shares of stock proposed to be transferred
by a founding shareholder are acquired by the Company and/or preferred
shareholders pursuant to the right of first refusal, each preferred shareholder
shall have the right to participate in such sale (co-sale rights) of stock on
the same terms and conditions. To the extent one or more of the preferred
shareholders exercises such right of participation, the number of shares of
stock the founding shareholder may sell in the transaction shall be
correspondingly reduced.
The rights of first refusal and the co-sale rights terminate upon the
occurrence of specific events, including the effective date of a bona fide firm
commitment underwritten public offering of the Company's common stock.
F-18
<PAGE>
PEMSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
Note 15. Geographic and Concentration of Credit Risk Information
The following is a summary of net sales and long-lived assets by geographic
location:
<TABLE>
<CAPTION>
March 31,
--------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Net sales:
United States................................... $165,049 $176,373 $318,616
Asia............................................ -- 11,008 44,314
Europe.......................................... -- -- 30,912
-------- -------- --------
$165,049 $187,381 $393,842
======== ======== ========
Long-lived assets:
United States................................... $ 16,497 $ 19,546 $ 42,463
Asia............................................ -- 3,538 10,421
Europe.......................................... -- -- 4,124
-------- -------- --------
$ 16,497 $ 23,084 $ 57,008
======== ======== ========
</TABLE>
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. The Company considers
concentrations of credit risk in establishing the allowance for doubtful
accounts and believes the recorded amount is adequate.
Customers that accounted for more than 10% of consolidated net sales are as
follows:
<TABLE>
<CAPTION>
March 31,
----------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Customer A.................................................... 36% 64% 37%
Customer B.................................................... 12 11 15
Customer C.................................................... 26 -- --
</TABLE>
As of March 31, 1999 and 2000, receivables from these customers represented
59% and 33% of total accounts receivable.
Note 16. Stock Option Plans
The Company has reserved 1,327 shares of common stock for issuance to board
members and employees under incentive stock option and purchase plans approved
by shareholders. Current exercisable options are granted at prices equal to the
fair market value on the dates of grant. All options are exercisable over a
ten-year period.
Grants under stock option plans are accounted for using APB No. 25 and
related interpretations. Accordingly, no compensation cost has been recognized
for grants under these stock option plans as the exercise price equaled the
fair market value of the stock on the date of grant. Had compensation cost for
stock option grants been based on the grant date fair values of awards (the
method described in SFAS No. 123), reported net income would have been reduced
to the pro forma amounts reported below.
F-19
<PAGE>
PEMSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31,
--------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Net income (loss):
As reported............................................ $5,317 $1,666 $2,651
Pro forma.............................................. 5,271 1,451 (4,499)
Basic earnings (loss) per share:
As reported............................................ $ 0.55 $ 0.15 $ 0.23
Pro forma.............................................. 0.55 0.13 (0.39)
Diluted earnings (loss) per share:
As reported............................................ $ 0.49 $ 0.12 $ 0.15
Pro forma.............................................. 0.48 0.10 (0.39)
</TABLE>
The fair value of each option grant has been estimated at the grant date
using a Black-Scholes option pricing model with the following weighted average
assumptions: dividend rate of 0% for all years; risk-free interest rates of
5.72%, 5.53% and 6.13% for 1998, 1999 and 2000, respectively, volatility factor
of expected market price of our common stock of .3, .3 and .5 for 1998, 1999
and 2000, respectively and expected lives of ten years.
Following is a summary of stock option activity for the fiscal years ended
March 31:
<TABLE>
<CAPTION>
1998 1999 2000
---------------- ---------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year................ 963 $0.32 1,866 $0.65 2,173 $1.40
Granted................. 1,176 0.83 418 4.52 3,269 4.39
Exercised/forfeited..... (273) 0.31 (111) 0.39 (1,597) 1.47
------ ------ -------
Outstanding, end of
year................... 1,866 0.65 2,173 1.40 3,845 4.35
====== ====== =======
Exercisable, end of
year................... 901 0.53 937 0.57 3,029 4.18
Weighted average fair
value per share of
options granted during
the year............... $ 0.47 $ 2.85 $ 2.35
</TABLE>
At March 31, 2000, the options outstanding have average remaining
contractual lives and exercise prices as follows:
<TABLE>
<CAPTION>
Average
Shares Contractual Life Exercise Price
------ ---------------- --------------
<S> <C> <C>
262 6 years $0.33
71 7.5 years 0.50
195 7.5 years 0.82
3,317 9.5 years 5.00
</TABLE>
In March 2000, the Company made loans to shareholders in connection with the
purchase of common stock of 281 shares and the exercise of stock options for
the purchase of 1,008 shares. The loans bear interest at 6.5%. Loans totaling
$1,090 are due within 90 days and loans totaling $2,168 are due within two
years. The loans are secured by the shares of common stock purchased and
provide for full recourse against the respective shareholder's personal assets.
In March 2000, the Company accelerated the vesting of all stock options
outstanding that were granted prior to December 13, 1999 totaling 930 options.
No compensation related to the accelerated vesting modification has been
recognized as of March 31, 2000. Should information become available prior to
F-20
<PAGE>
PEMSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
September 20, 2000, which is the last scheduled vesting date for options with
an intrinsic value at the date of the modification, that would indicate that
stock options that would otherwise be forfeited, absent the modification, be
retained or get exercised, the Company will recognize the related compensation
expense representing the difference between the original exercise price of the
stock option grant and the deemed fair value at the date of the modification.
Note 17. Sale-Leaseback
During the year ended March 31, 1999, the Company sold its manufacturing and
office space facility. The Company subsequently leased this facility back from
the new owner. The gain realized on this sale is being deferred and recognized
over the term of the new building lease. The remaining deferred gain, which is
included in the deferred revenue balance, as of March 31, 1999 and 2000 was
$272 and $250, respectively. The amount of gain recognized during the years
ended March 31, 1999 and 2000 was $14 and $22, respectively.
Note 18. Employee Benefit Plans
Retirement Savings Plans
The Company sponsors various employee retirement savings plans that allow
qualified employees to provide for their retirement on a tax-deferred basis. In
accordance with the terms of the retirement savings plans, the Company is
required to match certain of the participants' contributions and/or provide
employer contributions based on the Company's performance and other factors.
Employer contributions for the years ended March 31, 1998, 1999 and 2000
totaled $126, $295 and $413, respectively.
Note 19. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Supplemental disclosures for cash flow information:
Cash payments for:
Interest.......................................... $ 817 $ 643 $3,555
Income taxes...................................... 2,658 2,332 1,197
Supplemental schedule of non-cash investing and
financing activities:
Land acquired through tax increment financing....... $ 456 $ -- $ --
Property and equipment acquired through capital
lease agreements................................... 683 71 2,514
Purchase of minority interest in consolidated
subsidiary through issuance of common stock
(acquired 45%, 30% and 25% interests by issuing
1,175, 783 and 653 shares in June, 1997, August,
1998 and January, 2000, respectively).............. 963 3,915 3,263
</TABLE>
F-21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Pemstar Inc.
Rochester, Minnesota
We have audited the accompanying balance sheets of Quadrus Manufacturing, a
Division of Bell Microproducts, Inc. as of December 31, 1998, 1997 and 1996,
and the related statements of income, divisional equity, and cash flows for the
years then ended. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above presents fairly,
in all material respects, the financial position of Quadrus Manufacturing, a
Division of Bell Microproducts, Inc. as of December 31, 1998, 1997 and 1996,
and the results of its operations and its cash flows for the years then ended
in conformity with generally accepted accounting principles.
