As filed with the Securities and Exchange Commission on March 31, 2004 Registration No. 333-112492 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- PNY TECHNOLOGIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3674 11-2724278 (STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.) CLASSIFICATION CODE NUMBER) 299 Webro Road Parsippany, New Jersey 07054 (973) 515-9700 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Gadi Cohen Chief Executive Officer PNY Technologies, Inc. 299 Webro Road Parsippany, New Jersey 07054 (973) 515-9700 (Name, address, including zip code and telephone number, including area code, of agent for service) Please address a copy of all communications to: BARBARA L. BECKER, ESQ. JEREMY W. DICKENS, ESQ. GIBSON, DUNN & CRUTCHER LLP WEIL, GOTSHAL & MANGES LLP 200 PARK AVENUE 767 FIFTH AVENUE NEW YORK, NY 10166 NEW YORK, NY 10153 (212) 351-4000 (212) 310-8000 --------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] CALCULATION OF REGISTRATION FEE Proposed Maximum Title of Each Class of Securities Aggregate Amount of to be Registered Offering Amount Registration Fee - ----------------------------------- --------------- ---------------- Common Stock, par value $0.01 per share.............................. $100,000,000 $12,670 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 WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED , 2004 PROSPECTUS Shares (PNY LOGO) COMMON STOCK This is our initial public offering of common stock. We are offering shares of common stock. No public market currently exists for our shares. We propose to list our common stock on the Nasdaq National Market under the symbol "PNYT." We currently estimate that the initial public offering price will be between $ and $ per share. INVESTING IN THE SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 7. Per Share Total ------------- --------- Public Offering Price....................................... $ $ Underwriting Discount....................................... $ $ Proceeds to PNY Technologies (before expenses).............. $ $ We have granted the underwriters a 30-day option to purchase up to additional shares of common stock on the same terms and conditions 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 , 2004. - -------------------------------------------------------------------------------- LEHMAN BROTHERS NEEDHAM & COMPANY, INC. THOMAS WEISEL PARTNERS LLC , 2004 INSIDE FRONT COVER The artwork depicts the PNY Technologies(R) logo in the center of the page. Starting at the top left and going in a counter-clockwise direction are pictures of the following: PNY in-store displays, PNY Verto and NVIDIA Quadro(R) graphics cards, PNY consumer DRAM modules, PNY Flash products, a variety of PNY packages and PNY OEM DRAM modules. TABLE OF CONTENTS PAGE ---- Prospectus Summary................................. 1 Risk Factors....................................... 7 Forward-Looking Statements......................... 14 Use of Proceeds.................................... 15 Dividend Policy.................................... 15 Capitalization..................................... 16 Dilution........................................... 17 Selected Financial Data............................ 18 Management's Discussion and Analysis of Financial Condition and Results of Operations ............. 20 Business........................................... 31 Management......................................... 41 Related Party Transactions......................... 46 Principal Stockholders............................. 47 Description of Capital Stock....................... 49 Shares Eligible for Future Sale.................... 52 United States Federal Income and Estate Tax Consequences to Non-United States Holders ....... 54 Underwriting....................................... 57 Legal Matters...................................... 61 Experts............................................ 61 Where You Can Find Additional Information.......... 61 Index to Consolidated Financial Statements......... F-1 You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus regardless of the time of delivery of this prospectus or of any sale of our common stock. Through and including , 2004 (the 25th day after the date of this prospectus), all dealers effecting transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to a dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to its unsold allotment or subscription. ABOUT THIS PROSPECTUS This prospectus includes statistical data regarding our company and the markets in which we compete. We derived this data from our records or from information published or prepared by the following independent sources for market data: Gartner Dataquest, the research division of Gartner, Inc.; IDC Technologies, Inc., an independent research firm; NPD Intelect Market Tracking(R), the retail sales data collection division of NPD Intelect, L.L.C.; and Semico Research Corporation, a marketing and engineering research firm. The information regarding DRAM sales forecasts from Gartner Dataquest is derived from its "DRAM Forecast Statistics: Worldwide, 1997-2007 (4Q 03) Update" report, dated November 2003, written by Andrew Norwood. The USB Flash drive market data from Gartner Dataquest is derived from its "Worldwide USB Flash Drive Market Forecast Trends: 2001-2007" report, dated October 7, 2003, written by Joseph Unsworth. All references to Gartner Dataquest are based on estimates. The data from IDC's report was published in December 2003. Unless otherwise indicated, the information in this prospectus assumes that: - the underwriters do not exercise their over-allotment option; - the initial public offering price of our common stock will be $ per share, which is the midpoint of the range indicated on the cover page of this prospectus; and - the issued and outstanding 13,268 shares of our Series A preferred stock are converted into 3,980,400 shares of common stock at an effective conversion price of $3.85 per share. To the best of our knowledge, we own or have rights to product names, trade names and trademarks that we use in conjunction with the sale of our products, including the PNY Technologies(R) name and the PNY Technologies(R) logo. This prospectus also contains product names, trade names and trademarks that belong to other organizations. i PROSPECTUS SUMMARY This summary highlights key aspects of the information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors," before making an investment decision. PNY TECHNOLOGIES We are a leading designer and marketer of Flash memory cards, USB Flash drives, dynamic random access memory, or DRAM, modules, consumer and professional graphics cards and other computer-related technology products. We market these products to consumers through traditional retailers, such as Best Buy Co., Inc., CompUSA, Inc. and Staples, Inc., through other retail and distribution channels, and directly to professionals. We also design, manufacture and market custom and standard DRAM modules for original equipment manufacturers, or OEMs, and their designated contract manufacturers. These customers include high-end computing, networking, storage and telecommunications equipment manufacturers, such as LSI Logic Corporation and Network Appliance, Inc. We currently market our products throughout the United States, as well as in Canada, Western Europe and certain parts of the Asia Pacific region. For the year ended December 31, 2003, we had net sales of $364.0 million. We believe we are a value-added supplier for many of our customers, and that our strong customer relationships are the result of our combination of the following competitive strengths: - Strong brand. We were one of the top ten overall sellers, as measured in both dollars and units, at each of our four leading retail customers for 2003, according to NPD Intelect. We believe that our well recognized PNY Technologies(R) brand allows us to collaborate effectively with our retail customers to introduce new products and product line extensions. - Broad portfolio of complementary products. Our broad product portfolio allows our customers to consolidate their vendor relationships and more efficiently manage their inventory. Our comprehensive product line also allows us to work with our traditional retail customers to provide a variety of cross-promotional activities that we believe increases foot traffic through their stores. - Merchandising and marketing expertise. We work closely with our key customers to create a variety of advertisements, promotions and product bundles, which reduces our reliance on traditional consumer incentives and increases our customers' sales. - Strong supplier relationships. Many of our key supplier relationships are more than a decade old. We believe our purchasing history with these suppliers has enabled us to obtain adequate supplies of our products during periods of industry shortage. - Supply-chain management expertise. We believe our logistical operations, supply-chain management expertise and operational flexibility help our retail and OEM customers better manage their inventory, thereby reducing their exposure to potential price fluctuations and further strengthening our customer relationships. We operate through two divisions: Consumer and OEM. We market our complete line of products through our Consumer division, including: - Flash memory cards. Flash memory cards are used to store data in digital cameras, multimedia cell phones, MP3 players, personal digital assistants, or PDAs, and other consumer electronic devices. According to NPD Intelect, we had an 11.0% share of the U.S. retail market in Flash memory cards for 2003. 1 - USB Flash drives. USB Flash drives are self-contained, compact computer drives with no moving parts. We introduced our Attache((TM)) line of USB Flash drives in June 2003, and according to NPD Intelect, for the last six months of 2003, we had a 17.9% share of the U.S. retail market. - DRAM modules. DRAM modules are compact circuit board assemblies of DRAM semiconductors and related circuitry. DRAM upgrades provide a cost-effective way of improving the speed and performance of desktop and laptop computers. According to NPD Intelect, we have been the leading supplier of DRAM modules to the U.S. retail market in each of the last six years, and we had a 40.2% share and a 64.3% share of the U.S. retail market for desktop and laptop DRAM upgrades, respectively, for 2003. - Graphics cards. Our consumer graphics cards are used to enhance the performance of graphics-intensive applications on desktop computers. According to NPD Intelect, we had a 24.1% share of the U.S. retail market for consumer graphics cards for 2003. We are the exclusive provider of NVIDIA Corporation-based professional graphics cards to the professional aftermarket in the United States, Western Europe and other regions. These cards are used by game developers, computer assisted design, or CAD, engineers, digital animators and others who require advanced graphics capabilities. In our OEM division, our engineers work with OEMs or their designated contract manufacturers to design and manufacture custom and standard DRAM modules. Our OEM products include a broad range of DRAM modules that incorporate leading-edge, mainstream and trailing-edge memory technologies. OEMs use these modules in a variety of applications, including high-end computing products, such as servers and workstations, as well as networking, storage and telecommunications equipment products. MARKET OPPORTUNITY We believe that our strengths and our product offerings make us well positioned to take advantage of the expected growth in the market for Flash memory and related products. Semico Research forecasts that worldwide sales of Flash memory cards will grow from $2.0 billion in 2002 to $11.9 billion in 2006, a 56.4% compound annual growth rate. We believe this growth will be driven by the continuing proliferation of consumer electronic products that use Flash memory cards as their primary data storage device, such as digital cameras, multimedia cell phones, MP3 players and PDAs. We believe that the market for USB Flash drives, such as our Attache((TM)) device, will grow at an even greater rate. We believe USB Flash drives are beginning to replace floppy disk drives because of their small size, ease of use, rewrite capability, speed and security. Gartner Dataquest estimates that the worldwide market for USB Flash drives will grow from $135.6 million in 2002 to $1.7 billion in 2007, a 66.3% compound annual growth rate. We believe consumer and OEM demand for DRAM will increase due to the greater complexity of software enabled by increasing computer processing power, the development of high-bandwidth and graphics-intensive applications, evolving Internet and telecommunications infrastructure requirements, increased information technology, or IT, spending and computer-related equipment upgrades. Gartner Dataquest estimates that the worldwide market for DRAM will increase from $15.5 billion in 2002 to $23.4 billion in 2007. BUSINESS STRATEGY Our goal is to enhance our competitive position as a leading designer and marketer of computer-related technology products. We seek to accomplish this goal through the following strategies: - Capitalize on the growing demand for Flash products. We believe that the Flash memory industry will experience significant growth, driven by widespread adoption of consumer electronic devices with increasing data storage requirements and the adoption of USB Flash drives as a common storage device. We plan to capitalize on this growth by continuing to aggressively market our comprehensive offering of Flash memory products and by optimizing our opportunities to introduce new Flash memory products. For 2003, net sales of our Flash products increased by 132.4% compared to 2002. 2 - Introduce complementary product lines. We plan to capitalize on our brand by further broadening our product portfolio with new products that complement our existing offerings, as we did with our Attache((TM)) USB Flash drive introduced in June 2003 and our Executive Attache((TM)) in January 2004. We plan to take advantage of the growing computer, consumer electronics, storage and networking markets by initially focusing on the product needs of our existing customer base and expanding into new markets as opportunities arise. - Expand OEM market presence. As demand returns for networking, storage and high-end computing products, we plan to maintain our relationships with our existing customers and selectively add new customers. One of our strengths in the OEM market is our ability to access trailing-edge memory technologies not readily available to other suppliers, which often offers us increased profit opportunities. - Further broaden our geographic presence. We intend to expand our geographic presence by targeting emerging and growing markets, such as the Far East, for both Consumer and OEM market expansion. Our facility in Taiwan allows us to increase our operational flexibility by establishing new supplier and contract manufacturing relationships, strengthening our existing supplier relationships and improving access to new technologies and products. - Continue to focus on superior customer service. We intend to focus our resources and expertise on providing superior quality and service to a core group of market leaders. We plan to further integrate our business with that of our existing retail customers, while seeking new customers that we believe have the potential to generate significant revenue. - Pursue acquisitions of complementary technologies, products or companies. We may make acquisitions to strengthen our position in our target markets, enhance our technology base, increase our supply capabilities or expand our geographic presence. PNY is a Delaware corporation, originally incorporated in 1985. Our principal executive office is located at 299 Webro Road, Parsippany, New Jersey 07054. Our telephone number is (973) 515-9700. We maintain a website on the Internet at www.pny.com. Our website and the information it contains are not a part of this prospectus. 3 THE OFFERING Common stock offered............................................................ shares Common stock to be outstanding after this offering.............................. shares Use of proceeds................................................................. We intend to use the net proceeds from this offering to repay substantially all of our existing indebtedness and for working capital and general corporate purposes. Proposed Nasdaq National Market symbol.......................................... "PNYT" The number of shares of common stock to be outstanding after this offering is as of December 31, 2003, after giving effect to: (1) the automatic conversion of all of our issued and outstanding Series A preferred stock into shares of common stock upon the consummation of this offering, which will result in the issuance of 3,980,400 shares of common stock with an effective conversion price of $3.85 per share, and (2) the shares of common stock being sold by us in this offering, and excludes: - 2,497,080 shares of common stock issuable upon exercise of stock options outstanding as of December 31, 2003, under our employee stock option plan, with a weighted average exercise price of $3.03 per share; - 49,500 shares of common stock issuable upon exercise of warrants outstanding as of December 31, 2003, with an exercise price of $0.03 per share; - 4,998,170 additional shares of common stock reserved for issuance under our employee stock option plan; and - up to shares of common stock to be sold by us if the underwriters exercise their over-allotment option in full. You should read the discussion under "Management - Stock Option and Other Benefit Plans" for additional information about our employee stock option plan. 4 SUMMARY CONSOLIDATED FINANCIAL DATA The following tables set forth summary consolidated financial information and other data for our company as of and for the periods indicated. You should read the summary data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. The pro forma net income per share for the year ended December 31, 2003 reflects the automatic conversion of all of our outstanding Series A preferred stock into shares of common stock, described under "Capitalization," as if it had occurred on the first day of the period presented. The pro forma as adjusted balance sheet data give effect to the conversion of all our issued shares of Series A preferred stock and this offering and the application of the net proceeds therefrom as though they had occurred at December 31, 2003. YEAR ENDED DECEMBER 31, -------------------------------------------------- 2001 2002 2003 ------------ ------------ ------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales $ 314,197 $ 334,603 $ 363,993 Cost of sales (1) 281,688 286,351 318,167 ------------ ------------ ------------ Gross profit 32,509 48,252 45,826 Operating expenses: Selling (1) 21,184 26,228 28,136 Warehouse (1) 1,608 1,735 2,199 General and administrative (1) 9,586 8,513 8,985 Restructuring and other charges (2) -- 10,387 1,745 ------------ ------------ ------------ Operating income 131 1,389 4,761 Total other expenses, net (1,576) (3,435) (1,173) ------------ ------------ ------------ (Loss) income before income taxes (1,445) (2,046) 3,588 Income taxes 943 1,189 1,625 ------------ ------------ ------------ Net (loss) income (2,388) (3,235) 1,963 Dividends (waiver of dividends) on Series A preferred stock 1,147 650 (1,797) ------------ ------------ ------------ Net (loss) income available to common stockholders $ (3,535) $ (3,885) $ 3,760 ============ ============ ============ Net (loss) income per common share: Basic $ (0.14) $ (0.14) $ 0.14 Diluted (0.14) (0.14) 0.06 Shares used in computing net income per common share: Basic 26,120,205 26,954,800 26,954,800 Diluted 26,120,205 26,954,800 32,569,891 Pro forma net income per common share (unaudited): Basic $ 0.06 Diluted 0.06 Shares used in computing pro forma net income per common share (unaudited): Basic 30,935,200 Diluted 32,569,891 - --------------- (1) Stock-based compensation included in the above amounts is as follows: YEAR ENDED DECEMBER 31, ------------------------------- 2001 2002 2003 ------ ------ ------ (IN THOUSANDS) Cost of sales $1,073 $ (279) $ 174 Selling 596 89 87 Warehouse 7 5 6 General and administrative 150 (38) 39 ------ ------ ------ Total $1,826 $ (223) $ 306 5 (2) Represents charge for the impairment of long-lived assets and the shutdown and closure of our manufacturing facility in Ireland and manufacturing operations in California. DECEMBER 31, 2003 ------------------------- PRO FORMA ACTUAL AS ADJUSTED ------ ----------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................................................... $ 7,190 $ Working capital......................................................................... 18,069 Total assets............................................................................ 137,193 Total bank debt......................................................................... 40,380 Capital lease obligations and bank overdrafts, including current maturities............. 4,033 Note payable to related party........................................................... 4,971 Total stockholders' equity.............................................................. 15,599 6 RISK FACTORS You should carefully consider the risks described below, as well as the other information in this prospectus, before making a decision to invest in our common stock. The occurrence of any of the following risks could harm our business and prospects and cause the trading price of our shares to decline, perhaps significantly. RISKS RELATED TO OUR BUSINESS SALES TO A SMALL NUMBER OF CUSTOMERS REPRESENT A SIGNIFICANT PORTION OF OUR NET SALES. IF WE WERE TO LOSE ONE OF OUR MAJOR CUSTOMERS OR EXPERIENCE ANY MATERIAL REDUCTION IN ORDERS FROM ANY OF THEM, OUR NET SALES AND OPERATING RESULTS WOULD SUFFER. Sales to our five leading customers accounted for approximately 50% of our net sales for 2002 and 2003. Our sales are made by standard purchase orders rather than long-term contracts. In addition, our exclusive relationship with NVIDIA to market their Quadro graphic cards in the aftermarket is not formalized and, as a result, could be terminated or altered by NVIDIA without notice to us. In 2001, when a larger portion of our sales were to OEMs, we lost our largest customer due, in large part, to a downturn in the technology market and vendor consolidation efforts by that customer, which adversely affected our business. Due primarily to the loss of that customer, our annual net sales declined by $234.1 million in 2001, compared to 2000. While our customer base is significantly more diversified than in 2001, our strategy is to continue to focus on a core group of customers. If we were to lose one of our major customers or experience any material reduction in orders from any of these customers, it could have a material adverse effect on our business and results of operations. THE PRODUCTS WE SELL ARE SUBJECT TO RAPIDLY CHANGING TECHNOLOGIES, WHICH WE OFTEN MUST OBTAIN OR LICENSE FROM THIRD PARTIES. OUR FAILURE TO OBTAIN NEEDED PRODUCTS, TECHNOLOGIES OR LICENSES COULD HARM OUR BUSINESS. The products we market are subject to rapid technological change and evolving industry standards. We rely on third parties for non-exclusive license rights in the technologies that are necessary for the operation of our products. Because we license the intellectual property that we use, competitive barriers to entry may be lower than if we owned exclusive rights to that technology. Moreover, if a competitor or potential competitor enters into an exclusive arrangement with any of our key third-party technology providers, our ability to develop and sell products containing that technology could be severely limited or curtailed entirely. We currently market CompactFlash(R), Secure Digital, MultiMedia Card and SmartMedia(R) Flash memory card formats. We do not currently market certain other Flash memory card formats, whose percentages of the Flash memory card market could increase and reduce demand for our products. Our success depends in part on our continued ability to use the technologies for which we do have licenses and our ability to obtain the licenses for other technologies. We do not know whether we will continue to be able to license these technologies on commercially reasonable terms, if at all. If we are unable to license the necessary technology, we may be forced to acquire or develop alternative technology, which may be more costly or of a lower quality or performance standard. This could limit and delay our ability to offer competitive products, increase our costs of production or harm our brands and reputation. As a result, it could have a material adverse effect on our business and results of operations. IF WE DO NOT EFFECTIVELY MANAGE OUR INVENTORY AND PRODUCT MIX, WE MAY INCUR COSTS ASSOCIATED WITH EXCESS INVENTORY OR LOSE SALES FROM NOT HAVING ENOUGH INVENTORY. If we are unable to properly monitor, control and manage our inventory and maintain an appropriate level and mix of products with our customers, we may incur increased and unexpected costs associated with this inventory. For example, if our Consumer division customers are unable to sell their inventory in a timely manner, we may choose or be required to lower the price of our products or allow our customers to exchange the slow-moving products for newer products. Similarly, if we improperly forecast demand for our products, we could end up with excess inventory that we may be unable to sell in a timely manner, if at all. As a result, we could incur increased expenses associated with writing off excess or obsolete inventory. In addition, some of our inventory is sold on a consignment basis, and we have very little ability to control or manage that inventory. Alternatively, we could end up with too little inventory and we may not be able to satisfy demand, which could have a material 7 adverse effect on our customer relationships. Our risks related to inventory management are exacerbated by our strategy of closely matching inventory levels with product demand, leaving limited margin for error. THE AVERAGE SELLING PRICES OF OUR PRODUCTS OFTEN DECREASE, WHICH MAY NEGATIVELY AFFECT OUR GROSS MARGINS. Our products often experience price erosion over their life cycle. In order to maintain gross profits for products that have a declining average selling price, we must continuously reduce costs or increase sales volume. We must also successfully manage our inventory to reduce our overall exposure to price erosion. In the OEM DRAM market specifically, we must collaborate with our contract manufacturers and suppliers to create the most cost-effective design for our products in order to manage costs. If we are unable to manage the cost of procuring trailing-edge memory products or if we are unsuccessful in introducing new products with higher gross margins, our business will suffer. In the consumer graphics card market, there is a constant demand for leading-edge memory products, which can result in excess inventory of older products and price erosion. Finally, the Flash memory industry is beginning to show signs of price erosion, as rapid technological change causes the value of older products to erode. If we are unable to properly manage our inventories of these products, it could have a material adverse effect on our business and results of operations. WE OBTAIN MANY OF OUR PRODUCTS FROM LIMITED OR SOLE SUPPLIERS, AND IF THESE SUPPLIERS FAIL TO MEET OUR SUPPLY REQUIREMENTS OR CEASE PRODUCTION OF OUR PRODUCTS, WE MAY LOSE SALES AND EXPERIENCE INCREASED COSTS. Our product inventory strategy is to maintain as little inventory as is necessary for the efficient operation of our business, which creates the risk that any shortage or delay in the supply of our products could harm our ability to meet demand. We obtain many of our products from a limited number of suppliers on a purchase order basis. None of our suppliers have a contractual commitment to supply us with products. These products include our Flash memory cards and related products and some of our DRAM modules. We obtain virtually all of the graphics processors for our Verto(R) graphics cards and all of the NVIDIA Quadro(R) graphics cards directly from NVIDIA. If demand for a specific product or component increases, we may not be able to obtain an adequate supply of that product or component in a timely manner, since our suppliers may fill other orders before ours. It could be difficult, costly and time-consuming to obtain alternative sources for these components, or to change product designs to make use of alternative products or components. In addition, difficulties in transitioning from an existing supplier to a new supplier could create delays in product or component availability that would have a significant impact on our ability to fulfill orders for our products. This would adversely impact our ability to meet demand and damage our brand and reputation in the market, which could have a material adverse effect on our business and results of operations. WE ARE SUBJECT TO THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY AND ANY FUTURE DOWNTURN COULD ADVERSELY AFFECT OUR BUSINESS. The semiconductor industry is highly cyclical and characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The DRAM market has experienced significant downturns often connected with, or in anticipation of, maturing product cycles and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average sales prices. It is impossible to predict whether demand for our products will diminish or costs for any of our products will increase. The Flash memory market is a relatively new market. As more Flash memory production capacity comes online, it is possible that supply could exceed demand. Any future downturns could have a material adverse effect on our business and results of operations. OUR FAILURE TO EFFECTIVELY COMPETE BY FAILING TO RESPOND TO PRICE VOLATILITY, MATCH COMPETITORS' PRICES OR SERVICES OR IMPROVE BRAND RECOGNITION COULD REDUCE OUR PROFITABILITY. INCREASED COMPETITION FROM VERTICALLY INTEGRATED OR BETTER-POSITIONED COMPANIES MAY RESULT IN DECREASED DEMAND OR LOWER PRICES FOR OUR PRODUCTS. We compete primarily on the basis of service, quality, brand and value. Some of our competitors include large domestic and international companies that have substantially greater financial, technical, marketing, distribution and other resources, broader product lines, lower cost structures and long-term contracts with customers and suppliers. As a result, our competitors may be better able than we to respond to volatile average sales prices, to 8 deliver competitive products at a lower price, to provide services we cannot and compete based on brand recognition. Some of our significant suppliers, such as Micron Technology, Inc. and Panasonic Computer Solutions Company, as well as certain of our contract manufacturers, are also our competitors. These suppliers may be able to market competitive products at lower prices than ours due to lower underlying costs because they are vertically integrated. We also face competition in the OEM sales division from current and prospective customers that evaluate our capabilities against the merits of manufacturing products internally. Our inability to effectively compete in our markets could have a material adverse effect on our business and results of operations. THE SUCCESS OF OUR CONSUMER DIVISION STRATEGY DEPENDS ON OUR BRAND. IF OUR MARKETING EFFORTS ARE NOT SUCCESSFUL OR IF WE EXPERIENCE QUALITY OR SUPPLY PROBLEMS, THEN OUR CONSUMER DIVISION COULD SUFFER. We believe that brand recognition is critical to our success. We plan to increase our marketing expenditures to create and maintain prominent brand awareness. If we fail to promote our brands successfully, or if the expenses associated with doing so are disproportionate to any increased net sales we achieve, it could have a material adverse effect on our business and results of operations. In addition, if our products exhibit poor performance or other defects, then it could have a material adverse effect on our brands. WE MAY BECOME INVOLVED IN LITIGATION OVER INTELLECTUAL PROPERTY RIGHTS, WHICH MAY ADVERSELY AFFECT OUR ABILITY TO MANUFACTURE AND SELL OUR PRODUCTS. Our industry is characterized by vigorous protection and pursuit of intellectual property rights. Third parties may bring suits against us or we may be called upon to indemnify our customers for any intellectual property right infringements by us. Litigation could result in significant expense to us and divert the efforts of our technical and management personnel. In the event of an adverse result in litigation, we could be required to pay substantial damages, cease the manufacture, use and sale of some products, expend significant resources to develop non-infringing technology, discontinue the use of some processes or obtain licenses to use the infringed technology. Any of these results could have a material adverse effect on our business and results of operations. OUR INDEMNIFICATION OBLIGATIONS TO OUR CUSTOMERS FOR PRODUCT DEFECTS COULD REQUIRE US TO PAY SUBSTANTIAL DAMAGES. A number of our product sales agreements provide that we will defend, indemnify and hold harmless our customers from damages and costs that arise from product warranty claims or claims for injury or damage resulting from defects in our products. Our insurance coverage may not be adequate to cover all or any part of the claims asserted against us. A successful claim brought against us that is in excess of, or excluded from, our insurance coverage could have a material adverse effect on our business and results of operations. OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISKS, SUCH AS FOREIGN CURRENCY FLUCTUATIONS, WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS. General economic conditions and fluctuations in currency exchange rates affect the prices of our products and certain of our costs. International sales of our products accounted for approximately 28.6% of our net sales for 2003. We sell a significant portion of our products in western European markets, such as France, the United Kingdom and Germany. A significant portion of our European sales is denominated in local currencies, principally the euro and British pound. If there were a significant devaluation of these currencies against the U.S. dollar, the operating results of our European subsidiaries, when expressed in U.S. dollars, could be adversely affected. In addition, because we manufacture products and have employees in foreign countries, our costs and operations could be adversely impacted by currency fluctuations. International operations are subject to a number of other risks as well, including: - political and economic instability, international terrorism and anti-American sentiment, particularly in emerging markets; 9 - preference for locally-branded products, and laws and business practices favoring local competition; - unusual or burdensome foreign laws or regulations, and unexpected changes to those laws or regulations; - import and export license requirements, tariffs, taxes and other barriers; - costs of customizing products for foreign countries; - increased difficulty in managing inventory; - less effective protection of intellectual property; and - difficulties and costs of staffing and managing foreign operations. Any or all of these factors could adversely affect our ability to execute our geographic expansion strategy or have a material adverse effect on our business and results of operations. OUR ABILITY TO OPERATE OUR COMPANY EFFECTIVELY COULD BE IMPAIRED IF WE LOSE KEY PERSONNEL. Our success depends on the continued contributions of our senior management, particularly Gadi Cohen, our President, Chief Executive Officer and Chairman of our Board of Directors. Although Mr. Cohen will remain our majority shareholder following this offering, we do not have an employment agreement with him. The loss of Mr. Cohen could have a material adverse effect on us. Competition for employees in our industry is intense. We have had, and may continue to have, difficulty hiring the necessary sales and marketing, management and engineering personnel to support our growth. We cannot assure you that key personnel will continue to be employed by us or that we will be able to attract and retain qualified personnel in the future. We do not have "key person" life insurance to cover our executive officers. Failure to retain or attract key personnel could have a material adverse effect on us. WE EXPECT OUR OPERATING RESULTS TO FLUCTUATE IN FUTURE PERIODS, CAUSING OUR STOCK PRICE TO BE VOLATILE. Our operating results have fluctuated in the past, and we believe they will continue to do so in the future. Our future results of operations will depend on many factors, including: - seasonal purchasing patterns for our products; - our ability to procure our products or components or fluctuations in the cost of such products or components; - fluctuating market demand for, and changes in the average sales prices of, our products; - changes in our product and revenue mix; - market acceptance of new and enhanced versions of our products; - the timing of the introduction of new products or components and enhancements to our existing products; and - our ability to adequately support future growth. Due to these and other factors, quarterly revenues and results of operations are difficult to forecast, and period-to-period comparisons of our operating results may not be meaningful or predictive of future performance. In one or 10 more future quarters, our results of operations may fall below our expectations and those of our investors. In that event, the trading price of our common stock would likely decline. WE MAY MAKE ACQUISITIONS THAT ARE DILUTIVE TO EXISTING SHAREHOLDERS. IN ADDITION, OUR LIMITED EXPERIENCE IN ACQUIRING OTHER BUSINESSES, PRODUCT LINES AND TECHNOLOGIES MAY MAKE IT DIFFICULT FOR US TO OVERCOME PROBLEMS ENCOUNTERED IN CONNECTION WITH ANY ACQUISITIONS WE MAY UNDERTAKE. We intend to evaluate and explore strategic opportunities as they arise, including business combinations, strategic partnerships, capital investments and the purchase, licensing or sale of assets. In connection with any such future transaction, we could issue dilutive equity securities, incur substantial debt, reduce our cash reserves or assume contingent liabilities. In addition, we may fund all or a portion of the purchase price of a future acquisition with the proceeds from this offering. Our experience in acquiring other businesses, product lines and technologies is limited. Our inability to overcome problems encountered in connection with any acquisitions could divert the attention of management, utilize scarce corporate resources and otherwise harm our business. Any potential future acquisitions also involve numerous risks, including: - problems assimilating the purchased operations, technologies or products; - costs associated with the acquisition; - adverse effects on existing business relationships with suppliers and customers; - risks associated with entering markets in which we have no or limited prior experience; - potential loss of key employees of purchased organizations; and - potential litigation arising from the acquired company's operations before the acquisition. Furthermore, acquisitions may require material charges and could result in adverse tax consequences, substantial depreciation, deferred compensation charges, in-process research and development charges, the amortization of amounts related to deferred compensation and identifiable purchased intangible assets or impairment of goodwill, any of which could negatively affect our results of operations. IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO SUPPORT OUR FUTURE GROWTH. We may need to raise additional capital through public or private equity offerings or debt financings to support our growth strategy. We do not know whether additional financing will be available when needed, or, if available, whether the terms of any financing will be favorable to us. If we cannot raise needed funds on acceptable terms, we may not be able to develop or enhance our products, improve our manufacturing lines and testing equipment, take advantage of future opportunities, including acquisitions, or respond to competitive pressures or unanticipated events, all of which could harm our business and results of operations. