-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TG2f+vo1GuRJjTlXgM0p5rj0R/NbXFkp3wNxKbOId8p8tIQ+rejzpjAlDQT+miSq medn4mI53Tw2+gnKoR/xMw== 0001045969-01-500323.txt : 20010515 0001045969-01-500323.hdr.sgml : 20010515 ACCESSION NUMBER: 0001045969-01-500323 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20010514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEMSTAR INC CENTRAL INDEX KEY: 0000924829 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 411771227 STATE OF INCORPORATION: MN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-60832 FILM NUMBER: 1631532 BUSINESS ADDRESS: STREET 1: 3535 TECHNOLOGY DR NW CITY: ROCHESTER STATE: MN ZIP: 55901 BUSINESS PHONE: 5072886720 MAIL ADDRESS: STREET 1: 3535 TECHNOLOGY DR NW CITY: ROCHESTER STATE: MN ZIP: 55901 S-1 1 ds1.txt FORM S-1 As filed with the Securities and Exchange Commission on May 14, 2001 Registration No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- 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: [_] CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Amount of Maximum Aggregate Registration Titles of Each Class of Securities to be Registered Offering Price (1) Fee - ---------------------------------------------------------------------------------------------------- Common Stock, par value $0.1 per share (2)......................... $69,398,907 $17,350
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o). (2) Includes certain associated preferred stock rights that will be issued to each shareholder pursuant to a rights agreement. --------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +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 is not + +permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion, dated May 14, 2001 PROSPECTUS 5,125,000 Shares PEMSTAR Common Stock - -------------------------------------------------------------------------------- Pemstar Inc. is offering 4,500,000 shares and selling shareholders identified in this prospectus are offering 625,000 shares. Our common stock is reported on the Nasdaq National Market under the symbol "PMTR." The last reported sale price of the common stock on May 10, 2001 was $14.00 per share. Investing in the shares involves risks. "Risk Factors" begin on page 9.
Per Share Total ----- ----- Public Offering Price.............................................. $ $ Underwriting Discounts and Commissions............................. $ $ Proceeds to Pemstar................................................ $ $ Proceeds to Selling Shareholders................................... $ $
We have granted the underwriters a 30-day option to purchase up to 768,750 additional shares of common stock on the same terms and conditions as set forth above to cover over-allotments, if any. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on or about , 2001. - -------------------------------------------------------------------------------- Lehman Brothers JPMorgan Robertson Stephens CIBC World Markets , 2001 [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 TABLE OF CONTENTS
Page ---- Prospectus Summary.................. 3 Risk Factors........................ 9 Use of Proceeds..................... 15 Dividend Policy..................... 15 Price Range of Common Stock......... 15 Capitalization...................... 16 Unaudited Pro Forma Consolidated Financial Data..................... 17 Selected Consolidated Financial Data............................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 20
Page ---- Business............................ 27 Management.......................... 40 Related Party Transactions.......... 47 Principal and Selling Shareholders.. 49 Description of Capital Stock........ 51 Underwriting........................ 56 Legal Matters....................... 59 Experts............................. 59 Where You Can Find More Information........................ 59 Index to Financial Statements....... F-1
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. 2 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; . Supply chain management, including materials procurement, 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 to electronics manufacturing services providers. We provide a comprehensive range of electronics manufacturing services, including engineering, manufacturing and fulfillment services to our customers on a global basis through fifteen facilities strategically located in North America, Asia, Europe and South America. 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 optical and wireless components and 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. Our pro forma net sales for fiscal 2001 were $650.9 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 27%, from $78.0 billion of revenues in 1999 to $260.3 billion in 2004. Technology Forecasters also projects that the communications segment, which represented $37.9 billion of revenues in 2000, will be the fastest growing electronics manufacturing services market through 2004. Additionally, the electronics manufacturing services industry is highly fragmented, with over 3,000 independent electronics manufacturing services providers in existence and the twenty largest providers accounting for 72% of the worldwide market in 2000 based on revenues. 3 Our customers include industry leading original equipment manufacturers such as Diva Systems, Efficient Networks, Fluke Corporation, Fujitsu, Honeywell, IBM, Motorola, Pinnacle, RSA and Seagate. We also have capitalized on our expertise in the optical and wireless components and systems markets to develop strong relationships with a number of emerging optical and wireless components and systems original equipment manufacturers, including Interwave, ONI Systems, Optical Solutions, Qlogic, Repeater Technologies, Terayon 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. Since May 1, 1999, we have completed four acquisitions to expand our operations to Almelo, the Netherlands; San Jose, California; Dunseith, North Dakota and Boston, Massachusetts. Since 1994, we also have opened facilities in Austin, Texas; Guadalajara, Mexico; Tianjin, China; Navan, Ireland; Singapore; Hortolandia, Brazil; Yokohama, Japan 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 600 engineering professionals across all of our locations. . We focus substantial resources on the rapidly expanding communications industry and have developed specific expertise in optical and wireless components and 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 global network of facilities in the world's major electronics markets--North America, Asia, Europe and South America--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 electronics manufacturing services providers, 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 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: . Leverage our worldwide engineering services; . Provide comprehensive engineering, manufacturing and fulfillment service offerings; . Focus on optical and wireless markets; . Expand our global scale and infrastructure; . Pursue selective acquisitions; . Focus on quality management; and . Provide superior supply chain management. Recent Developments On May 7, 2001, we completed the acquisition of an electronics manufacturing services facility located outside of Boston, Massachusetts. This facility had total revenues of approximately $27.7 million in its last completed fiscal year. This facility's principal customer is Telco Systems, a telecommunications company. The aggregate purchase price included $13.9 million in cash and the assumption of $1.6 million of indebtedness. We believe this acquisition will enable us to better serve existing customers located in New England and provide access to important new customers. ---------------- 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. 5 The Offering Common stock offered by Pemstar..... 4,500,000 shares Common stock offered by selling 625,000 shares shareholders........................ Common stock to be outstanding after the offering................. 32,794,347 shares Use of proceeds..................... We intend to use the net proceeds from this offering to repay existing indebtedness. See "Use of Proceeds." Nasdaq National Market symbol....... "PMTR" The number of shares that will be outstanding after the offering is based on the number of shares outstanding as of March 31, 2001, and excludes: . 4,418,677 shares of common stock issuable upon exercise of stock options outstanding as of March 31, 2001, with a weighted average exercise price of $5.93 per share; and . 765,778 additional shares reserved for issuance under our stock incentive 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, 2001, is referred to as "fiscal 2001." Except as otherwise indicated, all information in this prospectus assumes that the underwriters do not exercise the option granted by us. 6 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, 2001 gives effect to the acquisition of Turtle Mountain Corporation as if it had occurred on April 1, 2000. Operating results for Turtle Mountain from the date of acquisition, August 1, 2000, through March 31, 2001, are included in our statement of income data for the year ended March 31, 2001.
Year Ended March 31, ------------------------------------------------------------- 2001 1997 1998 1999 2000 2001 Pro Forma(1) ------- -------- -------- -------- -------- ------------ (in thousands, except per share data) Consolidated Statements of Income Data: Net sales............... $31,895 $165,049 $187,381 $393,842 $635,307 $650,904 Costs of goods sold..... 27,347 147,962 172,219 363,974 581,278 594,993 ------- -------- -------- -------- -------- -------- Gross profit............ 4,548 17,087 15,162 29,868 54,029 55,911 Selling, general and administrative expenses............... 2,976 8,328 10,955 21,576 37,366 38,002 Amortization............ -- 54 190 1,281 1,961 2,118 ------- -------- -------- -------- -------- -------- Operating income........ 1,572 8,705 4,017 7,011 14,702 15,791 Other income (expense)-- net.................... 247 455 (438) (74) 967 1,030 Interest expense........ (315) (746) (640) (3,588) (7,550) (8,276) ------- -------- -------- -------- -------- -------- Income before income taxes.................. 1,504 8,414 2,939 3,349 8,119 8,545 Income tax expense...... 554 3,097 1,273 698 1,436 1,601 ------- -------- -------- -------- -------- -------- Net income.............. $ 950 $ 5,317 $ 1,666 $ 2,651 $ 6,683 $ 6,944 ======= ======== ======== ======== ======== ======== Net income per share: Basic................. $ 0.12 $ 0.55 $ 0.15 $ 0.23 $ 0.29 $ 0.30 Diluted............... 0.12 0.49 0.12 0.15 0.25 0.26 Weighted average number of common shares outstanding (2): Basic................. 8,009 9,653 10,897 11,503 23,013 23,013 Diluted............... 8,039 10,874 14,143 17,167 26,943 26,943 Other Financial Data: Depreciation............ $ 911 $ 1,929 $ 3,331 $ 7,455 $ 12,097 Capital expenditures.... 2,887 8,393 8,657 13,415 42,542 Supplemental Data: EBITDA (3).............. $ 2,730 $ 11,143 $ 7,100 $ 15,673 $ 29,727 Net cash provided by (used in) operating activities............. 776 (1,374) 65 (20,225) (54,219) Net cash provided by (used in) investing activities............. (2,938) (10,126) (4,989) (52,611) (62,684) Net cash provided by (used in) financing activities............. 2,133 14,661 2,556 74,734 119,512
7 The as adjusted balance sheet data gives effect to the consummation of this offering and the application of the net proceeds as described under "Use of Proceeds."
As of March 31, 2001 -------------------- As Adjusted Actual (unaudited) -------- ----------- (in thousands) Consolidated Balance Sheet Data: Unrestricted cash and cash equivalents................... $ 5,882 $ 5,882 Working capital.......................................... 131,851 131,851 Total assets............................................. 349,077 349,077 Long-term debt and capital lease obligations less current maturities.............................................. 84,873 25,838 Total shareholders' equity............................... 150,712 209,747
- -------- (1) Reflects adjustments for (i) the additional amortization expense related to the allocation of the purchase price to goodwill for the acquisition, based on an estimated useful life of twenty years for the goodwill, (ii) the additional interest expense related to the borrowings required by us to complete the acquisition using borrowing capacity available under our credit facility with US Bank; the additional interest charges represent four months of incremental borrowings for the purchase of Turtle Mountain totaling $16,584, calculated at an 10.4% interest rate, which approximates our current borrowing rate, and (iii) income tax effect of (i) and (ii) at a 38.5% marginal tax rate. See "Unaudited Consolidated Pro Forma Financial Data." (2) 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. (3) 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. 8 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. Recently, a number of original equipment manufacturers in these markets have publicly announced that they have experienced a reduction in demand for their products. 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. 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. 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 three largest customers in fiscal 2001 were IBM, Motorola and Efficient Networks, which represented approximately 23%, 16% and 11% of our total net sales. In addition, our ten largest customers in fiscal 2001 accounted for approximately 70% 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 and could result in us holding excess inventories of components and materials. 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 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 four acquisitions and began operations at eight 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 markets effectively 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: . Potential liabilities of the acquired businesses; . Dilutive effect of the issuance of additional equity securities; . Incurrence of additional debt; . Financial impact of transaction expenses; and . 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. 10 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; . Our ability to recognize revenue with respect to products held for 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 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 11 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 Brazil, China, Ireland, Japan, 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 foreign countries. 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 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. If we acquire a company, we may have difficulty integrating its personnel and operations into our operations. In addition, its key personnel may decide not to work for us. We may also have difficulty in integrating acquired businesses, products, services 12 and technologies into our operations. These difficulties could disrupt our ongoing business, distract our management and workforce, increase our expenses and adversely affect our operating results. We may also incorrectly judge the value or worth of an acquired company or business. Furthermore, we may incur significant debt or be required to issue equity securities to pay for future acquisitions or investments. The issuance of equity securities could be dilutive to our shareholders. 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. 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 13 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 market price of our common stock could fluctuate in response to quarterly operating results and other factors. The market price of our common stock could fluctuate significantly in response to quarterly operating results and other factors, including many over which we have no control and that may not be directly related to us. The stock market has from time to time experienced extreme price and volume fluctuations, which have often been unrelated or disproportionate to the operating performance of particular companies. Fluctuations or decreases in the trading price of our common stock may adversely affect your ability to trade your shares and you may lose all or part of your investment. In addition, these fluctuations could adversely affect our ability to raise capital through future equity financings. Future sales of our common stock could depress our stock price. Sales of a substantial number of shares of our common stock in the public market, or the perception that such sales are likely to occur, could depress the market price of our common stock. As of March 31, 2001, we had 28,294,347 shares outstanding. Of these shares, approximately 19,078,873 are available for sale in the public market. In connection with this offering, our executive officers, directors and our largest shareholder have agreed not to sell any shares owned by them for a period of 90 days following this offering. On the 91st day following this offering, at least an additional 9,215,474 shares will be eligible for sale in the public market. 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. 14 USE OF PROCEEDS The net proceeds from this offering will be approximately $59.0 million or approximately $69.2 million if the underwriters exercise their over-allotment option in full based on the public offering price of $14.00 per share and after deducting our underwriting and estimated offering expenses. We will not receive any of the proceeds from the sale of shares by the selling shareholders. We intend to use the net proceeds from this offering to repay our existing indebtedness under our credit facilities with IBM Credit Corporation and US Bank. As of March 31, 2001, our credit facility with IBM had $40.0 million of outstanding borrowings, an effective interest rate of 9.2% and a final maturity date of May 2002, and our credit facility with US Bank had $21.2 million of outstanding borrowings, an effective interest rate of 8.5% and a final maturity date of August 2002. Our borrowings under these credit facilities were incurred in the past year to fund working capital, capital expenditures and the acquisition of the Boston, Massachusetts facility. 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. PRICE RANGE OF COMMON STOCK Our common stock has been quoted on the Nasdaq National Market under the symbol "PMTR" since our initial public offering of common stock in August 2000. The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock, as reported on the Nasdaq National Market.
High Low ------- ------- Fiscal 2001: Second Quarter (beginning August 8, 2000)............... $25.875 $11.219 Third Quarter........................................... $20.000 $ 5.500 Fourth Quarter.......................................... $15.250 $ 6.250 Fiscal 2002: First Quarter (through May 10, 2001).................... $14.000 $ 6.625
On May 10, 2001, the last reported sale price of our common stock on the Nasdaq National Market was $14.00 per share. As of May 10, 2001, there were approximately 436 holders of record of our common stock. 15 CAPITALIZATION The following table sets forth our capitalization as of March 31, 2001: . on an actual basis; and . on an as adjusted basis to reflect the application of the net proceeds from this offering upon the consummation of this offering, at an estimated offering price of $14.00 per share after deducting our underwriting and estimated offering expenses.
As of March 31, 2001 --------------------- As Adjusted Actual (unaudited) -------- ----------- (in thousands, except share data) Unrestricted cash and cash equivalents................... $ 5,882 $ 5,882 ======== ======== Current maturities of long-term obligations.............. $ 13,122 $ 13,122 ======== ======== Long-term obligations, net of current maturities: Revolving credit facilities............................ $ 61,200 $ 2,165 Industrial revenue bonds............................... 4,445 4,445 Other total long-term obligations, net of current maturities (1)........................................ 19,228 19,228 -------- -------- Total long-term obligations, net of current maturities.......................................... 84,873 25,838 Shareholders' equity: Preferred stock, $0.01 par value, 5,000,000 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; 28,294,347 shares issued and outstanding on an actual basis; and 32,794,347 issued and outstanding on an as adjusted basis (2)............... 283 328 Additional paid-in capital............................. 137,139 196,129 Accumulated other comprehensive loss................... (2,299) (2,299) Retained earnings...................................... 17,853 17,853 Loans to shareholders.................................. (2,264) (2,264) -------- -------- Total shareholders' equity........................... 150,712 209,747 -------- -------- Total capitalization................................. $235,585 $235,585 ======== ========
- -------- (1) Includes capitalized lease obligations and other long-term indebtedness. (2) The number of shares that will be outstanding after this offering is based on the number of shares outstanding as of March 31, 2001, and excludes: . 4,418,677 shares of common stock issuable upon exercise of stock options outstanding as of March 31, 2001, with a weighted average exercise price of $5.93 per share; and . 765,778 additional shares reserved for issuance under our stock incentive plans. See "Management--Stock Option Plans." 16 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The unaudited pro forma consolidated statement of income for the fiscal year ended March 31, 2001 gives effect to the acquisition of Turtle Mountain Corporation as if it had occurred on April 1, 2000. Operating results for Turtle Mountain from the date of acquisition, August 1, 2000, through March 31, 2001, are included in our statement of income data for the year ended March 31, 2001. 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, 2001, and the related notes thereto, which statements have been audited by Ernst & Young 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 Turtle Mountain acquisition. 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 date. 17 PEMSTAR INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS Fiscal Year Ended March 31, 2001 (in thousands, except per share data)
Turtle Pemstar Inc. Mountain Year Ended From April 1, March 31, 2000 to Acquisition 2001 July 31, 2000 Adjustments Pro Forma ------------ ------------- ----------- ----------- (audited) (unaudited) (unaudited) (unaudited) Net sales................ $635,307 $15,597 $ -- $650,904 Cost of goods sold....... 581,278 13,715 -- 594,993 -------- ------- ------ -------- Gross profit............. 54,029 1,882 -- 55,911 Selling, general and administrative expenses................ 37,366 636 -- 38,002 Amortization............. 1,961 -- 157 (a) 2,118 -------- ------- ------ -------- Operating income (loss).. 14,702 1,246 (157) 15,791 Other income (expense)-- net..................... 967 63 -- 1,030 Interest expense......... (7,550) (151) (575)(b) (8,276) -------- ------- ------ -------- Income (loss) before income taxes............ 8,119 1,158 (732) 8,545 Income tax expense (benefit)............... 1,436 446 (281)(c) 1,601 -------- ------- ------ -------- Net income (loss)........ $ 6,683 $ 712 $ (451) $ 6,944 ======== ======= ====== ======== Net income (loss) per share: Basic.................. $ 0.29 $ 0.30 Diluted................ 0.25 0.26 Weighted average number of common shares outstanding: Basic.................. 23,013 23,013 Diluted................ 26,943 26,943
- -------- (a) Reflects the additional amortization expense related to the allocation of the purchase price to goodwill for the acquisition. 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 acquisition using borrowing capacity available under our credit facility with US Bank. The additional interest charges represent four months of incremental borrowings for the purchase of Turtle Mountain totaling $16,584. 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) and (b) at a 38.5% marginal tax rate. 18 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 years ended March 31, 2000 and 2001, and the historical consolidated balance sheet data as of March 31, 2000 and 2001, were derived from our consolidated financial statements audited by Ernst & Young LLP, whose report appears elsewhere in this prospectus. The selected historical consolidated statement of income data for the fiscal year ended March 31, 1999, was derived from our 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.
Year Ended March 31, ----------------------------------------------- 1997 1998 1999 2000 2001 ------- -------- -------- -------- -------- (in thousands, except for per share data) Consolidated Statements of Income Data: Net sales..................... $31,895 $165,049 $187,381 $393,842 $635,307 Costs of goods sold........... 27,347 147,962 172,219 363,974 581,278 ------- -------- -------- -------- -------- Gross profit.................. 4,548 17,087 15,162 29,868 54,029 Selling, general and administrative expenses...... 2,976 8,328 10,955 21,576 37,366 Amortization.................. -- 54 190 1,281 1,961 ------- -------- -------- -------- -------- Operating income.............. 1,572 8,705 4,017 7,011 14,702 Other income (expense) - net.. 247 455 (438) (74) 967 Interest expense.............. (315) (746) (640) (3,588) (7,550) ------- -------- -------- -------- -------- Income before income taxes.... 1,504 8,414 2,939 3,349 8,119 Income tax expense............ 554 3,097 1,273 698 1,436 ------- -------- -------- -------- -------- Net income.................... $ 950 $ 5,317 $ 1,666 $ 2,651 $ 6,683 ======= ======== ======== ======== ======== Net income per share: Basic........................ $ 0.12 $ 0.55 $ 0.15 $ 0.23 $ 0.29 Diluted...................... 0.12 0.49 0.12 0.15 0.25 Weighted average number of common shares outstanding (1): Basic........................ 8,009 9,653 10,897 11,503 23,013 Diluted...................... 8,039 10,874 14,143 17,167 26,943 Other Financial Data: Depreciation.................. $ 911 $ 1,929 $ 3,331 $ 7,455 $ 12,097 Capital expenditures.......... 2,887 8,393 8,657 13,415 42,542 Supplemental Data: EBITDA (2).................... $ 2,730 $ 11,143 $ 7,100 $ 15,673 $ 29,727 Net cash provided by (used in) operating activities......... 776 (1,374) 65 (20,225) (54,219) Net cash provided by (used in) investing activities......... (2,938) (10,126) (4,989) (52,611) (62,684) Net cash provided by (used in) financing activities......... 2,133 14,661 2,556 74,734 119,512 March 31, ----------------------------------------------- 1997 1998 1999 2000 2001 ------- -------- -------- -------- -------- (in thousands) Consolidated Balance Sheet Data: Unrestricted cash and cash equivalents.................. $ 34 $ 3,195 $ 827 $ 2,727 $ 5,882 Working capital............... 525 12,873 12,783 49,649 131,851 Total assets.................. 16,334 61,121 64,983 190,451 349,077 Long-term debt and capital lease obligations less current maturities........... 2,251 6,340 7,090 55,181 84,873 Redeemable preferred stock.... -- 8,549 8,549 26,549 -- Total shareholders' equity.... 3,009 19,544 16,555 22,673 150,712
- -------- (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. 19 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 fifteen facilities strategically located in North America, Asia, Europe and South America. 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 and emerging 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 the opening of new facilities in Austin, Texas, Guadalajara, Mexico, Tianjin, China, Navan, Ireland, Singapore, Hortolandia, Brazil, Yokohama, Japan and Bangkok, Thailand and the acquisition of established businesses in Almelo, the Netherlands, San Jose, California, Dunseith, North Dakota and Boston, Massachusetts. These growth initiatives have given us: . Expanded geographic presence in established and emerging markets and strengthened our presence in target markets; . Enhanced our product and service offerings while allowing us to offer cost-effective manufacturing and engineering capabilities; . Access to new customers; and . Specialized test and process equipment design, manufacturing and service capabilities. We derive most of our net sales from customer purchase orders. We charge our customers separately for engineering and manufacturing services. We recognize revenues from product sales, net of product returns and warranty costs, typically at the time of product shipment. In limited circumstances, although the product remains in our facilities, we recognize revenue when title to, and risks and rewards of ownership of, the products have contractually passed to the customer. Revenue from services are recognized as they are performed and collection is reasonably certain. Our engineering services accounted for 4.3%, 4.2% and 5.7% of our total net sales in fiscal 1999, 2000 and 2001, respectively, while manufacturing services accounted for 95.7%, 95.8% and 94.3% of our total net sales in fiscal 1999, 2000 and 2001, 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 expenses. During periods of high capacity utilization, our gross margins and operating margins generally improve while during periods of lower capacity utilization our 20 gross margins and operating margins generally decline. We have incurred, and will continue to incur, substantial selling, general and administrative expenses to establish a global platform of facilities, to develop a worldwide sales infrastructure and to implement industry-leading information technology systems. We believe that we have developed an infrastructure that will support substantially higher levels of sales in the future. 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 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 2001, inventory obsolescence reserves increased by $1.6 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:
Fiscal Year Ended March 31, ------------------- 1999 2000 2001 ----- ----- ----- Net sales.................................................. 100.0% 100.0% 100.0% Cost of goods sold......................................... 91.9 92.4 91.5 ----- ----- ----- Gross profit............................................... 8.1 7.6 8.5 Selling, general and administrative expenses............... 5.9 5.5 5.9 Amortization............................................... 0.1 0.3 0.3 ----- ----- ----- Operating income........................................... 2.1 1.8 2.3 Other income (expense)-net................................. (0.2) (0.0) 0.2 Interest expense........................................... (0.3) (0.9) (1.2) ----- ----- ----- Income before income taxes................................. 1.6 0.9 1.3 Income tax expense......................................... 0.7 0.2 0.2 ----- ----- ----- Net income................................................. 0.9% 0.7% 1.1% ===== ===== =====
Fiscal Year Ended March 31, 2001 Compared to Fiscal Year Ended March 31, 2000 Net Sales. Our net sales increased $241.5 million, or 61.3%, to $635.3 million in fiscal 2001 from $393.8 million in fiscal 2000. This increase resulted from both internal growth and the acquisition of Turtle Mountain. In fiscal 2001, our internal growth, which excludes net sales increases from operations acquired in the preceding twelve months, accounted for $203.7 million, or 84.3%, of total year-to-year growth and was driven by new projects with existing and new customers in North America and Asia. Our acquisition of Turtle Mountain accounted for $37.8 million, or 15.7%, of total year-to-year growth. Gross Profit. Our gross profit increased $24.1 million to $54.0 million in fiscal 2001 from $29.9 million in fiscal 2000. This increase in gross profit reflects the year-to-year growth in net sales. This higher gross profit in fiscal 2001 was primarily due to higher sales volumes from existing and new customers in both domestic and certain international locations and the acquisition of Turtle Mountain. Gross profit increased to 8.5% of net sales in fiscal 2001 from 7.6% in fiscal 2000 due to increased utilization of our facilities. Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased $15.8 million to $37.4 million in fiscal 2001 from $21.6 million in fiscal 2000. As a percentage of net 21 sales, our selling, general and administrative expenses increased to 5.9% in fiscal 2001 from 5.5% in fiscal 2000. These increases were primarily due to $5.6 million for additional sales and administrative compensation, $4.2 million of overhead expenses for existing and new facilities, $1.0 million of expenses from acquired businesses and $1.0 million of additions to information technology infrastructure. Amortization. Amortization increased $0.7 million to $2.0 million in fiscal 2001 from $1.3 million in fiscal 2000, primarily as a result of amortization of goodwill arising out of our acquisition of Turtle Mountain. Other Income (Expense)-Net. In fiscal 2001, we had other income of $1.0 million as compared to other expense of $0.1 million in fiscal 2000. This change in other income was primarily a result of currency gains in certain foreign locations and gains from sales of fixed assets. Interest Expense. Our interest expense increased $4.0 million to $7.6 million in fiscal 2001 from $3.6 million in fiscal 2000. This increase reflects increased borrowings required to fund the Turtle Mountain acquisition 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 2001, our effective tax rate decreased to 17.7% from 20.8% in fiscal 2000. This decrease resulted from the mix of domestic versus international income from operations and the benefit of our foreign sales corporation. 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, 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 acquisition. 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 profit. 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. 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. 22 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. Quarterly Results of Operations The following table sets forth unaudited quarterly financial information of Pemstar for the quarterly periods in fiscal 2000 and 2001. Historically, we have experienced some seasonal variation in net sales, with net 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.