/s/ McGLADREY & PULLEN, LLP
Rochester, Minnesota
January 13, 2000
F-22
<PAGE>
QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 -----------------------
(Unaudited) 1998 1997 1996
----------- ------- ------- -------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash..................................... $ -- $ -- $ 71 $ 513
Receivables, less allowance for doubtful
accounts 1998 $113; 1997 $107; 1996 $119
(Note 9)................................ 15,890 13,618 10,274 11,345
Inventories (Note 2)..................... 20,686 24,059 16,553 18,867
Prepaid expenses......................... 642 576 561 527
Income tax receivable, home office....... 299 1,975 1,775 --
------- ------- ------- -------
Total current assets................... 37,517 40,228 29,234 31,252
Other assets
Deposits................................. 120 126 132 123
Property and equipment (Notes 3 & 6)....... 8,783 9,411 8,654 7,952
------- ------- ------- -------
Total assets........................... $46,420 $49,765 $38,020 $39,327
======= ======= ======= =======
Liabilities and Net Assets
Current liabilities:
Checks in excess of bank balance......... $ 1,073 $ 1,121 $ -- $ --
Current maturities of long-term debt..... 2,366 2,232 1,728 1,375
Accounts payable......................... 8,642 8,238 4,587 3,871
Accrued expenses......................... 1,662 1,234 720 728
Income tax payable, home office.......... -- -- -- 1,746
------- ------- ------- -------
Total current liabilities.............. 13,743 12,825 7,035 7,720
------- ------- ------- -------
Long-term debt, net of current portion
(Note 4).................................. 3,859 4,530 4,442 4,985
------- ------- ------- -------
Commitments and contingencies (Note 5)
Divisional equity (Note 7)............... 28,818 32,410 26,543 26,622
------- ------- ------- -------
$46,420 $49,765 $38,020 $39,327
======= ======= ======= =======
</TABLE>
See accompanying notes.
F-23
<PAGE>
QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.
STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
For the three
months ended December 31,
March 31, 1999 ---------------------------
(Unaudited) 1998 1997 1996
-------------- -------- -------- -------
<S> <C> <C> <C> <C>
Net sales (Note 9)................. $27,048 $ 86,099 $ 73,221 $92,131
Cost of sales...................... 25,903 84,030 70,344 80,203
------- -------- -------- -------
Gross profit....................... 1,145 2,069 2,877 11,928
Corporate allocation............... 264 1,761 2,367 1,618
Operating expenses................. 911 3,566 3,459 4,818
------- -------- -------- -------
Operating income (loss)............ (30) (3,258) (2,949) 5,492
Nonoperating income (expenses):
Loss on disposal of assets......... (3) (20) (2) --
Interest expense................... (128) (515) (528) (507)
Corporate allocations-interest..... (551) (911) (747) (829)
------- -------- -------- -------
Income (loss) before income taxes.. (712) (4,704) (4,226) 4,156
Allocation for income taxes (Note
5)................................ (299) (1,975) (1,775) 1,746
------- -------- -------- -------
Net income (loss).................. $ (413) $ (2,729) $ (2,451) $ 2,410
======= ======== ======== =======
Pro forma data (Note 5)
Net income (loss) before income
taxes........................... $ (712) $ (4,704)
Federal and state taxes
(benefit)....................... -- (270)
------- --------
Net income (loss)................ $ (712) $ (4,434)
======= ========
</TABLE>
STATEMENTS OF DIVISIONAL EQUITY
<TABLE>
<CAPTION>
For the three
months ended December 31,
March 31, 1999 --------------------------
(Unaudited) 1998 1997 1996
-------------- ------- ------- --------
<S> <C> <C> <C> <C>
Balance, beginning.................. $32,410 $26,543 $26,622 $ 35,429
Net income (loss)................. (413) (2,729) (2,451) 2,410
Long-term working capital advanced
from (repaid to) the home of-
fice............................. (3,179) 8,596 2,372 (11,217)
------- ------- ------- --------
Balance, ending..................... $28,818 $32,410 $26,543 $ 26,622
======= ======= ======= ========
</TABLE>
See accompanying notes.
F-24
<PAGE>
QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the three
months ended December 31,
March 31, 1999 --------------------------
(Unaudited) 1998 1997 1996
-------------- ------- ------- --------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................. $(413) $(2,729) $(2,451) $ 2,410
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization... 773 2,844 2,472 1,973
Loss on sale of equipment....... 3 20 2 --
Change in assets and
liabilities:
(Increase) decrease in trade
receivables.................. (2,272) (3,344) 1,071 6,176
(Increase) decrease in
inventories.................. 3,373 (7,506) 2,314 1,838
Increase in prepaid expenses.. (66) (15) (34) (195)
(Increase) decrease in income
taxes receivable, home
office....................... 1,676 (200) (1,775) --
(Increase) decrease in
deposits..................... 6 6 (9) (98)
Increase (decrease) in
accounts payable............. 404 3,651 716 (244)
Increase (decrease) in accrued
expenses..................... 428 514 (8) 271
Increase (decrease) in income
taxes payable, home office... -- -- (1,746) 1,746
------ ------- ------- --------
Net cash provided by (used
in) operating activities... 3,912 (6,759) 552 13,877
Cash flows from investing
activities:
Purchase of property and
equipment........................ (148) (1,105) (1,829) (1,108)
Proceeds from sale of property and
equipment........................ -- 3 -- 375
------ ------- ------- --------
Net cash used in investing
activities................. (148) (1,102) (1,829) (733)
Cash flows from financing
activities:
Working capital advance from
(repayments to) the home office.. (3,179) 8,596 2,372 (11,217)
Principal payments on long-term
borrowings....................... (537) (1,927) (1,537) (1,600)
Increase in checks in excess of
bank balance..................... (48) 1,121 -- --
------ ------- ------- --------
Net cash provided by (used
in) financing activities... (3,764) 7,790 835 (12,817)
Net increase (decrease) in
cash....................... -- (71) (442) 327
Cash:
Beginning......................... -- 71 513 186
------ ------- ------- --------
Ending............................ $ -- $ -- $ 71 $ 513
====== ======= ======= ========
Cash payments for interest........ $ 128 $ 515 $ 528 $ 507
====== ======= ======= ========
Supplementary schedule of noncash
investing and financing activities;
Capital lease obligations incurred
for purchase of property and
equipment........................ $ -- $ 2,519 $ 1,347 $ 2,280
====== ======= ======= ========
</TABLE>
See accompanying notes.
F-25
<PAGE>
QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands)
Note 1. Nature of Business and Significant Accounting Policies
Nature of business--The Division's operations consist principally of
contract manufacturing. The Division also provides a variety of manufacturing
and value-added services to its customers, including the manufacturing of
board-level and systems products to customer specifications, and certain types
of component kits to customer specification.
Significant accounting policies are as follows:
Basis of presentation--The accompanying Divisional financial statements have
been prepared from the books and records maintained by Bell Microproducts, Inc.
The statements of income may not necessarily be indicative of the results of
operations that would have been obtained if the division had been operated as
an independent entity. The statements of income include allocation of certain
expenses which are material in amount. Such expenses are allocations for
corporate services, interest expense, and federal and state income taxes.