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution and the new equity securities may have rights, preferences or privileges senior to those of our common stock. RISKS RELATED TO THIS OFFERING THE MARKET PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD RESULT IN A DECLINE IN THE VALUE OF YOUR INVESTMENT. We believe that the market price of our common stock, like that of other technology companies, is likely to be volatile. The price of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay, depending on many factors, including: 11 - actual or anticipated fluctuations in our quarterly results of operations; - changes in our or security analysts' estimates of our operating results; - announcements by us or our competitors of new products or strategic partnerships; - a loss of, or decrease in, sales to major customers; - additions or departures of key personnel; - future sales of our common stock, particularly by our officers; and - commencement of or involvement in litigation. In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our actual operating performance. If our stock price were to experience a sudden and significant decline, then we could face litigation and associated costs and disruption to our business. OUR MANAGEMENT WILL HAVE BROAD DISCRETION TO USE THE PROCEEDS FROM THIS OFFERING, INCLUDING THE ABILITY TO APPLY THE PROCEEDS TO USES THAT DO NOT INCREASE OUR OPERATING RESULTS OR MARKET VALUE. Our management will have considerable discretion in the application of the net proceeds of this offering. You will not have the opportunity, as part of your investment decision, to assess whether the net proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase our operating results or market value. Prior to being used in our business, the net proceeds of this offering may be placed in investments that do not produce income or that lose value. The failure to apply these funds effectively could impair our financial condition. ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A CHANGE IN CONTROL AND, AS A RESULT, NEGATIVELY AFFECT OUR STOCKHOLDERS. We have taken a number of actions that could have the effect of discouraging a takeover attempt. Our certificate of incorporation grants our Board of Directors the authority to fix the rights, preferences and privileges of and issue shares of preferred stock without stockholder action. Although we have no present intention to issue shares of preferred stock, such an issuance could have the effect of making it more difficult and less attractive for a third-party to acquire a majority of our outstanding voting stock. Preferred stock may also have other rights, including economic rights senior to our common stock, which could have a material adverse effect on the market value of our common stock. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. This section generally provides that a corporation may not engage in any business combination with any interested stockholder during the three-year period following the time that a stockholder became an interested stockholder. This provision could have the effect of delaying or preventing a change of control of our company. THE LARGE NUMBER OF SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD CAUSE OUR STOCK PRICE TO DECLINE. Our current stockholders hold a substantial number of shares of our common stock that they will be able to sell in the public market in the near future. A significant portion of these shares are held by a small number of stockholders. Sales by our current stockholders of a substantial number of shares after this offering could significantly reduce the market price of our common stock. In addition, the perception that our current stockholders might sell common stock could depress the trading price of the common stock. Sales of our shares and the possibility of these sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we consider appropriate. 12 Upon the consummation of this offering, 13,268 shares of our Series A preferred stock will be automatically converted into 3,980,400 shares of common stock, and the holders of these shares will have the right, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. In addition, after this offering, we intend to register all common stock that we may issue under our employee stock option plan. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described in the section entitled "Shares Eligible for Future Sale -- Lock-up Agreements." If any of these holders cause a large number of securities to be sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital. MAJORITY OWNERSHIP BY OUR PRINCIPAL STOCKHOLDER MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS. Upon completion of this offering, Gadi Cohen, our Chief Executive Officer, President and Chairman of our Board of Directors, will beneficially own, in total, approximately % of our outstanding common stock, % if the underwriters exercise their over-allotment option in full. As a result, Mr. Cohen will have the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. He could dictate the management of our business and affairs. This control could be disadvantageous to other stockholders with interests different from those of Mr. Cohen. For example, Mr. Cohen could delay or prevent an acquisition or merger even if the transaction would benefit other stockholders. In addition, this majority ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. In addition, because we will be a "controlled company," we will be exempt from many of the recently adopted Nasdaq Qualitative Listing Standards. As a result, you will not have the benefit of certain requirements, such as having a majority of independent directors on the Board, which shareholders in non-controlled companies possess. THE LIQUIDITY OF OUR COMMON STOCK IS UNCERTAIN BECAUSE IT HAS NEVER BEEN PUBLICLY TRADED, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE PRICE YOU PAID. There is no existing public market for our common stock. As a result, the initial public offering price will be determined by negotiations among the underwriters and us, and may not be indicative of prices that will prevail in the public trading markets. We also cannot predict the extent to which a trading market for our common stock will develop or how liquid that market will be. You may not be able to resell your shares at or above the initial public offering price. 13 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements, including statements concerning conditions in the Flash memory, high performance computing, networking and communications and consumer electronics industries, and concerning our business, financial condition, operating strategies, and our operational and legal risks. We use words like "believe," "expect," "anticipate," "intend," "future," "plan" and other similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this prospectus. These forward-looking statements are based on our current expectations and are subject to a number of risks and uncertainties, including those identified under "Risk Factors" and elsewhere in this prospectus. Although we believe that the expectations reflected in these forward-looking statements are reasonable, our actual results could differ materially from those expressed in these forward-looking statements, and any events anticipated in the forward-looking statements may not actually occur. Except as required by law, we undertake no duty to update any forward-looking statements after the date of this prospectus to conform those statements to actual results or to reflect the occurrence of unanticipated events. 14 USE OF PROCEEDS We estimate that the net proceeds from this offering will be approximately $ million, or approximately $ million if the underwriters exercise their over-allotment option in full, based on an assumed initial public offering price of $ per share and after deducting the underwriting discount and our estimated offering expenses. We intend to use the net proceeds of this offering to repay substantially all of our existing indebtedness, which was $45.4 million at December 31, 2003. The remainder of the net proceeds, approximately $ million, will be used for working capital and general corporate purposes. If suitable opportunities are available, we may use a portion of the net proceeds currently intended for working capital for the acquisition of, or investment in, companies, manufacturing facilities, technologies or other assets that complement our business. We have no present understandings, commitments or agreements to enter into any potential acquisitions or investments. Our revolving U.S. credit facility will be repaid in its entirety with the net proceeds of this offering. As of December 31, 2003, we had $40.0 million outstanding under this facility. This facility matures on February 23, 2007, and had a blended interest rate of 3.57% at December 31, 2003. As of December 31, 2003, we owed Ruth Cohen, our Chief Executive Officer's spouse, approximately $5.0 million. The note held by Mrs. Cohen has an interest rate of 4.25% per annum and has a maturity date of December 31, 2004, subject to our option to extend the maturity date for up to five years. The note must be repaid with the proceeds of this offering. See the discussion under the heading "Related Party Transactions" for additional information relating to this obligation. Pending use of the net proceeds as described above, we intend to invest the net proceeds of this offering in short-term, interest-bearing securities. DIVIDEND POLICY We have never declared or paid dividends on our common stock and we do not anticipate paying any dividends on our common stock in the foreseeable future. We currently expect to retain all earnings, if any, for investment in our business. In addition, the terms of our credit facility, which we plan to repay with the net proceeds of this offering, prohibit us from paying dividends without our lenders' consent. We will pay dividends on our common stock only if and when declared by our Board of Directors. The Board's ability to declare a dividend is subject to limits imposed by Delaware corporate law. In determining whether to declare dividends, the Board will consider these limits, our financial condition, results of operations, working capital requirements, future prospects and other factors it considers relevant. 15 CAPITALIZATION The following table sets forth our cash and cash equivalents and capitalization, as of December 31, 2003, on: - an actual basis; and - a pro forma as adjusted basis to reflect (1) the automatic conversion of 13,268 outstanding shares of our Series A preferred stock into 3,980,400 shares of our common stock upon the consummation of this offering with an effective conversion price of $3.85 per share, (2) the automatic conversion of 1,117 treasury shares of Series A preferred stock into 335,100 treasury shares of common stock, (3) our proposed sale of shares of common stock in this offering at an assumed initial public offering price of $ per share and (4) our application of the estimated net proceeds of this offering after deducting fees and expenses. See "Use of Proceeds" and "Description of Capital Stock." The capitalization information in the table below is qualified by, and should be read in conjunction with, our consolidated financial statements and related notes appearing elsewhere in this prospectus. The table does not include 2,497,080 shares of common stock issuable upon exercise of options outstanding as of December 31, 2003 at a weighted average exercise price of $3.03 per share or the 49,500 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2003 at an exercise price of $0.03 per share held by one of our former officers. The following table also assumes that the underwriters do not exercise their over-allotment option. DECEMBER 31, 2003 --------------------------------------- PRO FORMA ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Cash and cash equivalents .................................................... $ 7,190 $ ======== ========== Total bank debt .............................................................. $ 40,380 Capital lease obligations .................................................... 12 Bank overdrafts .............................................................. 3,984 Long-term obligations, net of current maturities: Note payable to related party .............................................. 4,971 Capital lease obligations .................................................. 37 -------- Total debt ................................................................... 49,384 Stockholders' equity: Convertible Series A preferred stock, cumulative, participating, par value $0.01 per share; authorized 15,000 shares, issued 14,385 shares and outstanding 13,268 shares on an actual basis (preference in liquidation of $15,309); none on a pro forma as adjusted basis .......................... -- Common stock, $0.01 par value per share; authorized 125,000,000 shares; issued and outstanding 26,954,800 shares on an actual basis; issued 31,270,300 shares and outstanding 30,935,200 shares on a pro forma as adjusted basis................................................... 270 Deferred stock compensation .................................................. (154) Additional paid-in capital ................................................... 5,182 Treasury stock, at cost - 1,117 shares of Series A preferred stock, at cost on an actual basis and 335,100 shares of common stock on a pro forma as adjusted basis......................................................... (1,502) Accumulated earnings ......................................................... 6,955 Accumulated other comprehensive income ....................................... 4,929 Notes receivable ............................................................. (81) -------- ---------- Total stockholders' equity ................................................ 15,599 -------- ---------- Total capitalization ................................................... $ 64,983 $ ======== ========== 16 DILUTION Our pro forma net tangible book value, as of December 31, 2003, was $15.6 million, or $0.50 per share of common stock. We calculate net tangible book value per share by subtracting our total liabilities from our total tangible assets, which equals total assets less intangible assets, and dividing this amount by the number of shares of common stock outstanding on a pro forma basis, as of December 31, 2003, after giving effect to the automatic conversion of all of our outstanding Series A preferred stock into 3,980,400 shares of common stock upon the consummation of this offering with an effective conversion price of $3.85 per share. Assuming we sell shares of common stock in this offering at an assumed initial public offering price of $ per share, and assuming the application of the estimated net proceeds from this offering as set forth in "Use of Proceeds," our pro forma net tangible book value, as of December 31, 2003, would have been $ million, or $ per share of common stock. On the basis of the foregoing assumptions, there will be an immediate increase in pro forma net tangible book value of $ per share to our existing stockholders and an immediate dilution in net tangible book value of $ per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share................................. Pro forma net tangible book value per share at December 31, 2003........... Increase per share attributable to this offering........................... Pro forma net tangible book value per share after the offering.................. Pro forma net tangible book value dilution per share to new investors........... The following table summarizes, on a pro forma as adjusted basis as of December 31, 2003, the difference between our existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid. The following table does not include shares subject to outstanding options, outstanding warrants or options reserved for issuance under our employee stock option plan as of December 31, 2003. To the extent that outstanding options or warrants are exercised and shares of common stock are issued, there will be further dilution to new investors. SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ---------------------- ------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ------ ------- ------ ------- --------- Existing stockholders........................ % $ % $ New investors................................ Total..................................... % $ % $ If the underwriters exercise their over-allotment option in full, the number of shares of common stock held by new investors will increase to shares, or approximately % of the total number of shares of common stock to be outstanding immediately after this offering. 17 SELECTED FINANCIAL DATA We have derived the consolidated statement of operations data for the years ended December 31, 2001, 2002 and 2003 and the consolidated balance sheet data as of December 31, 2002 and 2003 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the consolidated statement of operations data for the years ended December 31, 1999 and 2000 and the consolidated balance sheet data as of December 31, 1999, 2000 and 2001 from our audited consolidated financial statements, although those financial statements are not included in this prospectus. The pro forma net income per common share for the year ended December 31, 2003 reflects the conversion of all of our outstanding Series A preferred stock into shares of common stock described under "Capitalization," which will result in the issuance of an aggregate of 3,980,400 shares of common stock, as if the conversion had occurred on the first day of such period. You should read the following selected consolidated financial data in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales ........................... $ 273,571 $ 548,341 $ 314,197 $ 334,603 $ 363,993 Cost of sales (1) ................... 233,261 484,053 281,688 286,351 318,167 ------------ ------------ ------------ ------------ ------------ Gross profit ........................ 40,310 64,288 32,509 48,252 45,826 Operating expenses: Selling (1) ....................... 15,082 21,328 21,184 26,228 28,136 Warehouse (1) ..................... 1,312 1,476 1,608 1,735 2,199 General and administrative (1) .... 7,701 13,086 9,586 8,513 8,985 Restructuring and other charges (2) -- -- -- 10,387 1,745 ------------ ------------ ------------ ------------ ------------ Total operating expenses .......... 24,095 35,890 32,378 46,863 41,065 ------------ ------------ ------------ ------------ ------------ Operating income .................... 16,215 28,398 131 1,389 4,761 Interest expense, net ............... (2,648) (4,319) (2,636) (1,618) (1,676) Foreign exchange (loss) gain ........ -- (751) 899 (1,983) 323 Other income (expense), net ......... 171 461 161 166 180 ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes ... 13,738 23,789 (1,445) (2,046) 3,588 Income taxes ........................ 1,364 3,402 943 1,189 1,625 ------------ ------------ ------------ ------------ ------------ Net income (loss) ................... 12,374 20,387 (2,388) (3,235) 1,963 Dividends on Series A preferred stock -- -- 1,147 650 (1,797) ------------ ------------ ------------ ------------ ------------ Net income (loss) available to common stockholders ........................ $ 12,374 $ 20,387 $ (3,535) $ (3,885) $ 3,760 ============ ============ ============ ============ ============ Net income (loss) per common share: Basic ............................. $ 0.48 $ 0.78 $ (0.14) $ (0.14) $ 0.14 Diluted ........................... 0.39 0.60 (0.14) (0.14) 0.06 Shares used in computing net income (loss) per common share: Basic ............................. 26,050,050 26,050,050 26,120,205 26,954,800 26,954,800 Diluted ........................... 31,525,033 33,720,454 26,120,205 26,954,800 32,569,891 Pro forma net income per common share (unaudited): Basic ............................. $ 0.06 Diluted ........................... 0.06 Shares used in computing unaudited pro forma net income per common share: Basic ............................. 30,935,200 Diluted ........................... 32,569,891 - --------------- 18 (1) Stock-based compensation included in the above amounts is as follows: YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1999 2000 2001 2002 2003 ----- ------ ------ ------ ------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Cost of sales ............ $ -- $ 814 $1,073 $ (279) $ 174 Selling .................. -- 490 596 89 87 Warehouse ................ -- 1 7 5 6 General and administrative -- 144 150 (38) 39 ----- ------ ------ ------ ------ Total ................ $ -- $1,449 $1,826 $ (223) $ 306 (2) Represents charge for the impairment of long-lived assets and the shutdown and closure of our manufacturing facility in Ireland and manufacturing operations in California. YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 1999 2000 2001 2002 2003 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents ......... $ 6,496 $ 10,311 $ 5,338 $ 7,480 $ 7,190 Working capital ................... 260 12,558 10,034 10,873 18,069 Total assets ...................... 81,143 154,231 113,023 124,657 137,193 Total bank debt ................... 25,326 48,738 31,560 33,894 40,380 Capital lease obligations, bank overdrafts and note payable -- acquisition of business, including current maturities ............... 5,479 16,161 4,443 2,692 4,033 Note payable to related party ..... -- 9,810 7,916 5,189 4,971 Redeemable preferred stock ........ 18,060 -- -- -- -- Total stockholders' equity ........ (8,547) 12,497 10,102 8,506 15,599 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion together with our consolidated financial statements and related notes appearing elsewhere in this prospectus. This discussion contains forward-looking statements regarding the electronics industry and our expectations regarding our future performance, liquidity and capital resources. Our actual results could differ materially from those expressed in these forward-looking statements. See "Forward-Looking Statements." OVERVIEW We are a leading designer and marketer of Flash memory cards, USB Flash drives, DRAM modules, consumer and professional graphics cards and other computer-related technology products. We market these products to consumers through traditional retailers, such as Best Buy, CompUSA and Staples, through other retail and distribution channels, and directly to professionals. We also design, manufacture and market custom and standard DRAM modules for OEMs and their designated contract manufacturers. Prior to 2000, we were primarily focused on marketing DRAM modules through both our Consumer and OEM divisions. In 2000, we experienced significant growth, resulting primarily from increased sales to one OEM customer. However, by the end of 2000 and throughout 2001 and 2002, net sales of DRAM to our OEM customers declined significantly as a result of the deteriorating economy and excess inventory throughout the electronics supply chain. Because of the volatile nature of the DRAM market, we made a strategic decision in 2000 to diversify our business by marketing complementary consumer products that capitalized on our existing customer and supplier relationships. As a result of this strategy, we offered our first new consumer product in the first quarter of 2000. Since then, we have introduced our consumer and professional lines of graphics cards, a variety of Flash memory cards and related products and, most recently, our USB Flash drives. Growth in sales of these consumer products has been the primary factor in our increased net sales since 2000. Our Consumer division net sales increased from $173.3 million for the year ended December 31, 2000 to $309.1 million for the year ended December 31, 2003. SEGMENTS We report results through two segments: our Consumer and OEM divisions. Our Consumer division markets our products through traditional retailers, web-based and mail-order retailers, distributors, value added resellers and system integrators, as well as directly to certain professional end-users. Our OEM division primarily markets our DRAM modules to OEMs and their contract manufacturers. We track net sales and gross profit for each division, but do not separately track operating expenses, interest or income taxes because those items cannot be specifically allocated to either division. 20 The following table sets forth summary financial information for our Consumer and OEM divisions: YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2002 2003 -------- -------- -------- (DOLLARS IN THOUSANDS) Net sales: Consumer ......... $189,861 $255,038 $309,078 OEM .............. 124,336 79,565 54,915 -------- -------- -------- Total .......... 314,197 334,603 363,993 Cost of sales (1): Consumer ......... 174,284 216,777 270,751 OEM .............. 107,404 69,574 47,416 -------- -------- -------- Total .......... 281,688 286,351 318,167 Gross profit (1): Consumer ......... 15,577 38,261 38,327 OEM .............. 16,932 9,991 7,499 -------- -------- -------- Total .......... 32,509 48,252 45,826 Gross profit margin: Consumer ......... 8.2% 15.0% 12.4% OEM .............. 13.6 12.6 13.7 Total .......... 10.3% 14.4% 12.6% - --------------- (1) For the years ended December 31, 2001, 2002 and 2003, the amount includes stock-based compensation expense (income) of (in thousands) $1,073, ($279) and $174, respectively. CUSTOMERS Historically, a limited number of customers in both our divisions have accounted for a significant percentage of our net sales. For the years ended December 31, 2001, 2002 and 2003, our five largest customers accounted for 64.8%, 54.1% and 51.4% of our net sales, respectively. We expect that sales of our products to a limited number of customers will continue to account for a majority of our sales in the foreseeable future. We do not have long-term purchase agreements with any of our customers. If we were to lose any of our major customers or experience any material reduction in orders from any of them, it could have a material adverse effect on our business and results of operations. INTERNATIONAL Net sales by geographic destination and as a percentage of total net sales are presented in the table below. For the years ended December 31, 2001, 2002 and 2003, 85.3%, 85.0% and 76.6%, respectively, of our net sales were denominated in U.S. dollars. YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------- 2001 2002 2003 -------------------------- -------------------------- -------------------------- (DOLLARS IN THOUSANDS) United States $266,573 84.8% $276,336 82.6% $259,826 71.4% Western Europe 46,974 15.0 50,098 15.0 75,848 20.8 Other ........ 650 0.2 8,169 2.4 28,319 7.8 -------- -------- -------- -------- -------- -------- Total ..... $314,197 100.0% $334,603 100.0% $363,993 100.0% ======== ======== ======== ======== ======== ======== SEASONALITY Products sold through our Consumer division have historically been affected by seasonal purchasing patterns. Our Flash memory cards and related products tend to have higher unit sales in the second and fourth quarters. These sales generally follow seasonal purchasing patterns of the consumer electronic devices that utilize Flash memory. Our DRAM products have generally shown lower unit sales in the second quarter. These sales tend to follow the purchasing patterns of software and new computers. Products sold through our OEM division do not 21 show significant seasonal trends. The impact of seasonality on our future results will be affected by our product mix, which will vary from quarter to quarter. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of net sales and expenses for each period. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Revenue recognition. The majority of our net sales in both our Consumer and OEM divisions are non-consignment and are recognized upon shipment to customers. Less than 10% of our net sales for the years ended December 31, 2001, 2002 and 2003 were consignment sales. A substantial portion of sales through our Consumer division include limited rights to return unsold inventory. We provide for estimated future returns of inventory based on historical experience. However, if certain returns in excess of our estimates occur, those amounts are accrued at the time we become aware of them, which may not be in the same period in which we book the initial sale. In addition, some customers have limited price protection rights for inventories of our products held by them. If we reduce the list price of these previously purchased products, these customers may be entitled to receive credits from us. We accrue for estimated cost for these limited price protection arrangements when the customer is notified of the price change. We also offer to both consumers and customers certain rebate arrangements. We accrue for the estimated cost of these rebate arrangements using actual sell through data supplied by our customers and historical redemption percentages. Our net sales are defined as our gross sales less these estimated future returns, limited price protection arrangements and rebate arrangements. Reserves for inventory excess and obsolescence. We generally purchase raw materials in quantities that we anticipate will be fully used within a short time of purchase. Changes in our operating strategy, customer demand and unpredictable fluctuations in market values of our finished goods can limit our ability to effectively sell through our existing inventory at a profit. We account for our inventory on a first-in, first-out basis and regularly monitor potential inventory excess, obsolescence and assess market values relative to costs. When necessary, we reduce the carrying amount of our inventory to market value, if lower than cost. Advertising and market development costs. Advertising and market development costs are charged to operations or offset against gross sales in accordance with Emerging Issues Task Force Issue No. 01-09. For the year ended December 31, 2003, our advertising and market development costs were $19.1 million, of which $2.2 million was offset against gross sales. Consideration generally given by us to a customer is presumed to be a reduction of selling price, and therefore, a reduction of gross sales. However, if we receive an identifiable benefit that is sufficiently separable from our sales to that customer, such that we could have paid an independent company to receive that benefit and we can reasonably estimate the fair value of that benefit, then the consideration is characterized as an expense. We estimate the fair value of the benefits we receive by tracking the advertising done by our customers on our behalf and calculating the value of that advertising using a comparable rate for similar publications. Stock-based compensation. As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," which establishes a fair value-based method of accounting for stock-based compensation plans, we have elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for recognizing stock-based compensation expense for financial statement purposes. We recognize stock-based compensation over the vesting period. Income taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process incorporates an assessment 22 of the current tax exposure together with temporary differences resulting from different treatment of transactions for tax and financial statement purposes. Such differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. The recovery of deferred tax assets from future taxable income must be assessed and, to the extent that recovery is not likely, we establish a valuation allowance. Increases in valuation allowances result in the recording of additional tax expense. Further, if our ultimate tax liability differs from the periodic tax provision reflected in our consolidated statements of operations, then additional tax expense may be recorded. At December 31, 2003, we had net operating loss carry-forwards for the states of New Jersey and California of approximately $4.5 million and $1.7 million, respectively. Both states enacted legislation that suspended the use of net operating loss carry-forwards during the 2002 and 2003 tax years. Valuation of long-lived assets and restructuring estimates. We assess the potential impairment of long-lived tangible and intangible assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Changes in our operating strategy can significantly reduce the estimated useful life of our assets. During 2002, we recorded a pre-tax charge of $8.9 million associated with the shutdown of our facility in Ireland and manufacturing operations in California. This charge included an accrual for equipment and building lease payments of $5.0 million. Also during 2002, we recorded a pre-tax charge of $1.4 million associated with the impairment of capitalized equipment located at our facilities in New Jersey and France. In the third quarter of 2003, we recorded an additional restructuring charge of $1.7 million related to the building lease associated with our manufacturing operations in California. When we incurred the restructuring charge related to this facility in 2002, we estimated that we would have been able to secure a sublease by January 1, 2004. However, due to the continued deteriorating real estate market in that area, we have now fully reserved for the remaining lease payments on the facility, since we do not expect to sublease it in the near future. RESULTS OF OPERATIONS The tables presented below, which compare our results of operations from one period to another, present the results for each period, the change in those results from one period to another in both dollars and percentage change and the results for each period as a percentage of net sales. The columns present the following: - The first two data columns in each table show the absolute results for each period presented. - The columns entitled "Period Over Period Change" and "Period Over Period Percentage Change" show the change in results, both in dollars and percentages. These two columns show favorable changes as a positive and unfavorable changes as negative. For example, when our net sales increase from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one period to the next, that change is shown as a negative number in both columns. - The last two columns in each table show the results for each period as a percentage of net sales. In these two columns, the cost of sales and gross profit for each are given as a percentage of that division's net sales. These amounts are shown in italics. In addition, as used in these tables, "NM" means "not meaningful." 