Quarter Ended ------------------------------------------------------------------------------- June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, 1999 1999 1999 2000 2000 2000 2000 2001 -------- --------- -------- -------- -------- --------- -------- -------- (in thousands) Net sales............... $68,598 $97,560 $111,745 $115,939 $122,604 $143,902 $184,366 $184,435 Cost of goods sold...... 62,429 90,157 103,351 108,037 112,696 132,535 168,319 167,728 ------- ------- -------- -------- -------- -------- -------- -------- Gross profit............ 6,169 7,403 8,394 7,902 9,908 11,367 16,047 16,707 Selling, general and administrative expenses............... 3,936 5,075 5,749 6,816 7,520 8,062 10,187 11,597 Amortization............ 205 271 277 528 343 503 547 568 ------- ------- -------- -------- -------- -------- -------- -------- Operating income........ 2,028 2,057 2,368 558 2,045 2,802 5,313 4,542 Other income (expense)--net......... (34) (542) (329) 831 236 (275) (176) (752) Interest expense........ (341) (776) (986) (1,485) (1,863) (1,622) (1,900) (2,165) ------- ------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes........... 1,653 739 1,053 (96) (54) 1,455 3,589 3,129 Income tax expense (benefit).............. 738 351 62 (453) (203) 349 954 336 ------- ------- -------- -------- -------- -------- -------- -------- Net income.............. $ 915 $ 388 $ 991 $ 357 $ 149 $ 1,106 $ 2,635 $ 2,793 ======= ======= ======== ======== ======== ======== ======== ========
Liquidity and Capital Resources We have funded our operations from the proceeds of bank debt, private and public offerings of equity, cash and cash equivalents generated from operations and lease financing of capital equipment. Our principal uses of cash have been to finance working capital, acquisitions, new operations, capital expenditures and debt service requirements. We anticipate these uses will continue to be our principal uses of cash in the future. 23 Net cash provided by (used in) operating activities for fiscal 2001, 2000 and 1999 was ($54.2), ($20.2) million and $0.1 million, respectively. Net cash used in operating activities increased in fiscal 2001 primarily as a result of increased working capital needs due to our higher sales volumes and higher inventory. Net cash used in investing activities for fiscal 2001, 2000 and 1999 was $62.7, $52.6 million and $5.0 million, respectively. In fiscal 2001, our cash used in investing activities consisted primarily of $21.2 million used in the acquisition of Turtle Mountain and $42.5 million used for capital expenditures. Capital expenditures increased in fiscal 2001 by $29.1 million as compared to the prior fiscal year. Capital expenditures were principally used for printed circuit board assembly equipment, optical technology equipment, buildings and information technology equipment and upgrades across several of our facilities. We estimate capital expenditures in fiscal 2002 will decrease as compared to fiscal 2001. Net cash provided by financing activities for fiscal 2001, 2000 and 1999 was $119.5 million, $74.7 million and $2.6 million, respectively. Our principal sources of cash from financing activities in fiscal 2001 included proceeds of approximately $93.9 million from our initial public offering of common stock and net increase in long-term borrowings of $16.5 million. Net 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. As of March 31, 2001, we had unrestricted cash and cash equivalents of $5.9 million and total borrowings, including capitalized lease obligations, of approximately $98.0 million. Borrowings under our two U.S. credit facilities 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 March 31, 2001, we had $21.2 million outstanding under our US Bank credit facility and $40.0 million outstanding under our IBM facility. Our increase in borrowings from March 31, 2000 was primarily due to increased working capital requirements to support higher sales, increased capital expenditures and the Turtle Mountain acquisition. We also have a $3.2 million credit facility serving our Netherlands operations. As of March 31, 2000, we had $1.6 million outstanding under our Netherlands credit facility. Each credit facility bears interest on outstanding borrowings at variable interest rates, which as of March 31, 2001, were 8.5% for the US Bank facility, 9.2% for the IBM facility and 7.0% for the Netherlands facility. Our US Bank credit facility matures in August 2002 and our IBM credit facility matures in May 2002. As of March 31, 2001, we had an aggregate of $14.6 million of borrowing availability under our credit facilities. We are currently renegotiating our existing credit facilities to increase our borrowing capacity. 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 March 31, 2001, we were not in compliance with our monthly leverage ratio covenant under our US Bank credit facility, which if not cured or waived, could have resulted in an event of default. We have obtained a one-time waiver of our compliance with this leverage ratio covenant from US Bank. In addition to our credit facilities, we had other debt obligations totaling $21.2 million as of March 31, 2001. See Notes 8 and 11 to our consolidated financial statements. We intend to use the net proceeds from this offering to repay indebtedness under our credit facilities with IBM Credit Corporation and US Bank. 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 24 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 borrowings. On March 31, 2001, we had total borrowings of $76.4 million bearing variable interest rates. 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 $764,000 on an annual basis. As of March 31, 2000, an adverse change of one percent in the interest rate would have caused us to incur a change in interest expense of approximately $605,000 on an annual basis for all borrowings outstanding bearing interest at variable rates at March 31, 2000. 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, Singapore 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 2001, sales denominated in Dutch Guilders totalled $32.4 million, sales denominated in Singapore dollars totalled $9.2 million and sales denominated in Chinese Renminbi totalled $41.9 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, 2001 and 2000 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 $780,000 and $148,000, respectively, for the fiscal years ended March 31, 2001 and 2000. For the fiscal year ended March 31, 2001, the amount we consider permanently invested in foreign subsidiaries and translated into dollars using the year end exchange rate is $43.7 million and $8.3 million, respectively, and the potential loss in fair value resulting from a hypothetical 10% adverse change in foreign currency exchange rate amounts to $4.0 million and $758,000, respectively. 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. Impact of Inflation We believe that our results of operations are not dependent upon moderate changes in the inflation rate. 25 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 liabilities 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. We adopted SFAS No. 133 effective April 1, 2001. The adoption of SFAS No. 133 did not have a material impact on our financial position or results of operations. 26 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 optical and wireless components and 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 fifteen facilities strategically located in North America, Asia, Europe and South America. 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. Our pro forma net sales for fiscal 2001 were $650.9 million. Industry Background Electronics manufacturing services providers deliver 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 27% from $78.0 billion in revenues in 1999 to $260.3 billion in 2004. 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 11.2% in 1999 to 25.9% by 2004. 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 ---------- ------------ 1999 $78.0 11.2% 2000 $100.9 13.1% 2001E $129.9 15.6% 2002E $164.6 18.4% 2003E $207.0 21.8% 2004E $260.3 25.9% Source: Technology Forecasters, Inc., Quarterly Forum, November 2000. 27 According to Technology Forecasters, the electronics manufacturing services industry is extremely fragmented, with over 3,000 independent electronics manufacturing services providers in existence today. Additionally, the twenty largest providers represented approximately 72% of the worldwide electronics manufacturing services market in 2000, with the largest provider in the industry representing 17% of total industry revenues. The industry has experienced and is anticipated to continue to experience significant consolidation. The electronics manufacturing services industry is highly diverse with providers serving original equipment manufacturers in a broad array of industry segments. Communications and computing are currently the largest electronics manufacturing services markets based on 2000 total revenues having accounted for 37.5% and 42.3% of total electronics manufacturing services revenues in 2000, respectively. Technology Forecasters also forecasts that the communications segment, which represented $37.9 billion of revenues in 2000, will be the fastest growing market for electronics manufacturing services through 2004. We also believe that certain segments of the communications sector offer particularly strong growth opportunities, including the optical and wireless 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. According to industry research, original equipment manufacturers have 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 providers 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 600 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 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. We also are a merchant provider of custom test equipment and automation systems, with particiular expertise in the optical and wireless market segments. 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 optical and wireless market segments. We use our optical and wireless components and systems capabilities to build a wide variety of advanced components and subsystems for existing and emerging original equipment manufacturers. Our focus and expertise in optical and wireless components and systems has enabled us to establish strong relationships with optical and wireless systems original equipment manufacturers, including 28 Interwave, ONI Systems, Optical Solutions, Qlogic, Repeater Technologies, Terayon and Western Multiplex. We believe that this expertise and our early entry into the optical and wireless systems markets makes us one of the few electronics manufacturing services providers that can offer original equipment manufacturers advanced optical and wireless 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, Japan, Mexico, the Netherlands, Singapore, Thailand, Brazil and Ireland, 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 continue 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 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 Optical and Wireless Markets. We have advanced engineering and manufacturing expertise in the optical and wireless segments of the communications market, which enables us to focus on profitable, strategic relationships with leading companies in these segments. We believe that industry experience and 29 technical expertise are critical attributes sought by optical and wireless original equipment manufacturers when they select an electronics manufacturing services provider. We will continue to leverage our industry knowledge and technical expertise to develop new relationships with established and emerging companies and to increase sales to our existing customers in these rapidly growing market segments. Expand Our Global Scale and Infrastructure. Over the last several years, we have expanded from one facility in North America to fifteen facilities across North America, Asia, Europe and South America. We believe our global infrastructure provides us with the necessary platform to serve our customers worldwide. 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. Since May 1, 1999, we have completed four acquisitions to expand our operations to Almelo, the Netherlands; San Jose, California; Dunseith, North Dakota; and Boston, Massachusetts, which have expanded our manufacturing and distribution capabilities and further broadened our customer base. We will continue to pursue strategic acquisitions that enable us to expand our geographic reach, add manufacturing and engineering 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 providers, 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. In addition, all of our facilities engaged in medical product design and manufacturing are FDA/QSR compliant, and our Rochester, Minnesota facilities are QS 9000 certified. We are currently pursuing an ISO 14000 environmental certification and TL 9000 telecommunications certification for our facilities. 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 have developed Web-based collaboration interfaces, based on leading supply chain software products from AGILE Software Corporation and i2 Technologies, which allow us to communicate with our supply chain partners, both customers and vendors, 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. 30 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. We are also a merchant provider of customer test equipment and automation systems to original equipment manufacturers. 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 5.7%, 4.2% and 4.3% of our total net sales in fiscal 2001, 2000 and 1999, 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 optical manufacturing services 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. 31 Revenues from manufacturing services were 94.3%, 95.8% and 95.7% of our total net sales in fiscal 2001, 2000 and 1999, 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 have developed a Web-based collaboration interface that enables real-time communication with our customers. 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 customers with a range of aftermarket services, including repair, replacement, refurbishment, remanufacturing, exchange, systems upgrade and spare part manufacturing for storage subsystems. 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. We also have developed a Web-based collaberation interface that utilizes products from AGILE Software Corporation and i2 Technologies to collaborate with our supply chain partners in real-time on product content and engineering change management. We are in the process of implementing our Web-based interfaces and real-time supply chain management software products across all of our facilities to enhance our ability to rapidly scale operations to 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. 32 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 ISO 14000 environment certification for all of our facilites which applies to environmental aspects of product management systems and life cycle impacts. In addition, we have initiated TL 9000 certification for our facilities that service the telecommunications, optical and wireless industries. We are also implementing a Six Sigma quality enhancement program. 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. We provide original equipment manufacturers with expertise in manufacturing technologies used in the production of optical and wireless components 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. 33 . 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. Our manufacturing technology expertise also 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 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. Customers Our customers include established original equipment manufacturers, including such industry leaders as Diva Systems, Efficient Networks, Fluke Corporation, Fujitsu, Honeywell, IBM, Motorola, Pinnacle, RSA and Seagate. We also have relationships with a number of emerging optical and wireless systems original equipment manufacturers, including Interwave, ONI Systems, Optical Solutions, Qlogic, Repeater Technologies, Terayon and Western Multiplex. Our customers include established and emerging original equipment manufacturers in 34 the communications, computing, data storage, industrial and medical equipment industries. The following table shows the percentage of our net sales in each of the markets we serve for the fiscal years ended March 31, 1999, 2000 and 2001.
Fiscal Year Ended March 31, ---------------- Markets 1999 2000 2001 ------- ---- ---- ---- Communications (1)........................................ 16% 40% 53% Computing................................................. 60 26 25 Data Storage.............................................. 18 20 10 Industrial Equipment...................................... 3 13 11 Medical Equipment......................................... 3 1 1 --- --- --- Total................................................... 100% 100% 100% === === ===
-------- (1) Includes optical systems, which represented 1.0%, 5.4% and 10.3% of our net sales in fiscal 1999, 2000 and 2001, respectively. The following table indicates, for fiscal 2001, our ten largest customers in terms of net sales, in alphabetical order, and the primary products for which we provided our services.
OEM Customers End Products ------------- ------------ Diva Systems..................... Cable video 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 Qlogic........................... Communications and switching equipment Western Multiplex................ Wireless network products
In fiscal 2001, IBM represented approximately 22.5% of our net sales, Motorola represented approximately 16.1% of our net sales and Efficient Networks represented 10.6% 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 four 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. Substantially all of our net sales in fiscal 2001 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 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 35 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 three patents and twenty-five 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 2001, 2000 and 1999 were $489,000, $410,000 and $387,000, 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 maintaining advanced technological capabilities, we have developed substantial expertise in communications, particularly in the areas of optical and wireless technologies, which we believe gives us a competitive advantage over many other electronics manufacturing services providers. 36 Employees As of March 31, 2001, we had 4,215 full-time 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 248 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, Japan, Mexico, the Netherlands, Singapore, Thailand, Brazil and Ireland. 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, engineering and manufacturing service companies. In May 1999, we acquired a facility located in Almelo, the Netherlands from Fluke Corporation. The 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. In 2000, we expanded our Mexican facility from 60,000 to 130,000 square feet to accommodate growth in this region. 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 facilities were initially a strategic partnership with Italade Technology Holdings, Ltd. These facilities are now owned by a wholly- owned subsidiary of Pemstar. We are currently building a new high-volume manufacturing facility outside of Bangkok in a tax-free industrial zone to expand our manufacturing capabilities and provide cost effective solutions for our customers. 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. In 2001, we acquired 100% ownership 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. In 2001, we established new facilities in Hortolandia, Brazil, in response to the needs of an existing customer. This facility has enabled us to reduce the time and cost to bring our customer's products to market in Brazil, while providing us with the opportunity to attract new customers in that region. 37 In 2001, we also established an engineering facility in Yokohama, Japan. This facility supports the engineering and design services needs of our customers in the wireless systems markets and also supports the outsourcing of capital equipment at our Singapore facilities. In 2001, we also established a facility in Navan, Ireland, which is in the process of starting operations. Facilities Our executive offices are located in Rochester, Minnesota, where we also have engineering and manufacturing facilities. We also have other U.S. facilities located in San Jose, California, Boston, Massachusetts, Dunseith, North Dakota and Austin, Texas, as well as facilities in China, Japan, Mexico, the Netherlands, Singapore, Thailand, Brazil and Ireland. Information about these facilities is set forth below:
Approximate Location Square Feet Owned/Leased Principal Services - -------- ----------- ------------ ------------------------- Rochester, Minnesota (2 156,000 Owned headquarters, engineering facilities)............... 69,000 Leased and manufacturing San Jose, California (2 141,000 Leased engineering and facilities)............... 38,000 Leased manufacturing Bangkok, Thailand (2 67,000 Leased manufacturing facilities)............... 20,000 Leased Almelo, the Netherlands.... 132,000 Leased engineering and manufacturing Guadalajara, Mexico........ 130,000 Leased manufacturing Tianjin, China (2 40,000 Leased manufacturing facilities)............... 70,000 Leased Boston, Massachusetts...... 85,000 Leased engineering and manufacturing Dunseith, North Dakota..... 30,000 Owned manufacturing 35,000 Leased Hortolandia, Brazil........ 30,000 Leased manufacturing Navan, Ireland............. 27,000 Leased manufacturing Singapore.................. 20,000 Leased engineering and manufacturing Austin, Texas.............. 10,000 Leased manufacturing Yokohama, Japan............ 1,000 Leased engineering
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. 38 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. We believe that large, publicly-traded original equipment manufacturers prefer to enter into outsourcing relationships with other public electronics manufacturing services providers 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. 39 MANAGEMENT Directors and Executive Officers The following table sets forth our directors and executive officers, their ages as of May 1, 2001 and the positions currently held by them:
Name Age Position ---- --- -------- Allen J. Berning........ 46 Chairman, Chief Executive Officer and Director William J. Kullback..... 41 Executive Vice President--Finance and Chief Financial Officer William B. Leary........ 59 Executive Vice President--Rochester Site Operations and Director Robert R. Murphy(1)..... 57 Executive Vice President--Corporate Operations, Treasurer and Director Steve V. Petracca....... 45 Executive Vice President--Business Development and Director Karl D. Shurson(1)...... 61 Executive Vice President--Quality and Director Hargopal (Paul) Singh... 51 Executive Vice President--International Operations and Director Robert D. Ahmann........ 45 Executive Vice President--Manufacturing Systems and Director Linda U. Feuss.......... 44 Vice President--General Counsel and Secretary Thomas A. Burton(1)(2).. 66 Director Bruce M. Jaffe(1)(2).... 57 Director Gregory S. Lea(2)....... 48 Director
- -------- (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 Executive 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. In connection with his planned retirement, Mr. Leary does not intend to stand for reelection at our 2001 annual meeting of shareholders. Robert R. Murphy has served as our 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. 40 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 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. Linda U. Feuss has served as our Vice President--General Counsel and Secretary since 2001. From 1998 to 2000, Ms. Feuss served as Vice President and General Counsel, Bakeries and Foodservice of The Pillsbury Company. From 1983 to 1998, Ms. Feuss was employed by Siemens Corporation, serving most recently as Associate General Counsel, Corporate. Ms. Feuss holds a J.D. from the Emory University School of Law and a B.A. from Colgate University. 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 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. 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 Directors of Metron Technology, a supplier of equipment, materials and outsourcing services to the semiconductor industry, and the Board of Advisors for the University of Southern California School of Business. 41 Gregory S. Lea has served as a director of Pemstar since April 2001. Since 1993, Mr. Lea has served as a corporate Vice President for Jostens Corporation, a commemorative and affiliation products manufacturer, serving most recently as corporate Vice President--Business Ventures. From 1993 to 1999, Mr. Lea held two other corporate vice presidency positions at Jostens Corporation. From 1974 to 1993, Mr. Lea was employed by IBM Corporation, where he held several management and administrative positions. From 1981 to 1993, Mr. Lea was President and a member of the Board of Directors of the Ability Building Center, Inc. Mr. Lea holds a B.S. in accounting/business management from Minnesota State University, Mankato. Board of Directors Our board of directors consists of ten directors divided into three classes with each class serving for a term of three years. At each annual meeting of shareholders, directors are elected by the holders of common stock to succeed those directors whose terms are expiring. Karl D. Shurson, Robert D. Ahman and Bruce M. Jaffe are Class I directors whose terms expire on July 26, 2001. In 2000, Class I director Gary L. Lingbeck resigned as a director in connection with his retirement as an employee of Pemstar. William B. Leary, Robert R. Murphy, Hargopal (Paul) Singh and Thomas A. Burton are Class II directors whose terms expire in 2002. Allen J. Berning, Steve V. Petracca and Gregory S. Lea are Class III directors whose terms expire in 2003. In 2001, Class III director David L. Sippel resigned as a director in connection with his retirement as an employee of Pemstar. In addition, Class III director Michael J. Odrich resigned as a director of Pemstar effective January 2001. Our bylaws provide that the number of directors shall be fixed by the board of directors. The number of directors on our board is 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 2001, two of our non-employee directors, Thomas A. Burton and Bruce M. Jaffe, were awarded options to purchase 4,250 shares and 6,375 shares, respectively, of common stock under our 2000 Stock 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, Bruce M. Jaffe and Gregory S. Lea, 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 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 and Bruce M. Jaffe, each a non-employee director, and Robert R. Murphy and Karl D. Shurson, 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 reviewing our general compensation strategy. 42 Executive Compensation Committee Interlocks and Insider Participation During fiscal 2001, Robert R. Murphy and Karl D. Shurson, each an executive officer of Pemstar, served on our executive compensation committee. In June 2000 Mr. Murphy 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 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. 43 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, 2001 by our Chief Executive Officer and the other four most highly compensated executive officers. Summary Compensation Table
Annual Long-Term Compensation(1) Compensation ----------------------------- Securities Underlying All Other Salary Bonus Options/SARs Compensation Name and Principal Position Year ($) ($) (#) ($)(2) - --------------------------- ---- ------ ------------------- ------------ Allen J. Berning............. 2001 200,769 0 42,500 3,825 Chairman of the Board and 2000 156,346 0 216,000 4,656 Chief Executive Officer Steve V. Petracca............ 2001 227,885 0 25,500 5,037 Executive Vice President-- 2000 182,948 0 210,000 5,192 Business Development William B. Leary............. 2001 162,885 0 25,500 2,236 Executive Vice President-- 2000 126,154 0 135,000 2,360 Rochester Site Operations Hargopal (Paul) Singh........ 2001 165,769 0 25,500 2,403 Executive Vice President-- 2000 126,154 0 135,000 2,360 International Operations David L. Sippel (3).......... 2001 162,885 0 25,500 2,316 Executive Vice President-- 2000 126,154 0 135,000 2,390 Rochester and Chief Technology Officer
- -------- (1) With respect to each of the named executive officers, the aggregate amount of perquisites and other personal benefits, securities or property received was less than either $50,000 or 10% of the total annual salary and bonus reported for such named officer. (2) The reported compensation includes our contributions (excluding employee earnings reduction contributions) under our 401(k). (3) Dr. Sippel resigned his executive positions with Pemstar in May 2001 in connection with his planned retirement. 44 Stock Option Grants in Last Fiscal Year The following table sets forth information regarding grants of stock options to each of the executive officers named in the Summary Compensation Table during fiscal 2001. The percentage of total options set forth below is based on an aggregate of 1,188,875 options granted to employees during fiscal 2001. All options were granted at the fair market value of our common stock, as determined by our board of directors, on the date of grant. Potential realizable values are net of exercise price, but before taxes associated with exercise. Amounts representing hypothetical gains are those that could be achieved for the options if exercised at the end of the option term. The assumed 5% and 10% rates of stock price appreciation are provided in accordance with rules of the Securities and Exchange Commission based on the fair market value of the stock at the time of option grant, and do not represent our estimate or projection of the future stock price. Option Grants in Fiscal Year Ended March 31, 2001
Potential Realizable Individual Grants Value at -------------------------------------------- Assumed Number of % of Total Annual Rate Of Shares of Options Stock Price Common Stock Granted to Appreciation Underlying Employees Exercise For Option Term Options in FY 2001 Price Per Expiration --------------- Name Granted(1) (%) Share ($) Date 5% ($) 10% ($) - ---- ------------ ---------- --------- ---------- ------- ------- Allen J. Berning........ 42,500 3.58 11.00 7/11/10 294,008 745,075 Steve V. Petracca....... 25,500 2.15 11.00 7/11/10 176,405 447,045 William B. Leary........ 25,500 2.15 11.00 7/11/10 176,405 447,045 Hargopal (Paul) Singh... 25,500 2.15 11.00 7/11/10 176,405 447,045 David L. Sippel......... 25,500 2.15 11.00 7/11/10 176,405 447,045
- -------- (1) Options vest in three equal annual installments commencing on the first anniversary of their grant date. 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, 2001 and the value and the number of shares of common stock subject to exercisable and unexercisable options held as of March 31, 2001, by each of the executive officers named in the Summary Compensation Table. Aggregate Option Exercises in Fiscal 2001 and Fiscal Year-End Option Values
Number of Shares Value of Unexercised In- Underlying Unexercised the-Money Options at Number of Options at Year-End Year-End Shares Value ------------------------- ------------------------- Name Acquired Realized(1) Exercisable Unexercisable Exercisable Unexercisable - ---- --------- ----------- ----------- ------------- ----------- ------------- Allen J. Berning........ 40,000 $42,400 110,000 42,500 $412,500 $159,375 Steve V. Petracca....... 0 0 210,000 25,500 787,500 95,625 William B. Leary........ 0 0 135,000 25,500 506,250 95,625 Hargopal (Paul) Singh... 0 0 0 25,500 0 95,625 David L. Sippel......... 0 0 143,100 25,500 536,250 95,625
- -------- (1) Based on the closing price of $6.625 of our common stock on December 20, 2000. (2) Based on an estimated fair market value of $8.75 per share of our common stock on March 31, 2001. 45 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 We currently maintain 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 46 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. 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 2001, we made $1,063,324 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 during fiscal 2001, in the following amounts, which represent the largest amounts outstanding during our last fiscal year: 90 day Notes
Name Principal Amount ---- ---------------- 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
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 represents the original principal balance and the largest amounts outstanding during our last fiscal year: 2 year Notes
Name Principal Amount ---- ---------------- 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
-------- (1) Note matures March 14, 2002. 47 In addition, in fiscal 2001, Allen J. Berning executed an additional promissory note in the face amount of $200,000 in connection with Mr. Berning's exercise of an option to purchase 40,000 shares of common stock. This note bears interest at 6.01% per annum and matures on December 20, 2002. This note is secured by a security interest in the shares purchased or issued upon exercise of the options. Financing Transactions 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. These shares of preferred stock were converted into shares of common stock in August 2000 in connection with our initial public offering of common stock. Lehman Brothers Inc. is the beneficial owner of more than 5% of our outstanding shares of common stock. See "Principal and Selling Shareholders" for information relating to the beneficial ownership of shares and identification of affiliates of Lehman Brothers Inc. Investment Banking Services Lehman Brothers Inc. served as an underwriter for our initial public offering of common stock in August 2000. In connection with this transaction, Lehman Brothers Inc. received customary fees, underwriting discounts and commissions. 48 PRINCIPAL AND SELLING SHAREHOLDERS The table below sets forth information known to us regarding the beneficial ownership of our common stock as of March 31, 2001, 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; . All executive officers and directors as a group; and . The selling shareholders. 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, 2001 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.
Shares Beneficially Owned Prior to Shares Beneficially Offering Shares Owned After Offering ----------------- to be ----------------------- Name of Beneficial Owner Number Percent Sold Number Percent - ------------------------ --------- ------- ------- ------------ ---------- 5% Shareholder: Lehman Brothers Inc. and certain of its affiliates(1)............. 4,959,903 17.5% 0 4,959,903 15.1% 3 World Financial Center New York, New York 10285 Executive Officers and Directors: Allen J. Berning(2)........ 1,111,100 3.9 35,000 1,076,100 3.3 Steve V. Petracca(3)....... 300,000 1.1 40,000 260,000 * William B. Leary(4)........ 624,808 2.2 100,000 524,808 1.6 Robert R. Murphy(5)........ 945,808 3.3 100,000 845,808 2.6 Karl D. Shurson(6)......... 452,608 1.6 100,000 352,608 1.1 Hargopal (Paul) Singh(7)... 491,400 1.7 100,000 391,400 1.2 Robert D. Ahmann(8)........ 462,000 1.6 50,000 412,000 1.3 Thomas A. Burton........... 6,000 * 0 6,000 * Bruce M. Jaffe............. 800 * 0 800 * Gregory S. Lea............. 0 0 0 0 0 All directors and executive officers as a group (12 persons)(9)............... 4,452,164 15.3 525,000 3,927,164 11.7 Other Selling Shareholder: David L. Sippel(10)........ 937,948 3.3 100,000 837,948 2.5
- -------- * Shares represent less than 1% of total shares outstanding. 49 (1) Shares beneficially owned by Lehman Brothers Inc. include shares held by the following wholly owned subsidiaries of Lehman Brothers Inc.:
Name Number of Shares ---- ---------------- LB I Group Inc. ("LB I Group")......................... 2,547,084 Lehman Brothers Venture Capital Partners I, L.P. ("LB VCP")................................................. 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
Effective March 15, 2001, LB I Group and LB VCP granted to Pemstar an irrevocable proxy to vote 2,200,000 of the shares of the common stock that they would otherwise be entitled to vote at any meeting of our shareholders, or to give consent in lieu of voting on any matter which is submitted for a vote of consent to our shareholders. The proxy and the powers granted under the proxy are not revocable by the grantors and will remain in effect until automatically terminated when the grantors and their affiliates cease to own on a collective basis 10% or more of our common stock. The proxy will also terminate with respect to any shares that are transferred by the grantors to any person that is not affiliated with the grantors. As a result of this proxy, Lehman Brothers will exercise voting power with respect to approximately 8.4% of the common stock after this offering. (2) The shares of common stock included in this table include 764,400 shares held jointly by Mr. Berning and his spouse, 110,000 shares that can be acquired upon the exercise of outstanding options and 200 shares owned by Mr. Berning's spouse. Mr. Berning disclaims beneficial ownership of the 200 shares owned by his spouse. (3) The shares of common stock included in this table include 210,000 shares that can be acquired upon the exercise of outstanding options. (4) 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. (5) 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. (6) The shares of common stock included in this table include 311,008 shares held jointly by Mr. Shurson and his spouse and 141,600 shares that can be acquired upon the exercise of outstanding options. (7) Includes 75,000 shares held by Mr. Singh's spouse. (8) The shares of common stock included in this table include 141,000 shares that can be acquired upon the exercise of outstanding options. (9) See Notes (2) through (9). Includes an aggregate of 884,840 shares issuable upon the exercise of currently exercisable options held by our executive officers and directors. (10) The shares of common stock included in this table include 385,020 shares held in the Donna L. Sippel 1999 Trust, 327,328 shares held in the David L. Sippel Revocable Trust, 82,500 shares held in the David L. Sippel 1999 Trust, over which Mr. Sippel shares voting and dispositive power and 143,100 shares that can be acquired upon the exercise of outstanding options. Mr. Sippel is a former director and Executive Vice President--Rochester Site Operations of Pemstar. 50 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, 2001, there were 28,294,347 shares of common stock outstanding, held by approximately 436 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. Registration Rights As of March 31, 2001, certain of our shareholders are entitled to rights with respect to the registration of 4,959,903 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 which was converted into shares of common stock on August 7, 2000. 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 February 7, 2001. The holders of registration rights have waived their registration rights in connection with this offering. In the event the holders of registration rights exercise their registration rights in the future, we will only be required to file two registration statements in 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 in 2005. Holders of registrable securities have agreed not to exercise their registration rights for a period of 90 days following the date of this prospectus. 51 Shareholder Rights Plan In May 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. In connection with the rights plan, the board of directors declared a dividend of one preferred share purchase right for each outstanding share of common stock outstanding on August 6, 2000 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 $85.00 per one one-hundredth of a preferred share, subject to adjustment. The description and terms of the share purchase rights are 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 this registration statement. 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; . 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. 52 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 $0.001 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 $0.01 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 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. 53 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. 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. 54 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 Wells Fargo Shareowner Services. 55 UNDERWRITING Under the underwriting agreement, which is filed as an exhibit to the registration statement relating to this prospectus, Lehman Brothers Inc., J.P. Morgan Securities Inc., Robertson Stephens, Inc. and CIBC World Markets Corp. are acting as representatives of each of the underwriters named below. Under the underwriting agreement, each of the underwriters will agree to purchase from us and the selling shareholders the respective number of shares of common stock shown opposite its name below:
Number of Underwriters Shares - ------------ --------- Lehman Brothers Inc................................................... J.P. Morgan Securities Inc............................................ Robertson Stephens, Inc............................................... CIBC World Markets Corp............................................... --------- 5,125,000 =========
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 and the selling shareholders 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 and the selling shareholders in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares described below. The underwriting fee is the difference between the public offering price and the amount the underwriters pay to us to purchase the shares from us. On a per share basis, the underwriting fee is % of the public offering price.