Financial statement estimates--The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair value of financial instruments--The fair value of cash, accounts
receivable, accounts payable and home office advance approximate the carrying
amount because of the short maturity of those instruments.
Cash--The Division maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Division has not experienced
any losses in such accounts.
Inventories--Inventories are stated at the lower of standard cost which
approximates actual cost on a first-in, first-out basis or market. Market is
based on estimated net realizable value. Work in process and finished goods
include materials, labor and allocated overhead.
Property and equipment--Property and equipment is carried at cost.
Depreciation on property and equipment is computed by the straight line method
over the following estimated useful lives:
<TABLE>
<CAPTION>
Years
------
<S> <C>
Manufacturing equipment........................................... 3 to 5
Office furniture and fixtures..................................... 5
Computer hardware and software.................................... 3 to 5
</TABLE>
Leasehold improvements are depreciated over the shorter of the term of the
lease or their estimated useful lives. The amortization of assets acquired
under capital leases is included with depreciation expense on owned assets.
Revenue recognition--Revenue is recognized when the product is shipped.
Products are shipped F.O.B. shipping point.
Corporate allocations--Corporate expenses allocated to the division are
based on percentages established by management and approximate actual usage.
Corporate interest expense is allocated to the division based on its average
intercompany payable balances.
F-26
<PAGE>
QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands)
Interim Financial Statements--The interim financial statements for the three
months ended March 31, 1999 are unaudited and have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles. In the opinion of the Company's
management, the unaudited interim financial statements contain all adjustments,
consisting of normal recurring adjustments, considered necessary for a fair
presentation. The results of operations for the interim periods are not
necessarily indicative of the results of the entire year.
Note 2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 -----------------------
(Unaudited) 1998 1997 1996
----------- ------- ------- -------
<S> <C> <C> <C> <C>
Raw materials............................... $12,792 $12,644 $ 7,833 $ 9,721
Work in process............................. 7,242 10,713 7,853 8,234
Finished goods.............................. 652 702 867 912
------- ------- ------- -------
Total inventories........................... $20,686 $24,059 $16,553 $18,867
======= ======= ======= =======
</TABLE>
Note 3. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 -----------------------
(unaudited) 1998 1997 1996
----------- ------- ------- -------
<S> <C> <C> <C> <C>
Asset Description:
Leasehold improvements................ $ 1,665 $ 1,660 $ 1,568 $ 332
Manufacturing equipment............... 13,447 13,353 10,435 9,604
Office furniture and fixtures......... 654 667 651 230
Computer hardware and software........ 1,856 1,824 1,461 1,109
------- ------- ------- -------
Total cost.......................... 17,622 17,504 14,115 11,275
Less: accumulated depreciation........ 8,839 8,093 5,461 3,323
------- ------- ------- -------
Total property and equipment............ $ 8,783 $ 9,411 $ 8,654 $ 7,952
======= ======= ======= =======
</TABLE>
F-27
<PAGE>
QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands)
Note 4. Long-Term Debt
The Division has $6,762 of leases with various banks. Due to the terms of
the leases, they are all considered capital lease obligations. The Division has
the following capital lease obligations:
<TABLE>
<CAPTION>
March 31, December 31,
1999 --------------------
(unaudited) 1998 1997 1996
----------- ------ ------ ------
<S> <C> <C> <C> <C>
Capital lease obligations due in monthly
payments of approximately $223 through
October 2003, discounted at rates of 6.9%
to 9.8%................................... $6,225 $6,762 $6,170 $6,360
Less: current maturities................. 2,366 2,232 1,728 1,375
------ ------ ------ ------
Total long-term debt....................... $3,859 $4,530 $4,442 $4,985
====== ====== ====== ======
</TABLE>
Aggregate maturities required on long-term debt at December 31, 1998 are due
as follows:
<TABLE>
<CAPTION>
<S> <C>
1999................................. $ 2,232
2000................................. 2,180
2001................................. 1,116
2002................................. 706
2003................................. 528
</TABLE>
Note 5. Income Taxes
The following table reconciles the expected amount from applying the
statutory federal income tax rate to income before income taxes.
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997 1996
-------- -------- ------
<S> <C> <C> <C>
Computed "expected' income tax expense
(benefit)...................................... $ (1,646) $ (1,437) $1,455
State income taxes, net of federal tax benefit.. (193) (177) 237
Other........................................... (136) (161) 54
-------- -------- ------
Total income taxes.............................. $ (1,975) $ (1,775) $1,746
======== ======== ======
</TABLE>
The pro forma data on the income statement is presented as if the division
had filed a separate return for all years. The tax benefit is lower than
expected since the division would have net operating loss carryforwards on a
separate return basis.
F-28
<PAGE>
QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands)
Note 6. Lease or Other Commitments
The Division leases a building under a 10 year triple net lease agreement.
Rental expense for the years ending December 31, 1998, 1997 and 1996 were
$1,046; $891 and $-0-, respectively. The total minimum rental commitment as of
December 31, 1998 is due in future years as follows:
<TABLE>
<S> <C>
Years ending December 31,
1999.............................................................. $ 969
2000.............................................................. 989
2001.............................................................. 989
2002.............................................................. 1,110
2003.............................................................. 1,120
Thereafter........................................................ 2,429
------
$7,606
======
</TABLE>
The Division leases manufacturing equipment under various leases which,
because of their terms, are recorded as capital leases.
The following is a schedule by years of the future minimum lease payments
under the capital leases together with the present value of the minimum lease
payments as of December 31, 1998:
<TABLE>
<S> <C>
Years ending December 31,
1999.............................................................. $2,689
2000.............................................................. 2,455
2001.............................................................. 1,255
2002.............................................................. 773
2003.............................................................. 536
------
Total minimum lease payments.................................... 7,708
Less the amount representing interest........................... 946
------
Present value of minimum lease payments......................... $6,762
======
</TABLE>
At December 31, 1998, 1997 and 1996, property and equipment includes amounts
for assets acquired under capital leases of $12,561, $10,042 and $8,695,
respectively. Accumulated depreciation for the same periods includes amounts of
$6,036, $4,001 and $2,253, respectively.
Note 7. Divisional Equity
Divisional equity balance was comprised of the following elements:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997 1996
(In thousands) ------- ------- -------
<S> <C> <C> <C>
Intercompany liability............................. $32,130 $21,759 $21,133
Investment by home office.......................... 1,759 1,759 1,759
Retained earnings (deficit)........................ (1,479) 3,025 3,730
------- ------- -------
$32,410 $26,543 $26,622
======= ======= =======
</TABLE>
F-29
<PAGE>
QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands)
Note 8. Sale of Division
On June 7, 1999 Bell Microproducts, Inc. sold the Quadrus Manufacturing
division to Pemstar Inc. Pemstar Inc. bought certain assets and assumed certain
liabilities as of that date. The adjusted sales price was $34,966. The
acquisition was funded through the increase in Pemstar Inc.'s operating line of
credit and from the sale of Pemstar Inc. preferred stock.