23 COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR ENDED DECEMBER 31, 2003 PERIOD OVER PERIOD OVER PERIOD PERIOD PERCENTAGE RESULTS AS PERCENTAGE OF CHANGE CHANGE NET SALES FOR THE YEAR YEAR ENDED DECEMBER 31, ------------- ------------- ENDED DECEMBER 31, ----------------------- FAVORABLE FAVORABLE ------------------------ 2002 2003 (UNFAVORABLE) (UNFAVORABLE) 2002 2003 --------- --------- ------------- ------------- ------ ------ (DOLLARS IN THOUSANDS) Net sales: Consumer ..................... $ 255,038 $ 309,078 $ 54,040 21.2% 76.2% 84.9% OEM .......................... 79,565 54,915 (24,650) (31.0) 23.8 15.1 --------- --------- --------- ------ ------ Total ...................... 334,603 363,993 29,390 8.8 100.0 100.0 Cost of sales (1): Consumer ..................... 216,777 270,751 (53,974) (24.9) 85.0 87.6 OEM .......................... 69,574 47,416 22,158 31.8 87.4 86.3 --------- --------- --------- Total ...................... 286,351 318,167 (31,816) (11.1) 85.6 87.4 Gross profit: Consumer ..................... 38,261 38,327 66 0.2 15.0 12.4 OEM .......................... 9,991 7,499 (2,492) (24.9) 12.6 13.7 --------- --------- --------- Total ...................... 48,252 45,826 (2,426) (5.0) 14.4 12.6 Operating expenses: Selling (1) .................. 26,228 28,136 (1,908) (7.3) 7.8 7.7 Warehouse (1) ................ 1,735 2,199 (464) (26.7) 0.5 0.6 General and administrative (1) 8,513 8,985 (472) (5.5) 2.6 2.5 Restructuring charge ......... 10,387 1,745 8,642 NM 3.1 0.5 --------- --------- --------- ------ ------ Total operating expense .... 46,863 41,065 5,798 12.4 14.0 11.3 --------- --------- --------- ------ ------ Operating income (expense) ..... 1,389 4,761 3,372 242.8 0.4 1.3 Interest expense, net .......... (1,618) (1,676) (58) (3.6) (0.5) (0.5) Other (expense) income, net .... (1,817) 503 2,320 NM (0.5) 0.1 --------- --------- --------- ------ ------ (Loss) income before taxes ..... (2,046) 3,588 5,634 275.4 (0.6) 1.0 Income taxes ................... 1,189 1,625 (436) (36.7) 0.4 0.4 --------- --------- --------- ------ ------ Net income (loss) .............. $ (3,235) $ 1,963 $ 5,198 160.7% (1.0)% 0.5% ========= ========= ========= ====== ====== - --------------- (1) Stock-based compensation for the years ended December 31 included in the above is as follows: 2002 2003 ------ ------ (IN THOUSANDS) Cost of sales ............ $(279) $174 Selling .................. 89 87 Warehouse ................ 5 6 General and administrative (38) 39 ----- ---- Total ................ $(223) $306 ===== ==== Net sales. The growth in our Consumer division was driven by an increase in net sales of our Flash memory cards and related products of $66.5 million, or 132.4%. A portion of this increase was due to our introduction of the Attache((TM)) USB Flash Drive in June 2003. Our average unit selling price for Flash cards increased 11.7% in 2003, reflecting an increasing customer preference for higher density products. On a per megabyte basis, pricing decreased 29.5%, which is generally consistent with the reduction in our cost on a per megabyte basis for Flash semiconductors. Net sales of our NVIDIA Quadro(R) graphics cards increased $22.5 million, or 187.9%. Since we introduced Quadro(R) in May 2002, a portion of this growth is attributable to a full year's contribution in 2003. Our sales of Quadro(R) increased $13.5 million, or 113.2%, for the period from May 1 to December 31, 2003 as compared to the same period in 2002. We expect to see more moderate growth in our Quadro(R) line in 2004, both in the United States and Europe. 24 The increase in Flash and Quadro(R) net sales was partially offset by declines in our DRAM and Verto(R) graphic cards product lines as well as a decline in our OEM division. Net sales in our DRAM product line declined due to a reduction in our promotional advertising activity at major retailers. The decline in Verto(R) graphics cards was based on our decision to focus on lower-price point cards, which caused our average selling price to decline 22.7% in 2003 compared to 2002. Our net sales were also impacted by increased competition in the consumer graphics card market. Our OEM net sales declined due to the loss of our largest customer and lower units shipped. Gross profit. The decline in gross profit is primarily due to the decline in our OEM division as the gross profit of our Consumer division was flat compared to 2002. The decrease in our OEM gross profit was principally caused by the decrease in net sales, as our gross profit margin rose to 13.7% for 2003 from 12.6% for 2002. Within our Consumer division, gross margins decreased to 12.4% in 2003 from 15.0% in 2002 due to a shift in demand for products with lower gross margins. Additionally, most of our Consumer division products experienced pricing pressure that depressed our margins compared to 2002. Quadro(R) contributed an additional $1.2 million of gross profit due to a full year of contribution in 2003. Selling. Advertising and market development costs represents the largest component of selling expense and is incurred almost entirely in connection with our Consumer division. The majority of our advertising expense is incurred as cooperative payments to our traditional retail customers for participation in their advertising circulars. These cooperative payments are calculated as a certain percentage of our net sales to these customers and are consistent with the benefit received. Therefore, as our net sales increase, so do our advertising costs on an absolute basis. The increase in selling expense for the year ended December 31, 2003 is attributable to an increase in advertising expenses totaling $1.5 million, resulting from increased advertising activity in our Consumer division. Fixed selling costs, including commission, were higher due to our hiring of additional personnel to promote our Quadro graphic cards. Warehouse. Warehouse expense consists primarily of shipping supplies and overhead. Overhead consists primarily of salaries and benefits and temporary labor costs of shipping and warehouse personnel. Our temporary labor cost generally increases and decreases with net sales, which was the primary driver of the increase in our shipping and warehouse expense. General and administrative. The increase in general and administrative expense was primarily attributable to the opening of our sales and procurement facility in Taiwan and higher employment-related costs in the United States. These were partially offset by the benefit derived from the closure of our facility in Ireland and manufacturing operations in California. Restructuring charge. During 2002, we recorded a pre-tax charge of $2.8 million associated with the shutdown of our facility in Ireland. In addition, we recorded a pre-tax charge of $6.2 million associated with the shutdown of our manufacturing operations in California, which included an accrual of $5.0 million for equipment and building lease payments to be made over the next several years. Also during 2002, we recorded a pre-tax charge of $1.4 million associated with the impairment of capitalized equipment located at our manufacturing facilities in New Jersey and France. In the third quarter of 2003, we recorded a pre-tax charge of $1.7 million related to the remaining lease payments on our manufacturing facility in California. Interest expense. Interest expense consists of interest related to our U.S. revolving credit facility and a note payable to a related party offset by some nominal interest income. Interest expense decreased as a result of a lower effective interest rate in 2003 compared to 2002. This was offset by higher short-term borrowings incurred by our European operation in 2003. Other (expense) income, net. Other expense consists primarily of foreign currency gain or losses due to fluctuations in the value of the euro. In the first half of 2002, our European operations had significant U.S. dollar receivables and during this period the euro strengthened by 10.8% relative to the U.S. dollar, which resulted in a foreign currency loss of $2.0 million during 2002. During the second half of 2002 and throughout 2003, our European operation reduced the amount of U.S. dollar receivables outstanding. For the year ended December 31, 2003, we had a foreign currency gain of $0.3 million. We have historically not hedged our exposure to these types of foreign currency risks. 25 Income taxes. Our effective tax rate for the year ended December 31, 2003 was approximately 45.3% as a result of a writedown of a deferred tax asset. For the year ended December 31, 2002, we accrued income tax expense because our foreign subsidiary earned a profit. COMPARISON OF THE YEAR ENDED DECEMBER 31, 2001 TO THE YEAR ENDED DECEMBER 31, 2002 PERIOD OVER PERIOD OVER PERIOD PERIOD PERCENTAGE RESULTS AS PERCENTAGE CHANGE CHANGE OF NET SALES FOR THE YEAR ENDED DECEMBER 31, ------------- ------------- YEAR ENDED DECEMBER 31, ----------------------- FAVORABLE FAVORABLE ----------------------- 2001 2002 (UNFAVORABLE) (UNFAVORABLE) 2001 2002 ---------- ----------- ------------- ------------- ------ ------ (DOLLARS IN THOUSANDS) Net sales: Consumer ..................... $ 189,861 $ 255,038 $ 65,177 34.3% 60.4% 76.2% OEM .......................... 124,336 79,565 (44,771) (36.0) 39.6 23.8 --------- --------- --------- ------ ------ Total ...................... 314,197 334,603 20,406 6.5 100.0 100.0 Cost of sales (1): Consumer ..................... 174,284 216,777 (42,493) (24.4) 91.8 85.0 OEM .......................... 107,404 69,574 37,830 35.2 86.8 87.4 --------- --------- --------- Total ...................... 281,688 286,351 (4,663) (1.7) 89.7 85.6 Gross profit: Consumer ..................... 15,577 38,261 22,684 145.6 8.2 15.0 OEM .......................... 16,932 9,991 (6,941) (41.0) 13.6 12.6 --------- --------- --------- Total ...................... 32,509 48,252 15,743 48.4 10.3 14.4 Operating expenses: Selling (1) .................. 21,184 26,228 (5,044) (23.8) 6.7 7.8 Warehouse (1) ................ 1,608 1,735 (127) (7.9) 0.5 0.5 General and administrative (1) 9,586 8,513 1,073 11.2 3.1 2.6 Restructuring charge ......... -- 10,387 (10,387) NM -- 3.1 --------- --------- --------- ------ ------ Total operating expense .... 32,378 46,863 (14,485) (44.7) 10.3 14.0 --------- --------- --------- ------ ------ Operating income ............... 131 1,389 1,258 960.3 0.0 0.4 Interest expense, net .......... (2,636) (1,618) 1,018 38.6 (0.8) (0.5) Other income (expense), net .... 1,060 (1,817) (2,877) NM 0.3 (0.5) --------- --------- --------- ------ ------ Income (loss) before taxes ..... (1,445) (2,046) (601) (41.6) (0.5) (0.6) Income taxes ................... 943 1,189 (246) (26.1) 0.3 0.4 --------- --------- --------- ------ ------ Net (loss) income .............. $ (2,388) $ (3,235) $ (847) (35.5) (0.8)% (1.0)% ========= ========= ========= ====== ====== - --------------- (1) Stock-based compensation for the years ended December 31 included in the above is as follows: 2001 2002 ------ ------ (IN THOUSANDS) Cost of sales ............ $1,073 $(279) Selling .................. 596 89 Warehouse ................ 7 5 General and administrative 150 (38) ------ ------ Total .................. $1,826 $(223) ====== ===== Net Sales. Our Consumer division's net sales increased in 2002 because we began offering several new products in 2001 and 2002. In May 2002, we began marketing our Quadro(R) line of professional graphics cards, which contributed $12.0 million to net sales in 2002. In 2001, our Flash sales were minimal as there was not a significant demand for Flash memory products, particularly in the retail channel of our Consumer division. In 2002, net sales of our Flash products increased $33.6 million due to the expansion of our product offerings and the addition of new retail customers. We entered the consumer graphics market in June 2001. Net sales of our Verto(R) graphic cards were $51.8 million higher in 2002 due to a full year's contribution. Our DRAM product line declined by $3.8 million, or 3.2%. Also, we exited the recorded compact disc, or CD-R, market in early 2002, which decreased net sales by $28.4 million. 26 Net sales in our OEM division decreased due to a decline in sales to our largest OEM customer. That customer's net sales declined to $37.9 million in 2002 from $77.4 million in 2001. In general, OEM sales declined due to the downturn in the networking, storage and high-end computing markets since late 2000. Gross profit. Gross profit as a percentage of net sales improved significantly in 2002. Within the Consumer division, we benefited from significantly increased sales of Flash-related products and a generally favorable pricing environment. Since the start of 2002, new products like digital cameras, MP3 players and PDAs have led to increased consumer demand for additional Flash memory to increase the capacities of these products. In addition, our Quadro(R) product line, which was introduced in May 2002, had slightly higher margins than our consumer graphics cards and our DRAM products. Overall, our Consumer gross profit was 15.0% in 2002 compared to 8.2% in 2001. Our OEM margin decreased to 12.6% from 13.6% due to the depressed market. Selling. The increase in selling expense in 2002 is attributable to an increase in some of our variable expenses, such as sales commissions, which increased by 45.4% for the year ended December 31, 2002. The majority of our commissions are paid to our manufacturer representatives. Advertising expenses for the same period increased 33.8%, resulting from increased sales volumes in our Consumer division. Warehouse. Although net sales improved from 2001, our shipping and warehouse expense remained relatively flat due to improved efficiencies in our shipping department. General and administrative. The decrease in general and administrative expense was primarily attributable to a reduction in employee-related expenses from the closure of our facility in Ireland and our manufacturing operations in California. Restructuring charge. During 2002, we recorded a pre-tax charge of $2.8 million associated with the shutdown of our facility in Ireland. In addition, we recorded a pre-tax charge of $6.2 million associated with the shutdown of our manufacturing operations in California, which included an accrual of $5.0 million for equipment and building lease payments to be made over the next several years. Also during 2002, we recorded a pre-tax charge of $1.4 million associated with the impairment of capitalized equipment located at our New Jersey and France manufacturing facilities. Other income (expense), net. In the first half of 2002, our European operation had significant U.S. dollar receivables and the euro strengthened by 10.8% relative to the U.S. dollar creating the currency loss. In 2001, the dollar was stronger than the euro creating the gain in that year. We have historically not hedged our foreign currency exposures. Interest expense. Interest expense decreased due to lower interest rates. The blended interest rate on our U.S. revolving credit facility decreased from 9.3% at December 31, 2000 to 4.1% at December 31, 2002. In addition, the interest rate on a note payable to a related party decreased from 7.0% to 4.25% per annum. Income taxes. For the years ended December 31, 2001 and 2002, although we had a loss before taxes on a consolidated basis, our European subsidiary paid income taxes on its earnings in France. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of liquidity have been cash provided by operations and borrowings under our various credit facilities. Our principal uses of cash have been to finance working capital, facility expansions, capital expenditures and debt service requirements. We anticipate these uses will continue to be our principal uses of cash in the future. 27 The following table sets forth, for the periods indicated, our net cash flows provided by operating, investing and financing activities and our period-end cash and cash equivalents: YEAR ENDED DECEMBER 31, --------------------------------------------- 2001 2002 2003 -------- -------- -------- (IN THOUSANDS) Cash flow from operating activities .............. $ 27,863 $ 5,554 $(7,316) Cash flow from investing activities .............. (2,751) (1,308) (1,203) Cash flow from financing activities .............. (29,718) (2,751) 7,533 Effect of exchange rate changes on cash and cash equivalents .................................. (367) 647 696 Cash and cash equivalents at period end .......... $ 5,338 $ 7,480 $ 7,190 Fluctuations in net cash provided by, or used in, operating activities is generally due to increases and decreases in our net income and increased working capital needs. For the year ended December 31, 2003, cash was provided by net income of $2.0 million and higher levels of accounts payable of $2.2 million. These inflows were offset by cash outflows needed for increases in working capital assets, including accounts receivable of $6.6 million, inventory of $3.4 million, and decreases in accrued expense and customer allowance liabilities of $3.6 million. We also used $2.3 million of cash for income taxes. For the years ended December 31, 2001, 2002 and 2003, accounts receivable days sales outstanding, based on trailing three-month net sales, were approximately 76, 61 and 54, respectively. Our receivable days at the end of 2001 were higher due to our decision to offer "seasonal dating" to certain customers, which extended payment terms up to 30 days more than their standard terms for purchases made in the fourth quarter of 2001. The further reduction in receivable days sales outstanding from December 31, 2002 to December 31, 2003 was due to a shift to customers with shorter payment terms. The decrease in net cash used by investing activities for the year ended December 31, 2003 was primarily due to lower capital expenditures. For the years ended December 31, 2001, 2002 and 2003, we purchased property and equipment for $2.9 million, $1.9 million and $1.3 million, respectively. Capital expenditures for the current year are primarily for upgrades in our shipping capabilities. Our capital requirements depend on a number of factors, including changes in product technology, demand and volume. Our capital expenditures budget for 2004 is approximately $1.0 million. Our financing activities are principally changes in our U.S. revolving credit facility. At December 31, 2001, 2002 and 2003, we had outstanding borrowings under the credit facility of $31.6 million, $33.9 million and $40.0 million, respectively. We may borrow a maximum of $50.0 million under this facility. Availability under the facility is based on specified percentages of accounts receivable and inventories. Interest is payable on average amounts outstanding under the revolving credit facility at a rate of either the prime rate plus 0.25% or the eurodollar rate plus 2.25%, at our option. The blended interest rate under the loan agreement relating to the revolving credit agreement was 3.57% at December 31, 2003. The loan agreement contains a number of restrictive covenants, including a prohibition on related party transactions, additional indebtedness and dividend payments, as well as a requirement to maintain a minimum adjusted tangible net worth and a minimum fixed charge coverage ratio requirements. This facility is secured by all of our US accounts receivable and inventory. We intend to repay this facility in full with a portion of the net proceeds of this offering. PNY Technologies Europe, one of our wholly-owned subsidiaries, has available lines of credit with foreign banks totaling $13.7 million, which expire December 31, 2004. There was $0.4 million outstanding under these lines at December 31, 2003. In 2000, we redeemed our outstanding Series B and Series C preferred stock. In connection with that redemption, we paid $6.0 million in cash, offset $2.3 million of indebtedness to us and issued a $9.8 million note. See "Related Party Transactions." We repaid $1.9 million, $2.7 million and $0.2 million on that note in 2001, 2002 and 2003, respectively. 28 The following table sets forth a summary of the payments due by period of our contractual obligations at December 31, 2003: PAYMENT DUE BY PERIOD ----------------------------------------------------------------------------- LESS THAN 1 MORE THAN 5 CONTRACTUAL OBLIGATIONS TOTAL YEAR 1 TO 3 YEARS 3 TO 5 YEARS YEARS ------- ----------- ------------ ------------ ----------- (IN THOUSANDS) Long-term debt obligations ..... $40,380 $40,380 $ -- $ -- $ -- Capital lease obligations ...... 49 12 37 -- -- Operating lease obligations .... 4,352 2,051 2,301 -- -- Lease obligations included in restructuring charge liability . 4,126 1,537 2,589 Purchase obligations ........... -- -- -- -- -- Note payable to related party(1) 4,971 -- -- -- 4,971 ------- ------- ------ ------ ----------- Total ........................ $53,878 $43,980 $4,927 -- $ 4,971 ======= ======= ====== ====== =========== - --------------- (1) The note payable to related party has a maturity date of December 31, 2004, but we have options to extend such date for up to five years. As of December 31, 2003, it was our intention to exercise those options and therefore have classified the note payable as long-term and included the amounts outstanding in the table above based on a maturity date of December 31, 2009, which assumes the exercise of all such extension options. The note is required to be repaid with the proceeds of this offering. Our operating leases typically provide for the option to buy at fair market value, renew the lease or return the equipment at lease end. We believe that our current cash balances, together with existing credit lines and expected cash flow from operations will be sufficient to fund our current operations for at least the next 12 months. However, we may need additional funding in connection with possible future acquisitions or other investments. Additional funds, if needed, may not be available at all or on terms acceptable to us. BACKLOG We sell our memory products under short-term cancelable purchase orders. We do not consider backlog to be a meaningful indicator of our future financial performance. We include in our backlog only those customer orders for which we have accepted purchase orders and to which we have assigned shipment dates within the upcoming three to six months. At December 31, 2002 and 2003, our backlog was $8.5 million and $10.0 million, respectively. Orders constituting our backlog are subject to change due to, among other things, customer cancellations and reschedulings and our ability to procure necessary components. IMPACT OF INFLATION We do not believe that general price inflation has a material adverse effect on our financial condition or results of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest rate risk. Our exposure to interest rate risk arises principally from the variable rates associated with our credit facilities. At December 31, 2003, we had total borrowings of $40.4 million under our credit facilities, with a blended rate of 3.57%. An adverse change of 1% in the interest rate of all borrowings outstanding at December 31, 2003 that bear interest at variable rates would cause us to incur an increase in interest expense of approximately $0.4 million on an annual basis. Foreign currency rate fluctuations. Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, principally the euro, could adversely affect our financial results. Except for sales in Western Europe, our sales are principally denominated in U.S. dollars. Costs related to these sales are largely denominated in their respective currencies, thereby limiting our transaction risk exposures. However, for sales not denominated in U.S. dollars, if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will 29 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 in U.S. dollars and competitors price their products in local currency, an increase in the relative strength of the U.S. dollar could result in our prices being uncompetitive in a market where business is transacted in the local currency. We currently do not hedge our exposure to foreign currency exchange rate fluctuations; we may, however, hedge such exposures in the future. RECENT ACCOUNTING PRONOUNCEMENTS Guarantor's accounting and disclosure requirements for guarantees, including guarantees of indebtedness of others. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others." This interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit and non-performance guarantees. It also requires that at the time a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its financial statements. The initial recognition and measurement provisions of this interpretation apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of this statement has not had a significant impact on our consolidated financial statements. Consolidation of variable interest entities. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51," or FIN 46. The objective of FIN 46 is to improve financial reporting by companies involved with variable interest entities. This new model for consolidation applies to an entity in which either (1) the powers or rights of the equity holders do not give them sufficient decision-making powers or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. FIN 46 requires a variable interest entity to be consolidated into the company that is subject to a majority of the risk of loss from the variable interest entity's activities or that is entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. For entities created before February 1, 2003, the consolidation requirements apply in the first fiscal year or interim period beginning after December 15, 2003. The adoption of this statement will not have a significant impact on our consolidated financial statements. Accounting for certain financial instruments with characteristics of both liabilities and equity. In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," or SFAS 150. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 applies to financial instruments entered into or modified after May 31, 2003 (except for mandatorily redeemable noncontrolling interests). For all instruments that existed prior to May 31, 2003, the standard is effective at the beginning of the first interim period beginning after June 15, 2003 (except for mandatorily redeemable noncontrolling interests). For mandatorily redeemable noncontrolling interests, the FASB has deferred the provisions of SFAS 150 until further notice. The provisions of SFAS 150 adopted thus far did not have a material effect on our consolidated financial statements and the adoption of the remaining provision of SFAS 150 will not have a significant impact on our consolidated financial statements. 30 BUSINESS COMPANY OVERVIEW We are a leading designer and marketer of Flash memory cards, USB Flash drives, DRAM modules, consumer and professional graphics cards and other computer-related technology products. We market these products to consumers through traditional retailers, such as Best Buy, CompUSA and Staples, through other retail and distribution channels, and directly to professionals. We also design, manufacture and market custom and standard DRAM modules for OEMs and their designated contract manufacturers. These customers include high-end computing, networking, storage and telecommunications equipment manufacturers, such as LSI Logic and Network Appliance. We currently market our products throughout the United States, as well as in Canada, Western Europe and certain parts of the Asia Pacific region. INDUSTRY OVERVIEW We compete in three primary segments of technology products: Flash, DRAM, and graphics cards. Flash is considered a non-volatile memory since it is able to retain data without a power source. As a result, Flash memory is used in devices that require data mobility, such as digital cameras. DRAM, on the other hand, requires a constant power supply to retain data and therefore it is most useful in devices that also require constant power to operate, such as computers and printers. Graphics cards are the devices within a computer that enhance the visual display of information and images. We market a wide variety of products in each of these categories. FLASH Flash memory, like traditional storage media such as floppy disks or CD-ROMs, allows data to be easily transported from one device to another. However, unlike traditional disk drives, Flash data storage products have no moving or mechanical parts and are considerably smaller, lighter and more rugged, and consume substantially less power than traditional disk drives, making Flash a preferred storage alternative for many applications. The development of Flash memory has led to the proliferation of consumer electronic devices designed to take advantage of these characteristics. In turn, the growth in shipments of these consumer electronic devices and their unique and expanding storage requirements have led to increasing demand for Flash data storage products. Currently, there are two basic types of Flash data storage products: Flash memory cards and USB Flash drives. Flash memory cards are available in a variety of formats, including CompactFlash(R), SmartMedia(R), xD, Memory Stick, MultiMedia Card and Secure Digital. Flash memory cards are primarily used to store digital content, such as pictures, digital music, video clips and files in consumer electronic devices, such as digital cameras, MP3 players, PDAs, digital camcorders and multimedia cell phones. The growth in popularity of these consumer electronic devices is driving the demand for small-sized, high-capacity Flash memory cards. Semico Research estimates that the Flash memory card market will grow from $2.0 billion in 2002 to $11.9 billion in 2006, a 56.4% compound annual growth rate. USB Flash drives are self-contained products that use Flash memory as their data storage medium. We believe USB Flash drives are beginning to replace floppy disk drives because of their small size, data storage capacity, ease of use, rewrite capability, speed and security. The USB Flash drive market is expected to grow at an even faster rate than the Flash memory card market. Gartner Dataquest estimates that the market for USB Flash drives will grow from $135.6 million in 2002 to $1.7 billion in 2007, a 66.3% compound annual growth rate. DRAM DRAM is a key component in determining the speed and efficiency of many desktop computers, laptops, high-performance workstations and printers, because increased memory capacity shortens processing times and allows multiple applications to run efficiently at the same time. DRAM can be divided into several architectures. Synchronous DRAM, or SDRAM, which includes double data rate synchronous DRAM, or DDR, represents the 31 technology currently used in most new computers. DDR II represents the leading-edge DRAM technology. Extended data output, or EDO, and fast page mode, or FPM, are trailing-edge technologies. We believe that consumer and OEM demand for DRAM will increase due to greater complexity of software enabled by increasing computer processing power, the development of high-bandwidth and graphics-intensive applications, evolving Internet and telecommunications infrastructure requirements, increased IT spending and computer-related equipment upgrades. These factors result in the need for faster, more powerful memory products to meet demand for greater capabilities in the storage, manipulation, transfer and management of digital data. Gartner Dataquest estimates that the worldwide market for DRAM will increase from an estimated $15.5 billion in 2002 to $23.4 billion in 2007. DRAM modules are compact circuit board assemblies of DRAM semiconductors and related circuitry. DRAM module upgrades, which we typically sell to consumers through our traditional retail customers, are a cost-effective way for consumers to improve computer performance. We expect sales of DRAM modules to grow as demand for DRAM increases. We also expect OEM demand for DRAM modules to increase based on increasing memory requirements, computer-related equipment upgrades and increasing IT spending. In the OEM market, major memory semiconductor manufacturers focus primarily on large-volume opportunities, manufacturing open-standard modules as base-level memory for leading manufacturers. Independent memory module manufacturers, including us, typically are smaller in size and seek to distinguish themselves by being more responsive and flexible in the types of products and services they provide. Independent memory module manufacturers are also able to provide open-standard modifications and upgrades used by OEMs and contract electronics manufacturers for which open-standard modules are not adequate. GRAPHICS Graphics cards are required components of most desktop computers and workstations, and enable the communication and visualization of information. The graphics processor unit, or GPU, and memory architecture of a graphics card dictate the speed and resolution of the images it produces. Features of graphics cards may include the ability to visualize information in 3D or the ability to support the use of multiple monitors on one computer. Consumer graphics cards are generally marketed toward individuals seeking to enhance the performance of graphics-intensive applications, such as video games on desktop computers, while our professional graphics card customers include users who require advanced graphics capabilities, such as game developers, CAD engineers, digital animators, as well as users who require the simultaneous use of multiple computer monitors. In the consumer graphics card market, we believe that graphics cards compete within their respective price ranges based on their performance and features. In the professional graphics card market, users such as game developers, CAD engineers and digital animators require high-performance, 3D graphics cards to develop their products. Other professional users, such as finance professionals, require the visualization of information on multiple monitors simultaneously. Competition in this market segment is based largely on the results of certification programs and benchmark testing done by software providers. There are two primary competitors designing GPUs: NVIDIA and ATI Technologies Inc. According to IDC, for the third quarter of 2003, NVIDIA held a 58% market share in the professional 3D graphics market, as well as a majority of unit share in the entry, midrange and high-end consumer markets. All of our consumer and professional graphics cards use NVIDIA processors. COMPETITIVE STRENGTHS We believe that we have successfully positioned our company as a leading supplier of our products to our Consumer and OEM division customers. Because of our capabilities as a value-added supplier, we have developed long-standing relationships with many industry-leading consumer electronics and office supply retailers and OEMs. The table below sets forth certain of our leading Consumer and OEM customers with whom we have had long-standing relationships, and the year in which we first did business with them. 32 CUSTOMER CUSTOMER CONSUMER CUSTOMERS SINCE OEM CUSTOMERS SINCE - ------------------ -------- ----------------------- -------- Best Buy.......... 1993 LSI Logic.............. 