No Full Exercise Exercise -------- -------- Per share............................................... $ $ Total paid by Pemstar................................... $ $ Total paid by selling shareholders...................... $ $
The representatives have advised us that the underwriters propose to offer the shares of common stock directly to the public at the 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 $500,000. We have granted to the underwriters an option to purchase up to 768,750 additional shares of common stock, exercisable to cover over-allotments, if any, at the public offering price less the underwriting discounts shown on the cover page of this prospectus. The 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 56 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. The underwriters have informed us that they do not intend to confirm sales to discretionary accounts without the prior written approval of the customer. We have agreed that, without the consent of Lehman Brothers Inc., we will not, directly or indirectly, subject to certain limited exceptions, 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 90 days from the date of this prospectus. All of our directors, executive officers and our largest shareholder, who after this offering, will collectively own approximately 9,215,474 shares of our common stock and will hold options to purchase an aggregate of 1,782,200 shares of common stock have also agreed that they will not, directly or indirectly, offer, sell or otherwise dispose of any shares of common stock or any securities convertible into or exchangable or exercisable for any shares of common stock or enter into any derivative transactions with similar effect as a sale of common stock for a period ending 90 days after the date of this prospectus without the written consent of Lehman Brothers. 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. Our common stock is traded 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 underwriters' option to purchase additional shares from the issuer in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. "Naked" short sales are any sales in excess of 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. 57 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. These transactions may be effected on Nasdaq or otherwise. Neither we, nor the selling shareholders nor 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 nor 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 and an exemption from the dealer registration requirement (where such an exemption is not available, offers shall be made only by a registered dealer) 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. Affiliates of Lehman Brothers Inc., one of the representatives of the underwriters hold an aggregate of 4,959,903 shares of our common stock. Because of this ownership, the offering is being conducted in accordance with Rule 2720 of the National Association of Securities Dealers, or NASD. This rule requires that the public offering price for our shares cannot be higher than the price recommended by a "qualified independent underwriter," as defined by the NASD. J.P. Morgan Securities 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. From time to time, the representatives have provided, and may continue to provide, investment banking services to us. Each of the representatives of the underwriters served as a representative in our initial public offering in August 2000, for which they received customary compensation. 58 LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us and the selling shareholders 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 years ended March 31, 2000 and 2001, as set forth in their report. McGladrey & Pullen, LLP, independent auditors, have audited our consolidated financial statements for the year ended March 31, 1999, as set forth in their report. We have included our financial statements in this prospectus and registration statement in reliance on the reports of Ernst & Young LLP and 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 this prospectus and registration statement in reliance on the report of Ernst & Young LLP, given on 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 year March 31, 1999 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 of common stock offered by this prospectus. This prospectus, which is a part of the registration statement, does not contain all of the information set forth in the registration statement. For further information about us and our common stock, you should refer to the registration statement. This prospectus summarizes material provisions of contracts and other documents to which we refer you. Since this prospectus may not contain all of the information that you may find important, you should review the full text of these documents. We have included copies of these documents as exhibits in our registration statement. We are subject to the informational requirements of the Securities Exchange Act of 1934, and file reports and other information with the Securities and Exchange Commission. These reports and other information can be inspected and copied at the Public Reference Section of the SEC located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 and at regional public reference facilities maintained by the SEC located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York 10048. 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). 59 PEMSTAR INC. INDEX TO FINANCIAL STATEMENTS
Pemstar Inc.: 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, 2000 and 2001................ F-4 Consolidated Statements of Income for the Years Ended March 31, 1999, 2000 and 2001........................................................... F-5 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 1999, 2000 and 2001................................................. F-6 Consolidated Statements of Cash Flows for the Years Ended March 31, 1999, 2000 and 2001........................................................... F-7 Notes to Consolidated Financial Statements............................... F-8 Turtle Mountain Corporation: Report of Independent Auditors--Ernst & Young LLP........................ F-21 Balance Sheets as of October 31, 1998 and October 30, 1999 and April 1, 2000 (unaudited)........................................................ F-22 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-23 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-24 Notes to Financial Statements............................................ F-27
F-1 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Directors of Pemstar Inc. We have audited the accompanying consolidated balance sheets of Pemstar Inc. as of March 31, 2000 and 2001 and the related consolidated statements of income, shareholders' 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 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 consolidated financial position of Pemstar Inc. at March 31, 2000 and 2001 and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota April 30, 2001 F-2 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Directors of Pemstar Inc. We have audited the consolidated statements of income, shareholders' equity, and cash flows for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the Company's consolidated results of operations, changes in shareholders' equity and cash flows for the year ended March 31, 1999, in conformity with generally accepted accounting principles. /s/ McGLADREY & PULLEN, LLP Rochester, Minnesota May 10, 1999 F-3 PEMSTAR INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)
March 31, ------------------ 2000 2001 -------- -------- Assets Current assets: Cash and cash equivalents................................. $ 2,727 $ 5,882 Restricted cash........................................... 528 459 Accounts receivable, net.................................. 60,061 106,510 Inventories, net.......................................... 64,437 113,421 Deferred income taxes..................................... 2,232 1,322 Prepaid expenses and other................................ 3,458 15,572 -------- -------- Total current assets.................................... 133,443 243,166 Property and equipment, net............................... 34,933 73,806 Goodwill, net............................................. 20,691 29,164 Other assets.............................................. 1,384 2,048 Deferred income taxes..................................... -- 893 -------- -------- Total Assets............................................ $190,451 $349,077 ======== ======== March 31, ------------------ 2000 2001 -------- -------- Liabilities and Shareholders' Equity Current liabilities: Bank overdrafts........................................... $ 10,213 $ 13,443 Accounts payable.......................................... 47,138 70,791 Accrued expenses and other................................ 9,740 12,762 Income taxes payable...................................... 1,474 1,197 Current maturities of long-term debt...................... 12,930 9,041 Current maturities of capital lease obligations........... 2,299 4,081 -------- -------- Total current liabilities............................... 83,794 111,315 Long-term debt, less current maturities.................... 51,114 75,136 Capital lease obligations, less current maturities......... 4,067 9,737 Other deferred credits..................................... 2,237 2,177 Deferred income taxes...................................... 17 -- Redeemable stock: Series A preferred stock, $0.01 par value; 570 shares issued and outstanding in 2000........................... 8,549 -- Series B preferred stock, $0.01 per share; 1,000 shares issued and outstanding in 2000........................... 18,000 -- Shareholders' equity: Common stock, $0.01 par value; 150,000 shares authorized; shares issued and outstanding; 2000--13,819 shares; 2001--28,294 shares...................................... 138 283 Additional paid-in capital................................ 15,395 137,139 Accumulated other comprehensive loss...................... (772) (2,299) Retained earnings......................................... 11,170 17,853 Loans to shareholders..................................... (3,258) (2,264) -------- -------- Total shareholders' equity.............................. 22,673 150,712 -------- -------- Total liabilities and shareholders' equity.............. $190,451 $349,077 ======== ========
See accompanying notes. F-4 PEMSTAR INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts)
Year Ended March 31, ---------------------------- 1999 2000 2001 -------- -------- -------- Net sales....................................... $187,381 $393,842 $635,307 Cost of goods sold.............................. 172,219 363,974 581,278 -------- -------- -------- Gross profit.................................... 15,162 29,868 54,029 Selling, general and administrative expenses.... 10,955 21,576 37,366 Amortization.................................... 190 1,281 1,961 -------- -------- -------- Operating income................................ 4,017 7,011 14,702 Other income (expense)--net..................... (438) (74) 967 Interest expense................................ (640) (3,588) (7,550) -------- -------- -------- Income before income taxes...................... 2,939 3,349 8,119 Income tax expense.............................. 1,273 698 1,436 -------- -------- -------- Net income...................................... $ 1,666 $ 2,651 $ 6,683 ======== ======== ======== Net income per common share: Basic......................................... $ 0.15 $ 0.23 $ 0.29 Diluted....................................... 0.12 0.15 0.25 Shares used in computing net income per common share: Basic......................................... 10,897 11,503 23,013 Diluted....................................... 14,143 17,167 26,943
See accompanying notes. F-5 PEMSTAR INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (in thousands)
Accumulated Common Stock Additional Other -------------- Paid-In Comprehensive Retained Loans to Shares Amount Capital Loss Earnings Shareholders Total ------ ------ ---------- ------------- -------- ------------ -------- 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 Issuance of common stock upon exercise of stock options................ 449 4 1,437 -- -- (200) 1,241 Payments on loans to shareholders -- -- -- -- -- 1,194 1,194 Issuance of common stock.................. 9,316 94 93,805 -- -- -- 93,899 Conversion of redeemable stock.................. 4,710 47 26,502 -- -- -- 26,549 Comprehensive income: Net income............ -- -- -- -- 6,683 -- 6,683 Foreign currency translation adjustment........... -- -- -- (1,527) -- -- (1,527) -------- Comprehensive income.. -- -- -- -- -- -- 5,156 ------ ---- -------- ------- ------- ------- -------- Balance, March 31, 2001................... 28,294 $283 $137,139 $(2,299) $17,853 $(2,264) $150,712 ====== ==== ======== ======= ======= ======= ========
See accompanying notes. F-6 PEMSTAR INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended March 31, --------------------------- 1999 2000 2001 ------- -------- -------- Cash flows from operating activities: Net income....................................... $ 1,666 $ 2,651 $ 6,683 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation..................................... 3,331 7,455 12,097 Amortization..................................... 190 1,281 1,961 Deferred income taxes............................ 151 (2,179) (146) (Gain) loss on sale of property and equipment.... 377 (42) (417) Issuance of stock options for services........... -- 150 -- Other deferred credits........................... (670) (571) (292) Changes in operating assets and liabilities: Accounts receivable............................. 439 (23,828) (41,563) Inventories..................................... 2,418 (22,962) (43,222) Recoverable income taxes........................ (1,214) 1,889 -- Prepaid expenses and other...................... (1,127) (343) (12,620) Accounts payable................................ (5,733) 15,404 21,149 Accrued expenses and other...................... 237 870 2,151 ------- -------- -------- Net cash (used in) provided by operating activities.................................... 65 (20,225) (54,219) Cash flows from investing activities: Decrease in restricted cash...................... 583 155 10 Business acquisitions, net of cash acquired...... -- (39,473) (21,225) Proceeds from sale of property and equipment..... 3,085 122 1,073 Purchases of property and equipment.............. (8,657) (13,415) (42,542) ------- -------- -------- Net cash used in investing activities.......... (4,989) (52,611) (62,684) Cash flows from financing activities: Bank overdrafts.................................. (1,273) 8,569 3,242 Proceeds from common stock sales................. -- -- 93,899 Proceeds from exercise of stock options.......... 46 802 1,241 Payments on loans to shareholders ............... -- -- 1.194 Repurchase of common stock....................... (34) (6) -- Proceeds from private placement offering......... -- 18,000 -- Proceeds from minority interest shareholder...... 296 -- -- Proceeds from sale and leaseback................. -- -- 4,060 Principal payments on long-term borrowings....... (1,879) (4,645) (94,457) Proceeds from long-term borrowings............... 5,956 52,892 110,968 Debt placement costs............................. (556) (878) (635) ------- -------- -------- Net cash provided by financing activities...... 2,556 74,734 119,512 Effect of exchange rate changes on cash........... -- 2 546 ------- -------- -------- Net increase (decrease) in cash and cash equivalents...................................... (2,368) 1,900 3,155 Cash and cash equivalents: Beginning of year................................ 3,195 827 2,727 ------- -------- -------- End of year...................................... $ 827 $ 2,727 $ 5,882 ======= ======== ========
See accompanying notes. F-7 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 North America, Asia, Europe and South America. Principles of consolidation--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. In limited circumstances, although the physical product remains on the Company's premises at the request of the customer, when title to and risks and rewards of ownership have contractually passed to the customer revenue is recognized in accordance with the guidance of Staff Accounting Bulletin No. 101. 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. 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:
Number of Years --------- Buildings and improvements......................................... 4 to 40 Machinery and equipment............................................ 4 to 5 Furniture and fixtures............................................. 2 to 10 Computer hardware and software..................................... 4
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 cash flows associated with them. If an impairment exists, the Company measures the impairment utilizing discounted cash flows. F-8 PEMSTAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) 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, 2000 and 2001. 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. Shipping and handling fees--The Company classifies costs associated with shipping and handling fees as a component of cost of goods sold. Customer billings related to shipping and handling fees are reported as net sales. 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. Research and development--Research and development costs are expensed when incurred and totaled $387, $410 and $489 for the years ended March 31, 1999, 2000 and 2001, 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. Comprehensive income--Comprehensive income reflects the change in equity of a business 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. 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 current fair value of the underlying stock exceeds the exercise price of the option. F-9 PEMSTAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) 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 15 and convertible preferred stock as discussed in Note 13). The following table reflects the components of common shares outstanding in accordance with SFAS No. 128:
Year Ended March 31, -------------------- 1999 2000 2001 ------ ------ ------ Weighted average common shares outstanding--basic........ 10,897 11,503 23,013 Effect of dilutive securities: Preferred stock conversion............................. 1,710 4,144 1,677 Stock options.......................................... 1,536 1,520 2,253 ------ ------ ------ Shares used in computing net income per common share-- diluted................................................. 14,143 17,167 26,943 ====== ====== ======
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. The Company adopted SFAS No. 133 effective April 1, 2001. The adoption of SFAS No. 133 did not have a material impact on the Company's financial position or its results of operations. 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. In August 2000, the Company acquired Turtle Mountain Corporation. Turtle Mountain is an electronics manufacturing services provider for commercial and military customers. The purchase price of $20,638, including liabilities assumed was funded with proceeds of a term loan of $9,500 with the remainder borrowed 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 $9,680 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, 2000 and 2001 was prepared in accordance with Accounting Principles Board Opinion No. 16 and assumes the acquisitions had occurred at the beginning of the periods presented. The following pro forma F-10 PEMSTAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) 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
Year Ended March 31, --------------------------- 1999 2000 2001 -------- -------- -------- Net sales....................................... $273,480 $436,891 $650,904 Net income (loss)............................... (2,591) 218 6,944 Net income (loss) per share--basic.............. $ (0.24) $ 0.02 $ 0.30 Net income (loss) per share--diluted............ (0.24) 0.01 0.26
Note 3. Accounts Receivable Accounts receivable consists of the following:
March 31, ----------------- 2000 2001 ------- -------- Accounts receivable....................................... $60,614 $107,744 Less allowance for doubtful accounts...................... (553) (1,234) ------- -------- $60,061 $106,510 ======= ========
Note 4. Inventories Inventories consist of the following:
March 31, ----------------- 2000 2001 ------- -------- Raw materials............................................. $49,948 $ 94,971 Work in process........................................... 8,675 11,042 Finished goods............................................ 6,387 9,562 Less allowance for inventory obsolescence................. (573) (2,154) ------- -------- $64,437 $113,421 ======= ========
F-11 PEMSTAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) Note 5. Property and Equipment Property and equipment consists of the following:
March 31, ------------------ 2000 2001 -------- -------- Land..................................................... $ 1,022 $ 1,812 Buildings and improvements............................... 11,818 15,860 Machinery and equipment.................................. 27,388 54,150 Computer hardware and software........................... 7,595 12,360 Construction in progress................................. 1,131 11,538 -------- -------- 48,954 95,720 Less accumulated depreciation............................ (14,021) (21,914) -------- -------- $ 34,933 $ 73,806 ======== ========
Note 6. Goodwill Goodwill consists of the following:
March 31, ---------------- 2000 2001 ------- ------- Goodwill................................................... $21,717 $31,570 Less accumulated amortization.............................. (1,026) (2,406) ------- ------- $20,691 $29,164 ======= =======
Note 7. Other Assets Other assets consist of the following:
March 31, ------------- 2000 2001 ------ ------ Restricted cash................................................ $ 182 $ 240 Other intangible assets, net of accumulated amortization - 2000--$299; 2001--$865........................................ 1,055 1,093 Other.......................................................... 147 715 ------ ------ $1,384 $2,048 ====== ======
F-12 PEMSTAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) Note 8. Financing Arrangements Long-term debt consists of the following:
March 31, ----------------- 2000 2001 -------- ------- Revolving credit facilities, interest at prime plus a margin ranging from 50 to 200 basis points or LIBOR plus a margin ranging from 225 to 375 basis points (10.21% at March 31, 2000 and 8.91% at March 31, 2001).................................................. $56,557 $62,866 Note payable bearing interest at prime plus 2.00% (10.00% at March 31, 2001), interest due monthly. Quarterly payments of principal ranging from $400 to $1,450 are due through June 2004. The note is unsecured.............................................. -- 8,500 Note payable bearing interest at 10.8%, due in monthly payments of principal and interest of $55 through September 2003, with a final balloon payment of $790 due October 2003. The Company has an option to extend the final balloon payment for 24 months. The note is secured by equipment................................... -- 2,043 Bonds payable to the City of Rochester with variable interest rates ranging from 4.20% to 6.25%, interest due monthly. Annual principal payments ranging from $75 to $285 are due through June 2018...................... 5,510 4,990 Other................................................... 1,977 5,778 -------- ------- 64,044 84,177 Less current maturities................................. (12,930) (9,041) -------- ------- $ 51,114 $75,136 ======== =======
Payment of the bonds is secured by irrevocable letters of credit in favor of the trustee in the amount of $5,081 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 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. Bond sinking funds and proceeds from the bonds, to the extent unused, are reported as restricted cash. Aggregate maturities of long-term debt are as follows:
Year Ending March 31: 2002............................................................... $ 9,041 2003............................................................... 64,503 2004............................................................... 4,580 2005............................................................... 1,730 2006............................................................... 291 Thereafter......................................................... 4,032 ------- $84,177 =======
F-13 PEMSTAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) The Company has Revolving Credit Facilities with US Bank and IBM Credit Corporation totaling $80,000 ($40,000-- "Revolver A" and $40,000--"Revolver B", respectively) for revolving credit loans and letter of credit which expire on Revolver A--August 2002 and Revolver B--May 2002. 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 prime or LIBOR plus a margin depending on the ratio of consolidated senior debt to EBITDA. The Company is obligated to pay a monthly fee of 0.25% to 0.375% on the unused portion of the facilities. The Revolving Credit Facilities are collateralized by substantially all domestic non-real estate assets of the Company. The lender for Revolver B is also a major customer of the Company. In addition, the Company has letters of credit totaling $5,695 outstanding as of March 31, 2001. 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 plus 1.5% (7.0% at March 31, 2001). The line of credit is secured by the inventory and receivables of the subsidiary and the corporate guarantee of the Company. Notes payable totaling $972 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. Note 9. Other Income (Expense)--Net The other income and expense consists of the following:
March 31, ------------------ 1999 2000 2001 ----- ----- ---- Foreign currency gains.................................. $ -- $ 243 $507 Minority interest in net (income)/loss of consolidated subsidiaries........................................... (277) (191) 84 Net other income (expense).............................. (161) (126) 376 ----- ----- ---- $(438) $ (74) $967 ===== ===== ====
Note 10. Fair Value of Financial Instruments The carrying values of cash and cash equivalents, and accounts receivable and payable approximate fair value due to the short-term maturity of these instruments. The carrying amount of the Company's revolving line of credit and long-term notes approximate fair value because the majority of the amounts outstanding accrue interest at variable rates. F-14 PEMSTAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) Note 11. Commitments and Contingencies The Company has various capital and operating leases which expire on various dates through 2013. Future minimum payments under both capital leases and operating leases are as follows:
Capital Operating Leases Leases ------- --------- Fiscal Year Ending March 31: 2002.................................................... $ 4,454 $ 7,723 2003.................................................... 4,252 6,882 2004.................................................... 4,035 5,872 2005.................................................... 2,188 3,846 2006.................................................... 150 3,896 Thereafter.............................................. -- 6,908 ------- ------- Total minimum lease payments.............................. 15,079 $35,127 ======= Less amount representing interest......................... (1,261) ------- Present value of minimum lease payment.................... 13,818 Less current portion...................................... (4,081) ------- $ 9,737 =======
Property and equipment includes the following amounts for capitalized leases:
March 31, --------------- 2000 2001 ------ ------- Machinery and equipment...................................... $5,189 $12,294 Furniture and fixtures....................................... 84 645 Computer hardware and software............................... 2,019 5,049 ------ ------- 7,292 17,988 Less accumulated depreciation................................ (719) (3,479) ------ ------- $6,573 $14,509 ====== =======
Total rent expense recognized under operating leases for the years ended March 31, 1999, 2000 and 2001 totaled $1,567, $3,027 and $5,175, respectively. Note 12. Income Taxes Income before income taxes consisted of the following:
Year Ended March 31, -------------------- 1999 2000 2001 ------ ------ ------ Domestic................................................ $1,837 $2,485 $3,403 Foreign................................................. 1,102 864 4,716 ------ ------ ------ $2,939 $3,349 $8,119 ====== ====== ======
F-15 PEMSTAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) The provision for income taxes consisted of the following:
Year Ended March 31, ----------------------- 1999 2000 2001 ------ ------- ------- Current: Domestic.......................................... $ 624 $ 2,378 $ 2,500 Foreign........................................... 498 499 (918) ------ ------- ------- 1,122 2,877 1,582 Deferred: Domestic.......................................... 151 (1,678) (1,247) Foreign........................................... -- (501) 1,101 ------ ------- ------- 151 (2,179) (146) ------ ------- ------- $1,273 $ 698 $ 1,436 ====== ======= =======
A reconciliation of the provision for income taxes at the statutory rates to the reported income tax provision is as follows:
Year Ended March 31, ---------------------- 1999 2000 2001 ------ ------ ------- Computed "expected" tax rate....................... $ 999 $1,139 $ 2,761 Increase (decrease) in income taxes resulting from: State taxes, net of credits and federal income tax benefit..................................... 80 (289) 105 Benefit of foreign sales corporation............. -- -- (244) Foreign taxes.................................... 108 (296) (1,284) Other............................................ 86 144 98 ------ ------ ------- $1,273 $ 698 $ 1,436 ====== ====== =======
A summary of deferred tax assets (liabilities) is as follows:
March 31, --------------- 2000 2001 ------ ------- Deferred tax assets: Deferred revenue......................................... $ 794 $ 730 Expenses accelerated for financial reporting purposes.... 1,135 1,665 Foreign net operating losses............................. 492 1,002 State tax credits........................................ 523 866 Other.................................................... 139 48 ------ ------- Total deferred tax assets.................................. 3,083 4,311 Deferred tax liabilities: Unbilled services........................................ (495) -- Foreign expenses accelerated for tax purposes............ -- (1,611) Accounting basis of assets in excess of tax basis........ (373) (485) ------ ------- Total deferred tax liabilities............................. (868) (2,096) ------ ------- Net deferred tax asset..................................... $2,215 $ 2,215 ====== =======
F-16 PEMSTAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) 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 $2,623 of foreign net operating loss carryforwards, which have an unlimited carryforward period. The state tax credit carryforwards of $1,311 expire at varying dates through 2016. The foreign tax expense was decreased by $231 ($0.02 and $0.01 per share on a basic and diluted basis, respectively) in fiscal 2000 and by $480 ($0.02 and $0.02 per share on a basic and diluted basis, respectively) in fiscal 2001 as a result of the benefit of a tax holiday. This holiday ran at full relief of the normal income tax rate of 15% through December 31, 2000, and will continue at half rate thereafter through December 31, 2002. Note 13. Mandatory Redeemable and Convertible Preferred Stock The Company has authorized 5,000 shares of $0.01 par value preferred stock. As of March 31, 2000, 667 shares, of which 570 were outstanding, were designated as Series A, and 1,000 shares were designated and outstanding as Series B. The preferred stock was automatically converted into 4,710 shares of common stock at conversion prices of $5.00 per share for Series A and $6.00 per share for Series B for upon the completion of the Company's initial public offering in August 2000. Note 14. Geographic and Concentration of Credit Risk Information The Company derives its revenue from one reportable segment, electronic manufacturing services. The following is a summary of net sales and long-lived assets by geographic location:
March 31, -------------------------- 1999 2000 2001 -------- -------- -------- Net sales: United States................................... $176,373 $318,616 $529,907 Asia............................................ 11,008 44,314 72,982 Europe.......................................... -- 30,912 32,418 -------- -------- -------- $187,381 $393,842 $635,307 ======== ======== ======== Long-lived assets: United States................................... $ 19,546 $ 42,463 $ 67,018 Asia............................................ 3,538 10,421 33,860 Europe.......................................... -- 4,124 5,033 -------- -------- -------- $ 23,084 $ 57,008 $105,911 ======== ======== ========
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:
March 31, ---------------- 1999 2000 2001 ---- ---- ---- Customer A.................................................... 64% 37% 23% Customer B.................................................... 11 15 16 Customer C.................................................... -- -- 11
F-17 PEMSTAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) As of March 31, 2000 and 2001, receivables from these customers represented 33% and 29% of total accounts receivable, respectively. Note 15. Shareholders' Equity In August and September of 2000, the Company sold 9,280 shares in an initial public offering from which the Company received net proceeds of $93,617. The Company has reserved 302 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.
March 31, --------------------- 1999 2000 2001 ------ ------ ------ Net income (loss): As reported............................................ $1,666 $2,651 $6,683 Pro forma.............................................. 1,451 (4,499) 4,207 Basic earnings (loss) per share: As reported............................................ $ 0.15 $ 0.23 $ 0.29 Pro forma.............................................. 0.13 (0.39) 0.18 Diluted earnings (loss) per share: As reported............................................ $ 0.12 $ 0.15 $ 0.25 Pro forma.............................................. 0.10 (0.39) 0.16
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 5.53%, 6.13% and 5.70% for 1999, 2000 and 2001, respectively, volatility factor of expected market price of our common stock of .3, .5 and 1.4 for 1999, 2000 and 2001, respectively, and expected lives of ten years. F-18 PEMSTAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) Following is a summary of stock option activity for the fiscal years ended March 31:
1999 2000 2001 ---------------- ----------------- ---------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ -------- ------- -------- ------ -------- Outstanding, beginning of year...................... 1,866 $0.65 2,173 $1.40 3,845 $ 3.91 Granted.................... 418 4.52 3,269 4.39 1,189 11.44 Exercised/forfeited........ (111) 0.39 (1,597) 1.47 (615) 3.96 ------ ------- ------ Outstanding, end of year... 2,173 1.40 3,845 3.91 4,419 5.93 ====== ======= ====== Exercisable, end of year... 937 0.57 3,029 4.18 3,081 5.08 Weighted average fair value per share of options granted during the year... $ 2.85 $ 2.35 $10.92
At March 31, 2001, the options outstanding have average remaining contractual lives and exercise prices as follows:
Average Shares Contractual Life Exercise Price ------ ---------------- -------------- 3,305 8.1 years $0.33 - $ 5.00 1,114 9.3 years 6.06 - 23.31
As of March 31, 2000 and 2001, the Company had loans outstanding to shareholders in connection with the exercise of stock options for the purchase of 1,008 and 624 shares, respectively. Loans totaling $2,064 and $200 are due in March, 2002, and December, 2002, respectively, and bear interest at 6.0% to 6.5%. The loans are secured by the shares of common stock purchased and provide for full recourse against the respective shareholder's personal assets. Note 16. Employee Benefit Plans Retirement 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, 1999, 2000 and 2001 totaled $295, $413 and $1,063, respectively. The Company sponsors a defined benefit retirement plan program at its Netherlands facility. As of March 31, 2001, the fair value of the plan assets and projected benefit obligations were $3,895 and $3,615, respectively. Expenses associated with this plan totalled $62 and $295 for the years ended March 21, 2000 and 2001, respectively. Employee Stock Purchase Plan During 2001, the Company established an employee stock discount purchase plan which provides for the sale of up to 500 shares of the Company's common stock at discounted purchase prices, subject to certain limitations. The cost per share under this plan is 85 percent of the market value of the Company's common stock at the date of purchase, as defined. During the year ended March 31, 2001, 36 shares of common stock were issued to employees pursuant to this plan. The weighted average fair value of shares sold in 2001 was $7.85. F-19 PEMSTAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) Note 17. Supplemental Cash Flow Information
Year Ended March 31, --------------------- 1999 2000 2001 ------ ------ ------- Supplemental disclosures for cash flow information: Cash payments for: Interest.......................................... $ 643 $3,555 $ 7,344 Income taxes...................................... 2,332 1,197 1,797 Supplemental schedule of non-cash investing and financing activities: Property and equipment acquired through capital lease agreements................................... $ 71 $2,514 $11,166 Purchase of minority interest in consolidated subsidiary through issuance of common stock (acquired 30% and 25% interests by issuing 783 and 653 shares in August, 1998 and January, 2000, respectively)...................................... 3,915 3,263 --
F-20 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-21 TURTLE MOUNTAIN CORPORATION BALANCE SHEETS
October 31, October 30, April 1, 1998 1999 2000 ----------- ----------- ----------- (Unaudited) 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 ========== =========== ===========
See accompanying notes. F-22 TURTLE MOUNTAIN CORPORATION STATEMENTS OF INCOME AND RETAINED EARNINGS
Year ended Five Months ended ------------------------------------- ------------------------ November 1, October 31, October 30, March 27, April 1, 1997 1998 1999 1999 2000 ----------- ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) 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 =========== =========== =========== ========== ===========
See accompanying notes. F-23 TURTLE MOUNTAIN CORPORATION STATEMENTS OF CASH FLOWS
Year ended Five Months ended ------------------------------------ ------------------------ November 1, October 31, October March 27, April 1, 1997 1998 30, 1999 1999 2000 ----------- ----------- ---------- ----------- ----------- (Unaudited) (Unaudited) 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
See accompanying notes. F-24 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-25 TURTLE MOUNTAIN CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) 2. Property and Equipment Property and equipment consists of the following:
October October 31, 1998 30, 1999 ---------- ---------- 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 ========== ==========
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-26 TURTLE MOUNTAIN CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) 4. Long-Term Debt The long-term debt of the Company is as follows:
October 31, October 30, 1998 1999 ----------- ----------- 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 ========== ==========
F-27 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: 2000........................................................... $ 576,701 2001........................................................... 402,349 2002........................................................... 343,552 2003........................................................... 138,574 2004........................................................... 17,182 Thereafter..................................................... 264,711 ---------- $1,743,069 ==========
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:
Operating Leases --------- 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 ========
6. Income Taxes The provision for income taxes consists of the following for the fiscal period ended:
October 31, October 30, 1998 1999 ----------- ----------- 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 ======== ========
F-28 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:
October 31, October 31, 1998 1999 ----------- ----------- Customer A........................................ 41% 41% Customer B........................................ 14 14 Customer C........................................ 12 14
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:
Weighted Average Shares Exercise Price ------ ---------------- 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 =====
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. F-29 TURTLE MOUNTAIN CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) 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, "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-30 Map of the world, continents only with stars and text indicating 13 PEMSTAR locations with connecting "call outs" to location photographs 11 photographs of PEMSTAR buildings--all outside shots Rochester, MN--front view of building Dunseith, ND--front view of building San Jose, CA--front view of building Taunton, MA--front view of building Guadalajara, Mexico--front view of building Navan, Ireland--front view of building Almelo, The Netherlands--arial view Tianjin, China--front view of building Singapore--front view of building Bangkok, Thailand--front view of building Hortolandia, Brazil--front view of building [LOGO OF WATERMARK] 5,125,000 Shares Common Stock ----------- PROSPECTUS , 2001 ----------- Lehman Brothers JPMorgan Robertson Stephens CIBC World Markets 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. SEC registration fee............................................ $ 17,350 NASD filing fee................................................. $ 7,440 Nasdaq National Market listing fee.............................. $ 35,000 Legal fees and expenses......................................... $175,000 Accounting fees and expenses.................................... $100,000 Transfer Agent's and Registrar's fees........................... $ 10,000 Printing and engraving expenses................................. $100,000 Miscellaneous................................................... $ 55,210 -------- Total........................................................... $500,000 ========
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 (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 Item 16. Exhibits and Financial Statement Schedules (a) Exhibits
Number Description ------ ----------- 1.1* Form of Underwriting Agreement. 3.1 Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 4.1 Form of Certificate of Common Stock of the Company (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 4.2 Form of Rights Agreement, dated as of , 2000, between the Company and , as Rights Agent (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 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 (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 4.4 Amendment No. 8, dated December 2000, to the Credit Agreement, referenced at Exhibit 4.3 above. 4.5 Revolving Credit Agreement, dated as of May 5, 2000, between the Company and IBM Credit Corporation, as amended on August 1, 2000 (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 4.6 ING Bank District Oost Nederland Credit Facility, dated May 26, 1999 (incorporated by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 4.7 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 (incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 5.1* Opinion of Dorsey & Whitney LLP. 10.1 Asset Purchase Agreement dated as of April 30, 1999, by and between the Company and Bell Microproducts, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File No. 333-37162)) 10.2 Supply Agreement dated April 30, 1999, between the Company, Fluke Corporation and Fluke Industrial B.V. (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File No. 333-37162)) 10.3 Form of Change in Control Agreement (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.4 Form of Promissory Note (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (File No. 333- 37162)). 10.5 Form of Promissory Note (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 333- 37162)). 10.6 Series A Stock Purchase Agreement, dated as of February 12, 1998, between the Company and the parties names therein (amended), (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.7 First Amendment to Series A Stock Purchase Agreement, dated as of March 27, 1998, between the Company and the parties named therein (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (File No. 333-37162)).
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Number Description ------ ----------- 10.8 Series B Stock Purchase Agreement, dated as of June 7, 1999, between the Company and the parties named therein (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.9 First Amended and Restated Investor Rights Agreement, dated as of June 7, 1999 between the Company and certain shareholders (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.10 First Amended and Restated Shareholders' Agreement dated June 7, 1997, between the Company and certain shareholders (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.11 Pemstar Inc. 1994 Stock Option Plan (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.12 Pemstar Inc. 1995 Stock Option Plan (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.13 Pemstar Inc. 1997 Stock Option Plan (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.14 Pemstar Inc. Amended and Restated 1999 Stock Option Plan (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.15 Pemstar Inc. 2000 Stock Option Plan (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.16 Supplementary Contract, dated March 24, 2000, between Pemstar (Tianjin) Enterprise Co. Ltd. and Tianjin Yat-Sen Scientific- Industrial Park International, Inc. (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 (File No. 333-37162)) 10.17 Lease Agreement, dated June 4, 1997, between Italade Technology (Thailand) Limited and Italade-Pemstar Limited (incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.18 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 (incorporated by reference to Exhibit 10.19 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.19 Sub-Lease Agreement, dated February 3, 1999, between Hongguan Technologies (S) Pte. Ltd. and Pemstar-Hongguan Pte. Ltd. (incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1 (File No. 333-37162)) 10.20 Lease Agreement dated September 30, 1998, between Guadalajara Industrial Technologico, S.A. de C.V. and Pemstar de Mexico S.A. de C.V. (incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1 (File No. 333-37162)) 10.21 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. (incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.22 Sublease Assignment Agreement dated June 8, 1999 between the Company and Bell Microproducts, Inc. (incorporated by reference to Exhibit 10.23 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.23 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.24 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 (incorporated by reference to Exhibit 10.25 to the Company's Registration Statement on Form S-1 (File No. 333-37162)).