Note 9. Major Customers
Net sales include sales to the following customers which accounted for 10%
or more of the total net sales of the Division. Information relating to these
customers is as follows:
<TABLE>
<CAPTION>
Trade Receivable
Net Sales for the Year Balance as of
Ended December 31, December 31,
----------------------- -------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Customer A....................... $ -- $14,537 $38,165 $ -- $362 $5,999
Customer B....................... -- -- 16,345 -- -- 1,882
Customer C....................... 10,986 20,315 -- 1,235 (20) --
Customer D....................... 24,464 -- -- 4,074 -- --
------- ------- ------- ------ ---- ------
$35,450 $34,852 $54,510 $5,309 $342 $7,881
======= ======= ======= ====== ==== ======
</TABLE>
Because of the nature of the Division's business, the major customers may
vary between years.
F-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Turtle Mountain Corporation
We have audited the accompanying balance sheets of Turtle Mountain
Corporation as of October 30, 1999 and October 31, 1998, and the related
statements of income and retained earnings and cash flows for each of the three
years in the period ended October 30, 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 financial statements referred to above present fairly,
in all material respects, the financial position of Turtle Mountain Corporation
at October 30, 1999 and October 31, 1998, and the results of its operations and
its cash flows for each of the three years in the period ended October 30,
1999, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
December 8, 1999
F-31
<PAGE>
TURTLE MOUNTAIN CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, October 30, April 1,
1998 1999 2000
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash.................................... $ 49,558 $ 27,174 $ 59,001
Accounts receivable, less allowance of
$25,000................................ 4,442,970 4,990,727 4,165,070
Inventories:
Raw materials......................... 1,257,291 2,037,447 3,309,273
Work in process....................... 922,195 404,846 1,134,891
Prepaid expenses........................ 17,564 14,935 34,852
Deferred income taxes................... 34,000 34,000 34,000
---------- ----------- -----------
Total current assets...................... 6,723,578 7,509,129 8,737,087
Property and equipment, less accumulated
depreciation and amortization............ 2,186,301 2,516,955 2,476,640
Other assets.............................. 150,846 155,906 160,921
---------- ----------- -----------
$9,060,725 $10,181,990 $11,374,648
========== =========== ===========
Liabilities and stockholders' equity
Current liabilities:
Note payable, bank...................... $ 400,000 $ 550,000 $ 1,200,000
Accounts payable........................ 1,645,552 1,348,244 1,744,904
Accrued expenses........................ 472,398 514,439 324,914
Income taxes payable.................... 107,689 144,926 246,672
Current portion of long-term debt....... 534,497 576,701 576,701
---------- ----------- -----------
Total current liabilities................. 3,160,136 3,134,310 4,093,191
Long-term debt............................ 1,231,391 1,166,367 1,095,374
Deferred income taxes..................... 107,000 137,000 137,000
Stockholders' equity:
Common stock--no par value:
Authorized shares--1,000,000
Issued and outstanding shares--
83,240--1998,
83,800--1999 and 84,260--2000........ 21,054 29,810 37,002
Retained earnings......................... 4,541,144 5,714,503 6,012,081
---------- ----------- -----------
4,562,198 5,744,313 6,049,083
---------- ----------- -----------
$9,060,725 $10,181,990 $11,374,648
========== =========== ===========
</TABLE>
See accompanying notes.
F-32
<PAGE>
TURTLE MOUNTAIN CORPORATION
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Year ended Five Months ended
------------------------------------- ------------------------
November 1, October 31, October 30, March 27, April 1,
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales............... $25,541,301 $29,365,455 $27,108,613 $8,972,136 $10,782,444
Cost of goods sold...... 22,678,387 25,630,186 23,545,358 8,065,198 9,626,345
----------- ----------- ----------- ---------- -----------
Gross profit............ 2,862,914 3,735,269 3,563,255 906,938 1,156,099
Selling, general and
administrative
expenses............... 1,361,901 1,579,834 1,601,499 552,527 626,087
----------- ----------- ----------- ---------- -----------
Income from operations.. 1,501,013 2,155,435 1,961,756 354,411 530,012
Other income (expense):
Interest expense...... (296,159) (226,507) (172,992) (51,372) (75,021)
Other income.......... 91,036 204,085 143,595 71,354 36,874
----------- ----------- ----------- ---------- -----------
(205,123) (22,422) (29,397) 19,982 (38,147)
----------- ----------- ----------- ---------- -----------
Income before income
taxes.................. 1,295,890 2,133,013 1,932,359 374,393 491,865
Provision for income
taxes.................. 515,000 842,000 759,000 154,000 194,287
----------- ----------- ----------- ---------- -----------
Net income.............. 780,890 1,291,013 1,173,359 220,393 297,578
Retained earnings:
Balance, beginning of
period............... 2,469,241 3,250,131 4,541,144 4,541,144 5,714,503
----------- ----------- ----------- ---------- -----------
Balance, end of
period............... $ 3,250,131 $ 4,541,144 $ 5,714,503 $4,761,537 $ 6,012,081
=========== =========== =========== ========== ===========
</TABLE>
See accompanying notes.
F-33
<PAGE>
TURTLE MOUNTAIN CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Five Months ended
------------------------------------ ------------------------
November 1, October 31, October March 27, April 1,
1997 1998 30, 1999 1999 2000
----------- ----------- ---------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income.............. $ 780,890 $ 1,291,013 $1,173,359 $ 220,393 $ 297,578
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation.......... 471,447 536,526 615,252 225,000 317,500
Gain on sale of
assets............... -- -- (3,966) -- --
Deferred income
taxes................ 25,000 (34,000) 30,000 -- --
Changes in operating
assets and
liabilities:
Accounts
receivable......... (82,302) (162,717) (547,757) 1,468,814 825,657
Inventories and
prepaid expenses... (871,607) 1,046,581 (260,178) (1,935,050) (2,021,788)
Other assets........ (1,065) (17,091) (5,060) (341,260) (5,015)
Accounts payable and
accrued expenses 1,013,840 (888,211) (255,267) 489,754 207,135
Income taxes payable
or refundable...... (439,887) 244,404 37,237 100,370 101,746
----------- ----------- ---------- ----------- -----------
Net cash provided by
(used in) operating
activities............. 896,316 2,016,505 783,620 228,021 (277,187)
Investing activities
Proceeds from sale of
equipment.............. -- -- 5,500 -- --
Purchase of property and
equipment.............. (1,150,296) (633,829) (947,440) (487,263) (277,185)
----------- ----------- ---------- ----------- -----------
Net cash used in
investing activities... (1,150,296) (633,829) (941,940) (487,263) (277,185)
Financing activities
Proceeds from long-term
borrowings............. 695,158 639,358 496,530 200,000 --
Principal payments of
long-term debt......... (554,804) (407,674) (519,350) (240,541) (70,993)
Net increase (decrease)
in short-term bank
debt................... 205,000 (1,675,000) 150,000 275,000 650,000
Proceeds from sale of
common stock........... 3,671 10,527 8,756 -- 7,192
----------- ----------- ---------- ----------- -----------
Net cash provided by
(used in) financing
activities............. 349,025 (1,432,789) 135,936 234,459 586,199
----------- ----------- ---------- ----------- -----------
Increase (decrease) in
cash................... 95,045 (50,113) (22,384) (24,783) 31,827
Cash, beginning of
period................. 4,626 99,671 49,558 49,558 27,174
----------- ----------- ---------- ----------- -----------
Cash, end of period..... $ 99,671 $ 49,558 $ 27,174 $ 24,775 $ 59,001
=========== =========== ========== =========== ===========
Interest paid........... $ 284,323 $ 225,308 $ 174,214 $ 69,330 $ 92,913
Income tax paid......... 954,200 668,400 692,000 53,630 92,541
</TABLE>
See accompanying notes.