1992 CompUSA........... 1991 Network Appliance...... 1997 Dixons Group PLC.. 1998 Sanmina-SCI Corporation 1992 Ingram & Co., Inc. 1992 Office Depot, Inc. 1999 Staples........... 1995 Our Consumer division customers rely on our marketing and merchandising expertise, product quality, capabilities and experience in logistics and supply-chain management. Our OEM division customers rely on us because of our design and manufacturing expertise, our logistics and supply-chain management capabilities and our ability to design and manufacture difficult-to-find products. We believe that our strong customer relationships are the result of our combination of the following competitive strengths: Strong brand. According to NPD Intelect, for 2003, we were one of the top ten overall sellers, as measured in both dollars and units, at each of our four leading retail customers. We promote our brand through our retail customers' circulars and are increasing our advertising presence in other media targeted at the primary users of our products. We utilize consistent packaging images across product categories, which we believe allows us to effectively cross-promote our products. We believe that our well recognized PNY Technologies(R) brand allows us to collaborate effectively with our retail customers to introduce new products and product line extensions. The following table sets forth our market share of the U.S. retail market for 2003: PERCENT PRODUCT LINE MARKET SHARE - ------------ ------------ Flash memory cards..... 11.0% USB Flash drives (1)... 17.9 Desktop DRAM modules... 40.2 Laptop DRAM modules.... 64.3 Consumer graphics cards 24.1 - --------------- (1) This data is for the six-month period commencing July 1, 2003. Broad portfolio of complementary products. Our broad product portfolio lets our customers consolidate their vendor relationships and more efficiently manage their inventory. We believe our retail customers prefer to consolidate purchases with a smaller number of vendors, where possible, lowering their cost of doing business. Therefore, by providing a more comprehensive product line within our markets, we are a more valuable supplier to those customers. These complementary product lines allow us to work with our traditional retail customers to provide a variety of cross-promotional activities that we believe increases foot traffic through their stores. Merchandising and marketing expertise. We work closely with our key customers to create a variety of advertisements, promotions and product bundles, which reduces our reliance on traditional consumer incentives and improves our customers sales. In addition, we help our customers assess how best to position our products. At times, we also design, develop and produce point-of-sale materials for our customers to use. Strong supplier relationships. We maintain strong relationships with our key suppliers, including Infineon Technologies AG, Micron, NVIDIA, Samsung Electronics America, Inc., Toshiba America, Inc. and Vanguard International Semiconductor, Inc. Many of these relationships are more than a decade old. Our key suppliers take into consideration the purchasing history of their customers when they make product allocation decisions. We believe our purchasing history with these suppliers has enabled us to obtain adequate supplies of our products during periods of industry shortage. We believe that our purchasing practices also increase vendor loyalty and assist us in reducing our exposure to price volatility. These 33 strong supplier relationships are particularly valuable to our OEM customers, who often rely on our ability to procure DRAM architectures that are difficult to obtain. Supply-chain management expertise. We believe our logistical operations, supply-chain management expertise and operational flexibility help our retail and OEM customers to better manage their inventory, thereby reducing their exposure to potential price fluctuations and further strengthening our customer relationships. Our merchandizing and inventory management capabilities also permit us to consult with our major customers to develop purchasing programs that seek to satisfy their product requirements, while limiting inventory risk for us and our major customers. We receive in-store and in-warehouse data on a regular basis from our major customers relating to their sales data and on-hand product inventory. As a result, we are able to minimize our exposure to customer allowances, optimize inventory mix and maximize inventory turnover. Additionally, our automated module assembly lines and semi-automated packaging lines have sufficient capacity to meet our customers' demands, even during peak seasons. These systems, along with our workforce flexibility, give us the ability to meet fluctuating customer demand while minimizing overtime. Experienced management team. Many of our senior managers have over 15 years of operating expertise in our industry. Their experience with the business cycles affecting our products benefits our customers and enables us to respond effectively to industry challenges. Gadi Cohen has 18 years of experience in this industry. OUR STRATEGY Our goal is to enhance our competitive position as a leading designer and marketer of computer-related technology products. We seek to accomplish this goal through the following strategies: Capitalize on the growing demand for Flash products. We believe that the Flash memory industry will experience significant growth, driven by widespread adoption of consumer electronic devices with increasing data storage requirements and the adoption of USB Flash drives as a common storage device. We have developed a comprehensive offering of Flash memory cards, USB Flash drives and a variety of Flash memory card readers and adapters. We plan to capitalize on this growth by continuing to aggressively market our comprehensive offering of Flash memory products. We also plan to monitor developments in the Flash memory market to optimize our opportunities to introduce new products. For 2003, our net sales of Flash-related products increased by 132.4% compared to 2002. Introduce complementary product lines. We plan to capitalize on our brand by further broadening our product portfolio with new products that complement our existing offerings. We have successfully taken advantage of our long-standing leadership position in DRAM to expand into Flash memory cards, USB Flash drives and graphics cards. We introduced our Attache(TM) USB flash drive in June 2003 and our Executive Attache(TM) USB flash drive in January 2004. We plan to take advantage of the growing computer, consumer electronics, storage and networking markets by initially focusing on the product needs of our existing customer base and expanding into new markets as opportunities arise. Because of our experience, capabilities and relationships, we have a demonstrated ability to introduce new products in short time periods, at times in as little as twelve weeks, as was the case with our consumer graphics cards and USB Flash drives. Expand OEM market presence. We have a diverse group of leading customers in our OEM division, including LSI Logic and Network Appliance. As demand returns for networking, storage and high-end computing products, we plan to maintain our relationships with existing customers and selectively add new customers. We offer our OEM customers a variety of customized and standard solutions, including leading-edge, mainstream and trailing-edge products, to meet their needs. One of our strengths in the OEM market is our ability to access trailing-edge technologies not readily available to other suppliers, which often offers superior profit opportunities. We believe that our OEM customers rely on us for superior service, flexibility and responsiveness, as well as our engineering and logistics expertise. 34 Further broaden our geographic presence. We intend to expand our geographic presence by targeting emerging and growing markets, such as the Far East, for both Consumer and OEM markets. Our facility in Taiwan allows us to increase our operational flexibility by establishing new supplier and contract manufacturing relationships, strengthening our existing supplier relationships and improving access to new technologies and products. Continue to focus on superior customer service. We intend to focus our resources and expertise on providing superior quality and service to a core group of market leaders. By doing so, we believe that we can become their preferred source for Flash memory, DRAM modules and graphics card solutions and become deeply integrated with their businesses at all levels. We plan to further integrate our business with that of our existing retail customers, while seeking new customers that we believe have the potential to generate significant revenue. In our OEM business, we intend to focus on serving our customers' memory needs through our logistics, design and engineering capabilities. Pursue acquisitions of complementary technologies, products or companies. We may make acquisitions to strengthen our position in our target markets, enhance our technology base, increase our supply capabilities or expand our geographic presence. We currently have no commitments or agreements and are not involved in any negotiations to acquire any technologies, products or companies. PRODUCTS We are a leading designer and marketer of Flash memory cards and related products, DRAM modules and consumer and professional graphics card products. FLASH PRODUCTS We market a variety of Flash memory cards, USB Flash drives and Flash memory card readers and adapters. Flash memory cards. Our Flash memory cards are used primarily in consumer electronic devices, such as digital cameras, MP3 players and PDAs. We offer a broad assortment of the currently available Flash memory card form factors, including: CompactFlash(R). CompactFlash(R)'s small size, durability and low power consumption make it well suited for a range of current and next generation, small-size consumer applications, such as digital cameras and PDAs. Canon Inc., Creative Labs, Inc., Nikon Inc. and Toshiba are among the manufacturers whose devices use CompactFlash(R). Secure Digital and MultiMedia Cards. Secure Digital cards and MultiMedia Cards are used in storage, data backup and data logging applications and are about the size of a postage stamp. Their slim, compact design makes them an ideal removable storage solution for smaller consumer electronic devices including multimedia mobile phones, MP3 players and digital cameras. Hewlett Packard Company, Eastman Kodak Company, Minolta Co., Ltd., palmOne, Inc., Panasonic, SONICblue Incorporated and Toshiba are among the manufacturers whose devices use Secure Digital and MultiMedia Cards. SmartMedia(R). We offer SmartMedia(R) cards, another format of removable Flash memory used to store music, images and data. Creative Labs and Olympus America Inc. are among the manufacturers who market consumer electronic devices that use SmartMedia(R). 35 The following table sets forth our Flash memory card offerings as of December 31, 2003: FLASH MEMORY CARD DENSITIES - ----------------- --------- CompactFlash(R)........................ 32MB, 64MB, 128MB, 256MB, 512MB, 1GB Secure Digital......................... 32MB, 64MB, 128MB, 256MB MultiMedia Card........................ 32MB, 64MB, 128MB SmartMedia(R).......................... 32MB, 64MB, 128MB USB Flash drives. USB Flash drives are self-contained computer drives. These are portable, pocket-sized storage devices used to store, transfer and carry data and allow access to that data via any desktop computers, laptop or other device with a USB port. Our USB Flash drives are marketed under the Attache(TM) brand and are available in densities of 64MB, 128MB, 256MB and 512MB. Flash readers. We offer Flash memory card readers and adapters for each of the Flash memory card form factors we market, as well as a reader for Memory Stick products. We also offer multi-slot readers, which allow consumers to access data from a variety of Flash memory cards via one reader. DRAM MODULES We offer a variety of DRAM modules including a wide range of single in-line memory modules, or SIMMs, dual in-line memory modules, or DIMMs, and small outline DIMMS, or SO DIMMs. Our DRAM modules are used in desktop PCs, laptops, workstations, servers and telecommunications and Internet infrastructure equipment. Our standard DRAM modules are available in various densities up to 4GB. We also offer many configurations utilizing different DRAM architectures, such as SDRAM, DDR, Rambus, EDO and FPM. We also offer stacked DRAM modules. To consumers, we market our DRAM products under the PNY Technologies(R), Verto(R), Optima(TM) and Bravo(TM) brands. Our Verto(R) branded DRAM products include a high-performance DDR-based DRAM memory module and a separate DRAM cooling device. These products are similarly packaged with our other Verto(R) products and are marketed to the same target audience. Our Optima(TM) branded DRAM modules are also high-performance DDR-based DRAM targeted at high-end users. Our Bravo(TM) branded DRAM modules are sold in the Far East. The following table describes certain of our DRAM products as of December 31, 2003: DRAM MODULE TYPE DENSITY SPEED - ---------------- ------- ----- 184-pin DDR SDRAM DIMM............................ 64MB-4GB 200-400 MHz 184-pin Registered DDR SDRAM DIMM................................... 64MB-2GB 200-333 MHz 200-pin DDR SDRAM SODIMM.......................... 64MB-1GB 200-400 MHz 168-pin SDR SDRAM DIMM............................ 64MB-1GB 100-133 MHz 168-pin Registered SDR SDRAM DIMM................................... 64MB-1GB 100-133 MHz 144-pin SDR SDRAM SODIMM.......................... 16MB-512MB 100-133 MHz 168-pin EDO, FPM DIMM............................. 16MB-256MB 50-70 nS 100-pin SDR SDRAM DIMM............................ 32MB-256MB 66 MHz 100-pin EDO DIMM.................................. 16MB-64MB 50-70 nS 72-pin EDO, FPM SIMM.............................. 16MB-128MB 50-70 nS 72-pin EDO, FPM SODIMM............................ 16MB-64MB 50-70 nS In our OEM division, our engineers work with OEMs or their designated contract manufacturers to engineer and manufacture custom and standard DRAM modules. In addition to our ability to design and manufacture most leading-edge technology products, we are able to supply memory modules incorporating trailing-edge technologies, which our OEM customers often find difficult to procure from other sources. These products are 36 necessary purchases for OEMs who have made commitments to support their older product lines through their life cycles. GRAPHICS We market graphics cards with a wide range of performance characteristics to the consumer and professional user. These cards, co-branded with NVIDIA, are sold through our Consumer division as upgrades to a user's existing graphics card. Verto(R) graphics cards. Our Verto(R) brand graphics cards utilize NVIDIA's GeForce family of desktop graphics processors. These include the GeForce FX, GeForce4 and GeForce2. The GeForce FX family represents NVIDIA's leading-edge consumer technology, designed for the enthusiast consumer market. Each product within the GeForce family is designed to deliver the highest speed, sharpest resolution and most features available of any graphics card in its respective price range. NVIDIA Quadro(R) Professional graphics cards. We are the exclusive marketing partner for NVIDIA's professional Quadro graphics cards in the Americas, Europe, the Middle East and Africa. NVIDIA's Quadro(R) branded graphics cards are robust, high-performance solutions for the professional user that are available for the leading-edge, mid-range, entry-level and multi-display product lines. The Quadro family of products, which consists of the Quadro FX, Quadro4 XGL and Quadro NVS workstation solutions, is designed to meet the needs of a number of applications, such as industrial product design, digital content creation, non-linear video editing, scientific and financial visualization, general purpose business and financial trading. Quadro products are certified for a multitude of professional applications, and are designed to deliver the graphics performance and resolution required by professional applications. CUSTOMERS We market our products through our Consumer and OEM divisions utilizing a combination of our own sales force and manufacturer representatives. In both divisions, sales are generally made by purchase order. We have no long-term sales contracts with any of our customers. To generate consumer sales, we market to traditional retailers, mail-order and web-based retailers, distributors, specialized photography retailers, system integrators and value-added resellers. In the case of our Quadro graphics cards, we also sell directly to the professional consumer. Our products are sold in over 10,000 traditional retail locations worldwide. Based on net sales, our four leading Consumer customers for 2003 were Best Buy, CompUSA, Ingram and Staples. We seek to have integrated relationships with all our primary Consumer division customers across our entire enterprise, from our sales force through our inventory management personnel. We have developed comprehensive, integrated inventory management systems and assist our retail customers in monitoring their inventory levels, reducing the volatility of their inventory costs. We also advise them on optimum inventory levels based on our market forecasts. We typically receive weekly, and in some cases daily, on-hand inventory reports from our largest customers. We also receive critical order data, as well as sales and inventory information, via electronic data interchange systems. We can either ship to a customer's warehouse or directly to its stores to reduce turnaround time and storage costs. Our OEM division sells our products directly to OEMs, contract electronics manufacturers and electronics component distributors. Based on net sales, our four leading OEM customers for 2003 were LSI Logic, Network Appliance, Sanmina-SCI and Solectron Corporation. For our OEM customers, we provide quick turnaround solutions and just-in-time delivery, which allows them to maximize production efficiencies. We consult with our OEM customers, sharing our DRAM market insights and forecasts, so they can more efficiently manage their memory module inventories. We also assist our OEM customers in obtaining trailing-edge memory technology that otherwise may be difficult to procure. 37 SALES AND MARKETING Our Consumer division utilizes a variety of advertisements, cross-promotions, in-package promotions and product bundles to generate sales. In the traditional retail market, in particular, these also add value to our customers by driving traffic to and within each store. Generally, we advertise weekly in our traditional retail customers' advertising circulars, which we believe improves our sales, creates brand loyalty and generates additional traffic for that customer. Based on the circulation data provided by each retailer, we believe our advertising generates an average of 150 million brand impressions weekly in the United States across all of our product categories. We utilize cross-promotions, in-package promotions and product bundles to improve our product sales at traditional retail locations. For example: - We occasionally provide discounts to consumers on the purchase of our Verto(R)-branded DRAM modules with the purchase of a Verto(R) graphics card. Cross-promotions such as these improve our sales and generate additional in-store traffic for our customers. - We recently included a free copy of a popular video game, Tom Clancy's Splinter Cell(R), with one model of our Verto(R) graphics cards. This type of in-package promotion represents significantly greater value to the consumer than our cost. - We regularly bundle our Flash memory cards with one of our Flash readers or adapters. Like our in-package promotions, these represent a greater value to the consumer than cost to us. We also use our website to promote our products. The website describes each product in detail, offers technical support and directs consumers to our retail customers for purchases. Our website also contains our memory configurator software, which helps customers select the appropriate DRAM memory module for their needs. In addition, we expect to participate in various educational programs, such as CyberScholar, designed to educate our customers' employees, making them more aware of our products and, at the same time, better able to serve their customers. We also participate in major industry trade shows. The breadth of our offerings across product lines and the depth of our offerings within each specific line provide an additional benefit to our Consumer division customers by reducing the number of vendors from whom they must purchase their inventory, which we believe reduces their costs. We market to OEM customers based on our engineering and design capabilities, and our logistics and supply-chain management services. In addition, our OEM customers rely on our ability to access trailing-edge technology. We believe this combination of abilities sets us apart from our competitors in the OEM market. Our Consumer division uses our own sales force, as well as manufacturers' representatives. We also have a separate internal Quadro sales force who sell directly to the professional user. Our internal OEM sales force is also complemented by manufacturers' representatives. We believe these combined sales forces have the local presence, market knowledge and strategic insight to allow us to effectively market our products to our Consumer and OEM customers. SUPPLIERS We purchase the majority of our Flash memory products from a small number of suppliers based on their supply capabilities and intellectual property. These include Infineon, Panasonic, Samsung and Toshiba. Our DRAM module products and component parts are also sourced from a small number of suppliers: Micron, Infineon, Samsung, and Powerchip Group Pty Ltd. These suppliers also provide us with DRAM components for use in our Verto(R) graphics cards. Collectively, our suppliers provide us with a full range of technologies. We purchase graphics processors used on our Verto(R) graphics cards almost exclusively from NVIDIA, and all the Quadro graphics cards we market are purchased solely from NVIDIA. 38 We utilize contract manufacturers for the production of all our Verto(R) graphics cards and our USB Flash drives. In addition to their responsibility for the manufacturing of these products, our manufacturers also purchase many of the parts necessary to produce complete, finished goods. As with our customers, we maintain close working relationships with our suppliers in the United States, Europe and the Far East. Our vendor base represents a cross-section of price leaders and leading-edge, mainstream and trailing-edge product suppliers. We believe that our relationships and our retail market share position help us secure allocations in times of product shortages. In addition to purchases from our traditional memory semiconductor suppliers, we also purchase a limited amount of products through the spot market. While we prefer to purchase from our suppliers, these spot market purchases increase our flexibility and allow us to meet our customers' needs more readily. Our procurement organization operates from offices in the United States, Western Europe and the Far East located near many of our suppliers to help ensure competitive pricing and a dependable supply of materials for our products. We opened our facility in Taiwan primarily for this reason. MANUFACTURING, DESIGN AND TESTING Manufacturing. For the production of memory modules, we employ highly automated manufacturing processes that involve the use of surface mount equipment. Due to our flexible manufacturing setup, we can offer our customers rapid manufacturing and test cycles on projects of all sizes. We employ rigorous quality control procedures in each facility and perform statistical process controls at various steps of the manufacturing process. In addition, we conduct quality assurance through audits to ensure that the final product meets required specifications. We believe that we adhere to the highest quality control standards in every aspect of our operations. We received ISO 9001 certification to the 2000 standards at our facility in New Jersey. ISO is an international series of quality standards that can improve quality, productivity and customer satisfaction, and reduce waste. To comply with ISO registration requirements, we continuously monitor and work to improve our product quality and customer satisfaction. Design. We provide comprehensive design and engineering services to our OEM customers for our DRAM modules. In consultation with a customer, we review its requirements and recommend cost-effective and efficient module solutions. We often provide our OEM customers with design assistance, either helping them to develop new DRAM interfaces to work with existing memory modules or to design new memory modules to work with existing memory interfaces. Our engineers also work closely with our suppliers, performing product design reviews, qualifications and testing prior to the release of new products into the market. Although we may receive additional compensation for providing our engineering, manufacturing and testing services, it is not significant and is provided as a means to increase sales. As a member of the Joint Electronic Device Engineering Council and as a participant in two of its key standard-setting committees, we participate in the industry design and standard-setting processes for memory modules. Testing. We test 100% of the products that we manufacture. We use sophisticated test systems to confirm that our memory modules function properly and meet or exceed our customers' requirements. COMPETITION We conduct business in markets characterized by intense competition, rapid technological change, evolving industry standards and price volatility. We compete in these markets on the basis of product depth and breadth, service, quality and value. Some of our significant suppliers, such as Micron and Panasonic, are also our competitors. Many have the ability to manufacture competitive products at lower costs as a result of their vertical integration. We compete in Flash memory cards largely based on marketing techniques and value. Because our inventory strategy allows us to move relatively high-priced inventory through our sales channels quickly, we are able to rapidly adjust to decreasing prices in this market. We believe that our primary competitors in our Flash 39 memory markets are Fuji Photo Film Co. Ltd., Lexar Media, Inc. and SanDisk Corporation. We believe that our primary competitors in the consumer DRAM modules market are Centon Electronics, Inc., K-Byte, a division of All Components, Inc., Kingston Technology Company, Inc., and Micron. Competition in the consumer graphics card market is based on product performance and price. While we only offer graphics cards based on NVIDIA technology, we believe that these cards offer competitive performance at their respective prices. In the consumer graphics card market, we compete with ATI, BFG Technologies Inc. and eVGA Corporation. ATI competes using its own graphics processors and cards; however, BFG and eVGA also use NVIDIA technology. In the professional graphics card market, we compete with ATI, 3DLabs, a wholly-owned subsidiary of Creative Labs, and Matrox Electronic Systems Ltd. We also face competition from current and prospective OEM customers that evaluate our capabilities against the merits of manufacturing products internally. We compete for OEM business with independent manufacturers such as Celestica, Inc., Kingston, Solectron and Sanmina-SCI. FACILITIES Our six facilities are located in: Parsippany, New Jersey, which is our corporate headquarters; Santa Clara, California; London, United Kingdom; Wurselen, Germany; Bordeaux, France; and Hsin Chu, Taiwan. We conduct sales, procurement and manufacturing from our facilities in New Jersey and France. We conduct sales and procurement from our facilities in California and Taiwan and sales from our other facilities. Both of our divisions use each of our facilities. We believe these facilities are strategically positioned to best serve both our customers and supply needs, while providing the geographic platform to carry out our strategy. EMPLOYEES As of December 31, 2003, we had 342 full-time employees. In addition to our full-time employees, we regularly employ temporary and part-time employees. Our employees in the United States are not represented by any collective bargaining agreements. Two employees in France are represented by unions. We have never experienced a work stoppage at any of our facilities. We consider our relationship with our employees to be good. LEGAL PROCEEDINGS We received notice on or about August 7, 2000 that Lemelson Medical, Education & Research Foundation, LLP filed a complaint against us and other defendants on June 30, 2000. The complaint was filed in the United States District Court in the District of Arizona and alleges that our manufacturing processes infringe several patents that the Lemelson Foundation allegedly owns. The case has been stayed pending the outcome of another case challenging the validity and enforceability of the patents at issue. We accrued $0.3 million in 2000 based in part on settlement discussions with Lemelson, which have since been abandoned. However, because of the preliminary stage of this case, any revised estimate of potential damages would be speculative, and we have not made any such revised estimate at this time. We are not currently involved in any other material legal proceedings. We are not aware of any other material legal proceedings threatened or pending against us. From time to time, however, we may become subject to additional legal proceedings, claims and litigation arising in the ordinary course of business, including, but not limited to, employee, customer and vendor disputes. In addition, in the past we have received, and we may continue to receive in the future, letters alleging infringement of patents or other intellectual property rights. Our management believes that these letters generally are without merit and intends to contest them vigorously. 40 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Set forth below is information concerning our executive officers and directors. NAME AGE POSITION - ---- --- -------- Gadi Cohen.................... 44 Chairman of the Board, President and Chief Executive Officer Jean-Pierre Pucheu............ 57 President of PNY Technologies Europe and Director John P. Hughes................ 45 Senior Vice President of New Business Development Robert J. Stone............... 40 Senior Vice President of Operations Mark J. Ciano................. 37 Vice President of Finance and Administrative Services Anthony G. Gomez.............. 40 Vice President of Sales and Marketing, Consumer division John A. Unland................ 50 Vice President of World Wide Procurement Luke M. Beshar................ 45 Director Gadi Cohen has served as our Chairman of the Board, President and Chief Executive Officer since he founded PNY in 1985. Prior to founding PNY, Mr. Cohen served for seven years as an officer in the Israeli army. Jean-Pierre Pucheu has served as President of PNY Technologies Europe since 1994 and as a Director since 1998. Mr. Pucheu supervises our European operations from our manufacturing, sales and procurement facility in Bordeaux, France. Prior to joining us, Mr. Pucheu spent 23 years with IBM, where he attained the position of Director of European Component Purchasing. Mr. Pucheu earned the equivalent of an M.B.A. from L'Ecole Superieure de Commerce et D'Administration. John P. Hughes has served as our Senior Vice President of New Business Development since 2002. Mr. Hughes is responsible for implementing and overseeing new business opportunities. Prior to holding his current position, Mr. Hughes was Vice President of Operations and Procurement. Formerly Product Manager at Quad Systems Corporation, a machine manufacturing company, Mr. Hughes joined us in 1991 as Director of Manufacturing. He has approximately 15 years of technology product manufacturing experience and earned a B.S. in Electrical Engineering from Lehigh University. Robert J. Stone has served as our Senior Vice President of Operations since 2002. Mr. Stone is responsible for manufacturing, engineering, packaging and warehouse operations. Prior to holding his current positions, Mr. Stone was Vice President of Manufacturing and Engineering. Formerly Vice President of Product Development and Integration at Quad Systems Corporation, Mr. Stone joined us in 1994 as Manufacturing Manager. He has over 18 years of experience in surface mount technology manufacturing and holds a B.S. in Electrical Engineering from the University of Rhode Island. Mark J. Ciano has served as our Vice President of Finance and Administrative Services since 2000. Mr. Ciano is responsible for overseeing all our financial and administrative affairs. Formerly a Senior Auditor with KPMG Peat Marwick, Mr. Ciano joined us in 1995 as Assistant Controller and became Controller in 1997. He has 13 years of finance experience and holds a B.A. in Accounting from William Patterson University. Anthony G. Gomez has served as our Vice President of Sales and Marketing, Consumer division since 2000. Mr. Gomez is responsible for managing and directing PNY's Consumer division sales. From April 1999 to June 2000, Mr. Gomez was the Vice President of Sales, Media Solutions at Sony Electronics Inc., with primary responsibility for managing the sale of consumer analog audio, video and camcorder media. From 1996 to 1999, Mr. Gomez was a director in this division at Sony. Mr. Gomez has an M.B.A. in Finance from Fairleigh Dickinson University. 