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Number Description ------ ----------- 10.25 Promissory Note dated October 4, 2000 between the Company and General Electric Capital Corporation (incorporated by reference to Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2000 (File No. 000-31223)). 10.26 Land and Factory Lease Agreement dated April 27, 2000 between the Company and Thai Factory Development Public Company Limited (incorporated by reference to Exhibit 10(ii) to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2000 (File No. 000-31223)). 10.27 Master Lease Agreement dated November 1, 2000 between the Company and GE Capital (Thailand) Ltd. (incorporated by reference to Exhibit 10(iii) to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2000 (File No. 000-31223)). 10.28 Lease Agreement dated August, 2000 between Pemstar De Mexico, S.A. de C.V. and Guadalajara Industrial Tecnologico, S.A. de C.V. (incorporated by reference to Exhibit 10(iv) to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2000 (File No. 000-31223)). 10.29 Rental Agreement dated September 28, 2000 between Pemstar B.V. and GE Capital B.V. (incorporated by reference to Exhibit 10(v) to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2000 (File No. 000-31223)). 10.30 Multi-Tenant Industrial Triple Net Lease dated March 12, 2000 between the Company and Senter Road, LLC (incorporated by reference to Exhibit 10(vi) to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2000 (File No. 000-31223)). 10.31 Stock Purchase Agreement between the Company and HongGuan Technologies PTE Ltd. dated November 15, 2000 (incorporated by reference to Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q for the period ending December 31, 2000 (File No. 000-31223)). 10.32 Banking Facility Agreement between Pemstar (Thailand) Ltd. and HSBC dated November 10, 2000 (incorporated by reference to Exhibit 10(ii) to the Company's Quarterly Report on Form 10-Q for the period ending December 31, 2000 (File No. 000-31223)). 10.33 Lease Agreement dated April 30, 2001, between the Company and James F. Matthews and Judith Matthews. 10.34 Asset Purchase Agreement dated as of May 7, 2001, between the Company, U.S. Assemblies New England, Inc., MATCO Electronics Group, Inc. and James F. Matthews. 10.35* Lease Agreement, dated September 15, 2000, between Pemstar (Tianjin) Enterprise Co. Ltd. and Tianjin Yat-Sen Scientific Industrial Park International, Inc. 10.36 Promissory Note date December 20, 2000 between the Company and Allen J. Benning (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 16.1 Statement Regarding Change in Certifying Accountant. 21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 1.1 to the Company's Registration Statement on Form S-1 (File No. 333- 37162)). 23.1 Consent of McGladrey & Pullen. 23.2 Consent of Ernst & Young. 23.3 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1). 24.1 Powers of Attorney.
- -------- * To be filed by amendment. II-5 (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. 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-6 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 registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Rochester, State of Minnesota, on May 14, 2001. 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 registration statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Allen J. Berning Chairman, Chief May 14, 2001 Executive Officer and Director (principal executive officer) ___________________________________________ Allen J. Berning /s/ William J. Kullback Chief Financial Officer May 14, 2001 (principal financial officer and principal accounting officer) ___________________________________________ William J. Kullback * Director ___________________________________________ William B. Leary * Director ___________________________________________ Robert R. Murphy Director ___________________________________________ Steve V. Petracca * Director ___________________________________________ Karl D. Shurson * Director ___________________________________________ Robert D. Ahmann Director ___________________________________________ Thomas A. Burton Director ___________________________________________ Hargopal (Paul) Singh
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Signature Title Date --------- ----- ---- * Director ___________________________________________ Gregory S. Lea Director ___________________________________________ Bruce M. Jaffe *By: /s/ William J. Kullback May 14, 2001 ___________________________________________ William J. Kullback Attorney-in-Fact
II-8 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, 2001 and 2000, and for the years then ended, and have issued our report thereon dated April 30, 2001 (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 April 30, 2001 S-1 SCHEDULE II REPORT OF INDEPENDENT AUDITORS To the Shareholders and Directors of Pemstar Inc. Our audit was made for the purpose of forming an opinion on the 1999 basic consolidated financial statements taken as a whole. The consolidated supplemental Schedule II 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 year ended 1999 in this schedule has been subjected to the auditing procedures applied in our audit 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 Schedule II--Valuation and Qualifying Accounts Pemstar Inc.
Col. A Col. B Col. C Col. D Col. E ------ ---------- ------------------- ----------- ------- Additions ------------------- Charged Charge to Balance Balance at to Costs Other at End Beginning and Accounts-- Deductions of Description of Period Expenses Described Described-- Period ----------- ---------- -------- ---------- ----------- ------- (Amounts in thousands) YEAR ENDED MARCH 31, 2001 Reserve and allowances deducted from accounts: Allowance for uncollectible accounts.. $553 $ 696 $ -- $ 15(1) $1,234 Allowance for inventory obsolescence............ 573 1,747 -- 166(2) 2,154 YEAR ENDED MARCH 31, 2000 Reserve and allowances deducted from accounts: Allowance for uncollectible accounts.. 53 545 -- 45(1) 553 Allowance for inventory obsolescence............ -- 573 -- -- 573 YEAR ENDED MARCH 31, 1999 Reserve and allowances deducted from accounts: Allowance for uncollectible accounts.. 6 74 -- 27(1) 53
- -------- (1) Write-off of accounts receivable determined to be uncollectable. (2) Disposal of obsolete inventories. S-3 EXHIBIT INDEX
Number Description ------ ----------- 1.1* Form of Underwriting Agreement. 3.1 Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 4.1 Form of Certificate of Common Stock of the Company (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 4.2 Form of Rights Agreement, dated as of , 2000, between the Company and , as Rights Agent (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1 (File No. 333- 37162)). 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 (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 4.4 Amendment No. 8, dated December 2000, to the Credit Agreement, referenced at Exhibit 4.3 above. 4.5 Revolving Credit Agreement, dated as of May 5, 2000, between the Company and IBM Credit Corporation, as amended on August 1, 2000 (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 4.6 ING Bank District Oost Nederland Credit Facility, dated May 26, 1999 (incorporated by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 4.7 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 (incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 5.1* Opinion of Dorsey & Whitney LLP. 10.1 Asset Purchase Agreement dated as of April 30, 1999, by and between the Company and Bell Microproducts, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File No. 333-37162)) 10.2 Supply Agreement dated April 30, 1999, between the Company, Fluke Corporation and Fluke Industrial B.V. (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File No. 333-37162)) 10.3 Form of Change in Control Agreement (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.4 Form of Promissory Note (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.5 Form of Promissory Note (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.7 First Amendment to Series A Stock Purchase Agreement, dated as of March 27, 1998, between the Company and the parties named therein (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.8 Series B Stock Purchase Agreement, dated as of June 7, 1999, between the Company and the parties named therein (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.9 First Amended and Restated Investor Rights Agreement, dated as of June 7, 1999 between the Company and certain shareholders (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (File No. 333-37162)).
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Number Description ------ ----------- 10.10 First Amended and Restated Shareholders' Agreement dated June 7, 1997, between the Company and certain shareholders (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.11 Pemstar Inc. 1994 Stock Option Plan (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.12 Pemstar Inc. 1995 Stock Option Plan (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.13 Pemstar Inc. 1997 Stock Option Plan (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.14 Pemstar Inc. Amended and Restated 1999 Stock Option Plan (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.15 Pemstar Inc. 2000 Stock Option Plan (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.16 Supplementary Contract, dated March 24, 2000, between Pemstar (Tianjin) Enterprise Co. Ltd. and Tianjin Yat-Sen Scientific-Industrial Park International, Inc. (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 (File No. 333-37162)) 10.17 Lease Agreement, dated June 4, 1997, between Italade Technology (Thailand) Limited and Italade-Pemstar Limited (incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.18 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 (incorporated by reference to Exhibit 10.19 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.19 Sub-Lease Agreement, dated February 3, 1999, between Hongguan Technologies (S) Pte. Ltd. and Pemstar-Hongguan Pte. Ltd. (incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1 (File No. 333-37162)) 10.20 Lease Agreement dated September 30, 1998, between Guadalajara Industrial Technologico, S.A. de C.V. and Pemstar de Mexico S.A. de C.V. (incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1 (File No. 333-37162)) 10.21 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. (incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-1 (File No. 333- 37162)). 10.22 Sublease Assignment Agreement dated June 8, 1999 between the Company and Bell Microproducts, Inc. (incorporated by reference to Exhibit 10.23 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.23 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.24 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 (incorporated by reference to Exhibit 10.25 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 10.25 Promissory Note dated October 4, 2000 between the Company and General Electric Capital Corporation (incorporated by reference to Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2000 (File No. 000-31223)). 10.26 Land and Factory Lease Agreement dated April 27, 2000 between the Company and Thai Factory Development Public Company Limited (incorporated by reference to Exhibit 10(ii) to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2000 (File No. 000-31223)).
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Number Description ------ ----------- 10.27 Master Lease Agreement dated November 1, 2000 between the Company and GE Capital (Thailand) Ltd. (incorporated by reference to Exhibit 10(iii) to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2000 (File No. 000-31223)). 10.28 Lease Agreement dated August, 2000 between Pemstar De Mexico, S.A. de C.V. and Guadalajara Industrial Tecnologico, S.A. de C.V. (incorporated by reference to Exhibit 10(iv) to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2000 (File No. 000- 31223)). 10.29 Rental Agreement dated September 28, 2000 between Pemstar B.V. and GE Capital B.V. (incorporated by reference to Exhibit 10(v) to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2000 (File No. 000-31223)). 10.30 Multi-Tenant Industrial Triple Net Lease dated March 12, 2000 between the Company and Senter Road, LLC (incorporated by reference to Exhibit 10(vi) to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2000 (File No. 000-31223)). 10.31 Stock Purchase Agreement between the Company and HongGuan Technologies PTE Ltd. dated November 15, 2000 (incorporated by reference to Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q for the period ending December 31, 2000 (File No. 000-31223)). 10.32 Banking Facility Agreement between Pemstar (Thailand) Ltd. and HSBC dated November 10, 2000 (incorporated by reference to Exhibit 10(ii) to the Company's Quarterly Report on Form 10-Q for the period ending December 31, 2000 (File No. 000-31223)). 10.33 Lease Agreement dated April 30, 2001, between the Company and James F. Matthews and Judith Matthews. 10.34 Asset Purchase Agreement dated as of May 7, 2001, between the Company, U.S. Assemblies New England, Inc., MATCO Electronics Group, Inc. and James F. Matthews. 10.35* Lease Agreement, dated September 15, 2000, between Pemstar (Tianjin) Enterprise Co. Ltd. and Tianjin Yat-Sen Scientific Industrial Park International, Inc. 10.36 Promissory Note date December 20, 2000 between the Company and Allen J. Benning (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 333-37162)). 16.1 Statement Regarding Change in Certifying Accountant. 21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 1.1 to the Company's Registration Statement on Form S-1 (File No. 333- 37162)). 23.1 Consent of McGladrey & Pullen. 23.2 Consent of Ernst & Young. 23.3 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1). 24.1 Powers of Attorney.
- -------- * To be filed by amendment. 3 EX-4.4 2 dex44.txt AMEND. NO. 8 TO CREDIT AGREEMENT EXHIBIT 4.4 AMENDMENT NO. 8 TO CREDIT AGREEMENT AND WAIVER This Amendment No. 8 to Credit Agreement and Waiver, dated as of December , 2000 (the "Amendment"), among PEMSTAR INC. (the "Borrower"), U.S. Bank National Association, as administrative bank (in such capacity, the "Administrative Bank"), and U.S. Bank National Association as the sole "Bank" party to that certain Credit Agreement dated as of June 4, 1999, among the Borrower, the Administrative Bank and the Banks, as amended by an Amendment No. 1 dated as of August 31, 1999, an Amendment No. 2 dated as of October 14, 1999, an Amendment No. 3 dated as of November 23 , 1999, an Amendment No. 4 dated as of December 20, 1999, an Amendment No. 5 dated as of March 10, 2000, an Amendment No. 6 dated as of May 5, 2000 and an Amendment No. 7 dated as of August 1, 2000(as so amended, the "Original Agreement"). RECITALS: -------- A. The Borrower has requested that the Administrative Bank and the Bank further amend certain provisions of the Original Agreement and waive the Borrower's compliance with certain provisions of the Original Agreement. B. Subject to the terms and conditions of this Amendment, the Administrative Bank and the Bank will agree to the Borrower's foregoing request. NOW, THEREFORE, the parties agree as follows: 1. Defined Terms. All capitalized terms used in this Amendment shall, except where the context otherwise requires, have the meanings set forth in the Original Agreement as amended hereby. 2. Amendment. The Original Agreement is hereby amended as follows: a. The definition of "Letter of Credit Commitment" appearing in Section 1.1 is amended by increasing the amount "$2,000,000.0" appearing therein to the amount "$10,000,000.00." b. The definition of "Revolving Credit Commitment" appearing in Section 1.1 is amended by reducing the amount "$45,000,000.0" appearing therein to the amount "$40,000,000.00." c. Section 9.10(j) is amended by increasing the maximum amount of the Indebtedness permitted under the IBM Credit Loan Agreement from "$45,000,000.00" to "$50,000,000.00". d. Section 9.16 of the Original Agreement is amended in its entirety to read as follows: "Section 9.16 Cash Flow Leverage Ratio. Permit, as of any Monthly Measurement Date, the Cash Flow Leverage Ratio to be greater than 3.0 to 1.0 except that, on the Monthly Measurement Dates respectively occurring on October 31, 2000, November 30, 2000, December 31, 2000, January 31, 2001 and February 27, 2001, the maximum permitted Cash Flow Leverage Ratio is 4.00 to 1.00." 3. Conditions to Effectiveness. This Amendment shall become effective on the date (the "Effective Date") when, and only when, the Administrative Bank shall have received: a. Counterparts of this Amendment executed by the Borrower and U. S. Bank; b. A Replacement Revolving Note (the "Replacement Revolving Note") payable to the order of U.S. Bank in the form provided by the Administrative Bank appropriately completed and duly executed by the Borrower; c. A Certificate by the Borrower's Secretary or any Assistant Secretary in form and substance satisfactory to the Administrative Bank and the Banks; d. The payment, in immediately available funds, of an amendment fee of $25,000.00 to the Administrative Bank solely for the benefit of U. S. Bank; e. An Amendment to the IBM Credit Loan Agreement in form and substance satisfactory to the Administrative Bank and the Bank appropriately completed and duly executed by the Borrower and IBM Credit; and f. Such other documents, certificates or other items as the Administrative Bank or the Bank may reasonably request. 4. Representations and Warranties. To induce the Administrative Bank and the Banks to enter into this Amendment, the Borrower represents and warrants to the Administrative Bank and the Banks as follows: a. The execution, delivery and performance by the Borrower of this Amendment, the Replacement Revolving Note and any other document required to be executed and/or delivered by the Borrower by the terms of this Amendment have been duly authorized by all necessary corporate action, do not require any approval or consent of, or any registration, qualification or filing with, any government agency or authority or any approval or consent of any other person (including, without limitation, any stockholder), do not and will not conflict with, result in any violation of or constitute any default under, any provision of the Borrower's articles of incorporation or bylaws, any agreement binding on or applicable to the Borrower or any of its property, or any law or governmental regulation or court decree or order, binding upon or applicable to the Borrower or of any of its property and will not result in the creation or imposition of any security interest or other lien or encumbrance in or on any of its property pursuant to the provisions of any agreement applicable to the Borrower or any of its property except pursuant to the Loan Documents to which the Borrower is a party; b. The representations and warranties contained in the Original Agreement are true and correct as of the date hereof as though made on that date; c. (i) No events have taken place and no circumstances exist at the date hereof which would give the Borrower the right to assert a defense, offset or counterclaim to any claim by the Administrative Bank or any Bank for payment of the Obligations now existing or hereafter arising under the Original Agreement, as amended by this Amendment or any other Loan Document; and (ii) the Borrower hereby releases and forever discharges the Administrative Bank, each Bank and their respective successors, assigns, directors, officers, agents, employees and participants from any and all actions, causes of action, suits, proceedings, debts, sums of money, covenants, contracts, controversies, claims and demands, at law or in equity, which the Borrower ever had or now has against the Administrative Bank, any Bank or their respective successors, assigns, directors, officers, agents, employees or participants by virtue of their relationship to the Borrower in connection with the Original Agreement, as amended by this Amendment, the other Loan Documents and the transactions related thereto; d. The Original Agreement, as amended by this Amendment, the Replacement Revolving Note, and each other Loan Document to which the Borrower is a party remain in full force and effect and are the legal, valid and binding obligations of the Borrower and are enforceable in accordance with their respective terms, subject only to bankruptcy, insolvency, reorganization, moratorium or similar laws, rulings or decisions at the time in effect affecting the enforceability of rights of creditors generally and to general equitable principles which may limit the right to obtain equitable remedies; and e. After giving effect to this Amendment, there does not exist any Default, Event of Default or Adverse Event. 5. Reference to and Effect on the Loan Documents. a. From and after the date of this Amendment, each reference in: 2 (i) the Original Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Original Agreement, and each reference to the "Credit Agreement", "Loan Agreement," "thereunder", "thereof", "therein" or words of like import referring to the Original Agreement in any other Loan Document shall mean and be a reference to the Original Agreement as amended hereby; and (ii) any Loan Document to "the Revolving Note" payable to U.S. Bank, "thereunder", "thereof", "therein" or words of like import referring to such Revolving Note shall mean and be a reference to the Replacement Revolving Note executed and delivered to U.S. Bank pursuant to this Amendment. b. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Administrative Bank or any Bank under the Original Agreement or any other Loan Document, nor constitute a waiver of any provision of the Original Agreement or any such other Loan Document. 6. Costs, Expenses and Taxes. The Borrower agrees to pay on demand all costs and expenses of the Administrative Bank in connection with the preparation, reproduction, execution and delivery of this Amendment and the other documents to be delivered hereunder or thereunder, including the Administrative Bank's reasonable attorneys' fees and legal expenses. In addition, the Borrower shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Amendment and the other instruments and documents to be delivered hereunder, and agrees to hold the Administrative Bank and the Banks harmless from and against any and all liabilities with respect to, or resulting from, any delay in the Borrower's paying or omission to pay, such taxes or fees. 7. Governing Law. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AMENDMENT AND THE REPLACEMENT REVOLVING NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS. 8. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 9. Counterparts. This Amendment may be executed in separate counterparts and by separate parties in separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same Amendment. 10. Recitals. The Recitals hereto are incorporated herein by reference. 11. Waiver. On the Effective Date of this Amendment, the Administrative Bank and the Bank waive the Event of Default under Section 10.1(c) of the Loan Agreement because of the Borrower's failure to be in compliance with Section 9.16 of the Loan Agreement as of July 31, 2000. The Administrative and the Bank's waiver is limited to the specific Event of Default described above and is not intended, and shall not be construed, to be a general waiver of any term or provision of the Original Agreement or a waiver of any other existing or future Default or Event of Default. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first written above. PEMSTAR Inc. By: Title: By: Title: U.S. Bank National Association, as Administrative Bank and the sole Bank By: Title: 4 REPLACEMENT REVOLVING NOTE -------------------------- $40,000,000.00 Rochester, Minnesota December , 2000 FOR VALUE RECEIVED, the undersigned, PEMSTAR INC., a Minnesota corporation (the "Borrower"), promises to pay to the order of U.S. BANK NATIONAL ASSOCIATION (the "Bank"), on the "Revolving Credit Termination Date" (as defined in the Credit Agreement hereinafter described (the "Credit Agreement")), the principal sum of FORTY MILLION AND NO/100THS DOLLARS ($40,000,000.00) or if less, the then aggregate unpaid principal amount of the Revolving Loans (as such term is defined in the Credit Agreement) as may be borrowed by the Borrower from the Bank under the Credit Agreement. All Revolving Loans and all payments of principal shall be recorded by the holder in its records which records shall be conclusive evidence of the subject matter thereof, absent manifest error. The Borrower further promises to pay to the order of the Bank interest on each Revolving Loan from time to time outstanding from the date hereof until paid in full at the rates per annum which shall be determined in accordance with the provisions of the Credit Agreement. Accrued interest shall be payable on the dates specified in the Credit Agreement. All payments of principal and interest under this Note shall be made in lawful money of the United States of America in immediately available funds to U.S. Bank National Association, as the Administrative Bank (the "Administrative Bank"), at the Administrative Bank's office at 155 First Avenue Southwest, Rochester, Minnesota 55902, or at such other place as may be designated by the Administrative Bank to the Borrower in writing. This Note is one of the Revolving Notes referred to in, and evidences indebtedness incurred under, a Credit Agreement dated as of June 4, 1999 (herein, as it may be amended, modified or supplemented from time to time, called the "Credit Agreement;" capitalized terms not otherwise defined herein being used herein as therein defined) among the Borrower, the Administrative Bank, the Bank and the other bank parties thereto, to which Credit Agreement reference is made for a statement of the terms and provisions thereof, including those under which the Borrower is permitted and required to make prepayments and repayments of principal of such indebtedness and under which such indebtedness may be declared to be immediately due and payable. REPLACEMENT REVOLVING NOTE -------------------------- Page 2 $40,000,000.00 Rochester, Minnesota December , 2000 All parties hereto, whether as makers, endorsers or otherwise, severally waive presentment, demand, protest and notice of dishonor in connection with this Note. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS. This Note is being executed and delivered in replacement of, but not in payment of: (a) that certain Replacement Revolving Note dated August 1, 2000 made by the Borrower payable to the order of the Bank in the original principal amount of $45,000,000.00; provided, however, that interest accrued on such replaced note through the date hereof shall be due and payable on the next interest payment date under the Credit Agreement. PEMSTAR INC. By: ------------------------------------- Its: ------------------------------------ By: ------------------------------------- Its: ------------------------------------ CERTIFICATE ----------- I, Gary Lingbeck, do hereby certify that I am the duly appointed or elected and qualified Secretary and the keeper of the records of PEMSTAR INC., a corporation organized and existing under the laws of the State of Minnesota (the "Corporation") and that the following is a true and correct copy of resolutions duly adopted: - at a meeting of the Board of Directors thereof, convened and held in accordance with law and the by-laws of said corporation on the _____ day of ___________, 2000; - by unanimous written action on the ____________ day of ___________, 2000; and that such resolutions are now in full force and effect, unamended, unaltered, and unrepealed: WHEREAS, there has been presented to the board of directors a form of Amendment No. 8 to Credit Agreement and Waiver to be dated on or about December ____ , 2000 (the "Eighth Amendment") among this Corporation, U.S. Bank National Association, a national banking association, as administrative bank (in such capacity, the "Administrative Bank") and U.S. Bank National Association, a national banking association as the sole "Banks" party thereto (the "Banks") further amending that certain Credit Agreement, dated as of June 4, 1999 among this Corporation, the Administrative Bank and the Banks as amended by an Amendment No. 1 dated as of August 31, 1999, an Amendment No. 2 dated as of October 14, 1999, an Amendment No. 3 dated as of November 23 , 1999, an Amendment No. 4 dated as of December 20, 1999, an Amendment No. 5 dated as of March 10, 2000, an Amendment No. 6 dated as of May 5, 2000, and an Amendment No. 7 dated as of August 1, 2000 (as so amended, the "Credit Agreement"); NOW, THEREFORE, BE IT RESOLVED, that any two of the __________________________________ , the _______________________________, the _______________________________________ of this Corporation are authorized to execute, in the name and on behalf of this Corporation, and deliver the Eighth Amendment to the Administrative Bank and the Banks, and any promissory note or other instrument, document or agreement to required by the Administrative Bank or any Bank in connection with such Eighth Amendment, substantially in the form reviewed by the directors, except for such changes, additions or deletions as such authorized officer(s) shall deem proper; execution by such authorized officer(s) of the Eighth Amendment and related documents to be conclusive evidence that such authorized officer(s) deem(s) all of the terms and provisions thereof to be proper (the executed Eighth Amendment being the "Amendment"); FURTHER RESOLVED, that each such authorized officer of this Corporation be and hereby is authorized to take such action from time to time on behalf of this Corporation as he/she may deem necessary, advisable or proper in order to carry out and perform the obligations of this Corporation under the Credit Agreement as amended by the Amendment and all related instruments, documents and agreements; FURTHER RESOLVED, that all authority conferred by these resolutions shall be deemed retroactive and any and all acts authorized hereunder performed prior to the adoption of these resolutions are hereby ratified, affirmed, adopted and approved; FURTHER RESOLVED, that the ___________ Secretary or any other officer of this Corporation are authorized to certify to the Administrative Bank and the Banks a copy of these resolutions and the names and signatures of this Corporation's officers or employees hereby authorized to act, and the Administrative Bank and the Banks are hereby authorized to rely upon such certificate until formally advised by a like certificate of any change therein, and is hereby authorized to rely on any such additional certificates. I FURTHER CERTIFY THAT the Bylaws and Articles of Incorporation previously delivered by this Corporation to the Administrative Bank and the Banks have not been amended, modified or restated after the date of such delivery. 1 I FURTHER CERTIFY THAT the following persons have been appointed or elected and are now acting as officer or employees of said Corporation in the capacity set before their respective names: TITLE NAME SIGNATURE - ----------------------- ------------------------- ---------------------- - ----------------------- ------------------------- ---------------------- IN WITNESS WHEREOF, I have subscribed my name as _________________________________________________ Secretary as of the _______________ day of December, 2000. ------------------------- 2 EX-10.33 3 dex1033.txt LEASE AGREEMENT EXHIBIT 10.33 ================================================================================ LEASE (ENTIRE BUILDING) Between James F. Matthews and Judith Matthews Landlord And PEMSTAR INC. Tenant Address of Premises: Constitution Drive, The Miles Standish Industrial Park, Taunton, MA 02780 Dated as of April 30, 2001 ================================================================================ BASIC TERMS ----------- The information provided on this page is for convenience purposes only. In the event of any conflict or inconsistency between the terms set forth below and the terms of the attached Lease, the terms of the Lease shall be controlling. DATE: April 30, 2001 PROPERTY DESCRIPTION: All that certain parcel of land situated at Lot 58R, Constitution Drive, in the Miles Standish Industrial Park in Taunton, Bristol County, Massachusetts, all more particularly described as Lot 58R on a plan entitled "Plan of Land in Taunton, Mass owned by Taunton Development Corp.", dated March 27, 1997, by Tibbetts Engineering Corp., recorded with the Bristol North District Registry of Deeds in Plan Book 361, Page 55, together with the improvements thereon, including a building consisting of approximately 83,800 square feet of manufacturing, distribution, warehouse and office space. USE: Offices and manufacturing, assembly, storage and distribution of electronics products and any other lawful business purpose LANDLORD'S NAME AND ADDRESS: James F. Matthews and Judith Matthews c/o The Matco Electronics Group 320 N. Jensen Road Vestal, New York 13850 Telephone No.: (607) 729-6720 Telecopy No.: (607) 729-8981 TENANT'S NAME AND ADDRESS: PEMSTAR INC. 3535 Technology Drive NW Rochester, Minnesota 55901 Telephone No.: (507) 288-6720 Telecopy No.: (507) 280-0838 INITIAL TERM: Five years, April 30, 2001, through April 30, 2006 OPTIONS TO EXTEND: One five (5) year option. INITIAL TERM MONTHLY BASE RENT: $41,000.00 ii INDEX ----- Article Title of Article Page - ------- ---------------- ---- 1 Definitions................................................. 1 2 Premises, Condition......................................... 4 3 Lease Term.................................................. 5 4 Rent........................................................ 5 5 Impositions, Assessments.................................... 6 6 Use......................................................... 7 7 Surrender................................................... 8 8 Insurance................................................... 9 9 Indemnification............................................. 10 10 Operation, Repairs and Maintenance; Alterations............. 11 11 Discharge of Liens.......................................... 14 12 Compliance with Laws........................................ 15 13 Damage or Destruction....................................... 15 14 Condemnation................................................ 16 15 Assignment.................................................. 18 16 Default..................................................... 19 17 Tenant Equipage............................................. 21 18 Subordination............................................... 21 19 Entry by Landlord; Performance of Covenants................. 22 20 Certificates................................................ 22 21 Notices..................................................... 23 22 Miscellaneous............................................... 24 iii LEASE ----- (ENTIRE BUILDING) THIS LEASE ("Lease") is made as of April 30, 2001, by and between James F. Matthews and Judith Matthews having an address at 320 North Jensen Road, Vestal, NY 13850 ("Landlord"), and PEMSTAR INC., a Minnesota corporation having an office at 3535 Technology Drive NW, Rochester, Minnesota 55901 ("Tenant"). ARTICLE 1 Definitions 1.1 Certain Definitions. Landlord and Tenant agree that the following capitalized terms when used herein shall, unless the context otherwise requires, have the following meanings: "Accessibility Regulation" shall mean a Law relating to accessibility of facilities or properties for disabled, handicapped and/or physically challenged persons, including, without limitation, the Americans With Disabilities Act of 1991, as amended. "Additional Rent" shall mean all sums payable by Tenant pursuant to this Lease, except Base Rent. "Base Rent" shall mean the sums payable to Landlord pursuant to Section 4.1.1 hereof. "Building" shall mean the warehouse/manufacturing building located on the Land, together with all Building Elements thereof, but excluding any Tenant Equipage. "Building Elements" shall mean the structural elements of the Building, together with those portions of the building systems therein which provide electrical, gas, water and sewer services to the Building for general warehouse and office uses (as opposed to such systems which are specific to the particular uses of Tenant). Building Elements expressly exclude all Tenant Improvements and Tenant Equipage. In illustration of the foregoing, the general electrical and plumbing systems providing electrical service to a main breaker box and making water and sewer service available to common lavatories and washbasins are Building Elements, distribution wiring to work areas and plumbing and sewer work to operational areas of the Premises are Tenant Improvements and any specialized wiring and plumbing unique to a particular activity being conducted by Tenant in the Premises are Tenant Equipage. "Commencement Date" shall mean the day the Lease Term begins as identified in Section 3.1 hereof. "Consumer Price Index" means the All Items portion of the "Consumer Price Index for All Urban Consumers", U.S. City Average published by the Bureau of Labor Statistics of the United States Department of Labor. If the base year selected by the United States Department of Labor for calculation of such index shall be changed, then the resultant index derived from such change shall be readjusted to reflect the base initially established. In the event said index shall be discontinued, Landlord shall select another index published by a department or agency of the United States Government to be substituted for the prior index, with any appropriate adjustment required because of differences in the prior index and the substituted index. This procedure shall continue until such time as no such index is so published, at which time Landlord shall reasonably substitute an index prepared by an appropriate corporation or other entity. "Environmental Regulation" shall mean a Law relating to the environment and/or the impact thereof on human health or safety, or governing, regulating or pertaining to the generation, treatment, storage, handling, transportation, use or disposal of any Hazardous Substance, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. 9601, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. 