F-34
<PAGE>
TURTLE MOUNTAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Turtle Mountain Corporation is a full-service contract manufacturer of high
quality electronics for commercial and military customers.
Definition of Fiscal Year
The Company's fiscal year is a fifty-two/fifty-three week period ending the
Saturday closest to October 31.
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 the estimates.
Accounting for Long-Lived Assets
The Company records losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out (FIFO) basis.
Property and Equipment
Property and equipment are stated at cost and are depreciated on the
straight-line basis over their estimated useful lives of three to ten years.
Data processing equipment under capital lease and leasehold improvements are
being amortized over the lives of their respective leases.
Income Taxes
Income taxes are accounted for under the liability method.
Revenue Recognition
Revenues from sales are recognized upon shipment of the finished product to
the end customer. The Company warrants its products for up to two years from
sale date. Product warranty expenses are recorded as products are returned and
are not material to the Company's financial statements.
Interim Financial Statements
The interim financial statements for the five months ended March 31, 1999
and 2000 are unaudited an have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles. In the opinion of the Company's management,
the unaudited interim financial statements contain all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation.
The results of operations for the interim periods are not necessarily
indicative of the results of the entire year.
F-35
<PAGE>
TURTLE MOUNTAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
October October
31, 1998 30, 1999
---------- ----------
<S> <C> <C>
Machinery and equipment............................ $3,778,563 $4,625,519
Furniture and fixtures............................. 170,115 119,917
Data processing equipment.......................... 515,373 551,236
Delivery equipment................................. 158,026 204,167
Leasehold improvements............................. 237,922 238,469
Building........................................... 796,692 788,633
---------- ----------
5,656,691 6,527,941
Less accumulated depreciation and amortization..... 3,470,390 4,010,986
---------- ----------
$2,186,301 $2,516,955
========== ==========
</TABLE>
3. Note Payable, Bank
Note payable, bank represents borrowings on a $2,750,000 revolving note
which is part of a bank credit agreement. The revolving note balance bears
interest at prime (8.25% at October 30, 1999). Accounts receivable,
inventories, equipment and life insurance contracts are pledged as collateral
on the credit agreement. The note is also guaranteed by officers of the Company
and is available through March 31, 2000.
The agreement contains certain covenants which require the Company to
maintain a minimum current ratio, debt to tangible net worth ratio, debt
service ratio, tangible net worth and retained earnings; restrict borrowings,
payments on subordinated debt and expenditures for fixed assets; and prohibit
dividend payments.
F-36
<PAGE>
TURTLE MOUNTAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Long-Term Debt
The long-term debt of the Company is as follows:
<TABLE>
<CAPTION>
October 31, October 30,
1998 1999
----------- -----------
<S> <C> <C>
Note payable to bank (as part of credit agreement),
interest at 7/8% over prime, payable in $14,825
monthly installments plus interest, maturing in
2003.............................................. $ 441,470 $ 537,091
Note payable to bank (as part of credit agreement),
interest at 1% over prime, payable in $14,425
monthly installments, maturing in 2000............ 302,039 149,893
Note payable to bank (as part of credit agreement),
interest at .5% over prime, payable in $10,417
monthly installments, maturing in 2004............ -- 338,000
Note payable to North Central Planning Council,
interest at 6%, payable in monthly installments of
$8,751, maturing in 2000, secured by all equipment
and fixtures acquired with loan proceeds,
inventories and accounts receivable, and the plant
building.......................................... 139,902 40,925
Note payable to City of Dunseith, North Dakota,
interest at 6%, payable in $20,457 annual
installments, maturing in 2021. Secured by
building addition and equipment purchased with
proceeds.......................................... 262,888 257,431
Note payable to bank (as part of credit agreement),
interest at 1% over prime, payable in $8,333
monthly installments, maturing in 2002............ 325,000 225,000
Note payable to North Central Electric Cooperative,
North Dakota, no interest, payable in monthly
installments of $5,000, maturing in 2000, secured
by equipment acquired with proceeds. Maximum
borrowings available up to $300,000. Guaranteed by
a letter of credit................................ 100,000 40,000
Two notes payable to the City of Dunseith, North
Dakota, interest at 6%, payable in annual
installments of $11,359, maturing in April 2008,
and in annual installments of $16,702 maturing in
November 2002, secured by equipment and building
improvements acquired with proceeds. Maximum
borrowings available up to $228,000. Personal
guarantee by the Company's majority owners........ 153,960 135,136
Note payable to Community Development Corp.,
interest at 6%, payable in monthly installments of
$228, maturing in 2004, unsecured................. 12,563 10,526
Note payable to City of Dunseith, North Dakota, no
interest, payable in monthly installments of $178,
maturing in 2003, unsecured....................... 11,200 9,066
Other.............................................. 16,866 --
---------- ----------
1,765,888 1,743,068
Less current portion............................... 534,497 576,701
---------- ----------
$1,231,391 $1,166,367
========== ==========
</TABLE>
F-37
<PAGE>
TURTLE MOUNTAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The loan agreement with the North Central Planning Council (NCPC) contains
restrictive covenants which include limitations on dividend distributions,
working capital base and sale of assets purchased with NCPC funds. This debt is
subordinated to the revolving note payable.
Aggregate maturities of long-term debt for each of the next five fiscal
years are as follows at October 30, 1999:
<TABLE>
<S> <C>
2000........................................................... $ 576,701
2001........................................................... 402,349
2002........................................................... 343,552
2003........................................................... 138,574
2004........................................................... 17,182
Thereafter..................................................... 264,711
----------
$1,743,069
==========
</TABLE>
5. Lease Commitments
The Company leases some of its office and warehouse facilities under
operating leases that expire at various dates through 2007. Certain leases
require the payment of property taxes, insurance and maintenance costs in
addition to the basic rents. Rent expense for fiscal 1999 and 1998 was $71,809
and $71,419, respectively.
The following is a schedule of future minimum rental payments for operating
leases that have initial or remaining non-cancelable terms in excess of one
year at October 30, 1999:
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
Year ending in fiscal:
2000.......................................................... $ 46,341
2001.......................................................... 33,842
2002.......................................................... 27,761
2003.......................................................... 23,195
2004.......................................................... 22,129
Thereafter...................................................... 97,145
--------
Total minimum obligations....................................... $250,413
========
</TABLE>
6. Income Taxes
The provision for income taxes consists of the following for the fiscal
period ended:
<TABLE>
<CAPTION>
October 31, October 30,
1998 1999
----------- -----------
<S> <C> <C>
Currently payable:
Federal income taxes............................ $715,000 $596,000
State income taxes.............................. 161,000 133,000
-------- --------
876,000 729,000
Deferred income taxes............................. (34,000) 30,000
-------- --------
Net tax expense................................... $842,000 $759,000
======== ========
</TABLE>
F-38
<PAGE>
TURTLE MOUNTAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred income taxes arise from the recognition of certain items of expense
in different years for tax and financial statement purposes. The principal
source of the deferred tax liability is the difference in inventory costs and
the use of accelerated depreciation methods for tax purposes. The deferred tax
assets relate to accrued vacation costs and the inventory reserves. Total
deferred tax assets are $34,000 and $34,000 and total deferred tax liabilities
are $137,000 and $107,000, as of October 30, 1999 and October 31, 1998,
respectively. The tax rate is a blend of the federal and state rates.