41 John A. Unland has served as our Vice President of Worldwide Procurement since 2001. Mr. Unland is responsible for managing and directing our global procurement operations and for managing our activities and growth in the Asia Pacific region. Prior to joining us, Mr. Unland held the position of Director, Strategic Alliances, with Hewlett Packard where he was responsible for establishing and managing strategic alliances with industry leading technology providers for Hewlett Packard's Personal Computer Organization. During his more than 20 years at Hewlett Packard, Mr. Unland led procurement and materials teams with global responsibility in support of server, printer and test and measurement product lines. Mr. Unland has a B.S. in Business Management from San Jose State University. Luke M. Beshar has served as one of our directors since December 31, 2003. He has served as Senior Vice President and Chief Financial Officer of Cambrex Corporation, a biotechnology, pharmaceutical chemicals and pharmaceutical research products company, since December 2002. From January 2002 to December 2002, Mr. Beshar served as Senior Vice President and Chief Financial Officer for Dendrite International, a Nasdaq listed company specializing in sales force effectiveness and CRM software, solutions and support services to the pharmaceutical industry. From November 1998 to January 2002, he was Executive Vice President, Finance and Chief Financial Officer for Expanets, Inc., a provider of advanced voice and data communication solutions. Mr. Beshar served as our Executive Vice President and Chief Financial Officer from 1996 through 1998. Mr. Beshar has a B.A. in Accounting from Michigan State University, is a graduate of The Executive Program of The Darden Graduate Business School at the University of Virginia and is a member of the New York Society of Certified Public Accountants. BOARD OF DIRECTORS Following the completion of this offering, our Board of Directors will have seven members, including three directors who are not employees and who are otherwise independent. Our directors will be divided into three classes. Each class will be elected for terms of three years. The initial terms of the Class I, Class II and Class III directors are expected to end at our annual stockholders' meeting held in 2004, 2005 and 2006, respectively. COMMITTEES OF THE BOARD OF DIRECTORS Following completion of this offering, our Board of Directors will have an audit committee. The Board may also establish other committees to assist in the discharge of its responsibilities. The functions of the audit committee, which is expected to consist of Messrs. Beshar, and , each a non-employee director, include: - reviewing the adequacy of our system of internal accounting controls; - reviewing the results of the independent auditor's annual audit, including any significant adjustments, management judgments and estimates, new accounting policies and disagreements with management; - reviewing our audited financial statements and discussing them with management; - reviewing the audit reports submitted by the independent auditors; - reviewing the disclosures by independent auditors concerning the relationships with our company and the performance of our independent auditors and annually recommending independent auditors; - adopting and annually assessing its charter; and - preparing such reports or statements as may be required by the Nasdaq National Market and applicable securities laws. 42 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION We do not have a compensation committee. Gadi Cohen was primarily responsible for all compensation decisions regarding our executive officers during the last fiscal year, other than his own. Mr. Cohen's compensation was determined and approved by the other members of the Board of Directors. BOARD COMPENSATION Directors who are not our employees will receive as compensation for their service on the Board. Directors who are our employees are not separately compensated for serving on the Board of Directors. EMPLOYMENT AGREEMENTS We currently do not have employment agreements with any of our executive officers. Each of our executive officers has entered into a severance agreement that provides for the payment of six months of salary upon termination of employment and contains a one-year non-competition provision. EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation for 2003 for our Chief Executive Officer and our four other most highly compensated executive officers at such date. Annual compensation amounts set forth on the table exclude perquisites and other personal benefits because such compensation did not exceed either $50,000, or 10% of the total annual salary and bonus for any of the named executive officers. All other compensation consists of discretionary matching contributions to our 401(k) plan on behalf of each named executive officer. 2003 SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------- ---------------------- ALL OTHER RESTRICTED SECURITIES ANNUAL STOCK UNDERLYING ALL OTHER SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION ($) ($) ($) ($) (#) ($) - --------------------------- --- --- --- --- --- --- Gadi Cohen................... 380,611(1) - - - 10,000(2) President and Chief Executive Officer Jean-Pierre Pucheu........... 190,660(3) 40,824(4) - - - - President of PNY Technologies Europe John P. Hughes............... 175,000 50,000 - - - 10,000(2) Senior Vice President of New Business Development Robert J. Stone.............. 175,000 50,000 - - - 8,375(2) Senior Vice President of Operations John A. Unland............... 175,000 50,000 - - 10,000(2) Vice President of Worldwide Procurement - ---------- (1) Represents a salary of $300,000 and a director's fee of L50,100 for service on the Board of Directors of PNY Technologies (UK) Limited, a wholly-owned subsidiary of PNY Technologies Europe, converted at the weighted average exchange rate for the year ended December 31, 2003 of $1.609 per pounds sterling. (2) Represents 401(k) contributions made by us. (3) Represents a salary of E146,351 converted at the weighted average exchange rate for the year ended December 31, 2003, of $1.134 per euro and a director's fee of L15,350 for service on the Board of Directors of PNY Technologies (UK) Limited, a wholly-owned subsidiary of PNY Technologies Europe, converted at the weighted average exchange rate for the year ended December 31, 2003, of $1.609 per pounds sterling. 43 (4) Represents a bonus of E36,000 converted at the weighted average exchange rate for the year ended December 31, 2003 of $1.134 per euro. All executive officers are eligible to participate in our employee stock option plan and may participate in other employee benefit plans and programs, such as health insurance plans, that we offer to our other employees. OPTION GRANTS IN LAST FISCAL YEAR None. AGGREGATE YEAR-END OPTION VALUES The table below sets forth the value and number of shares of common stock subject to exercisable and unexercisable options held as of December 31, 2003 by each of the executive officers named in the 2003 Summary Compensation Table. No named executive officer exercised any options in 2003. The value of the unexercised in-the-money options at year end assumes a deemed value for financial reporting purposes at year end of $ per share less the exercise price. AGGREGATE FISCAL YEAR END OPTION VALUES NUMBER OF SHARES OF COMMON STOCK UNDERLYING UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED IN-THE- YEAR END MONEY OPTIONS AT YEAR END -------- ------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- ----------- ------------- Gadi Cohen....................... - - Jean-Pierre Pucheu............... - - John P. Hughes................... 300,000 - Robert J. Stone.................. 330,000 - John A. Unland................... 67,500 22,500 STOCK OPTION AND OTHER BENEFIT PLANS STOCK OPTION PLAN In June 1999, we adopted our employee stock option plan, which was amended and restated in October 2000, for directors, officers, employees, consultants and other individuals or entities selected by our Board of Directors or compensation committee, which provides for nonqualified stock option and incentive stock option grants to our employees and directors. As of December 31, 2003, options for 4,328,990 shares were issued, 4,750 were exercised, 1,827,160 were cancelled and 4,998,170 shares were available for future grants under the plan. Options granted under our plan currently vest over four years. In connection with the consummation of this offering, we intend to grant options to purchase up to shares at an exercise price equal to $ per share to existing employees who currently do not hold stock options. We expect to incur a stock-based compensation charge of $ million in connection with this option grant over their four-year vesting period. We also intend to grant options to purchase up to shares to new employees at an exercise price equal to the public offering price. Options under the plan generally expire ten years from the date of grant. If a participant's employment or provision of services is terminated for a reason other than as a result of death, disability or retirement, the options expire 30 days after termination, unless extended in accordance with the plan. If a participant's employment is terminated as a result of death, disability or retirement, the options expire 90 days from the date of termination. All shares issued pursuant to the plan are subject to transfer restrictions. 401(k) PROFIT-SHARING PLAN We adopted a tax-deferred 401(k) profit-sharing plan in September 1996. The plan covers substantially all full-time U.S. employees on our payroll who are at least 21 years of age. Employees become eligible to participate 44 in the first quarterly enrollment date after hire. The plan provides for voluntary employee contributions up to 60% of their annual pre-tax compensation, subject to the maximum limit allowed by the Internal Revenue Service guidelines, which is currently $13,500 annually. The plan is intended to qualify under Section 401 of the Internal Revenue Code so that contributions to the plan, and income earned on the plan contributions, are not taxable to employees until withdrawn from the plan, and contributions by us will be deductible by us when made. The trustee under the plan, at the discretion of each participant, invests the employee contributions to the plan in selected investment options. At our discretion, we make matching contributions to each participating employee based on his or her voluntary contributions to the plan. We currently match one-half of an employee's matchable contributions to the plan, which cannot exceed 3% of their compensation. We may also make, in our discretion, annual profit-sharing contributions on behalf of eligible employees. Each employee who is a plan participant on the last day of the plan year and has completed at least 1,000 hours of service during the year is entitled to a share of any profit-sharing contribution we make for the plan year. Our matching contribution and profit-sharing contributions vest at the rate of 20% per year beginning after the employee's second year of employment with us. RESTRICTED STOCK AWARDS During 1997 and 1998, we granted to specified employees and in one case to a former employee for no consideration the right to receive 1,335,300 shares of common stock, which will be delivered to them when the restriction period described below terminates. These stock awards are subject to a ten-year cliff vesting schedule, based on continued employment. These shares are also subject to certain restrictions on transfer which terminate in part at the end of a restriction period that ends on the earliest to occur of (1) 180 days following the consummation of our initial public offering, (2) immediately prior to a change in control, and (3) ten years after the date of grant. Gadi Cohen has agreed to transfer to us as a contribution of capital, upon the termination of the restriction period, a number of shares of common stock equal to the number of shares of common stock that we have agreed to deliver to the specified employees. As of December 31, 2003, and after giving effect to shares to be issued and shares forfeited during the period beginning in 1997 and ending on December 31, 2003, we expect Gadi Cohen to deliver 520,800 shares to us, and we will in turn deliver those to the specified employees upon the termination of the restriction period. LIMITATION OF DIRECTORS AND OFFICERS LIABILITY Our certificate of incorporation provides that no director will be liable for monetary damages for breach of the director's fiduciary duty to us or our stockholders, except for liability arising from: - breach of the director's duty of loyalty to us or our stockholders; - acts or omissions not in good faith or involving intentional misconduct or knowing violations of law; - improper distributions to stockholders and improper purchases or redemptions of stock; and - transactions from which the director derived an improper personal benefit. This provision of our certificate of incorporation does not eliminate the director's fiduciary duties, and in appropriate circumstances, equitable remedies including an injunction or other forms of non-monetary relief would remain available under Delaware law. This provision also does not affect a director's responsibilities under any other laws, including federal securities laws or state or federal environmental laws. In addition, our bylaws provide that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. We are also empowered under our bylaws to enter into indemnification contracts with our directors and officers and to purchase insurance on behalf of any person we are required or permitted to indemnify. We have obtained director's and officer's liability insurance coverage, which covers, among other things, liabilities arising under the Securities Act of 1933, as amended, or the Securities Act. 45 RELATED PARTY TRANSACTIONS In August 1995, we entered into a Preferred Stock and Warrant Purchase Agreement with certain affiliates of Goldman, Sachs & Co. and Gadi Cohen. As part of that agreement, we sold 13,000 shares of Series A preferred stock, convertible into 3,900,000 shares of common stock, and warrants to purchase 1,462,500 shares of common stock for an aggregate purchase price of $15.0 million, to affiliates of Goldman, Sachs & Co. The warrants expired in August 2002, and were not exercised. Assuming an offering price of $ per share of common stock, the value of the Series A preferred stock held by certain affiliates of Goldman, Sachs & Co. would be $ million. Upon the automatic conversion of the Series A preferred stock upon consummation of this offering, the affiliates of Goldman, Sachs & Co. will be the beneficial owners of more than 5% of our outstanding shares of common stock. See "Principal Stockholders" for information relating to the beneficial ownership of shares and identification of affiliates of Goldman, Sachs & Co. In consideration for the redemption of our formerly outstanding Series B and Series C Preferred Stock held by Ruth Cohen, Gadi Cohen's spouse, on December 5, 2000, we paid her $6.0 million in cash, offset $2.3 million she owed us, and issued a note to her in the amount of $9.8 million. As of December 31, 2003, there was $5.0 million outstanding on the note, which must be repaid with proceeds from this offering. The holders of our Series A preferred stock are entitled to receive cash dividends at a rate of 4.25% per annum. Each class of our stockholders have approved amendments to our restated certificate of incorporation pursuant to which no such dividends will be payable or accrue prior to July 1, 2004. We recognized a net waiver of dividends of $1.8 million for the year ended December 31, 2003. We believe that each of the transactions described above was made on terms that were no less favorable to us than could be obtained from unaffiliated parties. 46 PRINCIPAL STOCKHOLDERS The table below sets forth information known to us regarding the beneficial ownership of our common stock as of December 31, 2003, as adjusted to reflect the automatic conversion of outstanding shares of Series A preferred stock into common stock, resulting in the issuance of 3,980,400 shares of our common stock, with an effective conversion price of $3.85 per share, and to reflect the sale of the common stock offered by this prospectus, by: - each stockholder known by us to be the beneficial owner of more than 5% of our outstanding common stock; - each named executive officer; - each of our directors; and - all executive officers and directors as a group. Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission, or the Commission, and generally includes voting power and/or investment power with respect to securities. Shares of common stock subject to options currently exercisable or exercisable within 60 days of the date of this prospectus are deemed outstanding for purposes of computing the beneficial ownership by the person holding such options, but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person. Except as otherwise noted, the persons or entities named have sole voting and investment power with respect to all shares shown as beneficially owned by them. Unless otherwise indicated, the principal address of each of the stockholders below is c/o PNY Technologies, Inc., 299 Webro Road, Parsippany, New Jersey 07054. PERCENTAGE OF SHARES NUMBER OF BENEFICIALLY OWNED SHARES ------------------------- BENEFICIALLY BEFORE AFTER BENEFICIAL OWNER OWNED OFFERING OFFERING - ---------------- ----- -------- -------- EXECUTIVE OFFICERS AND DIRECTORS: Gadi Cohen (1)............................................... 25,800,000 83.4% Jean-Pierre Pucheu (2)....................................... 944,100 3.1 Mark J. Ciano (3)............................................ 150,000 0.5 Anthony G. Gomez (4)........................................ 150,000 0.5 John Unland (5).............................................. 67,500 0.2 John P. Hughes (6)........................................... 323,700 1.0 Robert J. Stone (7).......................................... 337,800 1.1 Luke M. Beshar (8)........................................... 427,950 1.4 All executive officers and directors as a group (8 persons).. 28,201,050 91.2 OTHER STOCKHOLDERS: The Goldman Sachs Group, Inc. and affiliates (9)............. 3,783,000 12.2 85 Broad Street New York, NY 10004 - ---------- (1) Includes 532,800 shares of common stock that will be transferred to certain employees 180 days following the consummation of this offering. (2) Includes 147 shares of Series A preferred stock, which will automatically convert into 44,100 shares of common stock, with an effective conversion price of $3.85 per share, upon consummation of this offering and 900,000 shares of common stock that can be acquired upon the exercise of outstanding options. (3) Includes 150,000 shares of common stock that can be acquired upon the exercise of outstanding options. (4) Includes 150,000 shares of common stock that can be acquired upon the exercise of outstanding options. 47 (5) Includes 67,500 shares of common stock that can be acquired upon the exercise of outstanding options. (6) Includes 79 shares of Series A preferred stock, which will automatically convert into 23,700 shares of common stock, with an effective conversion price of $3.85 per share, upon consummation of this offering, and 300,000 shares of common stock that can be acquired upon the exercise of outstanding options. (7) Includes 26 shares of Series A preferred stock, which will automatically convert into 7,800 shares of common stock, with an effective conversion price of $3.85 per share, upon consummation of this offering, and 330,000 shares of common stock that can be acquired upon the exercise of outstanding options. (8) Includes 113 shares of Series A preferred stock, which will automatically convert into 33,900 shares of common stock with an effective conversion price of $3.85 per share, upon consummation of this offering, and 144,000 shares of common stock that can be acquired upon the exercise of outstanding options and 250,050 of common stock. (9) 7,912 shares of Series A preferred stock, which will automatically convert into 2,373,600 shares of common stock, with an effective conversion price of $3.85 per share, upon consummation of this offering held by GS Capital Partners II, L.P.; 3,145 shares of Series A preferred stock, which will automatically convert into 943,500 shares of common stock upon consummation of this offering held by GS Capital Partners II Offshore, L.P.; 292 shares of Series A preferred stock, which will automatically convert into 87,600 shares of common stock upon consummation of this offering held by Goldman, Sachs & Co. Verwaltungs GmbH; 594 shares of Series A preferred stock, which will automatically convert into 178,200 shares of common stock upon consummation of this offering held by Stone Street Fund 1995, L.P.; 667 shares of Series A preferred stock, which will automatically convert into 200,100 shares of common stock upon consummation of this offering held by Bridge Street Fund 1995, L.P. Goldman, Sachs and Co. is an indirect wholly-owned subsidiary of The Goldman Sachs Group, Inc. The Goldman Sachs Group, Inc. and Goldman, Sachs & Co. may be deemed to own beneficially and indirectly an aggregate of 3,783,000 shares held by the limited partnerships listed above. Affiliates of Goldman, Sachs & Co. and The Goldman Sachs Group, Inc. are the general partner, managing general partner or investment manager of those partnerships. Each of the limited partnerships shares voting and investment power with certain of its respective affiliates. The Goldman Sachs Group, Inc. and Goldman, Sachs & Co. each disclaim beneficial ownership of the shares owned by the limited partnerships to the extent that those shares are attributable to partnership interests therein held by persons other than The Goldman Sachs Group, Inc. and its affiliates. 48 DESCRIPTION OF CAPITAL STOCK GENERAL As of December 31, 2003, the total amount of our authorized capital stock consisted of 125,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of preferred stock. After giving effect to this offering and the conversion of our Series A preferred stock described below, assuming an initial public offering price of $ per share and no exercise of the underwriters' over-allotment option, we will have shares of common stock outstanding. At the closing of this offering, all of our currently outstanding shares of Series A preferred stock will automatically convert into 3,980,400 shares of common stock with an effective conversion price of $3.85 per share. After giving effect to these transactions, we will have no shares of any series of preferred stock outstanding. The following summary of provisions of our capital stock describes all material provisions of, but does not purport to be complete and is subject to, and qualified in its entirety by, our amended and restated certificate of incorporation and our bylaws (both of which will be amended at or prior to the consummation of this offering to reflect the following description), and by the provisions of applicable law. COMMON STOCK The holders of our common stock are entitled to: - one vote per share on all matters submitted to a vote of our stockholders; - the payment of any dividends declared by the Board of Directors out of legally available funds, after the superior rights of any preferred stock holders have been satisfied; and - share ratably in company assets available for distribution to them in the event of our liquidation, dissolution, distribution of assets or winding up. The holders of common stock do not have cumulative voting rights. As a result, the holders of a majority of the outstanding common stock can elect all our directors. The remaining common stockholders will not be able to elect any directors. The holders of common stock have no preemptive or other subscription rights, and there are no conversion, redemption or sinking fund provisions with respect to the common stock. All outstanding shares of common stock are, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and non-assessable. There are provisions in our certificate of incorporation and bylaws that would have the effect of delaying, deterring or preventing a change in control of our management in the case of a hostile takeover or other acquisition. See "--Anti-Takeover Provisions of Delaware Law and Our Certificate of Incorporation." PREFERRED STOCK Our Board of Directors will have the authority, without action by the stockholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, any of which may be greater than the rights of the common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of common stock until the Board of Directors determines the specific rights of the preferred stock. However, the effects might include, among other things, restricting dividends on the common stock, diluting the power of the common stock, impairing liquidation rights of the common stock and delaying or preventing a change of control or the removal of our existing management without further action by the shareholders. We have no present plans to issue any shares of preferred stock. 49 WARRANTS There are currently 49,500 warrants outstanding. Each of these warrants provides for the purchase of one share of common stock and has an exercise price of $0.03. These warrants expire May 1, 2008. REGISTRATION RIGHTS As of the completion of this offering, the holders of an aggregate of 30,935,200 shares of common stock will be entitled to registration rights. These rights are provided under the terms of a registration rights agreement, management stockholders agreement and employee stock option plan between us and the holders of registrable securities, who include the affiliates of Goldman Sachs mentioned above, Gadi Cohen and current and former members of management and employees who purchased stock under the option plan. This agreement provides demand registration rights to the holders of registrable securities. In addition, the holders of all of the registrable securities are entitled under these agreements, subject to limitations, to require us to include their registrable securities in future registration statements filed by us. The demand registration rights provide that stockholders may request registration of their shares at our expense 180 days after the effective date of the registration statement of which this prospectus is a part, subject to a minimum amount of the requesting stockholder's shares per requested registration, and subject to our right to register our own shares or shares of other requesting stockholders, which may limit the total number of shares that may be sold in a single offering. These rights are being waived in connection with this offering for a period of 180 days after the date of the final prospectus relating to this offering. Holders of registrable securities are entitled to request us to register their securities when we propose or are required to register equity securities under the Securities Act. We are obligated to provide notice of the registration and the holders of registrable securities may request registration of their shares within 15 days of receipt of the notice. These rights are being waived in connection with this offering for a period of 180 days after the date of the final prospectus relating to this offering. Registration of shares of common stock pursuant to the rights granted in these agreements will result in such shares becoming freely tradable without restriction under the Securities Act. All registration expenses incurred in connection with the above registrations will be borne by us. ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION Delaware Law. In general, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless: - before that date, the Board of Directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; - on consummation of the transaction that resulted in the stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding those shares owned by persons who are directors and also officers, and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held under the plan will be tendered in a tender or exchange offer; or - on or after that date, the business combination is approved by the Board of Directors and authorized at a meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock not owned by the interested stockholder. Section 203 defines "business combination" to include: 50 - any merger or consolidation involving the corporation and the interested stockholder; - any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation; - in general, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; or - the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person. Certificate of Incorporation provisions. Our certificate of incorporation and bylaws include a number of provisions that may have the effect of deterring hostile takeovers or delaying or preventing changes in control of our management. First, our certificate of incorporation provides that all stockholder actions upon completion of this offering must be effected at a duly called meeting of holders and not by a consent in writing. Second, our bylaws provide that special meetings of the holders may be called only by the chairman of the Board of Directors or shall be called by our Secretary at the request of our Board of Directors under a resolution adopted by a majority of the total number of authorized directors. Third, our certificate of incorporation and bylaws provide for a classified Board of Directors in which approximately one-third of the directors would be elected each year. Consequently, any potential acquirer would need to successfully complete two proxy contests in order to take control of the Board of Directors. As a result of the provisions of the certificate of incorporation and Delaware law, stockholders will not be able to cumulate votes for directors. Finally, our bylaws establish procedures, including advance notice procedures, with regard to the nomination of candidates for election as directors and stockholder proposals. These provisions of our certificate of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of our management. TRANSFER AGENT AND REGISTRAR American Stock Transfer has been appointed as the transfer agent and registrar for our common stock. 51 SHARES ELIGIBLE FOR FUTURE SALE The sale of a substantial amount of our shares in the public market after this offering could adversely affect the prevailing market price of our shares. Furthermore, the sale of a substantial amount of shares in the public market after the contractual and legal restrictions on resale described below lapse could adversely affect the prevailing market price of our shares and our ability to raise equity capital in the future. Upon completion of this offering, we will have outstanding an aggregate of shares, assuming no exercise of the underwriters' over-allotment option. Of these shares, all of the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless the shares are purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act. Any shares purchased by an affiliate may not be resold except pursuant to an effective registration statement or an applicable exemption from registration, including an exemption under Rule 144 of the Securities Act. The remaining shares of common stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act. These restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act. These rules are summarized below. Assuming the conversion of the Series A preferred stock and the exercise of all outstanding and vested options, upon the expiration of the lock-up agreements described below and subject to the provisions of Rule 144 and Rule 701, restricted shares totaling 30,935,200 will be available for sale in the public market 180 days after the date of this prospectus. The sale of these restricted securities is subject to the volume restrictions contained in those rules. Some of these restricted shares, described as not being eligible for sale until 180 days after the date of this prospectus, may become eligible for sale at an earlier date, as described in "Underwriting." LOCK-UP AGREEMENTS We, our directors and executive officers and substantially all of our stockholders, who own or have the right to purchase in the aggregate 30,935,200 shares of our common stock, have entered into lock-up agreements with the underwriters. Under those agreements, subject to limited exceptions, neither we nor any of our directors or executive officers nor any of those stockholders may dispose of or hedge any shares of common stock or securities convertible into or exchangeable for shares of common stock. These restrictions will be in effect for a period of 180 days after the date of this prospectus. At any time and without notice, Lehman Brothers may release all or some of the securities from these lock-up agreements. See "Underwriting." RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year from the later of the date those shares of common stock were acquired from us or from an affiliate of ours would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - one percent of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or - the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale of any shares of common stock. The sales of any shares of common stock under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. 52 RULE 144(K) Under Rule 144(k), a person who is not one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years from the later of the date such shares of common stock were acquired from us or from an affiliate of ours, including the holding period of any prior owner other than an affiliate, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Immediately upon completion of this offering, shares will be eligible for sale under Rule 144(k). RULE 701 In general, under Rule 701 of the Securities Act as currently in effect, each of our employees, consultants or advisors who purchased shares from us in connection with a compensatory stock plan or other written agreement is eligible to resell those shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period, contained in Rule 144. No precise prediction can be made as to the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price of our common stock prevailing from time to time. We are unable to estimate the number of our shares that may be sold in the public market pursuant to Rule 144 or Rule 701 because this will depend on the market price of our common stock, the personal circumstances of the sellers and other factors. After this offering, there will be shares available for sale under Rule 701. Nevertheless, sales of significant amounts of our common stock in the public market could adversely affect the market price of our common stock. STOCK PLANS We intend to file a registration statement under the Securities Act covering shares of common stock reserved for issuance under our employee stock option plan. This registration statement is expected to be filed as soon as practicable after the effective date of this offering. As of December 31, 2003, there are options to purchase 2,497,080 shares of our common stock outstanding under our employee stock option plan. In connection with the consummation of this offering, we intend to grant options to purchase up to shares at an exercise price equal to $ per share to existing employees who currently do not hold stock options. Also, in connection with the consummation of this offering, we intend to grant options to purchase an additional shares of our common stock to new employees at an exercise price equal to the public offering price. All of these shares will be eligible for sale in the public market from time to time, subject to vesting provisions, Rule 144 volume limitations applicable to our affiliates and, in the case of some of the options, the expiration of lock-up agreements. 