Back to GetFilings.com
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-31051
SMTC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
635 Hood Road, Markham, Ontario, Canada
(Address of Principal Executive Offices)
98-0197680
(IRS Employer Identification Number)
L3R 4N6
(Zip Code)
Registrant's telephone number, including area code: 905-479-1810
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share.
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
The aggregate market value of common stock of the registrant held by non-
affiliates of the registrant was approximately $151,162,708, on March 26, 2001,
including the value of exchangeable shares of the registrant's subsidiary, SMTC
Manufacturing Corporation of Canada, exchangeable for common stock of the
registrant. For purposes of the foregoing sentence, the term "affiliate"
includes each director and executive officer of the registrant and each holder
of more than 5% of the registrant's common stock. The computation of the
aggregate market value is based upon the average bid and asked prices of the
common stock and the exchangeable shares as reported on The Nasdaq National
Market and The Toronto Stock Exchange, respectively, on March 26, 2001.
As of March 26, 2001, SMTC Corporation had 22,318,820 shares of common
stock, par value $0.01 per share, and one share of special voting stock, par
value $0.01 per share, outstanding. As of March 26, 2001, SMTC Corporation's
subsidiary, SMTC Manufacturing Corporation of Canada, had 6,370,959 exchangeable
shares outstanding, each of which is exchangeable into one share of common stock
of SMTC Corporation.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the
registrant's 2001 Annual Meeting of Stockholders to be filed pursuant to
Regulation 14A are incorporated by reference in Part III of this Report.
PART I
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements as defined under the
federal securities laws. Actual results could vary materially. Factors that
could cause actual results to vary materially are described herein and in other
documents. Readers should pay particular attention to the considerations
described in the section of this report entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors that May
Affect Future Results." Readers should also carefully review any risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission.
Item 1: Business
BUSINESS
Overview
SMTC Corporation ("We" or "SMTC" or the "Company") is a leading provider of
advanced electronics manufacturing services, or EMS, to electronics industry
original equipment manufacturers, or OEMs, worldwide. We service our customers
through eleven manufacturing and technology centers strategically located in key
technology corridors in the United States, Canada, Europe and a cost-effective
region of Mexico. Our full range of value-added services include product
design, procurement, prototyping, assembly, enclosures, interconnect, test,
final system build, comprehensive supply chain management, packaging, global
distribution and after-sales support. Our business is focused on the fast-
growing fixed and wireless communications, networking and computing sectors.
Based upon our comparison of our 2000 pro forma revenue of approximately $842.6
million with 2000 EMS industry revenue data provided by Technology Forecasters,
Inc., or TFI, we are among the 15 largest public EMS companies worldwide. We
believe we are well-positioned to capitalize on the significant and growing
market opportunity to provide advanced EMS solutions to OEMs on a global basis.
We have customer relationships with over 50 OEMs, many of which date back
more than five years. Our customers include industry leading OEMs such as Dell,
Alcatel, Motorola, IBM, EMC and Lucent Technologies. We developed these
relationships by capitalizing on the continuing trend of OEMs to outsource
manufacturing services to consolidate their supply base and to form long-term
strategic partnerships with selected high quality EMS providers. We also have
relationships with a number of emerging companies in the high-growth
communications and networking sectors, including Cobalt Networks (now part of
Sun Microsystems), Netopia and Sycamore Networks. In 2000, approximately 79% of
our pro forma revenue was generated from the communications and networking
sectors. We expect to continue to grow our business through the addition of
new, high quality customers and the expansion of our relationships with existing
customers.
We believe that our key competitive advantages include our global
manufacturing capabilities, customer focused team-based approach, global supply
chain management capabilities and leading edge equipment and processes that are
consistent from site to site. In addition, we have introduced advanced web-
based collaborative planning tools that electronically link us with our
customers and suppliers in real time, enhancing our supply chain management
capabilities.
-2-
SMTC Corporation is the result of the July 1999 combination of the former
SMTC Corporation, or Surface Mount, and HTM Holdings, Inc., or HTM. Surface
Mount was established in Toronto, Ontario in 1985. HTM was established in
Denver, Colorado in 1990. SMTC was established in Delaware in 1998. Combining
Surface Mount and HTM provided us with increased strategic and operational scale
and greater geographic breadth. After the combination, we purchased Zenith
Electronics' facility in Chihuahua, Mexico, which expanded our cost-effective
manufacturing capabilities in an important geographic region. In September
1999, we established a manufacturing presence in the Northeastern United States
and expanded our value-added services to include high precision enclosure
capabilities by acquiring Boston, Massachusetts based W.F. Wood. In July 2000,
we acquired Pensar Corporation, an EMS company specializing in design
engineering and headquartered in Appleton, Wisconsin. In November 2000, we
acquired Qualtron Teoranta, a provider of specialized cable and harness
interconnect assemblies, based in Donegal, Ireland and with a subsidiary in
Haverhill, Massachusetts.