7. Transactions with Related Party
Two officers who own 78% of the common stock of the Company also own 37% of
the common stock of Turtle Mountain Chiptronics, Inc. (TMC, Inc.). Sales to
TMC, Inc. were $22,493,724 and $23,862,012 in fiscal 1999 and 1998,
respectively, and accounts receivable from TMC, Inc. were $4,338,526 and
$4,061,329 at October 30, 1999 and October 31, 1998, respectively.
8. Major Customers
Three customers accounted for 65% of sales during fiscal 1999, and three
customers accounted for 66% of sales during fiscal 1998. Net sales to customers
which accounted for 10% or more of net sales are as follows:
<TABLE>
<CAPTION>
October 31, October 31,
1998 1999
----------- -----------
<S> <C> <C>
Customer A........................................ 41% 41%
Customer B........................................ 14 14
Customer C........................................ 12 14
</TABLE>
For purposes of this disclosure, customers of TMC, Inc. are considered
customers of the Company.
9. Stock Option Plan
The Company has a stock option plan which provides for the granting of stock
options to key employees and directors at an exercise price not less than the
fair market value of the common stock on the date of the grant. The Company has
reserved 8,200 shares for issuance. Options may be granted as incentive stock
options or as nonstatutory stock options. Stock options vest 20% annually,
commencing upon completion of one year of employment subsequent to the date of
the grant, and expire ten years from the date of the grant. All options are
exercisable in blocks of 20. The following summarizes the stock option
transactions during fiscal 1999 and 1998:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ ----------------
<S> <C> <C>
Options outstanding November 1, 1997............. 5,960 $19.49
Exercised...................................... (600) 17.55
-----
Options outstanding October 31, 1998............. 5,360 19.71
Exercised...................................... (560) 15.64
-----
Options outstanding October 30, 1999............. 4,800 $17.62
=====
</TABLE>
At October 30, 1999, 4,160 options are vested and exercisable with a
weighted average exercise price of $19.32. Options outstanding have exercise
prices that range from $10.89 to $28.43 per share. The weighted average
remaining contractual life for these options is 4.88 years as of October 30,
1999.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123,
F-39
<PAGE>
TURTLE MOUNTAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The effect of applying FASB 123's fair value method to the Company's stock-
based awards results in net income that is not materially different from the
amounts reported in 1999 and 1998.
10. Employee Retirement Plan
The Company has adopted a 401(k) retirement plan. The plan covers
substantially all employees meeting minimum eligibility requirements. Under the
plan, employees may contribute up to 18% of their compensation with matching
contribution by the Company determined annually at the discretion of the Board
of Directors. The Company recognized $30,000 and $25,555 of 401(k) matching
expense in fiscal years 1999 and 1998, respectively.
F-40
<PAGE>
Map of the world, continents only with stars and text indicating 7 PEMSTAR
locations with connecting "call outs" to location photographs
9 photographs of PEMSTAR buildings--all outside shots
Almelo, The Netherlands--arial view
Bangkok, Thailand--front view of building
Guadalajara, Mexico--front view of building
Rochester , MN--front view of North location, front view of South location
San Jose, CA--front view of 10th Street location, front view of Center
Street location
Singapore--front view of building
Tianjin, China--front view of building
<PAGE>
[LOGO OF WATERMARK]
8,400,000 Shares
Common Stock
-----------
PROSPECTUS
, 2000
-----------
Lehman Brothers
Robertson Stephens
Chase H&Q
CIBC World Markets
Fidelity Capital Markets
a division of National Financial Services Corporation
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Except as set forth below the following fees and expenses will be paid by
Pemstar in connection with the issuance and distribution of the securities
registered hereby and do not include underwriting commissions and discounts.
All such expenses, except for the SEC registration, NASD filing and Nasdaq
listing fees, are estimated.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 33,154
NASD filing fee............................................... $ 12,000
Nasdaq National Market listing fee............................ $ 95,000
Legal fees and expenses....................................... $ 350,000
Accounting fees and expenses.................................. $ 275,000
Transfer Agent's and Registrar's fees......................... $ 20,000
Printing and engraving expenses............................... $ 150,000
Miscellaneous................................................. $ 64,846
----------
Total......................................................... $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 302A.521 of the Minnesota Statutes provides that a corporation shall
indemnify any person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of such person against
judgments, penalties, fines (including, without limitation, excise taxes
assessed against such person with respect to any employee benefit plan),
settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person (1) has not been indemnified therefore by another
organization or employee benefit plan for the same judgments, penalties or
fines; (2) acted in good faith; (3) received no improper personal benefit and
Section 302A.255 (with respect to director conflicts of interest), if
applicable, has been satisfied; (4) in the case of a criminal proceeding, had
no reasonable cause to believe the conduct was unlawful; and (5) in the case of
acts or omissions in such person's official capacity for the corporation,
reasonably believed that the conduct was in the best interests of the
corporation, or in the case of acts or omissions in such person's official
capacity for other affiliated organizations, reasonably believed that the
conduct was not opposed to the best interests of the corporation. Section
302A.521 also requires payment by a corporation, upon written request, of
reasonable expenses in advance of final disposition of the proceeding in
certain instances. A decision as to required indemnification is made by a
disinterested majority of the Board of Directors present at a meeting at which
a disinterested quorum is present, or by a designated committee of the Board,
by special legal counsel, by the shareholders or by a court.
Provisions regarding indemnification of officers and directors of Pemstar to
the extent permitted by Section 302A.521 are contained in Pemstar's articles of
incorporation and bylaws.
Item 15. Recent Sales of Unregistered Securities
During the past three years, the registrant sold the following securities
that were not registered under the Securities Act. No underwriting commission
or discount was paid in connection with any of the sales.
(1) Between May 16, 1997 and May 16, 2000, we sold 1,664,358 shares of
common stock to various employees, directors, consultants and advisors
pursuant to the exercise of outstanding options for an aggregate of
$1,133,452.26 cash in reliance upon Rule 701 of the Securities Act.
II-1
<PAGE>
(2) On May 19, 1997 we sold 15,000 shares of common stock for $7,500 cash
to one employee in reliance upon the exemption contained in Section
4(2) of the Securities Act for transactions not involving a public
offering.
(3) In 1997 we entered into a joint venture with Italade Technology of
Thailand to form Italade Pemstar Limited. Pursuant to the terms of the
joint venture agreement, we acquired Italade Technology's joint venture
interest in Italade Pemstar Limited in exchange for 2,610,000 shares of
our common stock. The sales were made in reliance upon the exemptions
contained in Regulation S of the Securities Act for sales to non U.S.
persons and in Section 4(2) of the Securities Act for transactions not
involving a public offering.
(4) On September 30, 1997, we sold 270,000 shares of common stock for
$221,400 cash to eight officers (who were also directors of the
registrant) and to one other accredited investor in reliance upon the
exemption contained in Section 4(2) of the Securities Act for
transactions not involving a public offering.
(5) In February 1998, we sold 285,102 shares of common stock for $1,425,510
cash to various accredited investors in a private placement in reliance
upon the exemptions contained in Section 4(2) of the Securities Act and
Rule 506 of Regulation D thereunder.