53 UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS The following is a general discussion of the material U.S. federal income and estate tax consequences of the ownership and disposition of our common stock to a non-U.S. holder. For the purpose of this discussion, a non-U.S. holder is any holder that for U.S. federal income tax purposes is not a U.S. person. For purposes of this discussion, the term U.S. person means: - an individual citizen or resident of the United States; - a corporation or other entity taxable as a corporation created or organized in the United States or under the laws of the United States, any state or the District of Columbia; - an estate whose income is subject to U.S. federal income tax regardless of its source; or - a trust (x) whose administration is subject to the primary supervision of a U.S. court and which has one or more U.S. persons that have the authority to control all substantial decisions of the trust or (y) which has made an election to be treated as a U.S. person. If a partnership holds common stock, the tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. Accordingly, partnerships which hold our common stock and partners in such partnerships should consult their tax advisors. This discussion assumes that non-U.S. holders will hold our common stock issued pursuant to this offering as a capital asset (generally, property held for investment). This discussion does not address all aspects of U.S. federal income taxation that may be relevant in light of a non-U.S. holder's special tax status or special tax situation. U.S. expatriates or former long-term residents, life insurance companies, tax-exempt organizations, dealers in securities or currency, banks or other financial institutions, investors whose functional currency is other than the U.S. dollar, that have elected market-to-market accounting, who acquired our common stock as compensation, or that hold our common stock as part of a hedge, straddle, constructive sale, conversion, or other risk reduction transaction, and special status corporations (such as "controlled foreign corporations," "foreign investment companies," "foreign passive investment companies," "foreign personal holding companies," and corporations that accumulate earnings to avoid U.S. income tax) are among those categories of potential investors that are subject to special rules not covered in this discussion. This discussion does not address any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction. Furthermore, the following discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, and Treasury Regulations and administrative and judicial interpretations thereof, all as in effect on the date hereof, and all of which are subject to change, possibly with retroactive effect. Accordingly, each non-U.S. holder should consult a tax advisor regarding the U.S. federal, state, local and non-U.S. income and other tax consequences of acquiring, holding and disposing of shares of our common stock. DIVIDENDS We have not paid any dividends on our common stock and we do not plan to pay any dividends for the foreseeable future. However, if we do pay dividends on our common stock, those payments will constitute dividends for U.S. tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those dividends exceed our current and accumulated earnings and profits, the dividends will constitute a return of capital and will first reduce a holder's tax basis, but not below zero, and then will be treated as gain from the sale of stock. Any dividend (out of earnings and profits) paid to a non-U.S. holder of common stock generally will be subject to U.S. withholding tax at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable tax treaty. In order to receive a reduced treaty rate, a non-U.S. holder must provide us with an Internal Revenue Service ("IRS") Form W-8BEN (or successor form) or an appropriate substitute form 54 certifying qualification for the reduced rate. The non-U.S. holder must periodically update the information on such forms. Such non-U.S. holder may also be required to obtain and provide a U.S. taxpayer identification number and/or demonstrate residence in the applicable foreign jurisdiction by providing documentation issued by the government of such jurisdiction. Furthermore, Treasury Regulations require special procedures for payments through qualified intermediaries. A non-U.S. holder of common stock that is eligible for a reduced rate of withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts currently withheld if an appropriate claim for refund is filed with the IRS. Dividends received by a non-U.S. holder that are effectively connected with a U.S. trade or business conducted by the non-U.S. holder are exempt from such withholding tax. In order to obtain this exemption, a non-U.S. holder must provide us with an IRS Form W-8ECI (or successor form) or an appropriate substitute form properly certifying such exemption. "Effectively connected" dividends, although not subject to withholding tax, are taxed at the same graduated rates applicable to U.S. persons, net of certain deductions and credits. If the non-U.S. holder is eligible for the benefits of a tax treaty between the United States and the holder's country of residence, any effectively connected dividends or gain would generally be subject to U.S. federal income tax only if it is also attributable to a permanent establishment or fixed base maintained by the holder in the United States. In addition to the graduated tax described above, dividends received by a corporate non-U.S. holder that are effectively connected with a U.S. trade or business of the corporate non-U.S. holder may be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable tax treaty. GAIN ON DISPOSITION OF COMMON STOCK A non-U.S. holder generally will not be subject to U.S. federal income tax on any gain realized upon the sale or other disposition of our common stock unless: - the gain is effectively connected with a U.S. trade or business of the non-U.S. holder (which gain, in the case of a corporate non-U.S. holder, must also be taken into account for branch profits tax purposes); - the non-U.S. holder is an individual who is present in the United States for a period or periods aggregating 183 days or more during the calendar year in which the sale or disposition occurs and certain other conditions are met; or - our common stock constitutes a U.S. real property interest by reason of our status as a "U.S. real property holding corporation" for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the disposition or the holder's holding period for our common stock, and the non-U.S. holder does not fall within a de minimis exception. We have determined that we are not and do not believe that we will become a U.S. real property holding corporation for U.S. federal income tax purposes. However, we can give no assurance that we will not become a U.S. real property holding corporation. Accordingly, non-U.S. holders are urged to consult their tax advisors to determine the application of these rules to their disposition of our common stock. FEDERAL ESTATE TAXES Common stock owned or treated as owned by an individual who is a non-U.S. holder at the time of death will be included in the individual's gross estate for U.S. federal estate tax purposes and may be subject to U.S. federal estate tax, unless an applicable tax treaty provides otherwise. An individual may be subject to U.S. federal estate tax but not U.S. federal income tax as a resident or may be subject to U.S. federal income tax as a resident but not U.S. federal estate tax. INFORMATION REPORTING AND BACKUP WITHHOLDING Generally, we must report annually to the IRS the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld in the case of each non-U.S. holder. A similar report is sent to the 55 holder. Tax treaties or other agreements may require the IRS to make its reports available to tax authorities in the recipient's country of residence. Payments of dividends or of proceeds on the disposition of stock made to a non-U.S. holder may be subject to backup withholding (currently at a rate of 28%) unless the non-U.S. holder establishes an exemption, for example by properly certifying its non-U.S. status on a Form W-8BEN (or successor form) or an appropriate substitute form. Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that the holder is a U.S. person or that any other condition of exemption is not satisfied. The payment of the gross proceeds of the sale, exchange or other disposition of our common stock to or through the U.S. office of any broker, U.S. or foreign, will be subject to information reporting and possible backup withholding unless the non-U.S. holder, prior to payment, certifies as to its non-U.S. status under penalties of perjury or otherwise establishes an exemption, and provided that the broker does not have actual knowledge, or reason to know, that the purported non-U.S. holder is actually a U.S. person or that the conditions of any other exemption are not in fact satisfied. The payment of the gross proceeds of the sale, exchange or other disposition of our common stock to or through a non-U.S. office of a non-U.S. broker will not be subject to information reporting or backup withholding unless the non-U.S. broker has certain types of relationships with the United States (a "U.S.-related person"). In the case of the payment of the gross proceeds of the sale, exchange or other disposition of our common stock to or through a non-U.S. office of a broker that is either a U.S. person or a U.S.-related person, Treasury Regulations do not require backup withholding but do require information reporting on the payment unless the broker, prior to payment, (a) has documentary evidence in its files that the owner is a non-U.S. holder, and (b) has no knowledge, or reason to know, to the contrary. Backup withholding is not an additional tax. Rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained, provided that the required information is furnished to the IRS. THE PRECEDING DISCUSSION OF MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES IS GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH INVESTOR SHOULD CONSULT THAT INVESTOR'S OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF OUR COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR NON-U.S. TAX LAWS AND OF ANY CHANGES OR PROPOSED CHANGES IN APPLICABLE LAW. 56 UNDERWRITING Under the terms of an underwriting agreement, which has been filed as an exhibit to the registration statement relating to this prospectus, each of the underwriters named below, for whom Lehman Brothers Inc., Needham & Company, Inc. and Thomas Weisel Partners LLC are acting as representatives, have severally agreed to purchase from us the respective number of shares of common stock opposite its name below: NUMBER OF UNDERWRITERS SHARES - ------------ ------ Lehman Brothers Inc.............................................................................. Needham & Company, Inc........................................................................... Thomas Weisel Partners LLC....................................................................... --------- Total............................................................................................ ========= The underwriting agreement provides that the underwriters' obligations to purchase shares of our common stock depends on the satisfaction of the conditions contained in the underwriting agreement, including: - the obligation to purchase all of the shares of our common stock, if any of the shares are purchased (other than those shares subject to the underwriters' over-allotment option, until that option is exercised); - if an underwriter defaults, purchase commitments of the non-defaulting underwriters may be increased or the underwriting agreement may be terminated; - the representations and warranties made by us to the underwriters are true; - there is no material change in the financial markets; and - we deliver customary closing documents to the underwriters. OVER-ALLOTMENT OPTION We have granted the underwriters a 30-day option to purchase up to shares at the public offering price less underwriting discounts and commissions. This option may be exercised to cover over-allotments. To the extent that the option is exercised, each underwriter will be obligated, subject to certain conditions, to purchase a number of additional shares proportionate to the underwriter's initial commitment as indicated in the preceding table, and we will be obligated, pursuant to the option, to sell these shares to the underwriters. COMMISSIONS AND EXPENSES The representatives have advised us that the underwriters propose to offer shares of common stock directly to the public at the public offering price on the cover of this prospectus and to selected dealers, who may include the underwriters, at such offering price less a selling concession not in excess of $ per share. The underwriters may allow, and the selected dealers may re-allow, a discount from the concession not in excess of $ per share to other dealers. After the offering, the underwriters may change the public offering price and other offering terms. The following table summarizes the underwriting discounts and commissions we will pay to the underwriters in connection with the offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' over-allotment option to purchase up to additional shares. The underwriting fee is the difference between the initial price to the public and the amount the underwriters pay us for the shares. 57 NO EXERCISE FULL EXERCISE ----------- ------------- Per Share................................. $ $ Total..................................... $ $ We estimate that the total expenses of this offering, excluding underwriting discounts and commissions paid by us, will be approximately $ . LISTING We propose to list our common stock on the Nasdaq National Market under the symbol "PNYT." In connection with that listing, the underwriters have undertaken to sell the minimum number of shares to the minimum number of beneficial owners necessary to meet the Nasdaq National Market listing requirements. OFFERING PRICE DETERMINATION Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiation between us and the underwriters. The factors that the representatives will consider in determining the public offering price include: - the history and prospects for the industry in which we compete; - the ability of our management and our business potential and earning prospects; - the prevailing securities markets at the time of this offering; and - the recent market prices of, and the demand for, publicly traded shares of generally comparable companies. STABILIZATION, SHORT POSITIONS AND PENALTY BIDS The underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Securities Exchange Act of 1934, as amended: - Over-allotment involves sales by the underwriter of shares in excess of the number of shares the underwriter is obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriter is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriter may close out any short position by either exercising its over-allotment option and/or purchasing shares in the open market. - Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. - Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriter 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. If the underwriter sells more shares than could be covered by the over-allotment option, which is called a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriter is concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase shares in the offering. 58 - Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids 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 the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor the underwriters make any representation that the underwriters will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice. LOCK-UP AGREEMENTS We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of Lehman Brothers Inc., on behalf of the underwriters, for a period of 180 days after the date of this prospectus, except pursuant to the exercise of options outstanding on the date hereof, grants of employee stock options pursuant to the terms of a plan in effect on the date hereof, issuances pursuant to the exercise of such options, the filing of registration statements on Form S-8 and amendments thereto in connection with those stock options or our employee stock purchase plans in existence on the date hereof. Our executive officers and directors and stockholders holding substantially all of our common stock have entered into lock-up agreements under which they agreed not to transfer or dispose of, directly or indirectly, including by way of any hedging or derivatives transaction, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock for a period of 180 days after the date of this prospectus without the prior written consent of Lehman Brothers Inc., on behalf of the underwriters. INDEMNIFICATION We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, liabilities arising from breaches of the representations and warranties contained in the underwriting agreement and liabilities incurred in connection with the directed share program referred to below, and to contribute to payments that the underwriters may be required to make for these liabilities. DIRECTED SHARE PROGRAM At our request, the underwriters have reserved for sale at the initial public offering price up to shares offered hereby to certain persons as directed by us. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered hereby. DISCRETIONARY ACCOUNTS The representatives have informed us that they will not intend to confirm the sales of shares of common stock offered by this prospectus to any accounts over which they exercise discretionary authority in excess of 5% of shares offered by them. 59 STAMP TAXES Purchasers of the shares of our common stock offered by 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 of this prospectus. Accordingly, we urge you to consult a tax advisor with respect to whether you may be required to pay those taxes or charges, as well as any other tax consequences that may arise under the laws of the country of purchase. OFFERS AND SALES IN CANADA This prospectus is not, and under no circumstances is to be construed as, an advertisement or a public offering of shares in Canada or any province or territory thereof. Any offer or sale of shares in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable provincial securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. ELECTRONIC DISTRIBUTION A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by the underwriters participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the underwriter, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations. Other than the prospectus in electronic format, the information on the underwriters' web site and any information contained in any other web site maintained by the underwriter is not part of this prospectus or the registration statement of which this prospectus and the accompanying prospectus form a part, has not been approved and/or endorsed by us or the underwriters in its capacity as underwriter and should not be relied upon by investors. OUR RELATIONSHIPS WITH THE UNDERWRITERS Certain of the underwriters and their respective affiliates expect to perform financial advisory and investment and commercial banking services for us for which they will receive customary compensation. 60 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Gibson, Dunn & Crutcher LLP, New York, New York. Weil, Gotshal & Manges LLP advised the underwriters in connection with this offering. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements and schedule as of December 31, 2001 and for the year then ended as set forth in their reports. We have included our financial statements and schedule as of and for the year ended December 31, 2001 in this prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's reports given on their authority as experts in accounting and auditing. The consolidated financial statements and schedule of PNY Technologies, Inc. and subsidiaries as of December 31, 2002 and 2003 and for the years then ended have been included herein and in the registration statement in reliance upon the reports of KPMG LLP, independent accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. In 2002, we decided to engage KPMG LLP as our independent auditors. We did not have any disagreement with Ernst & Young LLP on any matters of accounting principle or practice, financial statement disclosure or auditing scope or procedure. Ernst & Young LLP's report on our consolidated financial statements for the year ended December 31, 2001 expressed an unqualified opinion as to those financial statements. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Commission a registration statement on Form S-1 under the Securities Act with respect to the common stock offered by this prospectus. While the information contained in this prospectus is materially complete, this prospectus does not contain all the information set forth in the registration statement and its exhibits and schedules. For further information with respect to us and the common stock offered by this prospectus, we refer you to the registration statement and to the exhibits. The exhibits to the registration statement include the full text of contracts, agreements and other documents described in this prospectus. You should refer to these exhibits when reading the descriptions of these documents contained in this prospectus. You should be aware that when we discuss these contracts or documents in this prospectus we are assuming that you will read the exhibits to the registration statement for a more complete understanding of the contract or document. Following the offering we will become subject to the reporting requirements of the Securities Act. In accordance with that law, we will be required to file reports and other information with the Commission. The registration statement and exhibits, as well as those reports and other information when so filed, may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further information on the operation of the public reference facilities. Copies of all or any part of the registration statement may be obtained from the Commission's offices on payment of fees prescribed by the Commission. The Commission maintains a World Wide Website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is http://www.sec.gov. We will furnish our shareholders annual reports and unaudited quarterly reports for the first three quarters of each fiscal year. Annual reports will include audited consolidated financial statements prepared in accordance with generally accepted accounting principles. The consolidated financial statements included in the annual reports will be examined and reported on, with an opinion expressed, by our independent auditors. 61 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors' Report - KPMG LLP............................. F-2 Independent Auditors' Report - Ernst & Young LLP.................... F-3 Consolidated Balance Sheets......................................... F-4 Consolidated Statements of Operations............................... F-5 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)..................................... F-6 Consolidated Statements of Cash Flows............................... F-7 Notes to Consolidated Financial Statements.......................... F-8 F-1 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors PNY Technologies, Inc. We have audited the accompanying consolidated balance sheets of PNY Technologies, Inc. and subsidiaries (the "Company") as of December 31, 2002 and 2003, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PNY Technologies, Inc. and subsidiaries as of December 31, 2002 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP March 22, 2004 F-2 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of PNY Technologies, Inc. We have audited the accompanying consolidated statements of operations, stockholders' equity and comprehensive income (loss) and cash flows for the year ended December 31, 2001 of PNY Technologies, Inc. and subsidiaries. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of PNY Technologies, Inc. and subsidiaries for the year ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Metro Park, New Jersey March 27, 2002, except for Note 16 - Segment Information, as to which the date is January 14, 2004 F-3 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) PRO FORMA STOCKHOLDERS' EQUITY DATA AT DECEMBER 31, DECEMBER 31, 2003 ------------ 2002 2003 (UNAUDITED) ---- ---- ----------- ASSETS Current assets: Cash and cash equivalents .................................................... $ 7,480 $ 7,190 Accounts receivable, less allowance for doubtful accounts of $1,060 and $740 at December 31, 2002 and 2003, respectively ............................ 55,257 63,540 Inventories .................................................................. 48,285 53,374 Income taxes receivable ...................................................... -- 949 Deferred income taxes ........................................................ 1,838 2,402 Prepaid expenses and other ................................................... 3,967 3,198 Assets held for sale ......................................................... -- 212 --------- --------- Total current assets ..................................................... 116,827 130,865 Property, plant and equipment, net ............................................. 6,615 5,735 Deferred income taxes .......................................................... 1,029 409 Deposits and other ............................................................. 186 184 --------- --------- Total assets ............................................................. $ 124,657 $ 137,193 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt ............................................ $ 33,894 $ 40,380 Current portion of capital lease obligations.................................. 331 12 Accounts payable ............................................................. 38,839 41,971 Bank overdrafts .............................................................. 2,238 3,984 Accrued expenses ............................................................. 10,778 9,941 Customer allowances .......................................................... 17,205 15,411 Income taxes payable ......................................................... 1,555 328 Interest payable to related party ............................................ 46 -- Other ........................................................................ 1,068 769 --------- --------- Total current liabilities ................................................ 105,954 112,796 Capital lease obligations ...................................................... 123 37 Note payable to related party .................................................. 5,189 4,971 Dividends payable to convertible Series A preferred stockholders................ 1,797 -- Other long-term liabilities .................................................... 3,088 3,790 --------- --------- Total liabilities ........................................................ 116,151 121,594 --------- --------- Commitment and contingencies Stockholders' equity: Convertible Series A preferred stock cumulative, participating: par value $.01 per share; authorized 15,000 shares; issued 14,385 shares and outstanding 13,268 shares in 2002 and 2003 (liquidation preference of $15,309 at December 31, 2003), and none on a pro forma basis (unaudited)........................................ -- -- -- Common stock: par value $0.01 per share; authorized 125,000,000 shares; issued and outstanding 26,954,800 shares in 2002 and 2003, and issued 31,270,300 shares (unaudited) and outstanding 30,935,200 shares (unaudited) on a pro forma basis ............................................................ 270 270 313 Deferred stock compensation .................................................. (477) (154) (154) Additional paid-in capital ................................................... 5,199 5,182 5,139 Treasury stock, at cost: 1,117 shares of Series A preferred stock in 2002 and 2003, and 335,100 shares (unaudited) of common stock on a pro forma basis.................................................................. (1,502) (1,502) (1,502) Accumulated earnings ......................................................... 3,195 6,955 6,955 Accumulated other comprehensive income ....................................... 1,902 4,929 4,929 Notes receivable from employees .............................................. (81) (81) (81) --------- --------- ------ Total stockholders' equity ............................................... 8,506 15,599 15,559 ========= ========= ====== Total liabilities and stockholders' equity................................ $ 124,657 $ 137,193 ========= ========= See accompanying notes to consolidated financial statements. F-4 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, ------------------------------------------------ 2001 2002 2003 ---- ---- ---- Net sales ................................ $ 314,197 $ 334,603 $ 363,993 Cost of sales ............................ 281,688 286,351 318,167 ------------ ------------ ------------ Gross profit ............................. 32,509 48,252 45,826 ------------ ------------ ------------ Operating expenses: Selling ................................ 21,184 26,228 28,136 Warehouse .............................. 1,608 1,735 2,199 General and administrative ............. 9,586 8,513 8,985 Restructuring and other charges ........ -- 10,387 1,745 ------------ ------------ ------------ Total operating expenses ............. 32,378 46,863 41,065 ------------ ------------ ------------ Operating income ......................... 131 1,389 4,761 Other income (expense): Interest income ........................ 177 164 142 Interest expense ....................... (2,182) (1,477) (1,598) Interest expense to related party ...... (631) (305) (220) Foreign exchange gain (loss) ........... 899 (1,983) 323 Other income, net ...................... 161 166 180 ------------ ------------ ------------ Total other expense ................... (1,576) (3,435) (1,173) ------------ ------------ ------------ (Loss) income before income taxes ........ (1,445) (2,046) 3,588 Provision for income taxes ............... 943 1,189 1,625 ------------ ------------ ------------ Net (loss) income ........................ (2,388) (3,235) 1,963 Dividends (waiver of dividends) on Convertible Series A preferred stock ..... 1,147 650 (1,797) ------------ ------------ ------------ Net (loss) income available to common stockholders ........................... $ (3,535) $ (3,885) $ 3,760 ============ ============ ============ Net (loss) income per common share: Basic .................................. $ (0.14) $ (0.14) $ 0.14 Diluted ................................ (0.14) (0.14) 0.06 Shares used in computing net (loss) income per common share Basic .................................. 26,120,205 26,954,800 26,954,800 Diluted ................................ 26,120,205 26,954,800 32,569,891 See accompanying notes to consolidated financial statements. F-5 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS, EXCEPT SHARE AMOUNTS) CONVERTIBLE SERIES A PREFERRED STOCK COMMON STOCK DEFERRED ADDITIONAL ----------------- ----------------------- STOCK PAID-IN SHARES AMOUNT SHARES AMOUNT COMPENSATION CAPITAL ------ ------ ------ ------ ------------ ------- Balance at January 1, 2001 ............. 13,268 -- 26,050,050 261 (9,341) 12,434 Exercise of employee stock options .. 4,750 -- 5 Exercise of warrants ................ 900,000 9 21 Cancellation of notes receivable charged to compensation expense ... Cancellation of compensatory stock option grants upon termination of employment ..................... 4,669 (4,669) Stock-based compensation ............ 1,868 (42) Dividends on Series A preferred stock Net loss ............................ Currency translation adjustment ..... Comprehensive loss .................. ------ ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2001 ........... 13,268 -- 26,954,800 270 (2,804) 7,749 Cancellation of compensatory stock option grants upon termination of employment ..................... 2,550 (2,550) Stock-based compensation ............ (223) Dividends on Series A preferred stock Net loss ............................ Currency translation adjustment ..... Comprehensive loss .................. ------ ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2002 ........... 13,268 -- 26,954,800 270 (477) 5,199 Cancellation of compensatory stock option grants upon termination of employment ..................... 323 (323) Stock-based compensation ............ 306 Waiver of dividends on Series A preferred stock ................... Dividends on Series A preferred stock Net income .......................... Currency translation adjustment ..... Comprehensive income ................ ------ ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2003 ........... 13,268 $ -- 26,954,800 $ 270 $ (154) $ 5,182 ====== ========== ========== ========== ========== ========== TREASURY STOCK ACCUMULATED NOTES SERIES A OTHER RECEIVABLE TOTAL PREFERRED STOCK ACCUMULATED COMPREHENSIVE FROM STOCKHOLDERS' SHARES AMOUNT EARNINGS INCOME (LOSS) EMPLOYEES EQUITY ------ ------ -------- ------------- --------- ------ Balance at January 1, 2001 ............. 1,117 (1,502) 10,615 123 (93) 12,497 Exercise of employee stock options .. 5 Exercise of warrants ................ 30 Cancellation of notes receivable charged to compensation expense ... 12 12 Cancellation of compensatory stock option grants upon termination of employment ..................... -- Stock-based compensation ............ 1,826 Dividends on Series A preferred stock (1,147) (1,147) Net loss ............................ (2,388) (2,388) Currency translation adjustment ..... (733) (733) ---------- Comprehensive loss .................. (3,121) ----- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2001 ........... 1,117 (1,502) 7,080 (610) (81) 10,102 Cancellation of compensatory stock option grants upon termination of employment ..................... -- Stock-based compensation ............ (223) Dividends on Series A preferred stock (650) (650) Net loss ............................ (3,235) (3,235) Currency translation adjustment ..... 2,512 2,512 ---------- Comprehensive loss .................. (723) ----- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2002 ........... 1,117 (1,502) 3,195 1,902 (81) 8,506 Cancellation of compensatory stock option grants upon termination of employment ..................... -- Stock-based compensation ............ 306 Waiver of dividends on Series A preferred stock ................... 2,447 2,447 Dividends on Series A preferred stock (650) (650) Net income .......................... 1,963 1,963 Currency translation adjustment ..... 3,027 3,027 ---------- Comprehensive income ................ 4,990 ----- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2003 ........... 1,117 $ (1,502) $ 6,955 $ 4,929 $ (81) $ 15,599 ===== ========== ========== ========== ========== ========== See accompanying notes to consolidated financial statements. F-6 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Year Ended December 31, ------------------------------------ 2001 2002 2003 ---- ---- ---- Cash flows from operating activities: Net (loss) income .......................................... $ (2,388) $ (3,235) $ 1,963 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization ............................ 