1801, et seq., and the Resource Conservation and Recovery Act 42 U.S.C. 6901 et seq., and the regulations promulgated thereunder. "Event of Default" shall mean any of the events or circumstances described in Section 16.1 hereof. "Expiration Date" shall mean the day the initial Lease Term expires as identified in Section 3.1 hereof (or, if Tenant exercises its early termination option pursuant to Section 3.3 hereof, the Expiration Date set forth in the notice given pursuant to such Section). "Full Insurable Value" shall mean the replacement cost of the Building, without allowance for depreciation, but excluding footings, foundations and other portions of improvements which are not insurable. A determination of Full Insurable Value shall be made at least once every three (3) years at Tenant's expense by a firm of qualified property insurance appraisers satisfactory to Landlord and to property insurance companies generally. "Hazardous Substance" means any substance or material defined in or governed by any Environmental Regulation as a dangerous, toxic or hazardous pollutant, contaminant, chemical, waste, material or substance, and also expressly including urea-formaldehyde, polychlorinated biphenyls, dioxin, asbestos, asbestos containing materials, nuclear fuel or waste, radioactive materials, explosives, carcinogens and petroleum products, including but not limited to crude oil or any fraction thereof, natural gas, natural gas liquids, gasoline and synthetic gas, or any other waste, material, substance, pollutant or contaminant which would subject the owner or operator of the Premises to any damages, penalties or liabilities under any applicable Environmental Regulation. 2 "Impositions" shall mean all real estate taxes, water, sewer, heat, electricity, gas and all other utility rates and other similar governmental charges, which are assessed, levied, confirmed, imposed or shall become payable upon or with respect to the Premises during the term hereof. There shall also be included with such term any taxes which may hereafter be imposed upon or payable with respect to the Rent payable by Tenant hereunder, excluding income and franchise taxes imposed with respect to all income of Landlord. "Land" shall mean the parcel of land described in Part I of Exhibit A attached hereto, together with all appurtenances thereto and easements benefiting such parcel. "Law" shall mean any federal, state or local law, statute, code, ordinance, rule or regulation applicable to the Premises or the use or operation thereof. "Lease Term" shall mean the term of this Lease as identified in Article 3 hereof, including any extensions of the initial term made in accordance with the provisions thereof. "Permitted Encumbrances" shall mean those matters listed in Part II of Exhibit A attached hereto. "Premises" shall mean the Land and Building and all other improvements now, or at any time hereafter, erected or situated on the Land. "Rent" shall mean all Base Rent, Additional Rent and other sums payable to Landlord or on behalf of Landlord under this Lease, whether or not specifically denominated as rent. "Tenant Equipage" shall mean all Tenant Equipment, temporary dividers and partitions, and special use building and utility systems, from time to time located on the Premises. In illustration, and not in limitation of the foregoing, Tenant Equipage shall include all project-specific equipment and support systems now existing or installed from time to time to meet the requirements of a specific manufacturing project or process as opposed to being of general utility in the Premises. Tenant Equipage includes, without limitation, such items as compressed air systems, demineralized water systems and nitrogen systems. "Tenant Equipment" shall mean Tenant's personal property and items of manufacturing equipment other than building or utility systems. Tenant Equipment does not include building or support systems such as compressed air systems, demineralized water systems and nitrogen systems. "Tenant Improvements" shall mean the internal non-load bearing walls, internal general-purpose building and utility systems, such items as general use heating and air conditioning units and systems as well as all internal walls and offices. 3 ARTICLE 2 Premises, Condition 2.1 Leasing. Landlord hereby leases the Premises to Tenant and Tenant hereby leases the Premises from Landlord, subject to the Permitted Encumbrances and upon all of the terms, covenants and conditions set forth herein. 2.2 Warranties of Condition. Landlord warrants that the Premises are in good and safe condition, structurally sound and that all heating, ventilating and cooling systems, plumbing systems, electrical systems and other building systems are and will be in good working condition, and in compliance with Accessibility Regulations and all other applicable Laws. Without limitation of the foregoing, Tenant may submit to Landlord at any time prior to the date ninety (90) days after taking possession of the Premises a punchlist of defective items in the Premises. Landlord agrees to correct all such defective items, at Landlord's sole expense, as soon as reasonably possible, but in no event more than thirty (30) days after receipt of notice from Tenant. Notwithstanding the foregoing, Landlord will, at Landlord's sole expense, correct any latent defect promptly after Tenant notifies Landlord of any latent defect. Tenant will not be deemed to waive any rights Tenant may have against Landlord under Landlord's warranties, as provided below, by taking possession of the Premises. Landlord agrees to provide Tenant with copies of all warranties and maintenance information from manufacturers with respect to the components of the Premises. 2.3 Environmental. Without limitation of the foregoing, Landlord has supplied to Tenant a true and complete copy of a Preliminary Site Assessment dated September 16, 1994 by Tibbetts Engineering Corp. (TEC Job No. 10052.010); a Report on Oil and Hazardous Material Site Evaluation, Proposed Building for U.S. Assemblies Company, Constitution Drive, Taunton, Massachusetts by Haley & Aldrich, Inc. dated May 1997 (File No. 11651-042) and a letter dated March 29th, 2001 from Richard L. Shafer, Executive Director of the Taunton Development Corporation (the "Reports"). Landlord represents and warrants to Tenant that Landlord does not have and does not know of any other environmental reports, studies or tests which have been prepared or conducted with respect to the Premises, which provide additional information or contradict the findings set forth in the Reports and the tests identified therein. Landlord represents and warrants that, except as provided in the Reports, to the best of Landlord's knowledge: (i) the Premises are in compliance with all Environmental Regulations and (ii) no Hazardous Substances have been stored, used or otherwise located on, in or under the Premises. Landlord agrees to indemnify, defend and hold Tenant harmless against any and all Environmental Damages incurred or to be incurred as a result Existing Contamination or Landlord Contamination or failure to comply with any Environmental Regulations, including reasonable attorneys' fees. "Existing Contamination" means Contamination, if any, which exists on, in, below, or is migrating on, under or in the direction of the Premises, whether known or unknown on the date Tenant takes possession of the Premises. "Landlord Contamination" means contamination at the Premises caused by or arising out of any act, omission, neglect or fault of Landlord or its agents, employees, contractors or invitees. "Contamination" means the 4 uncontained or uncontrolled presence of or release of Hazardous Substances into any environmental media from, upon, within, below, into or on the Premises. "Environmental Damages" means all claims, judgments, losses, penalties, fines, liabilities, encumbrances, liens, costs and reasonable expenses of investigation, defense or good faith settlement resulting from violations of Environmental Regulations, and including, without limitation: (i) damages for personal injury and injury to property or natural resources; (ii) reasonable fees and disbursement of attorneys, consultants, contractors, experts and laboratories; (iii) costs of any cleanup, remediation, removal, response, abatement, containment, closure, restoration or monitoring work required by any Environmental Regulation and other costs reasonably necessary to restore full economic use of the Premises; and (iv) third-party claims relating to the immediately preceding subsections (i) - (iii). Landlord will perform any remediation required by any governmental authority in such a manner as to have as little impact on Tenant's business being conducted at the Premises as reasonably possible. If Existing Contamination or Landlord Contamination actually prevents Tenant, or is reasonably expected to prevent Tenant, or its employees or customers, from occupying any material part of the Premises in a manner that materially adversely affects Tenant's business being conducted at the Premises for any period of 60 or more continuous calendar days, Tenant will have the right to terminate the Lease by giving written notice to Landlord. Landlord's obligations and liabilities under this Section will survive the expiration or termination of this Lease. ARTICLE 3 Lease Term 3.1 Initial Term. The Premises are leased to Tenant, for a term (the "Initial Term") of five (5) years, commencing on April 30, 2001, and ending on April 30, 2006, unless sooner terminated or further extended, as hereinafter provided. 3.2 Option to Extend. Provided that no Event of Default shall exist hereunder at the time of exercise of such option, Tenant shall have the right and option to extend the Lease Term for one additional period of five years (the "Extension Period"), commencing on the day following the Expiration Date. Such option shall be exercised by Tenant giving written notice (an "Extension Notice") thereof to Landlord not later than one year prior to what would otherwise be the last day of the Lease Term, time being of the essence. If Tenant so exercises its option to extend the Lease Term, all of the terms, covenants, conditions and provisions of this Lease shall continue to be applicable during such additional period, except that the monthly Base Rent shall be adjusted as provided below. ARTICLE 4 Rent 4.1 Rent. Tenant agrees to pay to Landlord, without demand, at the address set forth hereinabove, or at such other place as Landlord may from time to time designate in writing, Rent for the Premises as follows: 5 4.1.1 Base Rent. A monthly Base Rent shall be due and payable in advance on the first day of each and every calendar month during the Lease Term, commencing May 1, 2001. (a) Initial Term. For the Initial Term, the monthly Base Rent shall be $41,000.00 per month. (b) Extension Period. In the event Tenant exercises its option to extend the Lease Term as provided in Section 3.2 above, during the Extension Period, the monthly Base Rent shall be the lesser of (a) $47,983.00 or (b) $41,000 multiplied by the ratio of the Consumer Price Index for the month of March of 2006 to the Consumer Price Index for the month of March, 2001. 4.1.2 Additional Rent. Tenant shall pay as Additional Rent all other sums of money required to be paid pursuant to this Lease, which shall be paid at the time and in the amounts set forth elsewhere in this Lease. ARTICLE 5 Impositions, Assessments 5.1 Tenant to Pay Impositions. Landlord shall pay all Impositions existing or pending or arising out of use of the Premises on or before the Commencement Date. Tenant shall pay, as Additional Rent, when due and before any fine or penalty is added thereto for the nonpayment thereof, all other Impositions which become due and payable during the years which are included in whole or in part in the Lease Term; provided, however, that if any such Imposition may be paid in installments, Tenant may pay each installment before any fine or penalty is added to any such installment for the nonpayment thereof. Impositions due and payable during the years when the Lease Term commences and terminates shall be prorated according to the number of days in such years included in the Lease Term. With respect to Impositions which are payable in installments which extend beyond the Lease Term, Tenant shall only be obligated to pay those installments which fall within the Lease Term. Tenant shall also reimburse Landlord for sales or rental taxes, if any, paid or payable by Landlord on rentals from the Premises. 5.2 Payment of Assessments. Landlord shall pay all special assessments for local improvements and betterments levied or pending or which relate to improvements in place on the Commencement Date. Tenant covenants to pay when due and before any fine or penalty is added thereto for the nonpayment thereof, all other assessments for local improvements and betterments which become due and payable during the years which are included in whole or in part in the Lease Term; provided, however, that if any such assessment may be paid in installments, Tenant shall be required to pay only those installments which come due during the Lease Term. If any such assessments are proposed, and if Tenant so requests, Landlord agrees to cooperate with and 6 assist Tenant in seeking to have such assessments made payable in installments, spread over the longest period then available under applicable law and/or governmental policies. 5.3 Evidence; Contents. Tenant shall deliver to Landlord from time to time duplicate receipts or photostatic copies thereof showing payment of all Impositions within 10 days after Landlord's request therefor from time to time. Landlord shall, at its option, have the right at any time during the Lease Term to pay, without the necessity of inquiring into the validity or legality thereof, any delinquent Impositions and interest and penalties thereon, and the amount so paid, including reasonable expenses incurred in connection therewith, shall be so much Additional Rent due from the Tenant to Landlord at the next rental payment date after such payment; provided, however, that if Tenant shall in good faith proceed to contest any such Impositions or the validity thereof by proper legal proceedings which shall operate to prevent the collection thereof and the sale of the Premises or any part thereof to satisfy the same, Tenant shall not be required to pay, discharge or remove any Impositions so long as such proceeding is pending and Tenant is diligently prosecuting such proceeding; provided further that Tenant, not less than 10 days before any such Impositions shall become delinquent, shall give notice to Landlord of Tenant's intention to contest the validity thereof and shall deposit with Landlord an amount sufficient to pay the contested Impositions, plus penalty and interest through the period of contest. 5.4 Utilities. Landlord represents and warrants that water, sewer, gas, heat, electricity, light and power are available to the Premises in amounts adequate for the business conducted on the Premises prior to the Commencement Date and will continue to be so available. Tenant acknowledges that Landlord shall not be required to furnish to Tenant any water, sewer, gas, heat, electricity, light, power or any other facilities, equipment, labor, materials or any services of any kind whatsoever. Tenant shall make its own arrangements, at its own cost and expense, for the furnishing to the Premises of all utilities, facilities or services required for Tenant's use, and Tenant shall pay for all such utilities, facilities or services to the Premises. ARTICLE 6 Use 6.1 Use. The Premises may be used and occupied by Tenant for offices and manufacturing, assembly, storage and distribution of electrical, electromechanical and electronic products and components and any other lawful business purposes which do not cause loss of any tax exemption on the Landlord's Massachusetts Industrial Finance Agency ("MIFA") Industrial Development Revenue Bonds (James F. and Judith Matthews Issue - Series 1997) (the "Bonds") and which are permitted under the terms of the Bond Documents or are consented to by MIFA. If Tenant shall use the Premises in violation of this Section 6.1, Landlord may give Tenant written notice demanding that Tenant terminate such improper use within 30 days thereafter. A failure to timely cease such violation shall be deemed a default in the performance of a provision of this Lease, within the meaning of Section 16.1.2 hereof. 7 6.2 Compliance with Environmental Regulations. Except for substances and in quantities which are normally used in the operation of Tenant's business or for the maintenance or operation of the Premises, and which are used, stored and disposed of in accordance with all applicable Environmental Regulations, Tenant shall not, nor shall it authorize others to, place, store, locate, generate, produce, create, process, treat, handle, transport, incorporate, discharge, emit, spill, release, deposit or dispose of any Hazardous Substance in, upon, under, over or from the Premises. Tenant shall cause all Hazardous Substances placed in or under the Premises by or with authority of Tenant and which are not permitted under the foregoing sentence and which are the result of Tenant's violation of the foregoing sentence, and which exist in quantities which violate applicable Environmental Regulations to be properly removed therefrom and properly disposed of at Tenant's expense. Tenant shall not install or permit to be installed any underground storage tank on or under the Land. Tenant shall, promptly after obtaining actual knowledge thereof, give notice to Landlord of (i) any activity in material violation of any applicable Environmental Regulation relating to the Premises, (ii) any governmental or regulatory actions instituted or threatened under any Environmental Regulation affecting the Premises, (iii) all claims made or threatened by any third party against Tenant or the Premises relating to any Hazardous Substance or a violation of any Environmental Regulation, and (iv) any discovery by Tenant of any occurrence or condition on or under the Premises which could subject Landlord, Tenant or the Premises to a claim under any Environmental Regulation. Any investigation, remedial or corrective action taken with respect to the Premises shall be done under the supervision of a qualified engineer or consultant acceptable to Landlord who shall, at the completion of such investigation or action, provide a written report thereon to Landlord. If such investigation, remedial or corrective action is required as a result of Tenant's violation of its obligations under this Section 6.2, the same shall be performed at Tenant's expense. ARTICLE 7 Surrender 7.1 Time; Condition. Upon termination of this Lease, whether by reason of lapse of time, forfeiture or otherwise, Tenant shall immediately surrender possession of the Premises to Landlord in good order, condition and repair, ordinary wear and tear and loss by insured casualty excepted, and shall remove all Tenant Equipment (unless Landlord and Tenant otherwise agree in writing). All Tenant Equipage (other than the Tenant Equipment) not removed from the Premises by Tenant shall become the property of Landlord without any obligation on the part of Landlord to compensate Tenant therefor. If possession be not immediately surrendered, Landlord may forthwith re-enter the Premises and repossess the same or any part thereof and expel and remove therefrom all persons and property without being deemed guilty of any unlawful act or liable for damages by reason of such re-entry and without prejudice to any other legal remedy available to Landlord. 7.2 Removal of Tenant Equipage. Notwithstanding the preceding Section hereof, Tenant or Tenant's lender(s) may remove any or all of the Tenant Equipage (including any or all Tenant 8 Equipment), provided that such removal shall be made prior to the end of the Lease Term. Tenant or such lender shall repair any damage resulting from such removal at Tenant's sole expense. ARTICLE 8 Insurance 8.1 Tenant Insurance. Tenant, at its sole cost and expense, shall maintain in effect at all times during the Lease Term, a Commercial General Liability Insurance policy, which policy shall include coverage for bodily injury, property damage, personal injury, contractual liability (applicable to this Lease), independent contractors and products-completed operations liability. Such policy shall provide coverage of at least $1,000,000 for each occurrence and annual aggregate coverage of at least $2,000,000. 8.2 Landlord Insurance. Landlord shall purchase and maintain insurance on the Building against loss by fire and other hazards as reasonably required by Landlord's Mortgagee under the Bonds, and in any event with coverage not less than that covered by a so-called "all-risk" form of policy, including contingent liability from operation of building laws coverage, in an amount not less than the Full Insurable Value. Such policy shall have an "agreed amount" endorsement or otherwise exclude co-insurance participation by the insured, and may include a deductible in an amount not greater than $10,000.00. Tenant shall reimburse Landlord for the cost of such insurance by remitting payment to Landlord within 30 days after receipt of evidence that Landlord has paid the same. 8.3 Insured Parties; Other Provisions. All property insurance policies shall name Tenant as an additional named insured. All liability insurance policies shall name Landlord, Landlord's mortgagee and Tenant as named insureds. In the event that the holder of such a mortgage is named as an insured under any of the foregoing property insurance policies, the proceeds under such policies shall be made payable to such mortgagee or mortgagees pursuant to standard mortgagee clauses. Each of the foregoing policies shall, to the extent reasonably available, contain the agreement of the insurer that: 8.3.1 Such policies shall not be canceled except upon 30 days' prior notice to each named insured; 8.3.2 The insurer waives all rights of subrogation against all named insureds; and 8.3.3 The insurance provided thereunder shall not be affected by any defense the insurer may have against Landlord, Tenant or any other person. 8.4 Companies; Renewals; Failure to Provide. All policies required by this Article shall be carried in such companies and upon forms reasonably acceptable to Landlord and Tenant. Certificates of all policies required to be furnished by a party hereunder shall be deposited with 9 the other party hereto prior to the commencement of the Lease Term, and renewals thereof, and evidence of the payment of premium to continue coverage in force shall all be deposited with such other party not less than 30 days prior to the date on which such insurance would otherwise expire. At Landlord's option, exercised in writing, in the event Tenant shall fail to provide a policy Tenant is required to carry, Landlord may obtain such insurance and the entire cost thereof shall be due and payable as Additional Rent upon billing by Landlord. At Tenant's option, exercised in writing, in the event Landlord shall fail to provide a policy Landlord is required to carry, Tenant may obtain such insurance and shall not be required to reimburse Landlord for any insurance costs for the period during which the insurance so obtained by Tenant is in effect. ARTICLE 9 Indemnification 9.1 Tenant Indemnity. Tenant shall indemnify and hold Landlord harmless against and from all liabilities, obligations, damages, penalties, claims, costs, charges and expenses, including reasonable attorneys' and other consultants' fees, which may be imposed upon, incurred by or asserted against Landlord by reason of any accident, injury, death or damage to property occurring in, on or about the Premises during the Lease Term, unless and except to the extent arising out of the negligence or misconduct of Landlord or its agents or employees or out of the condition of the Premises at the time Landlord delivers possession thereof to Tenant. In case any action or proceeding is brought against Landlord by reason of such indemnified liabilities, obligations, damages, penalties, claims, costs, charges, and expenses, Tenant, upon written notice from Landlord, shall at Tenant's expense resist or defend such action or proceeding by counsel approved by Landlord in writing. 9.2 Landlord Indemnity. Landlord shall indemnify and hold Tenant harmless against and from all liabilities, obligations, damages, penalties, claims, costs, charges and expenses, including reasonable attorneys' and other consultants' fees, which may be imposed upon, incurred by or asserted against Tenant by reason of any accident, injury, death or damage to property occurring in, on or about the Premises during the Lease Term, to the extent arising out of the negligence or misconduct of Landlord or its agents or employees or out of the condition of the Premises at the time Landlord delivers possession thereof to Tenant. In case any action or proceeding is brought against Tenant by reason of such indemnified liabilities, obligations, damages, penalties, claims, costs, charges, and expenses, Landlord, upon written notice from Tenant, shall at Landlord's expense resist or defend such action or proceeding by counsel approved by Tenant in writing. 10 ARTICLE 10 Operation, Repairs and Maintenance; Alterations 10.1 Landlord Repairs and Maintenance. Prior to delivering possession of the Premises to Tenant, Landlord, at its sole expense, will cause the Premises to comply with all Accessibility Regulations and all other Laws. Landlord, at its sole expense, will be responsible for any noncompliance of the Premises with the Laws existing at the Commencement Date. Throughout the Lease Term, Landlord shall, at Landlord's sole cost and expense, keep the roof and all structural elements of the Premises, the exterior supporting walls and the foundations of the Premises in good, watertight condition and repair and shall make all repairs or replacements to the Premises, where such repairs or replacements are necessary due to design, construction or latent defects, or are subject to construction or material warranties. Landlord will do or cause others to do all necessary shoring of foundations and walls of the Building and every other act or thing for the safety and preservation thereof which may become necessary by reason of any excavation or other building operation upon any adjoining property or street, alley or passageway. 10.2 Tenant Operation, Repairs and Maintenance. Throughout the Lease Term (and except for the matters which Landlord is required to repair and maintain pursuant to Section 10.1 above), Tenant shall, at Tenant's sole cost and expense, take good care of the Premises, including the roof and spouting, all passageways, sidewalks, curbs and vaults adjoining the Premises, and shall put and keep the same in good order, condition and repair, and shall make all non-structural repairs thereto, all as may be necessary to keep the Premises and the fixtures, appurtenances, and installations therein contained in good order and condition and in compliance with all Laws. When used in this Lease, the term "repairs" shall include all replacements, renewals, and alterations, when necessary and appropriate. All repairs made by Tenant shall be comparable in quality and class to the original work. Tenant shall keep the Building adequately heated during all months of the year when temperatures are below freezing to prevent damage to the Building by freezing or heaving and further shall make all repairs necessary to avoid any structural damage or injury to the Premises whether caused by freezing or heaving or any other reason. Tenant shall also keep and maintain all portions of the Premises, and all passageways, roadways, entrances, curbs and sidewalks adjoining the Premises, in a clean and orderly condition, reasonably free of accumulated dirt, rubbish, snow and ice, and any other unlawful obstructions; and Tenant shall not permit or suffer the overloading of any of the floors of the Building. Without limitation of the foregoing, Tenant shall not do, permit or suffer to be committed any waste or damage, disfigurement or injury to the Premises, or any part or portion thereof, except as expressly provided in this Article 10. 10.3 Alterations. Landlord and Tenant acknowledge that Tenant's anticipated use of the Premises may require periodic remodeling and alterations of the Premises to accommodate the varying needs of Tenant and/or its customers. Landlord also has legitimate rights to approve certain changes to the Premises. To balance these interests, the parties agree as follows: 11 10.3.1 Work Not Requiring Consent. Tenant may at any time and from time to time do the following at Tenant's sole cost and expense and without obtaining the consent of Landlord (a) make changes, alteration, additions, restorations or improvements in, to or of the Tenant Equipage. (b) add or make changes to Tenant Improvements (herein collectively referred to as a "Tenant Improvement Alteration") or make non-structural alterations to Building Elements(herein collectively referred to as a "Minor Building Alteration") costing $50,000 (as such sum may be adjusted as set forth below) or less, in any 12 month period. The amount of Tenant Improvement Alterations and Minor Building Alterations which can be made without Landlord consent shall be increased from time to time in proportion to the increase, if any, in the Consumer Price Index between the date of this Lease and the date the work is being performed. 10.3.2 Work Requiring Consent. Tenant may not make any change, alteration, addition, restoration or improvement in, to or of the Building Elements other than Minor Building Alterations (herein collectively referred to as a "Major Building Alteration") without first, in each instance, obtaining the written consent of Landlord and compliance with the provisions of Section 10.3.3 below. Such consent shall not be unreasonably withheld unless (a) in the reasonable opinion of Landlord, the Major Building Alteration would materially impair the structural integrity of the Building, or any part thereof, or (b) Landlord's mortgagee's consent is required and is withheld; and shall not be withheld to the extent to which such a Building Alteration is in fact required to effect compliance with any Law. Before the commencement of any Major Building Alteration herein: (a) Tenant shall, except in emergency, give 60 days' prior written notice thereof to Landlord; (b) Tenant shall obtain Landlord's prior written approval of a licensed architect or a licensed professional engineer selected and paid for by Tenant who shall supervise any such Major Building Alteration; and (c) Tenant shall obtain Landlord's prior written approval of plans and specifications prepared by said approved architect or engineer, which approval shall not be unreasonably withheld or delayed. No such Major Building Alterations shall be made except such as are in all material respects in accordance with said plans and specifications. The reasonable cost and expense, if any, of reviewing the plans and specifications for each such Major Building Alteration, whether by Landlord, or by the holders of any first 12 mortgage, if for any reason billed by them or by any of them to Landlord, shall be paid by Tenant to Landlord, as Additional Rent, forthwith upon demand. 10.3.3 For purposes of this Section, Tenant Improvement Alterations, Minor Building Alterations and Major Building Alterations are collectively called "Alterations." (a) No Alteration shall be undertaken until Tenant shall have procured and paid for, so far as the same may be required from time to time, all permits and authorizations of any federal, state or municipal government or department, or subdivision of any of them, having or asserting jurisdiction. Landlord shall join in the application for such permits or authorizations, if and to the extent required, but at Tenant's sole cost and expense. (b) Any Alteration shall be made promptly and in a good and workmanlike manner and in compliance with all applicable permits and authorizations and building and zoning laws, and with all other Laws. (c) The cost of any Alteration shall be paid when due so that the Premises shall at all times be free of liens for labor and materials supplied or claimed to have been supplied to the Premises and free from any encumbrances, chattel mortgages, conditional bills of sale, or security interests. (d) Whenever appropriate, the property insurance required to be maintained during the Lease Term shall be endorsed or supplemented to provide, at Tenant's sole cost and expense, during any period when Building Alterations are in progress, for builder's risk insurance. Workman's compensation insurance covering all persons employed in connection with the work and with respect to whom death or bodily injury claims could be asserted against Landlord, Tenant or the Premises, and comprehensive general public liability insurance, providing full coverage with respect to any accident, injury or occurrence involving, relating to, or arising during or as a result of such Building Alteration, naming Landlord and Tenant as insureds, with limits of not less than those required for commercial general liability insurance hereunder, shall be maintained by Tenant (or Tenant's independent contractor) at Tenant's (or at such contractor's) sole cost and expense at all times when any work is in progress in connection with any such Building Alteration. (e) No Alteration shall materially increase the height of the Building, or combine, tie-in or connect the Building and/or any other portion of the Premises, or any structure or improvement thereon erected or situated, with any other building or improvement located on any adjoining property; and Tenant shall in no event include or attempt to include the Premises with other properties in a 13 common zoning lot under any zoning ordinance or related statute which may now or hereafter be applicable to the Premises in such respect. ARTICLE 11 Discharge of Liens 11.1 No Liens. If any lien for work performed or materials supplied after the Commencement Date is filed against the Premises or Landlord's or Tenant's interest therein, other than liens arising as a result of acts of Landlord, Tenant shall immediately notify Landlord and shall bond over such lien or cause same to be discharged of record within 30 days after notice of such filing. Tenant, at its sole expense, shall defend the Premises and Landlord against all suits for the enforcement of any such lien or any bond in lieu of such lien, and Tenant hereby indemnifies Landlord against any and all loss, cost, damage, expense or liability resulting from any such lien or suit. Should Tenant fail to so discharge any such lien, Landlord may do so by payment, bond or otherwise on 10 days' written notice to Tenant, and the amount paid or incurred therefor by Landlord shall be reimbursed to Landlord by Tenant as Additional Rent upon demand, with interest from the date of demand at the maximum rate of interest lawfully permitted to be collected (limited to the rate of 18% per annum). 11.2 Right to Contest. Tenant shall have the right to contest any such mechanic's or other lien claim filed against the Premises or any part thereof if Tenant notifies Landlord in writing of its intention so to do, diligently prosecutes any such contest, at all times effectually stays or prevents any official or judicial sale of the Premises under execution or otherwise, and pays or otherwise satisfies any final judgment adjudicating or enforcing such contested mechanic's or other lien and thereafter promptly procures and records a satisfaction and release of same, provided Tenant has deposited with Landlord a sum sufficient to cover the lien so contested, plus interest, costs and attorneys' fees which will accrue during the period of such contest. 11.3 No Consent. Nothing in this Lease shall be deemed to constitute the consent or request of Landlord to any contractor, subcontractor or material supplier for the performance of any labor or the furnishing of any materials for any specific improvement to the Premises. Notice is hereby given that Landlord has assumed no obligation and shall not be liable or responsible for or in connection with any labor or materials hereafter furnished to Tenant, or to any other party, whether on credit, or otherwise, and that no mechanic's or other lien for any such labor or materials shall attach to or affect the Premises, or Landlord's reversionary interest and estate therein. Landlord shall have the right to post and maintain on the Premises, notice of nonresponsibility under the laws of the State of Massachusetts. 14 ARTICLE 12 Compliance with Laws 12.1 Compliance. Throughout the Lease Term, Tenant shall at Tenant's sole cost and expense (except as provided below), promptly remove of record any and all violations noted or filed against the Premises, shall correct all conditions constituting violations, and shall promptly comply with all present and future Laws and directives of all federal, state and municipal governments, departments, commissions, boards and officers, and all orders, rules and regulations of the National Board of Fire Underwriters, or any other body or bodies exercising similar functions, which may be applicable to the Premises and the sidewalks, alleyways, passageways, curbs and vaults adjoining the Premises, or to the use or manner of use of the Premises, or to the owners, tenants or occupants thereof, whether or not any such Law or directive shall necessitate structural changes or improvements, or interfere with the use and enjoyment of the Premises. To the extent that any such work shall be the result of conditions existing at the Commencement Date, or to the extent the existence of such condition constitutes a breach of any representation or warranty of Landlord hereunder, Landlord shall reimburse Tenant for all such costs upon demand. If Landlord fails to pay such sum within 30 days after demand, Tenant may, at its option and in addition to all other rights and remedies hereunder, offset such costs against Rent accrued or accruing hereunder. 