(6) In February and March 1998, we sold 569,966 shares of Series A
preferred stock for $8,549,490 cash to two accredited investors in a
private placement in reliance upon the exemptions contained in Section
4(2) of the Securities Act and Rule 506 of Regulation D thereunder.
(7) In June 1999, we sold 1,000,000 shares of Series B preferred stock for
$18,000,000 cash to three accredited investors in a private placement
in reliance upon the exemptions contained in Section 4(2) of the
Securities Act and Rule 506 of Regulation D thereunder.
(8) In September 1999, we sold 300 shares of common stock for $1500 cash
upon the exercise of a stock option previously granted to one employee
in reliance upon the exemption contained in Section 4(2) of the
Securities Act for transactions not involving a public offering.
(9) In March 2000, we sold 332,250 shares of common stock for $348,750 cash
and $1,312,500 in promissory notes to four officers and 11 managerial
level employees in reliance upon the exemption contained in Section
4(2) of the Securities Act for transactions not involving a public
offering. The registrant believes that the Section 4(2) exemption was
available based on the financial and other information provided to (or
made available to) the purchasers and the representations made by the
purchasers in their subscription agreements as to their knowledge and
experience in financial and business matters, their ability to evaluate
the risks and merits of the prospective investment, the suitability of
the investment for them and their ability to bear the risks of the
investment. All purchasers represented that they purchased for
investment purposes only and received share certificates that were
legended to restrict transferability except in compliance with the
Securities Act.
(10) In March 2000, we sold 296,298 shares of common stock for $1,481,490
cash upon the exercise of stock options previously granted to four
officers and eight managerial level employees in reliance upon the
exemption contained in Section 4(2) of the Securities Act for
transactions not involving a public offering. The registrant believes
that the Section 4(2) exemption was available based on the financial
and other information provided to (or made available to) the
purchasers and based on the purchasers' position at the registrant.
All purchasers represented that they purchased for investment purposes
only and received share certificates that were legended to restrict
transferability except in compliance with the Securities Act.
(11) Between May 17, 2000 and June 21, 2000, we sold 49,050 shares of
common stock to various employees pursuant to the exercise of
outstanding options for an aggregate of $33,691 cash in reliance upon
Rule 701 of the Securities Act.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of the Company.
3.2 Amended and Restated Bylaws of the Company.
4.1 Form of Certificate of Common Stock of the Company.
4.2 Form of Rights Agreement, dated as of , 2000, between the
Company and , as Rights Agent.
4.3 Credit Agreement between the Company and U.S. Bank National
Association, as amended on August 31, 1999, October 14, 1999,
November 23, 1999, December 20, 1999, March 13, 2000, May 5, 2000 and
August 1, 2000.
4.4 Revolving Credit Agreement, dated as of May 5, 2000, between the
Company and IBM Credit Corporation, as amended on August 1, 2000.
4.5 ING Bank District Oost Nederland Credit Facility, dated May 26, 1999.
4.6 The Company agrees to furnish supplementally to the Securities and
Exchange Commission upon request a copy of any instrument defining
the rights of holders of long-term debt not being filed as an exhibit
in reliance on Item 601(b)(4)(iii)(A) of Regulation S-K.
5.1 Opinion of Dorsey & Whitney LLP.
10.1 Joint Venture Agreement dated September 25, 1998, between the Company
and Hongguan Technologies (S) Pte. Ltd (amended).
10.2 Asset Purchase Agreement dated as of April 30, 1999, by and between
the Company and Bell Microproducts, Inc.
10.3 Supply Agreement dated April 30, 1999, between the Company, Fluke
Corporation and Fluke Industrial B.V.
10.4 Form of Change in Control Agreement.
10.5 Form of Promissory Note.
10.6 Form of Promissory Note.
10.7 Series A Stock Purchase Agreement, dated as of February 12, 1998,
between the Company and the parties names therein (amended).
10.8 First Amendment to Series A Stock Purchase Agreement, dated as of
March 27, 1998, between the Company and the parties named therein.
10.9 Series B Stock Purchase Agreement, dated as of June 7, 1999, between
the Company and the parties named therein.
10.10 First Amended and Restated Investor Rights Agreement, dated as of
June 7, 1999 between the Company and certain shareholders.
10.11 First Amended and Restated Shareholders' Agreement dated June 7,
1997, between the Company and certain shareholders.
10.12 Pemstar Inc. 1994 Stock Option Plan.
10.13 Pemstar Inc. 1995 Stock Option Plan.
10.14 Pemstar Inc. 1997 Stock Option Plan.
10.15 Pemstar Inc. Amended and Restated 1999 Stock Option Plan.
10.16 Pemstar Inc. 2000 Stock Option Plan.
10.17 Supplementary Contract, dated March 24, 2000, between Pemstar
(Tianjin) Enterprise Co. Ltd. and Tianjin Yat-Sen Scientific-
Industrial Park International, Inc.
10.18 Lease Agreement, dated June 4, 1997, between Italade Technology
(Thailand) Limited and Italade-Pemstar Limited.
10.19 Lease, dated June 29, 1998, between the Company and Leslie E. Nelson
as Trustee of the Leslie E. Nelson Revocable Trust dated December 20,
1994, as amended.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.20 Sub-Lease Agreement, dated February 3, 1999, between Hongguan
Technologies (S) Pte. Ltd. and Pemstar-Hongguan Pte. Ltd.
10.21 Lease Agreement dated September 30, 1998, between Guadalajara
Industrial Technologico, S.A. de C.V. and Pemstar de Mexico S.A. de
C.V.
10.22 Sublease for Office Premises, dated May 1, 1999, between Pemstar B.V.
and Fluke Industrial B.V. and Lease Agreement for Office Premises
dated July 11, 1997 between Fortress Beheer I B.V. & Garden End
Building B.V. and Fluke Industrial B.V.
10.23 Sublease Assignment Agreement dated June 8, 1999 between the Company
and Bell Microproducts, Inc.
10.24 Employee Stock Purchase Plan.
10.25 Stock Purchase Agreement dated as of June 20, 2000, between the
Company and John Miller, Robert Wilmot, Robert Wilmot Family
Charitable Remainder Trust, Chris Wilmot, Matthew Wilmot, Jessica
Wilmot, Damian Wilmot, Patricia Miller, Brett McAtee, Michael Miller,
Willard Patty, Keith Knudson, Kim Johnson, Greg Berginski and Michael
Kelly.
16.1** Statement Regarding Change in Certifying Accountant.
21.1 Subsidiaries of the Company.
23.1** Consent of McGladrey & Pullen, LLP.
23.2** Consent of Ernst & Young LLP.
23.3 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
--------
* To be filed by amendment.
** Filed herewith.
(b) Financial Statement Schedules
The following financial statement schedules are filed herewith:
Schedule II: Report of Independent Auditors--Ernst & Young LLP
Schedule II: Report of Independent Auditors--McGladrey & Pullen, LLP
Schedule II: Valuation and Qualifying Accounts
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
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 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.
II-4
<PAGE>
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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all if the
requirements for filing on Form S-1 and has duly caused this Amendment No. 4 to
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Rochester, State of Minnesota, on August 7,
2000.
PEMSTAR INC.