3,897 3,316 2,360 Non-cash restructuring and other charges ................. -- 3,859 -- Stock-based compensation ................................. 1,826 (223) 306 Loss (gain) on sale of assets ............................ 441 (70) (194) Interest payable to related party ........................ 631 305 220 Deferred income taxes .................................... 134 (130) 86 Loss on writedown of investments ......................... 286 -- -- Non-cash compensation .................................... 12 -- -- Changes in operating assets and liabilities: Accounts receivable .................................... 32,561 (4,046) (6,577) Inventories ............................................ 10,541 (13,813) (3,367) Prepaid expenses and other ............................. (4,227) 1,641 1,470 Accounts payable ....................................... (10,704) 9,924 2,248 Accrued expenses ....................................... (2,117) 1,293 (1,819) Customer allowances .................................... 1,699 55 (1,794) Income taxes payable ................................... (3,491) 3,710 (2,300) Other current liabilities .............................. (1,238) 2,968 82 -------- -------- -------- Net cash provided by (used in) operating activities 27,863 5,554 (7,316) -------- -------- -------- Cash flows from investing activities: Acquisition of property and equipment ..................... (2,947) (1,935) (1,338) Proceeds from disposal of assets .......................... 296 627 135 Investment in third parties ............................... (100) -- -- -------- -------- -------- Net cash used in investing activities .............. (2,751) (1,308) (1,203) -------- -------- -------- Cash flows from financing activities: (Repayment) proceeds of loans payable ..................... (16,080) 20 6,451 Change in bank overdrafts ................................. (10,801) 849 1,746 Paydown of capital lease obligations ...................... (977) (893) (446) Proceeds from common stock issued ......................... 5 -- -- Exercise of warrants ...................................... 30 -- -- Payment of note payable ................................... (1,895) (2,727) (218) -------- -------- -------- Net cash (used in) provided by financing activities (29,718) (2,751) 7,533 -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents ... (367) 647 696 -------- -------- -------- Net (decrease) increase in cash and cash equivalents ........... (4,973) 2,142 (290) Cash and cash equivalents at beginning of period ............... 10,311 5,338 7,480 -------- -------- -------- Cash and cash equivalents at end of period ..................... $ 5,338 $ 7,480 $ 7,190 ======== ======== ======== Supplemental disclosures of cash flow information Cash paid for: Interest to third parties ................................... $ 2,181 $ 1,471 $ 1,642 ======== ======== ======== Interest to related party ................................... $ 605 $ 332 $ 266 ======== ======== ======== Income taxes ................................................ $ 4,263 $ 168 $ 3,503 ======== ======== ======== Noncash financing activities: Acquisition of equipment under capital leases ............... $ 172 $ -- $ 50 Dividends (waiver of dividends) on Convertible Series A preferred stock .......................................... 1,147 650 (1,797) See accompanying notes to consolidated financial statements. F-7 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES DESCRIPTION OF BUSINESS PNY Technologies, Inc. (the "Company"), incorporated in 1985, is a designer and marketer of Flash memory cards, DRAM modules, consumer and professional graphics cards, USB Flash drives and other computer-related technology products. The Company markets these products to consumers through traditional retailers, such as Best Buy, CompUSA and Staples, through other retail and distribution channels, and directly to professionals. The Company also designs, manufactures and markets custom and standard DRAM modules for original equipment manufacturers, or OEMs, and their designated contract manufacturers. These customers include high-end computing, networking, storage and telecommunications equipment manufacturers, such as LSI Logic Corporation and Network Appliance, Inc. The Company currently markets its products throughout the United States, as well as in Canada, Western Europe and certain parts of the Asia Pacific region. OWNERSHIP At December 31, 2002 and 2003, a majority of the issued and outstanding common stock was owned by one individual, who was also the Chairman, President and Chief Executive Officer of the Company. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, PNY Technologies Europe, S.A.S. ("PNY Europe"). Prior to May 2002, the Company also consolidated its former wholly-owned subsidiary, PNY Technologies Ireland Limited ("PNY Ireland"), which has since been dissolved. The Company also consolidates a Taiwan branch office ("PNY Taiwan"). PNY Europe has two wholly-owned subsidiaries, PNY Technologies GmbH ("PNY Germany") and PNY Technologies (UK) Limited ("PNY UK"). PNY Europe, PNY Germany and PNY UK, and for the applicable years, PNY Ireland, are referred to collectively as the "Subsidiaries." All intercompany balances and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with the current year's presentation. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist mainly of cash, accounts receivable and accounts payable. The carrying amounts of these financial instruments approximate fair value due to their short-term nature. The carrying amounts of long-term debt, capital lease obligations and notes payable are estimated to approximate their fair values as the stated rates approximate current rates. FOREIGN CURRENCY TRANSLATION The financial statements of the Company's foreign subsidiaries have been translated in accordance with SFAS No. 52, Foreign Currency Translation ("SFAS No. 52"). The functional currency of the Company's foreign subsidiaries is the applicable local currency. The translation from the applicable foreign currency to U.S. dollars is performed for the balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate during the period. The resulting translation adjustments are recorded as a component of stockholders' equity. Gains and losses resulting from foreign currency transactions are included in other income in the accompanying statements of operations. F-8 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant items subject to such estimates and assumptions include the carrying amount of property, plant and equipment; valuation allowances for receivables, inventories and deferred tax assets; and valuation of customer allowances. Actual results could differ from those estimates. REVENUE RECOGNITION Non-consignment sales are recognized upon shipment of goods to customers. Consignment sales are recognized upon customer notification that the goods have been sold. A substantial portion of the Company's sales include limited rights to return unsold inventory. The Company provides for estimated future returns of inventory based on historical experience. However, if certain returns in excess of estimates occur, those amounts are accrued at the time the Company becomes aware of them, which may not be in the same period in which the initial sale is booked. In addition, some customers have limited price protection rights for inventories of the Company's products held by them. If the Company reduces the list price of these previously purchased products, these customers may be entitled to receive credits. The Company accrues for these limited price protection arrangements when the customer is notified of the price change. The Company offers various rebate arrangements to both customers and end-user consumers. The Company accrues for the estimated cost of these rebate arrangements using actual sell through data supplied by customers and historical redemption percentages. Net sales are defined as gross sales less these estimated future returns, limited price protection arrangements and rebate arrangements. STOCK-BASED COMPENSATION As permitted by SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), which establishes a fair value based method of accounting for stock-based compensation plans, the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), for recognizing stock-based compensation expense for financial statement purposes. The Company recognizes stock-based compensation resulting from vesting on a pro rata basis. If the Company had recognized compensation expense based on the fair value of the options as calculated using the Black-Scholes option-pricing model at the grant date as prescribed by SFAS No. 123, net (loss) income would have changed to the pro forma amounts indicated in the table below. F-9 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) YEAR ENDED DECEMBER 31, --------------------------------------- 2001 2002 2003 ---- ---- ---- Net (loss) income available to common stockholders, as reported .................... $ (3,535) $ (3,885) $ 3,760 Plus: Stock-based compensation expense (income) determined under APB 25, included in reported net (loss) income available to common stockholders, net of related taxes ....................... 1,826 (207) 446 Less: Stock-based compensation expense determined under fair value based method, net of related taxes ............... 2,965 959 1,292 --------- --------- --------- Net (loss) income attributable to common stock, as adjusted $ (4,674) $ (5,051) $ 2,914 ========= ========= ========= Net (loss) income per common share, as reported Basic ....................... $ (0.14) $ (0.14) $ 0.14 Diluted ..................... (0.14) (0.14) 0.06 Net (loss) income per common share, as adjusted Basic ....................... $ (0.18) $ (0.19) $ 0.11 Diluted ..................... (0.18) (0.19) 0.03 ADVERTISING AND MARKET DEVELOPMENT COSTS Advertising and market development costs were charged to operations as incurred. Advertising and development costs amounted to $19,104 for the year ended December 31, 2003 of which $2,168 was offset against gross sales in accordance with Emerging Issues Task Force Issue No. 01-09, "EITF 01-09", and $16,936 was charged as an operating expense. Advertising and market development costs amounted to $16,176 for the year ended December 31, 2002 of which $750 was offset against gross sales in accordance with EITF 01-09, and $15,426 was charged as an operating expense. Advertising and market development costs amounted to $11,528 for the year ended December 31, 2001, all of which was charged as an operating expense. Consideration generally given by us to a customer is presumed to be a reduction of selling price, and therefore, a reduction of gross sales. However, if we receive an identifiable benefit that is sufficiently separable from our sales to that customer, such that we could have paid an independent company to receive that benefit and we can reasonably estimate the fair value of that benefit then the consideration is characterized as an expense. We estimate the fair value of the benefits we receive by tracking the advertising done by our customers on our behalf and calculating the value of that advertising using a comparable rate for similar publications. INCOME TAXES In accordance with SFAS No. 109, Accounting for Income Taxes, ("SFAS No. 109"), the Company recognizes deferred income taxes for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. The effect in deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enacted date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. F-10 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) CASH EQUIVALENTS The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates its fair value due to its short-term and liquid nature. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market but not in excess of net realizable value. The Company provides reserves for excess and obsolete inventories in the period in which excess and obsolescence is determined. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the related assets. Expenditures for maintenance and repair costs are charged to expense as incurred. The estimated useful lives by asset category are as follows: Building and improvements ..... 10-20 years Machinery and equipment ....... 3-7 years Computer equipment and software 3-5 years Furniture and fixtures ........ 7-10 years LONG-LIVED ASSETS In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), which the Company adopted on January 1, 2002, the Company monitors events or changes in circumstance that may indicate the carrying amounts of its long-lived assets may not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of its assets by determining whether the carrying amount of its assets will be recovered through undiscounted, expected future cash flows. Should the Company determine that the carrying values of specific long-lived assets are not recoverable, the Company would record a charge to operations to reduce the carrying value of such assets to their fair values. The Company considers various valuation factors, principally discounted cash flows, to assess the fair values of long-lived assets. Prior to adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed of ("SFAS No. 121"). PRODUCT WARRANTIES The Company sells products to customers with a warranty that provides, at the sole option of the Company, either repairs at no cost to the customer or replacement of the product. The length of the warranty term depends on the product being sold, but ranges from 90 days to the lifecycle of the product. The Company defines the lifecycle of a product as the time during which the product is manufactured for the Company. The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued liability and included in cost of sales at the time of sale. Actual costs have been within management's expectations. F-11 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) GUARANTEES The Company has historically agreed to indemnify suppliers and customers for alleged patent infringements. The scope of such indemnity varies, but may, in some instances, include indemnification for damages and expenses, including attorneys' fees. The Company may periodically engage in litigation as a result of these indemnification obligations. The Company's insurance policies exclude coverage for third-party claims for patent infringement. The nature of the patent infringement indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its suppliers and customers. Historically, the Company has not made any significant indemnification payments under any such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees. The Company has issued a guarantee for the performance of obligations by one of its subsidiaries. The guarantee could require the Company to make future payments in the event the subsidiary does not make its required payments to a specific vendor. The liability of the Company is continuous until payment of every obligation is made. The Company has not recorded a liability for this guarantee. At December 31, 2003, the Company's subsidiary did not have an amount outstanding relating to this guarantee. COMPREHENSIVE INCOME The Company follows the provisions of SFAS No. 130, Reporting Comprehensive Income ("SFAS No. 130"), which established standards for reporting and display of comprehensive income and its components. Comprehensive income reflects the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, comprehensive income (loss) represents net income (loss) adjusted for foreign currency translation adjustments. In accordance with SFAS No. 130, the Company has chosen to disclose comprehensive income (loss) in the consolidated statements of stockholders' equity. PRO FORMA STOCKHOLDERS' EQUITY DATA (UNAUDITED) Upon the consummation of the initial public offering contemplated herein, all of the Company's Series A Preferred Stock, including 13,268 issued and outstanding shares and 1,117 treasury shares, automatically convert into 3,980,400 shares and 335,100 shares, respectively, of common stock (see Note 9). The effective conversion price is $3.85. The December 31, 2003 unaudited pro forma stockholders' equity data has been prepared assuming the conversion of the Company's Series A Preferred Stock as of December 31, 2003, into common stock as of December 31, 2003. PRO FORMA NET INCOME PER SHARE (UNAUDITED) Pro forma basic and diluted net income per share (unaudited) is computed using the weighted-average number of common shares outstanding, adjusted to include the unaudited pro forma effects of the automatic conversion of the Company's Series A Preferred Stock into shares of the Company's common stock (see Note 9) as if such conversion occurred on the first day of each such period. The resulting pro forma adjustment is an increase in the weighted-average shares used to compute basic earnings per share of 3,980,400 shares for the period ended December 31, 2003. Pro forma diluted net income per share (unaudited) is computed using the treasury stock method using average fair value adjusted to include the unaudited pro forma net effect of dilutive warrants and stock options. F-12 YEAR ENDED DECEMBER 31, 2003 ---- Net income available to common stockholders ................................ $ 3,760 Add: Waiver of dividends on Convertible Series A preferred stock........... (1,797) ------------ Pro forma net income available to common stockholders....................... $ 1,963 ============ Weighted average common shares outstanding ................................. 26,954,800 Add: Conversion of 13,268 shares of Convertible Series A Preferred Stock ................................................. 3,980,400 ------------ Pro forma weighted average common shares outstanding used to calculated pro forma basic earnings per share........................................ 30,935,200 Net effect of dilutive warrants and employee stock-based options on treasury stock method using average fair value: Warrants ................................................................. 49,259 Employee stock options ................................................... 1,585,432 ------------ Pro forma weighted average common shares and common share equivalents used to calculate pro forma diluted earnings per share......................... 32,569,891 ============ Pro forma net income per common share: Basic .................................................................... $ 0.06 Diluted .................................................................. 0.06 RECENTLY ISSUED ACCOUNTING STANDARDS In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit and non-performance guarantees. It also requires that at the time a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its financial statements. The initial recognition and measurement provisions of FIN 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of this statement has not had a significant impact on the Company's consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities - an interpretation of ARB No. 51 ("FIN 46"). The objective of FIN 46 is to improve financial reporting by companies involved with variable interest entities. This new model for consolidation applies to an entity in which either (1) the powers or rights of the equity holders do not give them sufficient decision making powers or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. FIN 46 requires a variable interest entity to be consolidated into the company that is subject to a majority of the risk of loss from the variable interest entity's activities or that is entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. For entities created before February 1, 2003, the consolidation requirements generally apply in the first fiscal year or interim period beginning after December 15, 2003. The adoption of this statement will not have a significant impact on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS No. 150"). SFAS No. 150 revised the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003 (except for mandatorily redeemable noncontrolling interests). For all instruments that existed prior to May 31, 2003, the Standard is effective at the beginning of the first interim period beginning after June 15, 2003 F-13 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) (except for mandatorily redeemable noncontrolling interests). For mandatorily redeemable noncontrolling interests, the FASB has deferred the provisions of SFAS No. 150 until further notice. The provisions of SFAS No. 150 adopted thus far did not have a material effect on the Company's consolidated financial statements and the adoption of the remaining provision of SFAS No. 150 is not expected to have a material effect on the Company's financial statements. NOTE 2 - ACCOUNTS RECEIVABLE AND CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. A limited numbers of customers historically have accounted for a substantial portion of the Company's net sales. Sales to our top 5 customers accounted for 64.8%, 54.1% and 51.4% of our net sales for the years ended December 31, 2001, 2002 and 2003, respectively. Only two of the top five customers in 2003 were also part of the Company's top five customers in 2002 and 2001. The Company extends credit to its customers in the normal course of business and performs periodic credit evaluations of its customers, maintaining allowances for potential losses. The Company generally does not require collateral or other security with regards to balances due from customers. Certain customers accounted for more than 10% of consolidated net sales as follows: YEAR ENDED DECEMBER 31, ----------------------- 2001 2002 2003 ---- ---- ---- Customer A - Consumer division ....................... 13% 21% 20% Customer B - Consumer division ....................... 18 14 14% Customer C - OEM division....... 24 5 -- ---- ---- ---- 55% 40% 34% ==== ==== ==== Accounts receivable from these customers represented 39% and 38% of total accounts receivable as of December 31, 2002 and 2003, respectively. NOTE 3 - INVENTORIES Inventories consist of: DECEMBER 31, 2002 2003 Raw materials and components ........ $ 7,879 $ 15,265 Work in process ..................... 4,846 2,152 Finished goods ...................... 37,371 39,141 -------- -------- Total inventories before reserves $ 50,096 $ 56,558 Reserves ............................ (1,811) (3,184) -------- -------- Total ........................... $ 48,285 $ 53,374 ======== ======== Changes in market conditions required management to make estimates regarding the reduction of the carrying value of inventory on hand at December 31, 2002 and 2003, to record inventory at the lower of cost or market. At December 31, 2002 and 2003, the Company had $6,193 and $3,084, respectively, of consigned inventory at certain of its customers. Such amounts were included within finished goods and will be recognized as revenue when the customer notifies the Company that the goods have been sold through. F-14 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 3 -INVENTORIES (CONTINUED) At December 31, 2002 and 2003, finished goods inventory includes $5,678 and $6,635, respectively, which represents the amount of inventory that the Company estimates will be returned from its customers. NOTE 4 - PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, net consists of: DECEMBER 31, ---------------------- 2002 2003 ---- ---- Land ...................................... $ 45 $ 54 Building and improvements ................. 3,843 3,787 Machinery and equipment ................... 7,063 7,003 Machinery and equipment under capital lease 2,591 2,695 Computer equipment and software ........... 2,025 2,313 Furniture and fixtures .................... 1,377 1,655 -------- -------- 16,944 17,507 Less accumulated depreciation and amortization .............................. (10,329) (11,772) -------- -------- Total ................................. $ 6,615 $ 5,735 ======== ======== Accumulated depreciation and amortization above includes amortization of property under capital leases of $2,137 and $2,645 at December 31, 2002 and 2003, respectively. F-15 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 5 - GOVERNMENT GRANTS The French government provided monetary grants totaling approximately $1,100 to PNY Europe based on employment and investment requirements. At December 31, 2002 and 2003, approximately $143 and $157 of the grants, respectively, have been deferred and will be recognized as income over the useful lives of the related assets. In 2001, 2002 and 2003, grant income was approximately $12, $12 and $13, respectively. NOTE 6 - LONG-TERM DEBT AND CAPITAL LEASES The Company has a revolving U.S. bank financing agreement originally dated February 23, 1996, as amended through November 7, 2003 (the "Agreement"). The maximum amount available under the Agreement is $50,000. The term of the Agreement extends to February 23, 2007. The Agreement specifies that interest is due monthly at an interest rate, at the option of the Company, of prime rate plus 0.25% or Eurodollar plus 2.25%. The blended interest rate under the Agreement was 4.05% and 3.57% at December 31, 2002 and 2003, respectively. At December 31, 2002 and 2003, $33,894 and $40,015, respectively, were outstanding under the Agreement and have been classified as a short-term borrowing due to withdrawal restrictions within the agreement on a related bank account in which customer receipts must be deposited. These restrictions prohibit disbursement of funds in the related bank account to anyone other than the bank for direct repayment of the outstanding liability. Availability under the Agreement is based on defined percentages of eligible accounts receivable and inventories. Amounts outstanding under the Agreement are collateralized by accounts receivable and inventories. The Agreement contains certain restrictive covenants, including a prohibition of related party transactions, additional indebtedness and dividend payments, as well as a requirement to maintain a minimum net worth and fixed charge ratio requirements. PNY Europe also has available lines of credit as of December 31, 2003 with various foreign banks totaling approximately $13,724 that expire through December 31, 2004. There were no borrowings outstanding under these lines at December 31, 2002. At December 31, 2003, there was $365 outstanding under these lines. The following is a schedule as of December 31, 2003 of future minimum lease payments under capital leases together with the present value of net minimum lease payments: 2004.................................. 13 2005.................................. 13 2006.................................. 13 2007.................................. 13 ---- Total minimum lease payments ....... 52 Less: Amounts representing interest... (3) ---- Present value of minimum lease payments $ 49 ==== NOTE 7 - EMPLOYEE BENEFIT PLAN The Company has a tax deferred savings plan covering substantially all U.S. employees of the Company under Section 401(k) of the Internal Revenue Code. The Company matches one-half of the first 6% of employee contributions and makes additional contributions to the plan annually at the discretion of the Board of Directors. Company contributions to the tax deferred savings plan were $522, $402 and $400 for the years ended December 31, 2001, 2002 and 2003, respectively. F-16 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 8 - REDEEMABLE PREFERRED STOCK On December 5, 2000, the Company redeemed all of its outstanding Series B and C preferred stock shares at their aggregate liquidation preference of $18,060. The Series B and C preferred stock was owned by the spouse of the principal stockholder. The holder of all the outstanding shares of Series B and C preferred stock had irrevocably waived the rights to all dividends. In lieu of a cash payment for the total liquidation preference, cash of $6,000 was paid and a note payable of $12,060 (the "Note") was issued. The Note was reduced by an outstanding loan receivable from the same individual in the amount of $2,250. At December 31, 2003, the outstanding balance of the Note was $4,971 (see Note 10). NOTE 9 - STOCKHOLDERS' EQUITY CAPITAL STOCK The Company is authorized to issue 135,000,000 shares of all classes of capital stock, 125,000,000 as common and 10,000,000 shares of preferred stock. The Board of Directors has the authority, without action by the stockholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, any of which may be greater than the rights of the common stock. It is not possible to state the actual effect of any issuance of any shares of the preferred stock on the rights of holders of common stock until the Board of Directors determines the specific rights of the preferred stock. The effects of such might include, among other things, restricting dividends on the common stock, diluting the power of the common stock, impairing liquidation rights of the common stock and delaying or preventing a change of control or the removal of our existing management without further action by the shareholders. At present, the Company has designated 15,000 shares of Convertible Series A preferred stock. Each share of common stock is entitled to one vote and each share of Convertible Series A preferred stock entitles the stockholder to votes equal to the number of shares of common stock into which the shares of Convertible Series A preferred stock is convertible. Each share of Convertible Series A preferred stock is convertible at the option of the holder, at any time, into fully paid and nonassessable shares of common stock, at a 300-to-1 conversion ratio, subject to anti-dilution adjustments. One such anti-dilution adjustment requires the conversion price to be reduced if the Company issues any shares of common stock (or common stock equivalents) at a price per share more than 1% less than the current conversion price of $3.85. In the event the Company completes a public offering for at least $15,000 in common stock, the Series A preferred stock automatically converts into common stock at the then existing conversion ratio. Each share of Series A preferred stock has a preference in liquidation equal to the original price per share ($1,153.85 per share), plus accrued and unpaid dividends, if any. The Convertible Series A preferred stock stockholders are entitled to participate in dividends declared and paid to common stockholders, on the basis of the number of shares of common stock into which the Convertible Series A preferred stock is convertible. In connection with the redemption of all shares of Series B and C preferred stock (see Note 8), the holders of Convertible Series A preferred stock became entitled to 7% dividends paid semi-annually. Effective January 1, 2002, the dividend rate was changed to 4.25%. On April 1, 2003, December 31, 2003 and January 1, 2004, holders of more than 50% of each class of issued and outstanding stock, by unanimous consent, approved a restated certificate of incorporation pursuant to which the dividends that were payable or were to be payable to the holders of shares of Convertible Series A preferred stock, which have been accrued since December 5, 2000, were waived. As such, no dividends shall accrue or be payable in respect to any periods prior to July 1, 2004 and all rights of the holders of the Convertible Series A preferred stock to receive dividends which had been accrued prior to such period and which had not been declared were cancelled. At December 31, 2002, the Company had a payable in the amount of dividends that have not been declared of $1,797. Accordingly, the Company recognized a waiver of dividends in the amount of $1,797 for the F-17 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 9 - STOCKHOLDERS' EQUITY(CONTINUED) year ended December 31, 2003. During 2003, the Company also accrued dividends of $650 and then recognized a waiver of such dividends in the amount of $650 as a result of the December 31, 2003 consent. TREASURY STOCK The Company has from time to time purchased outstanding shares of issued stock from stockholders. Such purchases are recorded at cost and represent the Company's estimated fair market value at the time of purchase. To date, the Company has purchased 1,117 shares of Convertible Series A preferred stock. WARRANTS In connection with the issuance of Convertible Series A preferred stock to certain investors, the Company issued warrants that expired on August 4, 2002. The holders of the Series A preferred stock and related warrants have certain registration rights. Certain members of senior management and the Board of Directors have been issued warrants to purchase shares of common stock of the Company. The first such warrant was issued on November 1, 1995, and provided for the purchase of 240,000 shares of common stock at an exercise price of $6.25 per share (whose price automatically increases by 10% as of November 1, 1996, and on each November 1 thereafter), was subject to pro rata vesting over a five year period and was exercisable through November 1, 2005. This warrant to purchase common stock was exchanged on March 4, 1997, for a new warrant to purchase 150,000 shares of common stock at an exercise price of $3.85 per share (whose price automatically increases by 10% as of April 22, 2000, and on each April 22 thereafter). A second such warrant was issued as of April 22, 1996, and provides for the purchase of 360,000 shares of common stock at an exercise price of $3.85 per share (whose price automatically increases by 10% as of April 22, 2000, and on each April 22 thereafter), is subject to pro rata vesting over a five year period and is exercisable through April 22, 2006. Under APB No. 25, these warrants required variable accounting treatment, thus compensation expense was recorded for an amount equal to the difference between the exercise price and fair market value at each reporting period-end. A $42 reduction of compensation expense was recorded during the year ended December 31, 2001, in connection with these warrants due to declines in the fair value market value of the underlying shares. During 1998, upon the resignation of a member of senior management, a portion of the second warrant, representing 216,000 shares of common stock (100% of non-vested shares under the warrant) was forfeited. On January 2, 2002, both holders elected to forfeit their remaining warrants to the Company. The Company subsequently issued stock options to these holders to purchase common stock, which qualified as a fixed award under SFAS No. 123. The related charge to compensation expense was not material to the consolidated financial statements. In May 1998, a member of senior management and a member of the Board of Directors were issued warrants to purchase 949,500 shares of common stock of the Company. The first such warrant provides for the purchase of 49,500 shares of common stock at an exercise price of $0.03 per share. Shares under this warrant were immediately vested. The second such warrant provides for the purchase of 900,000 shares of common stock at an exercise price of $0.03 per share and is subject to pro rata vesting over two and one-half years. Both warrants issued in 1998 are exercisable through May 1, 2008. On December 5, 2001, the warrant to purchase 900,000 shares of common stock was exercised by the member of senior management. RESTRICTED STOCK AWARDS During 1997 and 1998, the Company granted 1,335,300 shares of common stock for no consideration to certain employees. At the time these awards were made, the Company's principal stockholder agreed to transfer to the Company the number of shares of common stock equal to the number of shares of common stock that are no longer subject to restrictions. Compensation expense was recorded in connection with these stock awards in F-18 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 9 - STOCKHOLDERS' EQUITY(CONTINUED) accordance with Staff Accounting Bulletin Topic 5T. The compensation expense recorded and the increase to stockholders' equity was not material. These awards are subject to a ten-year cliff-vesting schedule, based upon continued employment. The shares are also subject to certain restrictions on transfer during a defined restriction period. The restriction period terminates on the earliest to occur of (1) 180 days following the consummation of an IPO, (2) immediately prior to a change in control and (3) ten years after the date of grant. The following table summarizes the activity related to these employee stock grants: YEAR ENDED DECEMBER 31, ------------------------------------ 2001 2002 2003 ---- ---- ---- Beginning of period 580,800 546,300 532,800 Shares granted .... -- -- -- Shares forfeited .. (34,500) (13,500) (12,000) ------- ------- ------- End of period ..... 