12.2 Insurance Requirements. Tenant shall likewise at Tenant's sole expense observe and comply with the requirements of all policies of public liability and property insurance, and all other policies of insurance at any time in force with respect to the Premises, and Tenant shall, in the event of any violation or any attempted violation of the provisions of this Article by any subtenant or occupant, take all required steps, immediately upon knowledge of such violation or attempted violation, to remedy or prevent the same, as the case may be. ARTICLE 13 Damage or Destruction 13.1 Casualty. In the event that the Premises shall be damaged or destroyed by fire or other casualty, Tenant shall promptly give written notice thereof to Landlord, and Landlord shall promptly repair, restore, replace, or rebuild the same, as nearly as may be practicable, to its condition and character immediately prior to such damage or destruction. Such restoration, repairs, replacements, rebuilding or alterations shall be commenced promptly and prosecuted with reasonable diligence, subject only to unavoidable delays. The net insurance proceeds on account of such damage or destruction to or of the Building Elements, and collected by Landlord and/or Tenant shall be held in trust and shall be made available to Landlord as the work progresses (subject to periodic delivery of appropriate architect's certifications as to the cost of the required work remaining until full completion, and title company certifications as to the absence of any liens, or encumbrances relating to such work) for use in making payments when due for the repairs, restoration or replacement required under this Article 13, and pursuant to such controls and subject to such approvals as Tenant shall reasonably require. If such insurance 15 money shall be insufficient to pay the entire cost of such work, Landlord agrees to pay the deficiency. At any time after the completion of such work, the balance of the insurance money not theretofore used pursuant to the foregoing provisions of this section shall be paid to Landlord or Landlord's mortgagee as their interests shall appear. 13.2 Rental Abatement. During any period in which the Premises or any portion of the Premises is made untenantable as a result of the Casualty, all Rent will be abated for the period of time untenantable in proportion to the square foot area untenantable. 13.3 Option to Terminate. In the event (a) the Premises are damaged by fire, explosion or other casualty insured under the fire and extended coverage insurance policy required hereunder (an "Insured Casualty") to the extent that such damage materially adversely affects Tenant's ability to use the Premises for its business purposes and the Premises cannot be or is not repaired, replaced and restored by Landlord within 6 months from the date of the casualty, (b) the Premises are damaged by a casualty or occurrence other than an Insured Casualty, and Landlord elects not to rebuild at its cost, (c) such damage occurs at any time within the last twelve (12) months of the Lease Term, or (d) the Premises or any portion thereof, is damaged by fire, explosion or other casualty and the Premises cannot be repaired, rebuilt or restored to substantially the same or similar condition, under any applicable law, code, ordinance or other governmental order or under any other agreement to which the Premises are subject (a "Prohibited Casualty"), then in such event, Tenant may terminate this Lease by giving Landlord written notice of termination. In any such event, all Rent payable hereunder shall be apportioned to the date of such damage or destruction and Landlord shall be entitled to receive and retain all insurance proceeds relating to the Building Elements payable by reason of such occurrence. Insurance proceeds relating to the Tenant Equipage payable by reason of such occurrence shall be paid to and be the property of Tenant. Tenant shall also have the right and option to terminate this Lease as of the date of such damage or destruction if the holder of any mortgage covering the Premises refuses to make the net insurance proceeds available for restoration and Landlord also refuses to provide such funds. Such option shall be exercised by Tenant giving written notice thereof to Landlord within 30 days after Landlord notifies Tenant that the funds will not be available. 13.4 Release. Landlord releases Tenant from all claims, and all liability or responsibility to Landlord and to anyone claiming through or under Landlord, by way of subrogation or otherwise, for any loss or damage to the Building caused by fire or other peril, even if such fire or other peril was caused in whole or in part by the negligence or other act or omission of Tenant or its agents or employees. ARTICLE 14 Condemnation 14.1 Total Taking. If the entire Premises shall be condemned or taken through or under the power of eminent domain, or if such a material portion of the Premises is so taken that in the 16 reasonable opinion of Tenant the restoration of the remaining portions of the Premises for the uses thereof at the time of such partial taking is economically unfeasible, this Lease and the term hereof shall cease and terminate upon the date of the vesting of title in the condemning authority, and all Rent hereunder shall be apportioned to such date of termination, and any payments theretofore made in advance by Tenant shall be refunded ratably to Tenant. Landlord shall be entitled in such event to receive the entire award for the Land and Building Elements so taken or condemned which may be made in such condemnation proceeding, and Tenant shall not be entitled to receive any portion thereof. Tenant hereby assigns and transfers to Landlord any and all claims to such award and waives and relinquishes any right to make any claim for an award for the value of this Lease, or otherwise; provided, however, that Tenant shall be permitted to make separate claims for all Tenant Equipage, and for relocation expenses and allowances, to the extent available. 14.2 Partial Taking. If less than such a material portion of the Premises shall be taken or condemned, as aforesaid, this Lease shall continue and shall remain in full force and effect; provided, however, that the Base Rent hereunder shall thereafter be reduced in an equitable manner in proportion to the reduction in value of the Premises for Tenant's use. The Base Rent shall be reduced to the product obtained when the Base Rent otherwise payable hereunder is multiplied by a fraction, the numerator of which shall be the total floor area of the Building (expressed in square feet) remaining following the condemnation and restoration, and the denominator of which shall be the total floor area thereof (expressed in square feet) upon the Commencement Date. Such reduction in Base Rent shall first become effective as of the first day of the month next succeeding the date of vesting of title in the condemning authority, and shall not in any event diminish, reduce or abate the Impositions, Additional Rent and other charges payable hereunder by Tenant. In the event of such a partial condemnation, Landlord shall promptly make, or cause to be made, all demolition, repairs, reconstruction, restoration, replacement or rebuilding and all other work necessary, as nearly as may be practicable, to restore the Building Elements to the utility and condition immediately prior to such taking (and including any new parking areas and/or demolition of the existing Building, to the extent the same may be reasonably necessary to accommodate Tenant's use of the Premises after the condemnation). The net proceeds of the award in respect of such partial taking or condemnation, after the payment of all fees and expenses incurred in connection with the collection of such award, shall be paid over to Landlord, and shall be held in trust and shall be made available to Landlord as work progresses (subject to periodic delivery of appropriate architect's certifications as to the cost of the required work remaining until full completion, and title company certifications as to the absence of any liens, or encumbrances relating to such work) for use in making payments when due for the demolition, repairs, restoration or replacement required under this Article 14, and pursuant to such controls and subject to such approvals as Landlord or Landlord's mortgagee shall reasonably require. If such proceeds shall be insufficient to pay the entire cost of such work, Tenant agrees to pay the deficiency. At any time after the completion of such work, the balance of the proceeds not theretofore used pursuant to the foregoing provisions of this section shall be paid to Landlord or Landlord's mortgagee as their interests shall appear. During any period in which the Premises or any portion of the Premises is made untenantable as 17 a result of the Condemnation or the work being performed by Landlord, all Rent will be abated for the period of time untenantable in proportion to the square foot area untenantable. 14.3 Temporary Taking. If the whole or any part of Tenant's estate or interest under this Lease shall be taken or condemned by any governmental agency or authority for its temporary use or occupancy, this Lease shall not terminate by reason thereof, and Tenant shall continue to pay, in the manner and at the times herein specified, the Base Rent, the Impositions and all other Additional Rent, and all other charges payable by Tenant hereunder, without any abatement or reduction thereof, and, except only to the extent that Tenant may be prevented from so doing pursuant to the terms of the order of the condemning authority, Tenant shall perform and observe all of the other terms, covenants, conditions and obligations hereof upon the part of Tenant to be performed and observed, as though such taking had not occurred. Tenant shall be entitled to receive the entire award paid for or in connection with such a taking, whether by way of damages, as rent, or otherwise, so long as Tenant shall not be in default hereunder; provided, however, that if the award is paid in a lump sum, or shall be payable less frequently than in monthly installments, the award shall be paid to and held jointly by Landlord and Tenant, in Landlord's and Tenant's names, in an interest-bearing account with a commercial banking organization designated by Landlord and such award shall be applied as follows: (a) If the award shall be made in a lump sum, it shall be divided by the number of months included in the period of such temporary use or occupancy and, so long as Tenant shall not be in default hereunder, an amount equal to the quotient shall be paid over to Tenant monthly; and (b) If the award or awards shall be paid less frequently than in monthly installments, each such installment shall be divided by the number of months to which it is attributable and, so long as Tenant shall not be in default hereunder, an amount equal to the quotient shall be paid over to Tenant monthly; provided, however, that if such period of temporary use or occupancy shall extend beyond the expiration of the Lease Term, Landlord shall be entitled to receive and retain the amount of the award attributable to the period subsequent to the expiration of the Lease Term. Upon the termination of any such period of temporary use or occupancy, Tenant shall, at its sole cost and expense, restore the Premises, as nearly as may be practicable, to the condition thereof immediately prior to such taking. ARTICLE 15 Assignment 15.1 Assignment by Tenant. Except as otherwise provided in this Lease, Tenant shall not transfer, mortgage or pledge this lease or sublease the entire Premises without Lessor's prior written consent. Notwithstanding the foregoing, Tenant shall have the right, upon ten (10) days written notice to Landlord, but without Landlord's consent, to sublet the Premises or to assign 18 this Lease to any parent, subsidiary or related entity of Tenant; any entity with which Tenant may merge or any entity acquiring all or substantially all of the assets or stock of Tenant or of that division or operating group of Tenant which occupies the Premises, provided that any such assignee shall assume all obligations of Tenant under this Lease and shall agree to comply with all provisions of this Lease, including the use restrictions of Section 6.1 hereof. Landlord may deem any levy or sale on execution of this lease or any assignment or sale of this lease in bankruptcy or assignment to a receiver to be an assignment within the meaning of this section. No assignment of this Lease or sublease of the Premises or any part thereof shall be deemed a release of Tenant, which shall continue to be jointly, severally, unconditionally and primarily liable for payment and performance of all obligations hereunder with any assignee. 15.2 Assignment by Landlord. In the event that Landlord, or any successor owner of the Premises, or the lessee under any ground or underlying lease, or any holder of Landlord's interest in this Lease, or any fee owner of all or any portion of the Premises (or the owner of any interest or estate therein), shall convey or otherwise dispose of such title, interest or estate, or shall assign Landlord's interest in this Lease to any ground or underlying lessee, then all liabilities and obligations thereafter accruing or maturing on the part of Landlord or any such successor-owner of the Premises, or former holder of Landlord's interest under this Lease, or former fee owner of the Premises or any interest or estate therein, shall cease and terminate, and each successor-owner of the Premises or holder of Landlord's interests under this Lease, shall, without further agreement, be bound by Landlord's covenants and obligations, but only during the respective periods of the ownership by such parties; and Tenant shall continue to be bound by this Lease, and shall recognize the successor to Landlord's interests as the Landlord hereunder. ARTICLE 16 Default 16.1 Events of Default. There shall be an "Event of Default" hereunder and the Landlord may terminate this Lease upon 30 days' notice to Tenant: 16.1.1 If Tenant shall be in default in the payment of any Rent and such default is not cured within 30 days after written notice thereof given by Landlord; or 16.1.2 If Tenant shall be in default in the performance of any of the terms, covenants, conditions and provisions of this Lease on Tenant's part to be performed (other than the covenants for the payment of Rent) and such default is not cured within 60 days after written notice thereof given by Landlord; or if such default shall be of such nature that it cannot be cured completely within said 60 day period, if Tenant shall not have promptly commenced curing such default within such period and shall not thereafter proceed with reasonable diligence and dispatch and in good faith to remedy such default; or 19 16.1.3 If Tenant shall be adjudicated a bankrupt, shall make a general assignment for the benefit of its creditors, or invoke the benefit of any insolvency act, or if a permanent receiver or trustee in bankruptcy be appointed for Tenant's property and such appointment is not vacated within 90 days; or 16.2 Termination. If Landlord shall give the applicable notice of termination provided in Section 16.1, then, upon the expiration of the applicable period, this Lease shall terminate and Tenant shall then quit and surrender the Premises to Landlord. If this Lease shall so terminate, it shall be lawful for Landlord, at its option, without formal demand or notice of any kind, to re-enter the Premises by summary dispossession proceedings, or by any other lawful means, and to remove Tenant therefrom without being liable for any damages therefor. 16.3 Remedies. Notwithstanding such termination as provided in Section 16.2, and such re-entry by Landlord, or in the event Landlord shall dispossess Tenant by summary proceedings, or otherwise, the obligations of Tenant shall survive and Tenant shall remain liable for all of its obligations hereunder for the balance of the Lease Term, and shall reimburse Landlord for all costs and expenses as Landlord may reasonably sustain or incur for attorneys' and accountants' fees and disbursements, brokerage fees, and/or putting the Premises in good order, and for preparing the same for re-rental; and Landlord may re-let the Premises, or any part or parts thereof, either in the name of Landlord, or as agent for Tenant, on such conditions and for such term or terms as Landlord may deem advisable, if Landlord so elects, which terms may at Landlord's option be less than or exceed the unexpired period which would otherwise have constituted the remainder of the Lease Term; and Tenant shall pay to the Landlord, as damages for the failure of Tenant to observe and perform this Lease, and Tenant's undertakings and obligations hereunder, any deficiency (herein called the "deficiency") between the Rent hereby reserved and/or covenanted to be paid, including all Impositions and other charges required to be paid by Tenant hereunder, and the net amounts, if any, of the rents collected on account of such re-lettings of the Premises for each month of the period which would otherwise have constituted the unexpired Lease Term, if this Lease had remained in effect. Landlord agrees to exercise good faith efforts to mitigate its damages hereunder. Tenant shall pay such deficiency to Landlord monthly, in advance, on the days on which the Rent would have been payable under this Lease if this Lease were still in effect, and Landlord shall be entitled to recover from Tenant each monthly deficiency as the same shall arise or accrue. At any time after any such expiration or termination, whether or not Landlord shall have collected any monthly deficiencies, Landlord shall be entitled to recover from Tenant, and Tenant shall pay to Landlord, on demand, as and for liquidated and agreed final damages for Tenant's default, an amount equal to the then present worth (computed using 10% per annum as the discount factor) of the excess of the Rent, Impositions and other charges reserved under this Lease from the date of such expiration or termination for what would have been the then unexpired Lease Term if the same had remained in effect, above the then fair market rental value of the Premises for the same period. 16.4 No Release. The remedies of Landlord and Tenant provided in this Lease are cumulative and shall not exclude any other remedies to which either may be lawfully entitled. 20 The failure of either party to insist upon strict performance by the other of any term, covenant or condition herein contained shall not be a waiver of such term, covenant or condition by the non-objecting party for the future. The acceptance by Landlord of the payment of fewer than three monthly installments of Rent after notice is received by Landlord of an Event of Default or state of affairs which, but for the giving of notice and/or passage or time would be an Event of Default shall not constitute a waiver of such Event of Default or state of affairs. 16.5 Costs; Interest. In the event it is necessary to commence an action to enforce the terms hereof, the party prevailing in such action shall be entitled to its reasonable attorneys' fees and expenses, including those incurred at the appellate level. Tenant shall be liable to Landlord for interest on all sums not paid to Landlord when due hereunder from the date due until paid at the rate of 10% per annum, or such lesser rate as shall be the maximum permitted by law. ARTICLE 17 Tenant Equipage 17.1 Tenant Equipage. The Tenant Equipage shall be and be deemed the sole property of Tenant until and unless it becomes the property of Landlord pursuant to Article 7 above. Tenant shall have the right from time to time to pledge the Tenant Equipage and/or grant security interests in the Tenant Equipage to its lender(s) and Landlord agrees to execute such Lessors' Agreements, Landlord Waivers or other agreements as may be required by such lender(s) in connection with any lending secured thereby. ARTICLE 18 Subordination 18.1 Lease Subordinate. This Lease shall be and it hereby is made, and shall at all times be and remain, subject and subordinate to the lien of any duly recorded first mortgage, whether heretofore or hereafter made, affecting or encumbering the Premises, and to all extensions, renewals, modifications or replacements thereof; provided that provisions substantially as follows with respect to this subordination shall be contained in such mortgage (or in a separate instrument), and at all times duly observed by the holder thereof, namely that so long as this Lease has not been terminated by reason of any default by Tenant hereunder, and so long as Tenant is not in default in the payment of Rent or any Imposition or other charge payable by Tenant as in this Lease provided, Tenant shall not (unless required by law) be made a party to any action or proceeding to foreclose any such mortgage, or to any judgment of foreclosure and sale, and Tenant's use, possession, tenancy and occupancy hereunder shall remain undisturbed and shall survive any such action, proceeding, order or judgment and the proceeds of all insurance and/or condemnation affecting the Premises shall be applied as herein provided. 18.2 Attornment. The subordination of this Lease and Tenant's rights hereunder, as provided in Section 18.1, shall be effective without the execution of any further or other 21 instruments by Tenant, but Tenant shall, at Landlord's request, and without charge therefor to Landlord, execute and deliver any further document or instrument to evidence the subordination of this Lease to such mortgage as shall comply with the provisions of Section 18.1; and, to the extent requested by the holder of any such mortgage, Tenant shall execute and deliver such instruments and documents as shall confirm Tenant's undertaking and agreement hereunder to attorn under the terms and provisions of this Lease to such a mortgagee, or to the designee or nominee of such mortgagee, or to the purchaser of the mortgaged premises at a foreclosure sale, or at a sale of the premises pursuant to such power of sale as may be contained in such mortgage, and to recognize such mortgagee, its designee or nominee, or such purchaser, as the Landlord hereunder from and after the date of such a transfer of title, with the same force and effect as if the Premises had been sold or conveyed to such new landlord by the prior landlord hereunder. ARTICLE 19 Entry by Landlord; Performance of Covenants 19.1 Entry. Tenant shall permit Landlord or its agents to enter the Premises during normal business hours (and at any time in cases of emergency) (i) for the purpose of inspection thereof, (ii) for showing the Premises to persons wishing to purchase the same, or in connection with mortgage or other financing, and (iii) at any time within 12 months prior to the expiration of the Lease Term, for exhibition to persons wishing to rent the same. 19.2 Cure of Covenants. If Tenant shall be in default hereunder, Landlord may, with or without declaring an "Event of Default", upon 10 days' prior notice to Tenant, or without notice in case of an emergency, cure such default on behalf of Tenant (unless Tenant shall itself, within such period, commence and thereafter diligently proceed to cure such default), and for the purpose thereof may enter upon the Premises, and upon demand Tenant shall reimburse Landlord for any reasonable and necessary expenses incurred to effect such cure, together with interest thereon at the maximum rate which may be legally collected by Landlord (not to exceed 18% per annum). ARTICLE 20 Certificates 20.1 Estoppel Certificates. Tenant agrees, at any time, and from time to time, upon not less than 10 days' prior written notice by Landlord, to execute, acknowledge and deliver to Landlord, or to any existing or prospective ground or underlying lessee or mortgagee, or to any prospective purchaser, of the Premises, a statement or certificate in writing setting forth the Rent, Impositions and other charges then payable, and specifying each element thereof, and certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that this Lease is in full force and effect, as modified, and setting forth the modifications), and the dates to which the Rent, Impositions, and other charges payable hereunder have been paid, and stating (to the extent known to Tenant) whether or not the Landlord is in default in keeping, observing or performing any of the terms contained in this Lease and, if in default, specifying 22 each such default. It is intended that any such statement or certificate delivered pursuant hereto may be relied upon by Landlord, by any prospective purchaser of the Premises, or by any existing or prospective ground or underlying lessee, mortgagee, or lender. ARTICLE 21 Notices 21.1 Notices. All notices, demands, consents, or requests under this Lease must be in writing and shall be sent postage prepaid by United States registered or certified mail addressed, or telecopied and followed within one day by registered or certified mail, if the party for whom intended is the Landlord, to Landlord at the following addresses and telecopy numbers: James F. Matthews and Judith Matthews 320 North Jensen Road Vestal, NY 13850 Telecopy No.: (607) 729-8981 with copy to Deily, Dautel & Mooney, LLP 8 Thurlow Terrace Albany, NY 12203 Telecopy No.: (518) 436-8273 and if such party is the Tenant, to Tenant at the following addresses and telecopy numbers: PEMSTAR INC. 3535 Technology Drive NW Rochester, Minnesota 55901 Telecopy No.: (507) 280-0838 with copy to: Dorsey & Whitney LLP Suite 340, 201 First Avenue SW Rochester, MN 55902 Telecopy No.: (507) 288-6190 Notices, demands, consents or requests served or given as aforesaid shall be deemed sufficiently served or given for all purposes hereunder on the day on which such telecopying or mailing shall occur; provided, however, that in lieu of such notice by United States registered or certified mail, the party giving the notice may do so by personal delivery to the addresses above specified. Either party shall have the right to change the address or telecopy number to which notices shall thereafter be sent to it by giving notice to the other party as aforesaid, but not more than two addresses shall be in effect at any given time for Landlord and Tenant hereunder. 23 ARTICLE 22 Miscellaneous 22.1 Quiet Possession. Landlord covenants that Tenant shall peaceably and quietly enjoy the Premises for as long as Tenant performs and observes its obligations hereunder. 22.2 Holding Over by Tenant. In the event of holding over by Tenant after expiration or termination of the Lease Term, without the consent of Landlord, Tenant shall pay as monthly Base Rent 125% of the Base Rent applicable to the last month of the Lease Term for the entire holdover period. In the event that, and so long as, Landlord and Tenant are negotiating in good faith for the renewal or extension of this Lease and Tenant holds over with Landlord's consent such tenancy shall be on the same terms as provided for in this Lease other than this Section 22 and shall continue on such terms as a tenancy from month to month until sixty (60) days after notice by Landlord to Tenant of Landlord's intention to terminate the tenancy. During any such consensual holdover period, the rent shall be the same rent as was or would be applicable for the Extension Period. 22.3 Binding Effect. The terms, covenants, conditions and agreements herein contained shall run with the Premises and shall bind and inure to the benefit of the parties hereto and their respective representatives, successors and assigns. 22.4 Captions. The captions of this Lease are for convenience and ease of reference only, and in no way define, limit or describe the scope or intent of this Lease, nor in any way affect this Lease, and shall be disregarded in the interpretation hereof. 22.5 Severable. If any provisions of this Lease shall be declared invalid or unenforceable, the remainder hereof shall remain unaffected thereby and shall continue in full force and effect. 22.6 Interpretation. It is acknowledged that in preparation of this Lease, indistinguishable contributions have been made by representatives of both Landlord and Tenant, and that Landlord and Tenant each waives any and all rights, either at law or in equity, to have this Lease, or any term or provision herein contained, construed in favor of either party over the other by reason of who drafted the same. 22.7 Entire Agreement. This Lease contains the entire and only agreement between the parties hereto with respect to the Premises; and no oral statements, agreements or representations not embodied in this Lease shall have any force or effect. This Lease shall not be modified or amended in any manner except in writing, by instrument executed by both parties. 22.8 Interpretation of Terms. All personal pronouns used in this agreement shall include the other genders whether used in the masculine or feminine or neuter gender, and the singular shall include the plural whenever and as often as may be appropriate. 24 22.9 No Partnership. This Lease does not create the relationship of principal and agent or of partnership or of joint venture or of any association between Landlord and Tenant, the sole relationship between the parties being that of landlord and tenant. The laws of the State of Massachusetts shall govern the validity, performance and enforcement of this Lease. 22.10 Brokers. Each party hereby indemnifies the other and agrees to hold the other harmless from and against the claim of any other realtor, broker or agent with whom such party may have dealt with regard to such sale, this Lease or the Premises. IN WITNESS WHEREOF, Landlord and Tenant have each duly executed this Lease as of the date and year first above written. LANDLORD: ---------------------------- James F. Matthews ---------------------------- Judith Matthews TENANT: PEMSTAR INC. By ------------------------- Its ------------------------- 25 EXHIBIT A Part I: Legal description of the Land That certain premises consisting of a certain parcel of land located on the westerly side of Constitution Drive in The Miles Standish Industrial Park shown as lot 58R containing 7.02 acres as shown on a Plan entitled "Plan of Land in Taunton, Massachusetts Owned by the Taunton Development Corporation Scale 1" = 100', dated March 27, 1997, Tibbetts Engineering Corporation, which plan is recorded in the Bristol County Northern District Registry of Deeds at Plan Book 361, Page 55. Part II Permitted Encumbrances Liens as to which an attornment agreement acceptable to Tenant has been executed and easements which do not adversely affect the use and operation of the Premises for the purposes contemplated by this Lease. EX-10.34 4 dex1034.txt ASSET PURCHASE AGREEMENT EXHIBIT 10.34 ASSET PURCHASE AGREEMENT ------------------------ This ASSET PURCHASE AGREEMENT (this "Agreement"), dated as of ___________, 2001, is made and entered into by and among PEMSTAR Inc., a Minnesota corporation ("Buyer"), U.S. Assemblies New England, Inc., a Massachusetts corporation ("Seller"), The MATCO Electronics Group, Inc. a Delaware corporation ("Parent") and James F. Matthews, an individual resident of the State of New York ("Matthews"). WHEREAS, Matthews owns all or substantially all of the stock of Parent, and Parent owns 100% of the stock of Seller, and Seller is engaged in the business of electronic manufacturing services (the "Business"); and WHEREAS, Seller desires to sell and assign to Buyer, and Buyer desires to purchase and assume from Seller, on the terms and subject to the conditions set forth in this Agreement, substantially all of the assets and certain liabilities of Seller that are currently being used by Seller in the conduct of the Business; and WHEREAS, Matthews and Parent are willing to enter into this Agreement to induce Buyer to purchase the assets of Seller. NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements and the conditions set forth in this Agreement, Buyer, Seller, Parent and Matthews hereby agree as follows: ARTICLE I TRANSFER OF ASSETS; ASSUMPTION OF LIABILITIES --------------------------------------------- 1.01 Transfer of Assets. On the terms and subject to the conditions set forth in this Agreement, Seller shall, at the Closing (as defined in Section 3.01 hereof), sell, transfer and assign to Buyer, and Buyer shall purchase and acquire from Seller, all of Seller's right, title and interest, as of the Closing Date (as defined in Section 3.01 hereof), in and to the following assets of Seller related to, or used in conjunction with, the Business (collectively, the "Assets"): (a) All of the equipment, machinery, vehicles, furniture, fixtures, furnishings and leasehold improvements owned by Seller and used by Seller in the operation of the Business, all of which are identified on Schedule 1.01(a) hereto, but excluding those assets which are identified as excluded assets on Schedule 1.01(a); (b) Seller's interest in all personal property leases to which Seller is a party that are used in connection with the operation of the Business, all of which leases are identified in Schedule 1.01(b) hereto; (c) All of Seller's usable inventories of supplies, raw materials, parts, finished goods, work-in-process, product labels and packaging materials used in connection with the Business and Seller's interest in all orders or contracts for the purchase of usable supplies, raw materials, parts, product labels and packaging materials used in connection with the Business, but only to the extent that there are outstanding purchase orders (for purchase within 90 days) from customers associated with such inventory and the orders or contracts for such inventory, and which will be described on Schedule 2.01 at the Closing; (d) Seller's interest in all licenses, contracts or agreements with respect to the Business to which Seller is a party and which are identified on Schedule 1.01(d) hereto; (e) All unfilled or uncompleted customer contracts, commitments or purchase or sales orders received and accepted by Seller in connection with the Business in the ordinary course of business and which are identified on Schedule 1.01(e) hereto, including those mutually agreed to by Buyer and Seller and added to Schedule 1.01(e) at the Closing; (f) All documents or other tangible materials embodying technology or intellectual property rights owned by, licensed to or otherwise controlled by Seller and used in connection with the Business, whether such properties are located on Seller's business premises or on the business premises of Seller's suppliers or customers, including, without limitation all software programs (including both source and object codes) and related documentation for software used in or developed for support of the Business; (g) All intellectual property rights, if any, owned by, licensed to (but only to the extent assignable) or otherwise controlled by Seller or used in, developed for use in or necessary to the conduct of the Business as now conducted or planned to be conducted including, without limitation, the rights to institute or maintain any action or investigation for and to recover damages for any past infringement thereof or any actions of unfair competition relating thereto, but excluding the Mapics software; (h) All of Seller's customer, prospect, dealer and distributor lists, sales literature, inventory records, purchase orders and invoices, sales orders and sales order log books, customer information, commission records, correspondence, employee payroll and personnel records, product data, material safety data sheets, price lists, product demonstrations, quotes and bids and all product catalogs and brochures; (i) All permits, licenses and other governmental approvals held by Seller with respect to the Business, to the extent they are assignable; (j) All deposits made by Seller with respect to the Business, but excluding Seller's deposit under the real estate lease for the property described in Schedule 4.07(a); and (k) Goodwill, all related tangibles and intangibles which Seller uses in the conduct of the Business and all rights to continue to use the Assets in the conduct of a going business. The parties hereto expressly agree that Buyer is not assuming any of the liabilities, obligations or undertakings relating to the foregoing Assets, except for those liabilities and obligations specifically assumed by Buyer in Section 1.02 hereof. 2 1.02 Assumption of Liabilities. Buyer shall assume, pay, perform in accordance with their terms or otherwise satisfy, as of the Closing Date: (a) The liabilities of Seller set forth in Exhibit A hereto; and (b) Seller's obligations under the leases, agreements, contracts, arrangements and licenses described in Schedules 1.01(b), (d) and (e) hereto. 1.03 Excluded Liabilities. Other than as set forth above in Section 1.02, Seller shall retain, and Buyer shall not assume, and nothing contained in this Agreement shall be construed as an assumption by Buyer of, any liabilities, obligations or undertakings of Seller of any nature whatsoever, whether accrued, absolute, fixed or contingent, known or unknown due or to become due, unliquidated or otherwise. Seller shall be responsible for all of the liabilities, obligations and undertakings of Seller not assumed by Buyer pursuant to Section 1.02 hereof. ARTICLE II PURCHASE PRICE -------------- 2.01 Amount. Subject to the purchase price adjustment provisions immediately below, the total purchase price (the "Purchase Price") for the Assets shall be Fifteen Million Two Hundred Forty Thousand Dollars ($15,240,000), which is composed of (subject to reallocation pursuant to Section 2.03 below) $3,200,000 for the inventory identified below, $5,000,000 for equipment, fixed assets, etc., $4,250,000 for goodwill, and the assumption or payoff at Closing of $2,790,000 of equipment-related long-term debt (which debt is described in Exhibit A, and Exhibit A further identifies which debt will be assumed and which will be paid off). If the principal balance of the equipment-related long-term debt is less than $2,790,000 on the Closing Date, then the $5,000,000 paid for the equipment will be increased by such difference. The Purchase Price shall be adjusted, on a dollar-for-dollar basis, by an amount equal to the difference (which may be a positive or negative number) between the book value of the usable inventory purchased hereunder as of the Closing Date and $3,200,000. The usable inventory to be purchased hereunder shall be determined immediately prior to the Closing Date pursuant to the standards described in Section 1.01(c), and shall be identified on Schedule 2.01 and attached to this Agreement. The book value of such purchased inventory as of the Closing Date shall be jointly determined by Buyer and Seller pursuant to a physical inventory conducted immediately prior to the Closing Date and such inventory shall be calculated in accordance with generally accepted accounting principles applied on a consistent basis. Any disputes about the book value of such purchased inventory shall be settled as soon as possible after the Closing by an independent "big five" accounting firm chosen by Buyer and Seller. The cost of such independent accounting firm shall be split between Buyer and Seller. If there is a dispute regarding the book value of the purchased inventory, Buyer shall pay on the Closing Date the purchase price for the undisputed inventory and shall place in escrow with Deily, Dautel & Mooney, LLP on terms to be reasonably agreed the book value of the balance of the inventory (as reflected on Seller's books). The escrow account shall be interest bearing and invested in money market funds or government issues, whichever results in the higher rate under the circumstances. Upon resolution of the disputed amount, the escrowed funds and the pro rata share of earned interest, if any, shall be paid to the parties in accordance with such resolution. 