/s/ Allen J. Berning
By: _________________________________
Allen J. Berning
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to registration statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Allen J. Berning Chairman, Chief August 7, 2000
Executive Officer and
Director (principal
executive officer)
___________________________________________
Allen J. Berning
/s/ William J. Kullback Chief Financial Officer August 7, 2000
(principal financial
officer and principal
accounting officer)
___________________________________________
William J. Kullback
* Director
___________________________________________
William B. Leary
* Director
___________________________________________
Robert R. Murphy
* Director
___________________________________________
Gary L. Lingbeck
* Director
___________________________________________
Karl D. Shurson
* Director
___________________________________________
Robert D. Ahmann
* Director
___________________________________________
Thomas A. Burton
* Director
___________________________________________
Hargopal (Paul) Singh
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
* Director
___________________________________________
Michael J. Odrich
* Director
___________________________________________
Steve V. Petracca
* Director
___________________________________________
Bruce M. Jaffe
* Director
___________________________________________
David L. Sippel
*By: /s/ William J. Kullback August 7, 2000
___________________________________________
William J. Kullback
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
SCHEDULE II
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Directors of Pemstar Inc.
We have audited the consolidated financial statements of Pemstar Inc. as of
March 31, 2000, and for the year then ended, and have issued our report thereon
dated May 5, 2000 (included elsewhere in this Registration Statement). Our
audit 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
audit. 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
Minneapolis, Minnesota
May 5, 2000
S-1
<PAGE>
SCHEDULE II
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Directors of Pemstar Inc.
Our audits were made for the purpose of forming an opinion on the 1999 and
1998 basic consolidated financial statements taken as a whole. The consolidated
supplemental schedule listed as Item 16(b) of the registration statement is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic consolidated financial
statements. The information for the years ended 1999 and 1998 in this schedule
has been subjected to the auditing procedures applied in our audits of the
basic consolidated financial statements and, in our opinion, is fairly stated
in all material respects in relation to the basic consolidated financial
statements taken as a whole.
/s/ McGLADREY & PULLEN, LLP
Rochester, Minnesota
May 10, 1999
S-2
<PAGE>
Schedule II--Valuation and Qualifying Accounts
Pemstar Inc.
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
------ ---------- --------------------- ----------- --------
Additions
---------------------
Charge to Balance
Balance at Charged to Other at End
Beginning Costs and Accounts-- Deductions of
Description of Period Expenses Described Described-- Period
----------- ---------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31,
2000
Reserve and allowances
deducted from
accounts:
Allowance for
uncollectible
accounts............ $53,136 $ 545,079 $-- $ 45,215 $553,000
Allowance for
inventory
obsolescence........ -- 572,656 -- -- 572,656
YEAR ENDED MARCH 31,
1999
Reserve and allowances
deducted from
accounts:
Allowance for
uncollectible
accounts............ 6,000 73,801 -- 26,665 53,136
YEAR ENDED MARCH 31,
1998
Reserve and allowances
deducted from
accounts:
Allowance for
uncollectible
accounts............ 12,000 1,546,244 -- 1,552,244 6,000
</TABLE>
S-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of the Company (amended).
3.2 Amended and Restated Bylaws of the Company.
4.1 Form of Certificate of Common Stock of the Company.
4.2 Form of Rights Agreement, dated as of , 2000, between the Company
and , as Rights Agent.
4.3 Credit Agreement between the Company and U.S. Bank National
Association, as amended on August 31, 1999, October 14, 1999, November
23, 1999, December 20, 1999, March 13, 2000, May 5, 2000 and August 1,
2000.
4.4 Revolving Credit Agreement, dated as of May 5, 2000, between the
Company and IBM Credit Corporation, as amended on August 1, 2000.
4.5 ING Bank District Oost Nederland Credit Facility dated May 26, 1999.
4.6 The Company agrees to furnish supplementally to the Securities and
Exchange Commission upon request a copy of any instrument defining the
rights of holders of long-term debt not being filed as an exhibit in
reliance on Item 601(b)(4)(iii)(A) of Regulation S-K.
5.1 Opinion of Dorsey & Whitney LLP.
10.1 Joint Venture Agreement dated September 25, 1998, between the Company
and Hongguan Technologies (S) Pte. Ltd (amended).
10.2 Asset Purchase Agreement dated as of April 30, 1999, by and between the
Company and Bell Microproducts, Inc.
10.3 Supply Agreement dated April 30, 1999, between the Company, Fluke
Corporation and Fluke Industrial B.V.
10.4 Form of Change in Control Agreement.
10.5 Form of Promissory Note.
10.6 Form of Promissory Note.
10.7 Series A Stock Purchase Agreement, dated as of February 12, 1998,
between the Company and the parties names therein (amended).
10.8 First Amendment to Series A Stock Purchase Agreement, dated as of March
27, 1998, between the Company and the parties named therein.
10.9 Series B Stock Purchase Agreement, dated as of June 7, 1999, between
the Company and the parties named therein.
10.10 First Amended and Restated Investor Rights Agreement, dated as of June
7, 1999 between the Company and certain shareholders.
10.11 First Amended and Restated Shareholders' Agreement dated June 7, 1997,
between the Company and certain shareholders.
10.12 Pemstar Inc. 1994 Stock Option Plan.
10.13 Pemstar Inc. 1995 Stock Option Plan.
10.14 Pemstar Inc. 1997 Stock Option Plan.
10.15 Pemstar Inc. Amended and Restated 1999 Stock Option Plan.
10.16 Pemstar Inc. 2000 Stock Option Plan.
10.17 Supplementary Contract, dated March 24, 2000, between Pemstar (Tianjin)
Enterprise Co. Ltd. and Tianjin Yat-Sen Scientific-Industrial Park
International, Inc.
10.18 Lease Agreement, dated June 4, 1997, between Italade Technology
(Thailand) Limited and Italade-Pemstar Limited.
10.19 Lease, dated June 29, 1998, between the Company and Leslie E. Nelson as
Trustee of the Leslie E. Nelson Revocable Trust dated December 20,
1994, as amended.
10.20 Sub-Lease Agreement, dated February 3, 1999, between Hongguan
Technologies (S) Pte. Ltd. and Pemstar-Hongguan Pte. Ltd.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.21 Lease Agreement dated September 30, 1998 between Guadalajara Industrial
Technologico, S.A. de C.V. and Pemstar de Mexico S.A. de C.V.
10.22 Sublease for Office Premises, dated May 1, 1999, between Pemstar B.V.
and Fluke Industrial B.V. and Lease Agreement for Office Premises dated
July 11, 1997 between Fortress Beheer I B.V. & Garden End Building B.V.
and Fluke Industrial B.V.
10.23 Sublease Assignment Agreement dated June 8, 1999 between the Company
and Bell Microproducts, Inc.
10.24 Employee Stock Purchase Plan.
10.25 Stock Purchase Agreement dated as of June 20, 2000, between the Company
and John Miller, Robert Wilmot, Robert Wilmot Family Charitable
Remainder Trust, Chris Wilmot, Matthew Wilmot, Jessica Wilmot, Damian
Wilmot, Patricia Miller, Brett McAtee, Michael Miller, Willard Patty,
Keith Knudson, Kim Johnson, Greg Berginski and Michael Kelly.
16.1** Statement Regarding Change in Certifying Accountant.
21.1 Subsidiaries of the Company.
23.1** Consent of McGladrey & Pullen, LLP.
23.2** Consent of Ernst & Young LLP.
23.3 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
--------
* To be filed by amendment.
** Filed herewith.
2