546,300 532,800 520,800 ======= ======= ======= COMMON STOCK RESERVED At December 31, 2003, the Company has reserved shares of common stock as follows: Series A preferred stock............. 4,500,000 Exercise of warrants................. 49,500 Employee stock options............... 7,495,250 ---------- Total............................ 12,044,750 ========== NOTE 10 - RELATED PARTY TRANSACTIONS Notes receivable from employees are due on demand with interest at 8.0% per annum and represent loans to purchase Convertible Series A preferred stock (see Note 11). The underlying stock has been pledged as collateral for each outstanding note. The portions of such notes not repaid are reflected as a component of stockholders' equity. The note payable to related party is partial consideration for the liquidation of Series B and C preferred stock (see Note 8). The note is payable in full on December 31, 2004, and has three possible extensions at the option of the Company. The first extension extends the due date of the note one year, the second for two additional years after that and the third for an additional two years after that, for a total of five years from its initial due date. It is the Company's intention to exercise the first extension and thus the Company has classified the amount outstanding at December 31, 2003 as long-term. Interest is payable semi-annually and was originally 7% per annum. Effective January 1, 2002, the interest rate was changed to 4.25% per annum. Upon receipt of proceeds from an initial public offering under the Securities Act of 1933, the Company is required to prepay this note in an amount equal to the unpaid principal balance and accrued interest through such date. NOTE 11 - MANAGEMENT STOCK PURCHASE PLAN In 1996, the Company adopted a Management Stock Purchase Plan (the "1996 Plan"), whereby certain officers and key employees (e.g., "management stockholders") of the Company were provided an opportunity to purchase shares of the Company's Series A preferred stock at pre-determined prices. The shares owned by the participants in the 1996 Plan have certain registration rights and are subject to certain transfer restrictions (including F-19 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 11 - MANAGEMENT STOCK PURCHASE PLAN (CONTINUED) a three year mandatory holding period) and certain put and call rights that become effective in connection with the participants' termination of employment (see Note 10). All sales of stock are subject to the Company's right of first refusal. Should the Company's stock be publicly traded subsequent to the expiration of the mandatory holding period, all transfer restrictions and put and call rights cease to be effective. In May 2001, the Company forgave $12 of outstanding promissory notes due from a Series A preferred stockholder. This note was originally issued in 1996 in exchange for the stockholders' preferred shares. The $12 was included in compensation expense. NOTE 12 - EMPLOYEE STOCK OPTION PLAN In June 1999, the Company adopted a Stock Option Plan for Directors, Officers and Employees (the "1999 Plan") that provides for nonqualified stock option grants. Options granted in June 1999 have an exercise price of $1.00 per share and vested ratably over three years, provided the participant remained employed by the Company. Subsequent grants have an exercise price ranging from $1.33 to $14.00 per share and vest ratably over four years. In the event of death, disability or retirement of a participant, all shares immediately vest. At December 31, 2003, shares available for future grants under the 1999 Plan were 4,998,170. The options generally expire 10 years from the date of grant. However, in the event a participant's employment is terminated without cause or for good reason, as defined, the options expire 30 days after termination. If a participant's employment is terminated as a result of death, disability or retirement, the options expire 90 days from the date of termination. All shares issued pursuant to the 1999 Plan are subject to transfer restrictions and certain put and call rights that become effective in connection with the participant's termination of employment. These rights cease to be effective if the Company's stock becomes publicly traded. During the year ended December 31, 2003, no options were granted. In accordance with APB No. 25, the Company recorded compensation (income) expense of approximately $1,868, $(223) and $306 for the years ended December 31, 2001, 2002 and 2003, respectively, because the fair market value of the underlying common stock on the date of grant exceeded the exercise price of the options granted. In 2002, the compensation income resulted from non-vested options being forfeited due to employee terminations. Based on the vesting schedules of these grants, the Company will recognize additional compensation expense of $154 in 2004. In accordance with APB No. 25, no compensation expense was recognized related to grants issued during 2002 because the exercise price of the stock options granted were equal to or greater than the fair market value of the underlying common stock on the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: YEAR ENDED DECEMBER 31, ----------------------- 2001 2002 ---- ---- Expected dividend yield.................... 0.0% 0.0% Expected stock price volatility............ 0.78 0.7 Risk-free interest rate.................... 4.6% 1.7% Expected life of options................... 4 years 5 years F-20 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 12 - EMPLOYEE STOCK OPTION PLAN (CONTINUED) Activity under the 1999 Plan is as follows: YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------- 2001 2002 2003 ----------------------------- ---------------------------- ----------------------------- WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- ----- ------- ----- ------- ----- Outstanding, beginning of year 2,926,580 $ 3.59 2,567,230 $ 3.11 2,585,130 $ 3.05 Granted .................... 554,780 4.50 444,000 2.83 -- -- Exercised .................. (4,750) 1.00 -- -- -- Cancelled .................. (909,380) 5.52 (426,100) 3.17 (88,050) 3.52 --------- ---------- --------- ---------- --------- ---------- Outstanding, end of year ..... 2,567,230 $ 3.11 2,585,130 $ 3.05 2,497,080 $ 3.03 ========= ========== ========= ========== ========= ========== Exercisable, end of year ..... 1,084,890 $ 1.81 2,015,133 $ 2.27 2,275,365 $ 2.89 ========= ========== ========= ========== ========= ========== The weighted average fair value of options granted during 2001 and 2002 were $2.71 and $0.74, respectively. At December 31, 2003, for each of the following classes of options as determined by exercise price, the information regarding weighted-average exercise prices and weighted-average remaining contractual lives of each such class is as follows: OPTIONS OUTSTANDING WEIGHTED-AVERAGE REMAINING OPTION NUMBER OF CONTRACTUAL OPTIONS PRICE OPTIONS LIFE EXERCISABLE ----- ------- ---- ----------- $ 1.00 1,306,500 5.5 1,306,500 1.33 42,000 6.2 42,000 2.50 150,000 8.4 150,000 3.00 294,000 8.0 294,000 3.84 30,000 6.6 30,000 4.50 443,430 7.2 221,715 7.00 55,800 6.8 55,800 14.00 175,350 6.9 175,350 --------- --------- 2,497,080 2,275,365 ========= ========= NOTE 13 - RESTRUCTURING AND OTHER CHARGES During 2002, the Company recorded a pre-tax charge of $8,990 associated with the shutdown of its facilities in Ireland and manufacturing facilities in California. The charge included an accrual of $5,016 for equipment and building lease payments to be made over the next several years, $2,825 for the write-down of capitalized equipment and leasehold improvements, $905 for severance payments and $245 for the write-off of goodwill recognized. The severance payments were for approximately 58 employees of PNY Ireland and 35 employees in the Company's manufacturing operations in California. Also during 2002, the Company recorded a pre-tax charge of $1,397 associated with the impairment of capitalized equipment located at facilities in New Jersey and PNY Europe. The charge included accruals of $608 for equipment lease payments to be made over the next year and $788 for the write-down of capitalized equipment. In 2003, the Company recorded a pre-tax charge of $1,745 associated with the remaining building lease payments on its manufacturing facility in California. In 2003, the Company reclassified $512 of assets that F-21 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 13 - RESTRUCTURING AND OTHER CHARGES (CONTINUED) were previously used in the manufacturing facility in California from property, plant and equipment to assets held for sale. The following is a detail of the restructuring charges: RESTRUCTURING BALANCE AT BALANCE AT CHARGE 2002 DECEMBER 2003 2003 DECEMBER 31, RECOGNIZED USAGE 31, 2002 ADDITIONS USAGE 2003 ---------- ----- -------- --------- ----- ---- Severance ........ $ 905 (905) $ -- $ -- -- $ -- Building and equipment lease arrangements..... 5,624 (868) 4,756 1,745 (2,375) 4,126 Asset write-offs.. 3,858 (3,858) -- -- -- -- -------- ------ -------- -------- ------ -------- $ 10,387 (5,631) $ 4,756 $ 1,745 (2,375) $ 4,126 ======== ====== ======== ======== ====== ======== At December 31, 2003, the accrual for the future payments under non-cancelable operating leases is included in the accompanying consolidated balance sheet in accrued expenses and other long-term liabilities. The estimated future payments are as follows: 2004 .................... 1,537 2005 .................... 1,116 2006 .................... 1,159 2007 .................... 314 ------ Total future payments $4,126 ====== NOTE 14 - INCOME TAXES (Loss) income before income taxes consists of: YEAR ENDED DECEMBER 31, --------------------------------- 2001 2002 2003 ---- ---- ---- United States ........ $(6,828) $(4,110) $ (587) Foreign .............. 4,351 2,064 4,175 Eliminations ......... 1,032 -- -- ------- ------- ------- Total (loss) income before income taxes $(1,445) $(2,046) $ 3,588 ======= ======= ======= The provision for income taxes consists of: YEAR ENDED DECEMBER 31, -------------------------------- 2001 2002 2003 ---- ---- ---- Current: Federal ............. $ -- $ (408) $ 50 State ............... -- 107 189 Foreign ............. 809 1,620 1,300 ------- ------- ------- Total current taxes 809 1,319 1,539 Deferred taxes: Federal ............. 19 (7) (13) State ............... 10 -- -- Foreign ............. 105 (123) 99 ------- ------- ------- Total deferred taxes 134 (130) 86 ------- ------- ------- $ 943 $ 1,189 $ 1,625 ======= ======= ======= F-22 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 14 - INCOME TAXES (CONTINUED) Income taxes reconciled to the amount computed at federal statutory tax rates are as follows: YEAR ENDED DECEMBER 31, --------------------------------- 2001 2002 2003 ---- ---- ---- Computed expected tax (benefit) expense $ (491) $ (696) $ 1,220 Increase (decrease): State income tax benefit, net of federal benefit .... (7) (134) (27) Difference in Federal taxes vs ... foreign rates ...... (649) 822 -- Tax on earnings of foreign subsidiary . 3,702 600 -- Write down of federal deferred tax asset (net of $145 valuation allowance) ......... -- -- 144 Change in valuation allowance .......... (1,629) 621 261 Other .............. 17 (24) 27 ------- ------- ------- Provision for income taxes ...... $ 943 $ 1,189 $ 1,625 ======= ======= ======= F-23 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 14 - INCOME TAXES (CONTINUED) Significant components of the Company's deferred tax assets and liabilities are as follows: DECEMBER 31, -------------------- 2002 2003 ---- ---- Current deferred tax assets: Inventory reserves .................. $ 444 $ 958 Price protection and sales allowances 1,837 1,810 Employee bonuses .................... 193 232 Allowance for doubtful accounts ..... 304 260 Inventory capitalization ............ 52 17 Restructuring reserve ............... 1,601 1,587 Unrealized foreign exchange gain .... -- 19 Other ............................... 482 386 ------- ------- Total current deferred tax assets .. 4,913 5,269 Valuation allowance ................... (3,075) (2,867) ------- ------- Net current deferred tax assets .... $ 1,838 $ 2,402 ======= ======= Noncurrent deferred tax assets: Net operating loss carry-forwards ... $ 399 $ 412 Stock based compensation ............ 309 428 Tax credits ......................... 1,120 427 Fixed assets ........................ -- 123 Other ............................... 19 -- ------- ------- Total noncurrent deferred tax assets 1,847 1,390 Valuation allowance ................... (657) (981) ------- ------- Total noncurrent tax assets ........ 1,190 409 Noncurrent deferred tax liabilities: Fixed assets ........................ 129 -- Other ............................... 32 -- ------- ------- Total noncurrent deferred tax liabilities ...................... 161 -- ------- ------- Net noncurrent deferred tax assets . $ 1,029 $ 409 ======= ======= The Company has established a valuation allowance against its deferred tax assets based upon an assessment that it is more likely than not that it will not realize the benefits of all these tax deductions in the near future. The Company has established a valuation allowance against its entire state deferred tax asset and a portion of its federal deferred tax asset. The assessment is based upon the Company's past performance and its forecasted taxable income. The valuation allowance covers among other items, net operating loss carry-forwards, tax credits and stock based compensation. The increase (decrease) in the Company's valuation allowance for the years ended December 31, 2001, 2002 and 2003 was $(1,629), $621 and $116, respectively. At December 31, 2003, the Company had net operating loss carry forwards for the states of New Jersey and California at approximately $4.5 million and $1.7 million, respectively. Both states enacted legislation that suspended the use of net operating loss carry forwards during the 2002 and 2003 tax year. F-24 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 15 - COMMITMENTS AND CONTINGENCIES LEASES The Company has entered into operating leases for equipment, manufacturing and office facilities that expire on various dates through March 2007. The future minimum annual rental commitments under non-cancelable operating facilities leases, net of rental income at December 31, 2003, are as follows: 2004 .................................................. 2,051 2005 .................................................. 1,087 2006 .................................................. 1,041 2007 .................................................. 173 ------ Total future minimum annual rental commitments ...... $4,352 ====== Rent expense, net of rental income, for the years ended December 31, 2001, 2002 and 2003 was approximately $4,448, $5,100 and $2,823, respectively. In February 1999, the Company entered into a non-cancelable sublease agreement for office facilities. Rental income was $330 for each of the years ended December 31, 2001, 2002 and 2003. The lease expires February 28, 2005 and provides for monthly rental payments of $27. The lease may be extended through February 28, 2007 at the lessee's option at terms comparable to the initial term of the lease. LEGAL MATTERS In the ordinary course of business, the Company becomes involved in lawsuits, administrative and other proceedings. Some of these proceedings may result in fines, penalties or judgments being assessed against the Company. The Company received notice on or about August 7, 2000 that Lemelson Medical, Education & Research Foundation, LLP filed a complaint against the Company and other defendants on June 30, 2000. The complaint was filed in the United States District Court in the District of Arizona and alleges that the Company's manufacturing processes infringe several patents that the Lemelson Foundation allegedly owns. The case has been stayed pending the outcome of another case challenging the validity and enforceability of the patents at issue. The Company accrued $340 in 2000 based in part on settlement discussions with the plaintiff, which have since been abandoned. However, because of the preliminary stage of this case, any revised estimate of potential damages would be speculative, and the Company has not made any such revised estimate at this time. The Company is not currently involved in any other material legal proceedings. The Company is not aware of any other material legal proceedings threatened against it. NOTE 16 - SEGMENT INFORMATION The Company has two reportable segments: Consumer and OEM. The accounting policies of the segments are the same as those described in the summary of significant accounting policies and reflect the information used by the Company's management to evaluate the performance of its segments. Certain expenses reported within cost of sales are allocated between the divisions. The Company tracks separately net sales and gross profit, but does not track separately operating expenses, interest or income taxes by segment. The Company does not maintain separate records to identify assets by operating segment. F-25 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 16 - SEGMENT INFORMATION (CONTINUED) The following is a summary of financial information concerning each of the Company's reportable segments: YEAR ENDED DECEMBER 31, 2001 ------------------------------------------ CONSUMER OEM CONSOLIDATED -------- --- ------------ Net sales....................... $ 189,861 $ 124,336 $ 314,197 Cost of sales................... 174,284 107,404 281,688 ---------- ----------- ---------- Gross profit.................... 15,577 16,932 32,509 Operating expenses.............. 32,378 ---------- Operating income................ $ 131 ========== YEAR ENDED DECEMBER 31, 2002 ------------------------------------------ CONSUMER OEM CONSOLIDATED -------- --- ------------ Net sales......................... $ 255,038 $ 79,565 $ 334,603 Cost of sales..................... 216,777 69,574 286,351 ----------- ---------- ----------- Gross profit...................... 38,261 9,991 48,252 Operating expenses................ 46,863 ----------- Operating income.................. $ 1,389 =========== YEAR ENDED DECEMBER 31, 2003 ----------------------------------------- CONSUMER OEM CONSOLIDATED -------- --- ------------ Net sales......................... $ 309,078 $ 54,915 $ 363,993 Cost of sales..................... 270,751 47,416 318,167 ----------- ---------- ----------- Gross profit...................... 38,327 7,499 45,826 Operating expenses................ 41,065 ----------- Operating income.................. $ 4,761 =========== For the years ended December 31, 2001, 2002 and 2003, international sales comprised approximately 15.2%, 23.7% and 35.0% of the Company's revenues, respectively. During these years, no single foreign country accounted for more than 10% of total revenues, although because the Company does business within the European Union, the Company has exposure to fluctuations in the Euro. The amounts of revenue denominated in Euros for the years ended December 31, 2001, 2002 and 2003 were 12.8%, 13.7% and 15.6%, respectively. Foreign sales are shipped directly from the Company's foreign subsidiaries, while export sales are shipped from the United States to the Company's foreign customers. Financial information regarding the Company's international revenues is shown in the following table: YEAR ENDED DECEMBER 31, ---------------------------------- 2001 2002 2003 ---- ---- ---- Export . $ 1,437 $ 8,231 $ 19,085 Foreign 46,187 71,091 108,141 -------- -------- -------- Total $ 47,624 $ 79,322 $127,226 ======== ======== ======== F-26 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 16 - SEGMENT INFORMATION (CONTINUED) The following table shows financial information regarding the Company's property, plant and equipment, net: DECEMBER 31, ----------------- 2002 2003 ---- ---- United States ............................ $4,820 $3,863 International, principally France ........ 1,795 1,872 ------ ------ Total property, plant and equipment, net $6,615 $5,735 ====== ====== NOTE 17 - DILUTED EARNINGS PER SHARE The following is reconciliation of the numerator and denominator of the basic and diluted earnings per share computations: DECEMBER 31, -------------------------------------------- 2001 2002 2003 ---- ---- ---- Net (loss) income available to common stockholders for basic earnings per common share .......................................................................... $ (3,535) $ (3,885) $ 3,760 Adjustment for diluted earnings per share computation: Waiver of dividends of Convertible Series A preferred stock .................... -- -- (1,797) ---------- ---------- ---------- Net (loss)income for diluted earnings per common share ........................... $ (3,535) $ (3,885) $ 1,963 ========== ========== ========== Weighted-average common shares outstanding used to calculate basic earnings per common share ...................................................... 26,120,205 26,954,800 26,954,800 Assumed conversion of Series A preferred stock ................................... -- -- 3,980,400 Net effect of dilutive warrants and employee stock-based options on treasury stock method using average fair value: Warrants ...................................................................... -- -- 49,259 Employee stock options ........................................................ -- -- 1,585,432 ---------- ---------- ---------- Weighted-average common shares and common share equivalents used to calculate diluted earnings per common share ........................................... 26,120,205 26,954,800 32,569,891 ========== ========== ========== For 2001 and 2002, the numerator for the calculation of basic and diluted earnings per share was the same because the Company sustained a loss for the year and therefore, the effect would be anti-dilutive. For the year ended December 31, 2003, the net waiver of dividends on Convertible Series A preferred stock has been deducted from net income available to common stockholders, the numerator, for the calculation of diluted earnings per share, as the calculation for weighted-average common shares and common share equivalents assumes the conversion of the Convertible A Preferred stock as of the first day of the year. During the year 2001, the conversion of 13,268 shares of Series A preferred stock, warrants to purchase 1,806,000 common shares and employee stock options to purchase 2,567,230 shares of common stock were not included in the computation of diluted loss per common share because the Company sustained a loss for the year ended December 31, 2001, and, therefore, the effect would be anti-dilutive. During the year 2002, the conversion of 13,268 shares of Series A preferred stock, warrants to purchase 49,500 common shares and employee stock options to purchase 2,585,130 shares of common stock were not F-27 PNY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 17 - DILUTED EARNINGS PER SHARE (CONTINUED) included in the computation of diluted loss per common share because the Company sustained a loss for the year ended December 31, 2002, and, therefore, the effect would be anti-dilutive. F-28 SHARES (PNY LOGO) COMMON STOCK PROSPECTUS , 2004 LEHMAN BROTHERS NEEDHAM & COMPANY, INC. THOMAS WEISEL PARTNERS LLC PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses (other than the underwriting discount and commissions) expected to be incurred by the Registrant while issuing and distributing the securities registered pursuant to this Registration Statement. All amounts other than the SEC registration fee, NASD filing fee and Nasdaq National Market listing fee are estimates. Registration fee................................. $ 12,670 NASD filing fee.................................. 10,500 NASDAQ National Market listing fee............... 5,000 Legal fees and expenses.......................... * Accounting fees and expenses..................... * Printing and engraving........................... * Blue sky fees and expenses (including legal fees) * Transfer agent fees.............................. * Miscellaneous.................................... * ----------- Total...................................... $ * =========== * To be provided by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law permits indemnification of the Registrant's officers and directors under certain conditions and subject to certain limitations. Section 145 of the Delaware General Corporation Law also provides that a corporation has the power to purchase and maintain insurance on behalf of its officers and directors against any liability asserted against such person and incurred by him or her in such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of Section 145 of the Delaware General Corporation Law. Article V of the Registrant's Amended and Restated Bylaws provides that the Registrant shall indemnify its directors and officers to the fullest extent authorized by the Delaware General Corporation Law. The rights to indemnity thereunder continue as to a person who has ceased to be a director, officer, employee or agent and inure to the benefit of the heirs, executors and administrators of the person. In addition, expenses incurred by a director or executive officer in defending any civil, criminal, administrative or investigative action, suit or proceeding by reason of the fact that he or she is or was a director or officer of the Registrant (or was serving at the Registrant's request as a director or officer of another corporation) shall be paid by the Registrant in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Registrant as authorized by the relevant section of the Delaware General Corporation Law. As permitted by Section 102(b)(7) of the Delaware General Corporation Law, Article VIII of the Registrant's Restated Certificate of Incorporation, as amended, provides that a director of the Registrant shall not be personally liable for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in good faith or acts or omissions that involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. The Registrant has purchased directors' and officers' liability insurance. II-1 The underwriting agreement (Exhibit 1.1 hereto) contains provisions by which the underwriters have agreed to indemnify the Registrant, each person, if any, who controls the Registrant within the meaning of Section 15 of the Securities Act, each director of the Registrant, and each officer of the Registrant who signs this registration statement, with respect to information furnished in writing by or on behalf of the underwriters for use in the registration statement. ITEM 15: RECENT SALES OF UNREGISTERED SECURITIES The following is a summary of transactions by the Registrant during the past three years involving sales and issuances of securities that were not registered under the Securities Act of 1933. On March 1, 2001, the Registrant granted options to purchase an aggregate of 554,780 shares of common stock to a number of its employees at an exercise price of $4.50 per share. None of these shares have been exercised. However, 69,050 were forfeited and retired when certain employees resigned from the Registrant. In December 2001, a key employee exercised warrants that were granted to him by the Registrant, for no consideration, in May 1998. Upon exercise of these warrants, the Registrant issued 900,000 shares of common stock to this individual. In January 2002, two of the Registrant's directors exchanged variable priced warrants, which were issued while both directors were officers of the company, for fixed price options to purchase an aggregate of 294,000 shares of its common stock with an exercise price of $3.00 per share. These options have not been exercised. In June 2002, an officer of the Registrant was granted options to purchase 150,000 shares of its common stock, at an exercise price of $2.50 per share. These options have not been exercised. The sale and issuance of securities in the above transactions were deemed to be exempt from registration under the Securities Act of 1933 by virtue of Section 4(2) or Rule 701 thereof, as transactions by an issuer not involving a public offering under the Securities Act of 1933. Appropriate legends have been or will be affixed to the certificates issued in such transactions. ITEM 16: EXHIBITS AND FINANCIAL STATEMENTS; SCHEDULES (a) Exhibit Index EXHIBIT NO. DESCRIPTION - ----------- ----------- 1.1 Form of Underwriting Agreement.** 3.1.1 Restated Certificate of Incorporation of the Registrant. * 3.1.2 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated January 17, 1996. * 3.1.3 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated June 13, 1996. * 3.1.4 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated January 27, 1997. * 3.1.5 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated February 28, 1997. * 3.1.6 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated December 18, 1997. * 3.1.7 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated August 8, 1997. * 3.1.8 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated August 20, 1998. * II-2 EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.1.9 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated October 26, 2000. * 3.1.10 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated April 30, 2003.* 3.1.11 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated December 31,2003. 3.1.12 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated January 15, 2004. 3.2 Amended and Restated Bylaws of the Registrant.* 4.1 Specimen stock certificate representing the Registrant's common stock, $0.01 par value.** 5.1 Opinion of Gibson, Dunn & Crutcher LLP with respect to the validity of the securities offered.** 10.1.1 Amended and Restated Loan Agreement, dated February 23, 1996, among Corestates Bank, N.A., Congress Financial Corporation and the Registrant.* 10.1.2 Amendment No. 1 to Financing Agreements, dated July 3, 1996.* 10.1.3 Amendment No. 2 to Financing Agreements, dated April 15, 1997.* 10.1.4 Amendment No. 3 to Financing Agreements, dated June 2, 1997.* 10.1.5 Amendment No. 4 to Financing Agreements, dated April 20, 1998.* 10.1.6 Amendment No. 5 to Financing Agreements, dated April 5, 1999.* 10.1.7 Amendment No. 6 to Financing Agreements, dated September 29, 1999.* 10.1.8 Amendment No. 7 to Financing Agreements, dated March 17, 2000.* 10.1.9 Amendment No. 8 to Financing Agreements, dated June 13, 2000.* 10.1.10 Amendment No. 9 to Financing Agreements, dated July 24, 2000.* 10.1.11 Amendment No. 10 to Financing Agreements, dated August 21, 2000.* 10.1.12 Amendment No. 11 to Financing Agreements, dated September 5, 2000.* 10.1.13 Amendment No. 12 to Financing Agreements, dated October 16, 2000.* 10.1.14 Amendment No. 13 to Financing Agreements, dated December 5, 2000.* 10.1.15 Amendment No. 14 to Financing Agreements, dated December 5, 2000.* 10.1.16 Amendment No. 15 to Financing Agreements, dated January 15, 2001.* 10.1.17 Amendment No. 16 to Financing Agreements, dated November 6, 2001.* 10.1.18 Amendment No. 17 to Financing Agreements, dated July 31, 2002.* 10.1.19 Amendment No. 18 to Financing Agreements, dated March 20, 2003.* 10.1.20 Amendment No. 19 to Financing Agreements, dated August 6, 2003.* 10.1.21 Amendment No. 20 to Financing Agreements, dated November 7, 2003.* 10.2 Security Agreement, dated as of January 29, 1998, by the Registrant and Congress Financial Corporation.* 10.3 Preferred Stock and Warrant Purchase Agreement, dated as of August 4, 1995, among the Registrant, GS Capital Partners II, L.P. and certain of its affiliates, and Gadi Cohen.* 10.4 Registration Rights Agreement, dated as of August 4, 1995, among the Registrant, GS Capital Partners II, L.P. and certain of its affiliates, and Gadi Cohen.* 10.5 Stockholder Agreement, dated as of August 4, 1995 among the Registrant, GS Capital Partners II, L.P. and certain of its affiliates, and Gadi Cohen.* 10.6 Subordinated Note payable to Ruth Cohen, dated December 5, 2000.* 10.7 Amended and Restated 1999 Stock Option Plan, dated October 27, 2000.* 16.1 Letter re change in certifying accountant. II-3 EXHIBIT NO. DESCRIPTION - ----------- ----------- 21.1 List of subsidiaries of the Registrant.* 23.1 Report and Consent of Independent Accountants of Ernst & Young LLP. 23.2 Independent Accountants' Report and Consent of KPMG LLP. 23.3 Consent of Counsel (included in Exhibit 5.1).** 24.1 Power of Attorney (included on signature page).* * Previously filed. ** To be filed by amendment. (b) Schedule II--Consolidated Valuation and Qualifying Accounts and Reserves PNY TECHNOLOGIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) Valuation and Qualifying Accounts, which are Deducted in the Balance Sheet from the Assets to Which They Apply CHARGED CHARGED BALANCE (CREDITED) (CREDITED) AT TO COST TO BALANCE BEGINNING AND OTHER (DEDUCTIONS) AT END OF PERIOD EXPENSES ACCOUNTS ADDITIONS OF PERIOD --------- -------- -------- --------- --------- Allowance for bad debts: Year ended December 31, 2001 $1,462 (80) (12)(a) (109) (b) $1,261 Year ended December 31, 2002 $1,261 (232) (7)(a) 38 (b) $1,060 Year ended December 31, 2003 $1,060 (87) 28 (a) (261) (b) $740 Allowance for excess and obsolete inventory: Year ended December 31, 2001 $7,838 (882) (186)(a) (4,393) (c) $2,377 Year ended December 31, 2002 $2,377 1,281 315 (a) (2,162) (c) $1,811 Year ended December 31, 2003 $1,811 2,742 137 (a) (1,506) (c) $3,184 - ---------- (a) Represents currency translation adjustments. (b) Represents bad-debt write-offs or recoveries. (c) Represents inventory write-offs. Schedules other than those referred to above have been omitted because they are not applicable, are not required or because the information is included elsewhere in the Consolidated Financial Statements or the notes thereto. ITEM 17: UNDERTAKINGS The following undertakings correspond to the specified paragraph designation from Item 512 of Regulation S-K. II-4 (a) Equity offering of nonreporting registrant. The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. (b) Acceleration of effectiveness. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the 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. (c) Rule 430A. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Parsippany, and State of New Jersey, on the thirty-first day of March, 2004. PNY TECHNOLOGIES, INC. By:/s/ Mark J. Ciano -------------------------------- Mark J. Ciano Vice President of Finance and Administrative Services POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated as of the thirty-first day of March, 2004. SIGNATURE TITLE DATE - --------- ----- ---- /s/ Gadi Cohen Chairman of the Board, March 31, 2004 - ----------------------- Director, President and Chief Gadi Cohen Executive Officer (Principal Executive Officer) /s/ Mark J. Ciano Vice President of Finance and March 31, 2004 - ----------------------- Administrative Services Mark J. Ciano (Principal Financial Officer and Principal Accounting Officer) /s/ Jean Pierre Pucheu Director March 31, 2004 - ----------------------- Jean Pierre Pucheu /s/ Luke M. Beshar Director March 31, 2004 - ----------------------- Luke M. Beshar II-6