3 The costs of such escrow shall be paid by the party whose calculation of the inventory book value in dispute is furthest from the resolved amount. The costs of the escrow may be withheld from the distribution and paid to the escrow agent or the party who paid such escrow fees. 2.02 Manner of Payment. Buyer shall pay the cash portion of the Purchase Price for the Assets (which would be $12,450,000 before any adjustments pursuant to Section 2.01) on the Closing Date by wire transfer to Seller, as directed by Seller, except that $1,000,000 of the cash portion of the Purchase Price shall be paid directly by Buyer on the account of Seller to those suppliers of Seller listed on Exhibit B in the amounts listed on Exhibit B. Buyer shall have the right to offset from such payment any amounts Seller or Parent owes Buyer. 2.03 Allocation of Purchase Price. The Buyer and Seller have allocated the Purchase Price among the Assets as set forth on Exhibit C, which exhibit shall be updated as of the Closing Date in such a manner as determined by Buyer subject to Seller's consent (which shall not be unreasonably withheld), after taking into account, the applicable Treasury Regulations and the fair market value of such items. Buyer shall prepare for filing all Returns (as defined in Section 4.09(a)) that may be required with respect to the transaction provided for herein pursuant to Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"), any Treasury Regulations promulgated thereunder, any other similar provision of the Code and any other similar, applicable foreign, state or local tax law or regulation. Seller shall provide information that may be required by Buyer for the purpose of preparing such Returns, execute and file such Returns as requested by Buyer and file all other returns and tax information on a basis that is consistent with such Returns prepared by Buyer. ARTICLE III CLOSING ------- 3.01 Closing. The closing of the transactions contemplated by this Agreement (the "Closing") will take place at the offices of Seller at 9:00 a.m. on April 30, 2001, which is referred to herein as the "Closing Date," and the Closing shall be deemed effective as of the beginning of business on the Closing Date. 3.02 General Procedure. At the Closing, each party shall deliver to the party entitled to receipt thereof the documents required to be delivered pursuant to Article VI hereof and such other documents, instruments and materials (or complete and accurate copies thereof, where appropriate) as may be reasonably required in order to effectuate the intent and provisions of this Agreement, and all such documents, instruments and materials shall be satisfactory in form and substance to counsel for the receiving party. The conveyance, transfer, assignment and delivery of the Assets shall be effected by Seller's execution and delivery to Buyer of a bill of sale substantially in the form attached hereto as Exhibit D (the "Bill of Sale") and such other instruments of conveyance, transfer, assignment and delivery as Buyer shall reasonably request to cause Seller to transfer, convey, assign and deliver the Assets to Buyer, and the assignment and assumption of Seller's Liabilities to Buyer shall be effected by Seller's and Buyer's execution of an assignment and assumption agreement substantially in the form attached hereto as Exhibit E (the "Assignment and Assumption Agreement"). 4 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER ---------------------------------------- Seller and Parent hereby jointly and severally represent and warrant to Buyer that, except as set forth in the Disclosure Schedule delivered by Seller to Buyer on the date hereof (the "Disclosure Schedule") (which Disclosure Schedule sets forth the exceptions to the representations and warranties contained in this Article IV under captions referencing the Sections to which such exceptions apply): 4.01 Incorporation and Corporate Power. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Massachusetts and has all requisite corporate power and authority and all authorizations, licenses, permits and certifications necessary to carry on the Business as now being conducted and to own, lease and operate the Assets. 4.02 Execution, Delivery; Valid and Binding Agreement. The execution, delivery and performance of this Agreement by Seller and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors and Shareholders of Seller, and, no other proceedings on its part are necessary to authorize the execution, delivery and performance of this Agreement. This Agreement has been duly executed and delivered by Seller and, assuming that this Agreement is the valid and binding agreement of Buyer, constitutes the valid and binding obligation of Seller, enforceable in accordance with its terms. 4.03 Authority; No Breach. Seller has the requisite corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution, delivery and performance of this Agreement by Seller and the consummation of the transactions contemplated hereby do not conflict with or result in any breach of any of the provisions of, or constitute a default under, result in a violation of, result in the creation of a right of termination or acceleration or any lien, security interest, charge or authorization, consent, approval, exemption or other action by or notice to any court or other governmental body, under the provisions of the Articles of Incorporation or Bylaws of Seller or any indenture, mortgage, lease, loan agreement or other agreement or instrument by which Seller or the Assets are bound or affected, or any law, statute, rule or regulation or order, judgment or decree to which Seller or the Assets are subject, except as set forth in the Disclosure Schedule under the caption referencing this Section 4.03. 4.04 Governmental Authorities; Consents. Except as set forth in the Disclosure Schedule under the caption referencing this Section 4.04, the Seller is not required to submit any notice, report or other filing with any governmental authority in connection with the execution or delivery by it of this Agreement or the consummation of the transactions contemplated hereby. Except as set forth in the Disclosure Schedule, no consent, approval or authorization of any governmental or regulatory authority is required to be obtained by Seller in connection with its execution, delivery and performance of this Agreement. 4.05 Financial Information. Seller has delivered to Buyer copies of the following financial information: the unaudited balance sheets of the Seller as of December 31, 2000 (the 5 "Latest Balance Sheet") and December 31, 1999 and the unaudited statements of earnings, shareholders' equity and cash flows of the Seller for the year ended December 31, 2000 and December 31, 1999 (collectively, the "Financial Information"). This Financial Information is based upon the information contained in the books and records of Seller, fairly present the financial condition of the Business as of the dates thereof and results of operations for the periods referred to therein and were prepared in accordance with generally accepted accounting principles, consistently applied throughout the periods indicated. Since the respective dates of this Financial Information there have been no material changes in the Business or the Assets. 4.06 Absence of Undisclosed Liabilities. With respect to the Assets or the operations of the Business, Seller has no liabilities (whether accrued, absolute, contingent, unliquidated or otherwise, whether due or to become due, whether known or unknown, and regardless of when asserted) arising out of transactions or events heretofore entered into, or any action or inaction, or any state of facts existing, with respect to or based upon transactions or events heretofore occurring, except (i) as reflected in the Financial Statements, (ii) liabilities which have arisen after the date of the Latest Balance Sheet in the ordinary course of business (none of which is a material uninsured liability for breach of contract, breach of warranty, tort, infringement, claim or lawsuit), or (iii) as otherwise set forth in the Disclosure Schedule under the caption referencing this Section 4.06. 4.07 Title to Properties. (a) Seller does not own any real property relating to the Business. The real property demised by the leases (the "Leases") described under the caption referencing this Section 4.07(a) in the Disclosure Schedule constitutes all of the real property used or occupied by Seller used in connection with the Business (the "Real Property"). The Real Property has access, sufficient for the conduct of the Business as now conducted or as presently proposed to be conducted, to public roads and to all utilities, including electricity, sanitary and storm sewer, potable water, natural gas and other utilities, used in the operation of the Business at that location. (b) The leases and licenses to be assumed by Buyer and listed in Exhibit A or Schedules 1.01(b) or (d) are in full force and effect, and Seller holds a valid and existing interest under each lease or license for the term set forth under such caption in the Disclosure Schedule. Seller has delivered to Buyer complete and accurate copies of each lease or license, and none of such leases or licenses have been modified in any respect, except to the extent that such modifications are disclosed by the copies delivered to Buyer. Except as set forth in the Disclosure Schedule referencing this Section 4.07(b), Seller is not in default, and no circumstances exist which, if unremedied, would, either with or without notice or the passage of time or both, result in such default under any of such leases or licenses; nor, to the best knowledge of Seller, is any other party to any of such leases or licenses in default. (c) Except as set forth in the Disclosure Schedule referencing this Section 4.07(c), Seller owns good and marketable title to the Assets, including each of the tangible properties and tangible assets reflected on the Latest Balance Sheet or acquired since the date thereof, free and clear of all liens and encumbrances. 6 (d) Schedule 1.01(a) sets forth a description of all the assets which constitute equipment, machinery, motor vehicles, furniture, fixtures, furnishings and leasehold improvements that are used in connection with the operation of the Business. Except as otherwise described in the Disclosure Schedule under the caption referencing this Section 4.07(d), all of the buildings, machinery, equipment and other tangible assets necessary for the conduct of the Business are in good condition and repair, ordinary wear and tear excepted, and are usable in the ordinary course of business. There are no defects in such assets or other conditions relating thereto which, in the aggregate, materially adversely affect the operation or value of such assets. Seller owns, or leases under valid leases, all buildings, machinery, equipment and other tangible assets necessary for the conduct of the Business. (e) Except as set forth in the Disclosure Schedule referencing this Section 407(e), Seller is not in violation of any applicable zoning ordinance or other law, regulation or requirement relating to the operation of any properties used in the operation of the Business, and Seller has not received any notice of any such violation, or the existence of any condemnation proceeding with respect to any of the Real Property, except, in each case, with respect to violations the potential consequences of which do not or will not have a material adverse effect on Seller. (f) Seller has no knowledge of improvements made or contemplated to be made by any public or private authority, the costs of which are to be assessed as special taxes or charges against any of the Real Property, and there are no present assessments. 4.08 Inventory. Seller's inventory of raw materials, work in process and finished goods relating to the Business and purchased hereunder consists of items of a quality and quantity usable and, with respect to finished goods only, salable at the Seller's normal profit levels, in each case, in the ordinary course of the business, and there are outstanding purchase orders (for purchase within 90 days) from customers associated with such inventory. Seller's inventory of finished goods generated by the Business is not obsolete, excess or damaged and is merchantable and fit for its particular use. As of the date of the Latest Balance Sheet, the values at which such inventory is carried on the Latest Balance Sheet are in accordance with generally accepted accounting principles. The Disclosure Schedule, under the caption referencing this Section 4.08, contains a materially complete and accurate summary of the Seller's inventory of raw materials, work in progress and finished goods relating to the Business as of the dates set forth on the Schedule. 4.09 Tax Matters. (a) Each of Seller and any subsidiary, any affiliated, combined or unitary group of which the Company or any subsidiary is or was a member, any "Plans" (as defined in Section 4.15 hereof), as the case may be (each, a "Tax Affiliate" and, collectively, the "Tax Affiliates"), has: (i) timely filed (or has had timely filed on its behalf) all returns, declarations, reports, estimates, information returns, and statements ("Returns") required to be filed or sent by it in respect of any "Taxes" (as defined in subsection (b) below) or required to be filed or sent by it by any taxing authority having jurisdiction; (ii) timely and properly paid (or has had paid on its 7 behalf) all Taxes shown to be due and payable on such Returns; (iii) established on its Latest Balance Sheet, in accordance with generally accepted accounting principles, reserves that are adequate for the payment of any Taxes not yet due and payable; (iv) complied with all applicable laws, rules, and regulations relating to the withholding of Taxes and the payment thereof (including, without limitation, withholding of Taxes under Sections 1441 and 1442 of the Internal Revenue Code of 1986, as amended (the "Code"), or similar provisions under any foreign laws), and timely and properly withheld from individual employee wages and paid over to the proper governmental authorities all amounts required to be so withheld and paid over under all applicable laws. There are no liens for Taxes upon any of the assets, except liens for Taxes not yet due. (b) For purposes of this Agreement, the term "Taxes" means all taxes, charges, fees, levies, or other assessments, including, without limitation, all net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, social security, unemployment, excise, estimated, severance, stamp, occupation, property, or other taxes, customs duties, fees, assessments, or charges of any kind whatsoever, including, without limitation, all interest and penalties thereon, and additions to tax or additional amounts imposed by any taxing authority, domestic or foreign, upon Seller or any Tax Affiliate. 4.10 Contracts and Commitments. (a) The Disclosure Schedule, under the caption referencing this Section 4.10(a), lists the following agreements, whether oral or written, to which Seller is a party, which are currently in effect, and which relate to the operation of the Business or the Assets: (i) collective bargaining agreement or contract with any labor union; (ii) bonus, pension, profit sharing, retirement or other form of deferred compensation plan, other than as described under the caption referencing Section 4.15 hereof (or excluded by such Section from inclusion thereunder) in the Disclosure Schedule; (iii) hospitalization insurance or other welfare benefit plan or practice, whether formal or informal, other than as described under the caption referencing Section 4.15 hereof in the Disclosure Schedule (or excluded by such Section from inclusion thereunder); (iv) contract for the employment of any officer, individual employee or other person on a full-time or consulting basis or relating to severance pay for any such person; (v) confidentiality agreement; (vi) agreement or indenture relating to the borrowing of money or to mortgaging, pledging or otherwise placing a lien on any of the Assets; (vii) guaranty of any obligation for borrowed money or otherwise; (viii) lease or agreement under which it is lessee of, or holds or operates any property, real or personal, owned by any other party, for which the annual rental exceeds $5,000; (ix) lease or agreement under which it is lessor of, or permits any third party to hold or operate, any property, real or personal, for which the annual rental exceeds $5,000; (x) contract or group of related contracts with the same party for the purchase of products or services under which the undelivered balance of such products or services is in excess of $25,000; (xi) contract or group of related contracts with the same party for the sale of products or services under which the undelivered balance of such products or services has a sales price in excess of $25,000; (xii) contract or group of related contracts with the same party (other than any contract or group of related contracts for the purchase or sale of products or services) continuing over a period of more than six months from the date or dates thereof, not terminable 9 by it on 30 days' or less notice without penalty and involving more than $25,000; (xiii) contract which prohibits Seller from freely engaging in business anywhere in the world; (xiv) contract for the distribution of any of the products of the Business (including any distributor, sales and original equipment manufacturer contract); (xv) franchise agreement; (xvi) license agreement or agreement providing for the payment or receipt of royalties or other compensation by Seller in connection with the intellectual property rights listed under the caption referencing Section 4.11 hereof in the Disclosure Schedule; (xvii) contract or commitment for capital expenditures in excess of $25,000; (xviii) agreement for the sale of any capital asset; or (xix) other agreement which is either material to the Business or was not entered into in the ordinary course of business. (b) Except as disclosed in the Disclosure Schedule under the caption referencing this Section 4.10(b), Seller has performed all obligations required to be performed by it in connection with the contracts or commitments required to be disclosed in the Disclosure Schedule under the caption referencing Section 4.10(a) and is not in receipt of any claim of default under any contract or commitment required to be disclosed under such caption; Seller has no present expectation or intention of not fully performing any material obligation pursuant to any contract or commitment required to be disclosed under such caption; and Seller has no knowledge of any breach or anticipated breach by any other party to any contract or commitment required to be disclosed under such caption. (c) Prior to the date of this Agreement, Buyer has been supplied with a true and correct copy of each written contract or commitment, and a written description of each oral contract or commitment, referred to under the caption referencing Section 4.10(a) in the Disclosure Schedule, together with all amendments, waivers or other changes thereto. 4.11 Intellectual Property Rights. The Disclosure Schedule describes under the caption referencing this Section 4.11 all intellectual property rights which have been licensed to third parties and those intellectual property rights which are licensed from third parties. Seller has taken all necessary action to protect the intellectual property rights set forth under such caption. Seller has not received any notice of, nor are there any facts known to Seller which indicate a likelihood of, any infringement or misappropriation by, or conflict from, any third party with respect to the intellectual property rights listed in the Disclosure Schedule; no claim by any third party contesting the validity of any intellectual property rights listed under such caption has been made, is currently outstanding or, to the best knowledge of the Company, is threatened; Seller has not received any notice of any infringement, misappropriation or violation by Seller of any intellectual property rights of any third parties and Seller has not infringed, misappropriated or otherwise violated any such intellectual property rights; and no infringement, illicit copying, misappropriation or violation has occurred or will occur with respect to products currently being sold by Seller or with respect to the products currently under development (in their present state of development) or with respect to the conduct of the Business as now conducted. 4.12 Litigation. Except as set forth in the Disclosure Schedule under the caption referencing this Section 4.12, there are no actions, suits, proceedings, orders or investigations pending or, to the best knowledge of Seller, threatened against Seller, at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, 9 bureau, agency or instrumentality, domestic or foreign, relating to the Business and there is no reasonable basis known to Seller for any of the foregoing. 4.13 Warranties. The Disclosure Schedule summarizes under the caption referencing this Section 4.13 all claims outstanding, pending or, to the best knowledge of Seller, threatened for breach of any warranty relating to any products of the Business sold by Seller prior to the date hereof. The description of Seller's product warranties set forth under the caption referencing this Section 4.13 is correct and complete. The reserves for warranty claims on the Latest Balance Sheet are consistent with Seller's prior practices and are fully adequate to cover all warranty claims made or to be made against any products of the Business sold prior to the date thereof. 4.14 Employees. Except as set forth in the Disclosure Schedule under the caption referencing this Section 4.14, and only with respect to employees of Seller who perform functions in connection with the Business: (a) to the best knowledge of Seller, no employee of Seller and no group of the Seller's employees has any plans to terminate his or its employment; (b) Seller has complied with all laws relating to the employment of labor, including provisions thereof relating to wages, hours, equal opportunity, collective bargaining and the payment of social security and other taxes; (c) Seller has no material labor relations problem pending and its labor relations are satisfactory; (d) there are no workers' compensation claims pending against Seller nor is Seller aware of any facts that would give rise to such a claim; (e) to the best knowledge of Seller, no employee of Seller is subject to any secrecy or noncompetition agreement or any other agreement or restriction of any kind that would impede in any way the ability of such employee to carry out fully all activities of such employee in furtherance of the Business; and (f) no employee or former employee of Seller has any claim with respect to any intellectual property rights of Seller set forth under the caption referencing Section 4.14 hereof in the Disclosure Schedule. The Disclosure Schedule, under the caption referencing this Section 4.14, lists, as of the date set forth in the Disclosure Schedule, each employee of Seller who performs functions in connection with the Business and the position, title, remuneration (including any scheduled salary or remuneration increases), date of employment and accrued vacation pay of each such employee. 4.15 Employee Benefit Plans. (a) Except as set forth under the caption referencing Section 4.15 hereof in the Disclosure Schedule, with respect to all employees and former employees of Seller who perform or performed functions in connection with the Business and all dependents and beneficiaries of such employees and former employees: (i) Seller does not maintain or contribute to any nonqualified deferred compensation or retirement plans, contracts or arrangements; (ii) Seller does not maintain or contribute to any qualified defined contribution plans (as defined in Section 3(34) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 414(i) of the Code; (iii) Seller does not maintain or contribute to any qualified defined benefit plans (as defined in Section 3(35) of ERISA or Section 414(j) of the Code); and (iv) Seller does not maintain or contribute to any employee welfare benefit plans (as defined in Section 3(1) of ERISA). 10 (b) To the extent required (either as a matter of law or to obtain the intended tax treatment and tax benefits), all employee benefit plans (as defined in Section 3(3) of ERISA) which Seller does maintain or to which it does contribute (collectively, the "Plans") comply in all material respects with the requirements of ERISA and the Code. With respect to the Plans, (i) all required contributions which are due have been made and a proper accrual has been made for all contributions due in the current fiscal year; (ii) there are no actions, suits or claims pending, other than routine uncontested claims for benefits; and (iii) there have been no prohibited transactions (as defined in Section 406 of ERISA or Section 4975 of the Code). (c) Buyer has received true and complete copies of the most recent determination letter, if any, received by Seller from the Internal Revenue Service regarding the Plans which Seller maintains or to which it contributes and any amendment to any Plan made subsequent to any Plan amendments covered by any such determination letter. (d) Seller does not contribute (and has not ever contributed) to any multi-employer plan, as defined in Section 3(37) of ERISA. Seller has no actual or potential liabilities under Section 4201 of ERISA for any complete or partial withdrawal from a multi-employer plan. Seller has no actual or potential liability for death or medical benefits after separation from employment, other than (i) death benefits under the employee benefit plans or programs (whether or not subject to ERISA) set forth under the caption referencing this Section 4.15 in the Disclosure Schedule and (ii) health care continuation benefits described in Section 4980B of the Code. (e) Neither Seller nor any of its directors, officers, employees or other "fiduciaries", as such term is defined in Section 3(21) of ERISA, has committed any breach of fiduciary responsibility imposed by ERISA or any other applicable law with respect to the Plans which would subject Seller, Buyer, Buyer's subsidiaries or any of their respective directors, officers or employees to any liability under ERISA or any applicable law. (f) Seller has not incurred any liability for any tax or civil penalty or any disqualification of any employee benefit plan (as defined in Section 3(3) of ERISA) imposed by Sections 4980B and 4975 of the Code and Part 6 of Title I and Section 502(i) of ERISA. 4.16 Suppliers. The Disclosure Schedule, under the caption referencing this Section 4.16, lists the 10 largest suppliers of Seller relating to the Business for the fiscal year ended December 31, 2000 and for the two-month period ended February 28, 2001 and sets forth opposite the name of each such supplier the approximate percentage of net sales or purchases by Seller attributable to such supplier for each such period. 4.17 Compliance with Laws; Permits. (a) Seller and its officers, directors, agents and employees have complied in all material respects with all applicable laws, regulations and other requirements, including, but not limited to, federal, state, local and foreign laws, ordinances, rules, regulations and other requirements pertaining to product labeling, consumer products safety, equal employment opportunity, employee retirement, affirmative action and other hiring practices, occupational 11 safety and health, workers' compensation, unemployment and building and zoning codes, which materially affect the Business, the Assets or the Real Property and to which Seller may be subject, and no claims have been filed against Seller alleging a violation of any such laws, regulations or other requirements. Seller has no knowledge of any action, pending or threatened, to change the zoning or building ordinances or any other laws, rules, regulations or ordinances affecting the Assets or the Real Property. Seller is not relying on any exemption from or deferral of any such applicable law, regulation or other requirement that would not be available to Buyer after it acquires the Assets. (b) Seller has, in full force and effect, all licenses, permits and certificates, from federal, state, local and foreign authorities (including, without limitation, federal and state agencies regulating occupational health and safety) necessary to conduct its Business and own and operate Assets (other than Environmental Permits, as such term is defined in Section 4.18(c) hereof) (collectively, the "Permits"). A true, correct and complete list of all the Permits is set forth under the caption referencing this Section 4.17 in the Disclosure Schedule, with an indication as to whether the Permit is assignable to Buyer. Seller has conducted its business in compliance with all material terms and conditions of the Permits. (c) In particular, but without limiting the generality of the foregoing, Seller has not violated and has no liability, and has not received a notice or charge asserting any violation of or liability under, the federal Occupational Safety and Health Act of 1970 or any other federal or state acts (including rules and regulations thereunder) regulating or otherwise affecting employee health and safety in connection with the Business. 4.18 Environmental Matters. (a) As used in this Section 4.18, the following terms shall have the following meanings: (i) "Hazardous Materials" means any dangerous, toxic or hazardous pollutant, contaminant, chemical, waste, material or substance as defined in or governed by any federal, state or local law, statute, code, ordinance, regulation, rule or other requirement relating to such substance or otherwise relating to the environment or human health or safety, including without limitation any waste, material, substance, pollutant or contaminant that might cause any injury to human health or safety or to the environment or might subject Seller to any imposition of costs or liability under any Environmental Law. (ii) "Environmental Laws" means all applicable federal, state, local and foreign laws, rules, regulations, codes, ordinances, orders, decrees, directives, permits, licenses and judgments relating to pollution, contamination or protection of the environment (including, without limitation, all applicable federal, state, local and foreign laws, rules, regulations, codes, ordinances, orders, decrees, directives, permits, licenses and judgments relating to Hazardous Materials in effect as of the date of this Agreement). 12 (iii)"Release" shall mean the spilling, leaking, disposing, discharging, emitting, depositing, ejecting, leaching, escaping or any other release or threatened release, however defined, whether intentional or unintentional, of any Hazardous Material. (b) Seller, with respect to the Business and the Real Property, is in material compliance with all applicable Environmental Laws. (c) Seller has obtained, and maintained in full force and effect, all environmental permits, licenses, certificates of compliance, approvals and other authorizations necessary to conduct the Business and own or operate the Assets, including the Real Property (collectively, the "Environmental Permits"). A copy of each such Environmental Permit has been provided by Seller to Buyer. Seller has conducted the Business in compliance with all terms and conditions of the Environmental Permits. Seller has filed all reports and notifications required to be filed under and pursuant to all applicable Environmental Laws with respect to the Business and the Assets. (d) Except as set forth in the Disclosure Schedule under the caption referencing this Section 4.18: (i) no Hazardous Materials have been generated, treated, contained, handled, located, used, manufactured, processed, buried, incinerated, deposited, stored, or released on, under or about any part of the Real Property, (ii) the Real Property and any improvements thereon, contain no asbestos, urea, formaldehyde, radon at levels above natural background, polychlorinated biphenyls (PCBs) or pesticides, and (iii) no aboveground or underground storage tanks are located on, under or about the Real Property, or have been located on, under or about the Real Property and then subsequently been removed or filled. If any such storage tanks exist on, under or about the Real Property, such storage tanks have been duly registered with all appropriate governmental entities and are otherwise in compliance with all applicable Environmental Laws. (e) Except as set forth in the Disclosure Schedule under the caption referencing this Section 4.18, Seller has not received notice alleging in any manner that Seller is, or might be potentially responsible for, any Release of Hazardous Materials, or any costs arising under or violation of Environmental Laws with respect to the Business or the Assets. (f) No expenditure will be required in order for Buyer to comply with any Environmental Laws in effect at the time of the Closing in connection with the operation or continued operation of the Business or the Real Property in a manner consistent with the current operation thereof by Seller. (g) Seller and the Real Property are not and have not been listed on the United States Environmental Protection Agency National Priorities List of Hazardous Waste Sites, or any other list, schedule, law, inventory or record of hazardous or solid waste sites maintained by any federal, state or local agency. (h) Seller has disclosed and delivered to Buyer all environmental reports and investigations which Seller has obtained or ordered with respect to the Business and the Assets, including the Real Property. 13 (i) No part of the Business or the Assets (including the Real Property) have been used as a landfill, dump or other disposal, storage, transfer, handling or treatment area for Hazardous Materials, or as a gasoline service station or a facility for selling, dispensing, storing, transferring, disposing or handling petroleum and/or petroleum products. (j) No lien has been attached or filed against Seller (with respect to the Business or the Assets) or the Assets or the Real Property in favor of any governmental or private entity for (i) any liability or imposition of costs under or violation of any applicable Environmental Law; or (ii) any Release of Hazardous Materials. (k) Seller, on behalf of itself and its successors and assigns, hereby waives, releases and agrees not to bring any claim, demand, cause of action or proceeding, including without limitation any cost recovery action, against Buyer under any Environmental Law in connection with the Buyer's purchase, ownership or operation of the Business and the Assets. Except as provided above, Buyer, on behalf of itself and its successors and assigns, hereby waives, releases and agrees not to bring any claim, demand, cause of action or proceeding, including without limitation any cost recovery action, against Seller under any Environmental Law arising from Buyer's operation of the Business and the Assets. 4.19 Brokerage. No third party shall be entitled to receive any brokerage commissions, finder's fees, fees for financial advisory services or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of Seller. ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER --------------------------------------- Buyer hereby represents and warrants to Seller that: 5.01 Incorporation and Corporate Power. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Minnesota, with the requisite corporate power and authority to enter into this Agreement and perform its obligations hereunder. 5.02 Execution, Delivery; Valid and Binding Agreement. The execution, delivery and performance of this Agreement by Buyer and the consummation of the transactions contemplated hereby have been duly and validly authorized by all requisite corporate action, and no other corporate proceedings on its part are necessary to authorize the execution, delivery or performance of this Agreement. This Agreement has been duly executed and delivered by Buyer and constitutes the valid and binding obligation of Buyer, enforceable in accordance with its terms. 5.03 No Breach. The execution, delivery and performance of this Agreement by Buyer and the consummation by Buyer of the transactions contemplated hereby do not conflict with or result in any breach of any of the provisions of, constitute a default under, result in a violation of, 14 result in the creation of a right of termination or acceleration or any lien, security interest, charge or encumbrance upon any assets of Buyer, or require any authorization, consent, approval, exemption or other action by or notice to any court or other governmental body, under the provisions of the Articles of Incorporation or Bylaws of Buyer or any indenture, mortgage, lease, loan agreement or other agreement or instrument by which Buyer is bound or affected, or any law, statute, rule or regulation or order, judgment or decree to which Buyer is subject. 5.04 Governmental Authorities; Consents. Buyer is not required to submit any notice, report or other filing with any governmental authority in connection with the execution or delivery by it of this Agreement or the consummation of the transactions contemplated hereby. No consent, approval or authorization of any governmental or regulatory authority or any other party or person is required to be obtained by Buyer in connection with its execution, delivery and performance of this Agreement or the transactions contemplated hereby. 5.05 Brokerage. No third party shall be entitled to receive any brokerage commissions, finder's fees, fees for financial advisory services or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of Buyer. ARTICLE VI COVENANTS OF SELLER AND CONDITIONS TO CLOSING --------------------------------------------- 6.01 Conduct of the Business. In connection with the Assets or the Business, Seller agrees to observe each term set forth in this Section 6.01 and agrees that, from the date hereof until the Closing Date, unless otherwise consented to by Buyer in writing: (a) The Business shall be conducted only in, and Seller shall not take any action except in, the ordinary course of Seller's business, on an arm's-length basis and in accordance in all material respects with all applicable laws, rules and regulations and Seller's past custom and practice; (b) Seller shall not, directly or indirectly, do or permit to occur any of the following insofar as they relate to Business or the Assets: (i) sell, pledge, dispose of or encumber any of the Assets, except in the ordinary course of business; (ii) acquire (by merger, exchange, consolidation, acquisition of stock or assets or otherwise) any corporation, partnership, joint venture or other business organization or division or material assets thereof; (iii) incur any indebtedness for borrowed money or issue any debt securities except the borrowing of working capital in the ordinary course of business and consistent with past practice; (iv) accelerate, beyond the normal collection cycle, collection of accounts receivable; or (v) enter into or propose to enter into, or modify or propose to modify, any agreement, arrangement or understanding with respect to any of the matters set forth in this Section 6.01(b); (c) Seller shall not, directly or indirectly, (i) enter into or modify any employment, severance or similar agreements or arrangements with, or grant any bonuses, salary increases, severance or termination pay to, any officers or directors or consultants; or (ii) in the case of employees, officers or consultants, take any action with respect to the grant of any 15 bonuses, salary increases, severance or termination pay or with respect to any increase of benefits payable in effect on the date hereof; (d) Seller shall not adopt or amend any bonus, profit sharing, compensation, pension, retirement, deferred compensation, employment or other employee benefit plan, trust, fund or group arrangement for the benefit or welfare of any employees or affiliates; (e) Seller shall not cancel or terminate its current insurance policies covering the Assets and the Business, or cause any of the coverage thereunder to lapse, unless simultaneously with such termination, cancellation or lapse, replacement policies providing coverage equal to or greater than the coverage under the canceled, terminated or lapsed policies for substantially similar premiums are in full force and effect; (f) Seller shall (i) use its best efforts to preserve intact the organization and goodwill of the Business, keep available the services of Seller's officers and employees as a group and maintain satisfactory relationships with suppliers, distributors, customers and others having business relationships with Seller in connection with the Business; (ii) confer on a regular and frequent basis with representatives of Buyer to report operational matters and the general status of ongoing operations with respect to the Business; (iii) not intentionally take any action which would render, or which reasonably may be expected to render, any representation or warranty made by it in this Agreement untrue at the Closing; (iv) notify Buyer of any emergency or other change in the normal course of the Business or in the operation of the properties of the Business and of any governmental or third party complaints, investigations or hearings (or communications indicating that the same may be contemplated) if such emergency, change, complaint, investigation or hearing would be material, individually or in the aggregate, to the business, operations or financial condition of Seller or to Seller's or Buyer's ability to consummate the transactions contemplated by this Agreement; and (v) promptly notify Buyer in writing if Seller shall discover that any representation or warranty made by it in this Agreement was when made, or has subsequently become, untrue in any respect; (g) Seller shall file any Tax returns, elections or information statements with respect to any liabilities for Taxes of Seller or other matters relating to Taxes of Seller which affect the Assets and pursuant to applicable law must be filed prior to the Closing Date; 6.02 Conditions to Buyer's Obligations. The obligation of Buyer to consummate the transactions contemplated by this Agreement is subject to the satisfaction of the following conditions on or before the Closing Date: (a) The representations and warranties set forth in Article IV hereof shall be true and correct in all material respects at and as of the Closing Date as though then made and as though the Closing Date had been substituted for the date of this Agreement throughout such representations and warranties (without taking into account any disclosures by Seller of discoveries, events or occurrences arising on or after the date hereof), except that any such representation or warranty made as of a specified date (other than the date hereof) shall only need to have been true on and as of such date; 16 (b) There shall not be threatened, instituted or pending any action or proceeding, before any court or governmental authority or agency, domestic or foreign, (i) challenging or seeking to make illegal, or to delay or otherwise directly or indirectly restrain or prohibit, the consummation of the transactions contemplated hereby or seeking to obtain material damages in connection with such transactions, (ii) seeking to prohibit direct or indirect ownership or operation by Buyer of all or a material portion of the Assets, or to compel Buyer or any of its subsidiaries to dispose of or to hold separately all or a material portion of the business or assets of Buyer and its subsidiaries, as a result of the transactions contemplated hereby, (iii) seeking to invalidate or render unenforceable any material provision of this Agreement, or (iv) otherwise relating to and materially adversely affecting the transactions contemplated hereby; (c) Buyer shall not have discovered any fact or circumstance existing as of the date of this Agreement which has not been disclosed to Buyer as of the date of this Agreement regarding the Business or Assets, which is, individually or in the aggregate with other such facts and circumstances, materially adverse to the value of the Assets or the Business, as determined by the Buyer in its reasonable discretion; (d) There shall have been no damage, destruction or loss of or to any of the Assets, whether or not covered by insurance, which, in the aggregate, has, or would be reasonably likely to have, a material adverse effect on the Assets or the Business; (e) Buyer shall have negotiated to its satisfaction the terms of a Lease Agreement for the facility currently leased by Seller (which Lease Agreement is referenced in subsection (g) (iii) below and shall include the consent of the Massachusetts Industrial Finance Agency and an Attornment Agreement acceptable to Buyer); (f) Buyer shall have received evidence of the appropriate consents as are necessary, in Buyer's judgment, for Buyer to assume the leases or debt to be assumed by Buyer under this Agreement on terms satisfactory to Buyer; (g) On the Closing Date, Seller shall have delivered to Buyer all of the following: (i) an executed copy of the Bill of Sale and such other instruments of conveyance, transfer, assignment and delivery as Buyer shall have reasonably requested pursuant to Section 3.02 hereof; (ii) an executed copy of the Assignment and Assumption Agreement; (iii)a Lease Agreement executed by the owner of the Real Property in the form attached hereto as Exhibit F (the "Lease Agreement") (if the Lease Agreement is not attached at the time of the execution of this Agreement, then it will be attached if and when Buyer successfully negotiates the terms as described in subsection (e) above); (iv) such representations, warranties and covenants, which shall be incorporated into this Agreement and subject to Article VIII, regarding the assumption of the 17 debt under the Industrial Development Revenue Bonds as Buyer deems necessary and reasonable under the circumstances; (v) certificate of the President of Seller dated as of the Closing Date stating that the conditions precedent set forth in subsections (a) and (b) above have been satisfied; (vi) an opinion letter from legal counsel to Seller addressed to Buyer opining as to the enforceability of this Agreement, the Bill of Sale and the Assignment and Assumption Agreement under Massachusetts law in such form as is reasonably satisfactory to Buyer; and (vii) such other certificates, documents and instruments as Buyer reasonably requests related to the transactions contemplated hereby (including UCC releases or termination statements from the creditors of Seller and Parent with liens on any of the Assets and the Attornment Agreement referred to in subsection (e) above). (h) Seller shall have made an arrangement with Microsoft Corporation on terms satisfactory to Buyer so that Buyer will have appropriate paid-up licenses to all the Microsoft software currently being used by Seller in the Business. (i) Buyer shall have received and shall be satisfied with the results of an environmental audit of the operations of and the real property used by the Business. 6.03 Conditions to Seller's Obligations. The obligation of Seller to consummate the transactions contemplated by this Agreement is subject to the satisfaction of the following conditions on or before the Closing Date: (a) On the Closing Date, Buyer will have delivered to Seller (i) an executed copy of the Assignment and Assumption Agreement; and (ii) an executed copy of the Lease Agreement. (b) On the Closing Date, Buyer shall have delivered to Escrow Agent the purchase price as determined pursuant to section 2.01 above. ARTICLE VII ADDITIONAL AGREEMENTS --------------------- 7.01 Employment Matters. Effective as of the Closing Date, Buyer shall offer to hire all qualified employees of Seller who Buyer reasonably believes are necessary and qualified to operate its business. All terms, including benefits, of each offer to such person shall be determined by Buyer in its sole discretion and nothing herein shall constitute an agreement to assume or be bound by any previous or existing agreement between Seller and any of Seller's employees or a guaranty that any employee of Seller, to whom an offer of employment may be 18 made, shall be entitled to remain in the employment of Buyer for a specified period of time. An employee of the Business to whom an offer of employment is made by Buyer and who accepts such offer shall become an employee of Buyer on the day such person reports to work for the Buyer. Such person who is unable to report to work for Buyer on the Closing Date due to illness, injury or other reason shall remain an employee of Seller until such person reports to work for Buyer. Seller shall remain solely responsible for all salaries, wages, benefits, severance arrangements and all other terms of employment for (a) each person who may become an employee of Buyer accruing prior to the date such person becomes an employee of Buyer and (b) each employee of the Business who does not become an employee of Buyer accruing at any time. 7.02 Payment of Seller Liabilities. Seller agrees that, after the Closing, it shall pay in the ordinary course of business all liabilities of Seller related to the Business and not provided for in the Escrow Agreement. 7.03 Non-Competition. (a) For a period of two (2) years from and after the Closing Date ("Non-Competition Period"), Seller, Parent, or any corporation or other entity or business with which Seller or Parent is in any way affiliated shall not directly or indirectly, without the prior written consent of Buyer, (i) engage anywhere in the Restricted Territory, or have any ownership interest in (except for ownership of one percent (1%) or less of any entity whose securities have been registered under the Securities Act or the Exchange Act), or participate in the financing, operation, management or control of, any firm, partnership, corporation, entity or business that engages or participates in a "Seller Competing Business Purpose," (ii) solicit any business from or perform any business for any customer of Seller existing on the Closing Date and identified on Schedule 7.03(a), (iii) induce or attempt to induce any customer, supplier, distributor, licensee or other business relation of the Seller to cease doing business with the Buyer or any affiliate of Buyer, or in any way interfere with the relationship between any such customer, supplier, distributor, licensee or business relation, (iv) request, induce or attempt to influence, directly or indirectly, any employee of Buyer to leave the employ of Buyer, or in any way interfere with the relationship between Buyer and any employee thereof, or (v) employ any person who as of the date of this Agreement is, or after such date is, an employee of Buyer or any affiliate of Buyer, or was within the preceding one-year period an employee of Seller or any affiliate of Seller. The term "Restricted Territory" shall mean Massachusetts, New Hampshire and Rhode Island. The term "Seller Competing Business Purpose" means the Business as conducted at the Closing Date. (b) Seller and Parent acknowledge and agree that their covenants and obligations with respect to non-competition relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause irreparable injury for which adequate remedies are not available at law. Therefore, Seller and Parent agree that Buyer will be entitled to an injunction, restraining order or such other equitable relief as a court of competent jurisdiction may deem necessary or appropriate to restrain Seller and/or Parent or its affiliates from committing any violation of the covenants set forth in this Section 7.03(b). 19 ARTICLE VIII SURVIVAL; INDEMNIFICATION ------------------------- 8.01 Survival of Representations and Warranties. Notwithstanding any investigation made by or on behalf of any of the parties hereto or the results of any such investigation and notwithstanding the participation of such party in the Closing, the representations and warranties contained in Article IV and Article V hereof shall survive the Closing. 8.02 (a) Indemnification by Seller. Seller and Parent jointly and severally agree to indemnify in full Buyer and its officers, directors, employees, agents and stockholders (collectively, the "Buyer Indemnified Parties") and hold them harmless against any loss, liability, deficiency, damage, expense or cost (including reasonable legal expenses) (collectively, "Losses"), which Buyer Indemnified Parties may suffer, sustain or become subject to, as a result of (i) any misrepresentation in any of the representations and warranties of Seller contained in this Agreement or in any exhibits, schedules, certificates or other documents delivered or to be delivered by or on behalf of Seller pursuant to the terms of this Agreement or otherwise referenced or incorporated in this Agreement (collectively, the "Related Documents"), (ii) any breach of, or failure to perform, any agreement of Seller contained in this Agreement or any of the Related Documents, (iii) any "Claims" (as defined in Section 8.04(a) hereof) or threatened Claims against Buyer arising out of the actions or inactions of Seller with respect to the Assets or the Business prior to the Closing, or (iv) any liabilities of the Seller or the Business not specifically assumed in this Agreement (collectively, "Buyer Losses"). (b) Indemnification by James F. Matthews. Matthews agrees to indemnify in full the Buyer Indemnified Parties and hold them harmless against any Loss which Buyer Indemnified Parties may suffer, sustain or become subject to, as a result of Buyer Losses, but only after and to the extent that Buyer has fully and completely exhausted its rights and remedies against Seller and Parent pursuant to Section 8.02(a) of this Agreement and is unable to collect some or all of the obligation owed to Buyer pursuant to Section 8.02(a) from Parent and/or Seller. Buyer expressly agrees that it may not seek indemnification from Matthews unless and until it has first exhausted its remedies against Seller and Parent. Buyer further agrees that it will notify Matthews of any claims to indemnification it may have against Parent or Seller simultaneously with notifying Parent or Seller of the same. 8.03 Indemnification by Buyer. Buyer agrees to indemnify in full the Seller, and its officers, directors, employees, agents and stockholders (collectively, the "Seller Indemnified Parties") and hold them harmless against any Losses which any of the Seller Indemnified Parties may suffer, sustain or become subject to as a result of (i) any misrepresentation in any of the representations and warranties of Buyer contained in this Agreement or in any of the Related Documents, (ii) any breach of, or failure to perform, any agreement of Buyer contained in this Agreement or any of the Related Documents, or (iii) any "Claims" (as defined in Section 8.04(a) hereof) or threatened Claims against Seller arising out of the actions or inactions of Buyer with respect to the Assets or the Business after the Closing (collectively, "Seller Losses"). 8.04 Method of Asserting Claims. As used herein, an "Indemnified Party" shall refer to a "Buyer Indemnified Party" or "Seller Indemnified Party," as applicable, the "Notifying 20 Party" shall refer to the party hereto whose Indemnified Parties are entitled to indemnification hereunder, and the "Indemnifying Party" shall refer to the party hereto obligated to indemnify such Notifying Party's Indemnified Parties. (a) In the event that any of the Indemnified Parties is made a defendant in or party to any action or proceeding, judicial or administrative, instituted by any third party for the liability or the costs or expenses of which are Losses (any such third party action or proceeding being referred to as a "Claim"), the Notifying Party shall give the Indemnifying Party prompt notice thereof. The failure to give such notice shall not affect any Indemnified Party's ability to seek reimbursement unless such failure has materially and adversely affected the Indemnifying Party's ability to defend successfully a Claim. The Indemnifying Party shall be entitled to contest and defend such Claim; provided, that the Indemnifying Party (i) has a reasonable basis for concluding that such defense may be successful and (ii) diligently contests and defends such Claim. Notice of the intention so to contest and defend shall be given by the Indemnifying Party to the Notifying Party within 20 business days after the Notifying Party's notice of such Claim (but, in all events, at least five business days prior to the date that an answer to such Claim is due to be filed). Such contest and defense shall be conducted by reputable attorneys employed by the Indemnifying Party. The Notifying Party shall be entitled at any time, at its own cost and expense (which expense shall not constitute a Loss unless the Notifying Party reasonably determines that the Indemnifying Party is not adequately representing or, because of a conflict of interest, may not adequately represent, any interests of the Indemnified Parties, and only to the extent that such expenses are reasonable), to participate in such contest and defense and to be represented by attorneys of its or their own choosing. If the Notifying Party elects to participate in such defense, the Notifying Party will cooperate with the Indemnifying Party in the conduct of such defense. Neither the Notifying Party nor the Indemnifying Party may concede, settle or compromise any Claim without the consent of the other party, which consents will not be unreasonably withheld. Notwithstanding the foregoing, (i) if a Claim seeks equitable relief or (ii) if the subject matter of a Claim relates to the ongoing business of any of the Indemnified Parties, which Claim, if decided against any of the Indemnified Parties, would materially adversely affect the ongoing business or reputation of any of the Indemnified Parties, then, in each such case, the Indemnified Parties alone shall be entitled to contest, defend and settle such Claim in the first instance and, if the Indemnified Parties do not contest, defend or settle such Claim, the Indemnifying Party shall then have the right to contest and defend (but not settle) such Claim. (b) In the event any Indemnified Party should have a claim against any Indemnifying Party that does not involve a Claim, the Notifying Party shall deliver a notice of such claim with reasonable promptness to the Indemnifying Party. If the Indemnifying Party notifies the Notifying Party that it does not dispute the claim described in such notice or fails to notify the Notifying Party within 30 days after delivery of such notice by the Notifying Party whether the Indemnifying Party disputes the claim described in such notice, the Loss in the amount specified in the Notifying Party's notice will be conclusively deemed a liability of the Indemnifying Party and the Indemnifying Party shall pay the amount of such Loss to the Indemnified Party on demand. If the Indemnifying Party has timely disputed its Liability with respect to such claim, the Chief Executive Officers of each of the Indemnifying Party and the Notifying Party will proceed in good faith to negotiate a resolution of such dispute, and if not 21 resolved through the negotiations of such Chief Executive Officers within 60 days after the delivery of the Notifying Party's notice of such claim, such dispute shall be resolved fully and finally in Boston, Massachusetts by an arbitrator selected pursuant to, and an arbitration governed by, the Commercial Arbitration Rules of the American Arbitration Association. The arbitrator shall resolve the dispute within 90 days after selection and judgment upon the award rendered by such arbitrator may be entered in any court of competent jurisdiction. (c) After the Closing, the rights set forth in this Article VIII shall be each party's sole and exclusive remedies against the other party hereto for misrepresentations or breaches of covenants contained in this Agreement and the Related Documents. Notwithstanding the foregoing, nothing herein shall prevent any of the Indemnified Parties from bringing an action based upon allegations of fraud or other intentional breach of an obligation of or with respect to either party in connection with this Agreement and the Related Documents. In the event any action is brought under this Article VIII, the prevailing party's attorneys' fees and costs shall be paid by the nonprevailing party. (d) Any indemnification payable under this Article VIII shall be, to the extent permitted by law, an adjustment to purchase price. ARTICLE IX MISCELLANEOUS ------------- 9.01 Expenses. Except as otherwise expressly provided for herein, Seller and Buyer will pay all of their own expenses (including attorneys' and accountants' fees), in connection with the negotiation of this Agreement, the performance of their respective obligations hereunder and the consummation of the transactions contemplated by this Agreement (whether consummated or not). In the event that the transactions contemplated hereby have not been consummated by April 30, 2001, and if the conditions of each party's obligation to consummate the transactions have been satisfied as set forth in Section 6.02 and 6.03, as the case may be, then the party not willing or able to consummate the transactions shall pay the "transaction expenses" of the other. For purposes of this Section, the "transaction expenses" shall mean the out-of-pocket expenses, including the expenses of outside legal counsel, incurred in the pursuit of this transaction and the negotiation of this Agreement for the 60 days preceding the expected Closing Date. The payment of these expenses shall be the sole remedy of either party for any claim relating to the failure to consummate the transactions contemplated hereunder. If the conditions to close as set forth in Section 6.02 or 6.03 have not been met by April 30, 2001, then the party for whom such conditions are identified shall have the right to terminate this Agreement without any further obligation or liability. 9.02 Further Assurances. Seller agrees that, on and after the Closing Date, it shall take all appropriate action and execute any documents, instruments or conveyances of any kind which may be reasonably necessary or advisable to carry out any of the provisions hereof, including, without limitation, putting Buyer in possession and operating control of the Assets and transferring all Permits and Environmental Permits to Buyer that are transferable. 22 9.03 Cooperation and Exchange of Information. Buyer and Seller shall provide each other with such cooperation and information as either of them reasonably may request of the other in filing any Tax return, amended return or claim for refund, determining a liability for Taxes or a right to a refund of Taxes or in conducting any audit or proceeding in respect of Taxes. Such cooperation and information shall include providing copies of relevant Tax returns or portions thereof, together with accompanying schedules and related work papers and documents relating to rulings or other determinations by Taxing authorities. Each party shall make its employees available on a mutually convenient basis to provide explanation of any documents or information provided hereunder. The Seller upon written request by the Buyer, will provide to the Buyer such factual information reasonably necessary for filing Tax returns, Tax planning and contesting any Tax audit that the Seller possesses as the Buyer may reasonably request with respect to the Assets (which information the Seller agrees to maintain and preserve for so long as it may be needed by the Buyer). 9.04 Amendment and Waiver. This Agreement may not be amended or waived except in a writing executed by the party against which such amendment or waiver is sought to be enforced. No course of dealing between or among any persons having any interest in this Agreement will be deemed effective to modify or amend any part of this Agreement or any rights or obligations of any person under or by reason of this Agreement. 9.05 Notices. All notices, demands and other communications to be given or delivered under or by reason of the provisions of this Agreement will be in writing and will be deemed to have been given when personally delivered or three business days after being mailed by first class U.S. mail, return receipt requested, or when receipt is acknowledged, if sent by facsimile, telecopy or other electronic transmission device. Notices, demands and communications to Buyer and Seller will, unless another address is specified in writing, be sent to the address indicated below: Notices to Buyer: with a copy to: ---------------- -------------- PEMSTAR Inc. Dorsey & Whitney 3535 Technology Drive, N. W. 201 First Avenue, S. W., Suite 340 Rochester, Minnesota 55901 Rochester, Minnesota 55902 Attention: Allen J. Berning, CEO Attention: William A. Jonason Telecopy: (507) 280-0838 Facsimile: (507) 288-6190 Notices to Seller, Parent and Matthews: with a copy to: -------------------------------------- -------------- MATCO Electronics Group, Inc. Deily, Dautel & Mooney, LLP 320 North Jensen Road 8 Thurlow Terrace Vestal, New York 13850 Albany, New York 12203 Attention: James Matthews Attention: Jonathan Deily Facsimile: (607) 729-8981 Facsimile: (518) 463-8273 9.06 Assignment. This Agreement and all of the provisions hereof will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted 23 assigns, except that neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by either party hereto without the prior written consent of the other party hereto. 9.07 Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 9.08 Complete Agreement. This Agreement and the Exhibits hereto, the Disclosure Schedule and the other documents referred to herein contain the complete agreement between the parties and supersede any prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof in any way. 9.09 Counterparts. This Agreement may be executed in one or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together will constitute one and the same instrument. 9.10 Governing Law. The internal law, without regard to conflicts of laws principles, of the State of Massachusetts will govern all questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PEMSTAR INC. By ------------------------------------- Its ------------------------------------ THE MATCO ELECTRONICS GROUP, INC. By ------------------------------------- Its ------------------------------------ U.S. ASSEMBLIES NEW ENGLAND, INC. By ------------------------------------- Its ------------------------------------ ---------------------------------------- JAMES F. MATTHEWS 24 LIST OF EXHIBITS ---------------- Exhibit A Liabilities of Seller Exhibit B List of Seller Suppliers to be Paid at Closing Exhibit C Allocation of Purchase Price Exhibit D Bill of Sale Exhibit E Assignment & Assumption Agreement Exhibit F Lease Agreement LIST OF SCHEDULES ----------------- Schedule 1.01(a) List of Equipment Schedule 1.01(b) Personal Property Leases Schedule 1.01(d) Seller's Interest in all Licenses Schedule 1.01(e) Customer Contracts Schedule 2.01 List of Usable Inventory to be Purchased Schedule 7.03(a) Closing Date Customer List Disclosure Schedule 25 EX-16.1 5 dex161.txt STATEMENT REGARDING CHANGE CERTIFYING ACCOUNTANT EXHIBIT 16.1 Securities and Exchange Commission Washington, D.C. 20549 We were previously the independent accountants for Pemstar Inc., and on May 10, 1999, we reported on the consolidated financial statements of Pemstar Inc. and subsidiaries as of and for the two years ended March 31, 1999. We were subsequently dismissed as independent accountants of Pemstar Inc. We have read Pemstar Inc.'s statements included under the caption "Experts" of its Form S-1 and we agree with such statements. /s/ McGLADREY & PULLEN, LLP Rochester, Minnesota May 11, 2001 EX-23.1 6 dex231.txt CONSENT OF MCGLADREY & PULLEN EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the use in this Registration Statement on Form S-1 of our report, dated May 10, 1999, relating to the consolidated statements of income, shareholders' equity and cash flows and Schedule II of Pemstar Inc. We also consent to the reference to our Firm under the captions "Selected Consolidated Financial Data," and "Experts" in the Prospectus. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-44044) pertaining to Pemstar Inc. of our report dated May 10, 1999, with respect to the consolidated financial statements and Schedule of Pemstar Inc. included in this Registration Statement on Form S-1. /s/ McGLADREY & PULLEN, LLP Rochester, Minnesota May 11, 2001 EX-23.2 7 dex232.txt CONSENT OF ERNST & YOUNG EXHIBIT 23.2 Consent of Independent Auditors We consent to the reference to our firm under captions "Selected Consolidated Financial Data," "Unaudited Pro Forma Consolidated Financial Data" and "Experts" and to the use of our reports dated April 30, 2001, in the Registration Statement (Form S-1) and related Prospectus of Pemstar Inc. We also consent to the use in this Registration Statement of our report, dated December 8, 1999, relating to the financial statements of Turtle Mountain Corporation. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-44044) pertaining to the Pemstar Inc. 1994 Stock Option Plan, 1995 Stock Option Plan, 1997 Stock Option Plan, 1999 Amended and Restated Stock Option Plan, 2000 Stock Option Plan and 2000 Employee Stock Purchase Plan, of our reports dated April 30, 2001, with respect to the consolidated financial statements and schedule of Pemstar Inc. for the year ended March 31, 2001, included in this Registration Statement. /s/ Ernst & Young LLP Minneapolis, Minnesota May 11, 2001 EX-24.1 8 dex241.txt POWERS OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned person whose signature appears below hereby constitutes and appoints Allen J. Berning, William J. Kullback and Linda U. Feuss, and each of them, his true and lawful attorney-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign (i) the Registration Statement on Form S-1 (as defined herein) under the Securities Act of 1933, as amended, related to the offering of shares of common stock, $.01 par value, of Pemstar Inc., up to a maximum aggregate offering price of $69,398,907 (the "Registration Statement"); (ii) amendments (including post-effective amendments) and additions to the Registration Statement; and (iii) any registration statements, and any and all amendments thereto (including post-effective amendments), pursuant to Rule 462(b) under the Securities Act of 1933, as amended, related to the offering contemplated by the Registration Statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. Signature Title Date --------- ----- ---- - ------------------------------ Director May 14, 2001 William B. Leary - ------------------------------ Director May 14, 2001 Robert R. Murphy - ------------------------------ Director May 14, 2001 Steve V. Petracca - ------------------------------ Director May 14, 2001 Karl D. Shurson - ------------------------------ Director May 14, 2001 Robert D. Ahmann - ------------------------------ Director May 14, 2001 Thomas A. Burton - ------------------------------ Director May 14, 2001 Hargopal (Paul) Singh /s/ Gregory S. Lea - ------------------------------ Director May 14, 2001 Gregory S. Lea - ------------------------------ Director May 14, 2001 Bruce M. Jaffe EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned person whose signature appears below hereby constitutes and appoints Allen J. Berning, William J. Kullback and Linda U. Feuss, and each of them, his true and lawful attorney-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign (i) the Registration Statement on Form S-1 (as defined herein) under the Securities Act of 1933, as amended, related to the offering of shares of common stock, $.01 par value, of Pemstar Inc., up to a maximum aggregate offering price of $69,398,907 (the "Registration Statement"); (ii) amendments (including post-effective amendments) and additions to the Registration Statement; and (iii) any registration statements, and any and all amendments thereto (including post-effective amendments), pursuant to Rule 462(b) under the Securities Act of 1933, as amended, related to the offering contemplated by the Registration Statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. Signature Title Date --------- ----- ---- - ------------------------------ Director May 14, 2001 William B. Leary /s/ Robert R. Murphy - ------------------------------ Director May 14, 2001 Robert R. Murphy - ------------------------------ Director May 14, 2001 Steve V. Petracca /s/ Karl D. Shurson - ------------------------------ Director May 14, 2001 Karl D. Shurson - ------------------------------ Director May 14, 2001 Robert D. Ahmann - ------------------------------ Director May 14, 2001 Thomas A. Burton - ------------------------------ Director May 14, 2001 Hargopal (Paul) Singh - ------------------------------ Director May 14, 2001 Gregory S. Lea - ------------------------------ Director May 14, 2001 Bruce M. Jaffe EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned person whose signature appears below hereby constitutes and appoints Allen J. Berning, William J. Kullback and Linda U. Feuss, and each of them, his true and lawful attorney-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign (i) the Registration Statement on Form S-1 (as defined herein) under the Securities Act of 1933, as amended, related to the offering of shares of common stock, $.01 par value, of Pemstar Inc., up to a maximum aggregate offering price of $69,398,907 (the "Registration Statement"); (ii) amendments (including post-effective amendments) and additions to the Registration Statement; and (iii) any registration statements, and any and all amendments thereto (including post-effective amendments), pursuant to Rule 462(b) under the Securities Act of 1933, as amended, related to the offering contemplated by the Registration Statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. Signature Title Date --------- ----- ---- /s/ William B. Leary - ------------------------------ Director May 14, 2001 William B. Leary - ------------------------------ Director May 14, 2001 Robert R. Murphy - ------------------------------ Director May 14, 2001 Steve V. Petracca - ------------------------------ Director May 14, 2001 Karl D. Shurson - ------------------------------ Director May 14, 2001 Robert D. Ahmann - ------------------------------ Director May 14, 2001 Thomas A. Burton - ------------------------------ Director May 14, 2001 Hargopal (Paul) Singh - ------------------------------ Director May 14, 2001 Gregory S. Lea - ------------------------------ Director May 14, 2001 Bruce M. Jaffe EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned person whose signature appears below hereby constitutes and appoints Allen J. Berning, William J. Kullback and Linda U. Feuss, and each of them, his true and lawful attorney-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign (i) the Registration Statement on Form S-1 (as defined herein) under the Securities Act of 1933, as amended, related to the offering of shares of common stock, $.01 par value, of Pemstar Inc., up to a maximum aggregate offering price of $69,398,907 (the "Registration Statement"); (ii) amendments (including post-effective amendments) and additions to the Registration Statement; and (iii) any registration statements, and any and all amendments thereto (including post-effective amendments), pursuant to Rule 462(b) under the Securities Act of 1933, as amended, related to the offering contemplated by the Registration Statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. Signature Title Date --------- ----- ---- - ------------------------------ Director May 14, 2001 William B. Leary - ------------------------------ Director May 14, 2001 Robert R. Murphy - ------------------------------ Director May 14, 2001 Steve V. Petracca - ------------------------------ Director May 14, 2001 Karl D. Shurson /s/ Robert D. Ahmann - ------------------------------ Director May 14, 2001 Robert D. Ahmann - ------------------------------ Director May 14, 2001 Thomas A. Burton - ------------------------------ Director May 14, 2001 Hargopal (Paul) Singh - ------------------------------ Director May 14, 2001 Gregory S. Lea - ------------------------------ Director May 14, 2001 Bruce M. Jaffe -----END PRIVACY-ENHANCED MESSAGE-----