Industry Background
The EMS industry provides manufacturing services to OEMs in the electronics
marketplace. The EMS market is large and continues to grow rapidly. According
to TFI, global EMS industry revenue is forecasted to grow at a compounded annual
growth rate of approximately 27%, from $78 billion in 1999 to $260 billion in
2004. TFI forecasts that larger EMS companies with revenue of approximately
$500 million or greater are expected to grow more rapidly during the same
period. We believe that the growth for larger EMS companies is projected to be
greater than the industry average because OEMs are increasingly outsourcing
production to larger manufacturers that have the ability to provide a total
service solution across multiple geographies. EMS industry growth is being
fueled by the overall growth of the electronics industry, the increased
outsourcing of manufacturing by OEMs, and the divestiture of OEM manufacturing
assets to EMS businesses. We believe that OEMs decide to outsource
manufacturing in order to take advantage of the technology and manufacturing
expertise of EMS companies, eliminate manufacturing overhead, reduce time-to-
market of products, and improve supply chain efficiency. TFI estimates that the
percentage of total cost of goods sold in the electronics industry which is
outsourced for manufacturing by OEMs will increase from 11% in 1999 to 26% by
2004.
In addition, according to TFI, the EMS industry is highly fragmented with
over 3,000 independent EMS companies in existence and the 15 largest companies
accounting for approximately 45% of the worldwide market in 1999. The EMS
industry has experienced, and is anticipated to continue to experience,
significant consolidation. We believe that the fragmented nature of the
industry will allow us to take advantage of further acquisition opportunities to
increase our scale and geographic scope as well as to expand our customer
relationships and service offerings.
Revenues generated by the EMS industry are relatively concentrated among
the computing and fixed and wireless communications sectors. TFI reports that
the $78 billion in revenues generated by the EMS industry in 1999 is
attributable to the following sectors: 13% to wireless telecom, 20% to wired
telecom/networking, 23% to computer peripheral, 20% to computer systems, 2% to
consumer, 7% to industrial and 15% to other. TFI forecasts that a projected
$260 billion in revenues generated by the EMS industry in 2004 will be
attributable to the following sectors: 19% to wireless telecom, 25% to wired
telecom/networking, 17% to computer peripheral, 18% to computer systems, 8% to
consumer, 4% to industrial and 9% to other.
Historically, OEMs were vertically integrated manufacturers that invested
significantly in manufacturing assets and facilities around the world to
manufacture, service and distribute their products. EMS originated as primarily
labor intensive functions outsourced by OEMs to obtain additional capacity
during periods of high demand. Early EMS providers were essentially
subcontractors, providing production capacity on a transactional basis.
However, with significant advances in manufacturing process technology, EMS
providers developed additional capabilities and were able to improve quality and
dramatically reduce OEMs' costs. Furthermore, as the capabilities of EMS
companies expanded, an increasing number of OEMs adopted and became dependent
upon EMS outsourcing strategies. Over time, OEMs came to rely on EMS providers
to perform a broader array of manufacturing services, including design and
development activities. In recent years, EMS providers have further expanded
their range of services to include advanced manufacturing, packaging and
distribution and overall supply chain management. In addition, many OEMs are
reducing the number of vendors from which outsourced services
-3-
are purchased, and are partnering with EMS suppliers that can provide a total
service solution on a national or global basis, in order to further lower costs
and increase supplier accountability.
By using EMS providers, OEMs are able to focus on their core competencies,
including product development, sales and marketing, while leveraging the
manufacturing efficiency and capital investment of EMS providers. OEMs use EMS
providers to enhance their competitive position by:
. Reducing Time-to-Market. Electronics products are experiencing
increasingly shorter product life cycles, requiring OEMs to continually
reduce the time required to bring new products to market. OEMs can
significantly improve product development cycles and enhance time-to-
market by benefiting from the expertise and infrastructure of EMS
providers. This expertise includes capabilities relating to design,
quick-turn prototype development and rapid ramp-up of new products to
high volume production, with the critical support of worldwide supply
chain management.
. Improving Supply Chain Management. OEMs who manufacture internally are
faced with greater complexities in planning, procurement and inventory
management due to frequent design changes, short product life cycles and
product demand fluctuations. OEMs can address these complexities by
outsourcing to EMS providers which possess sophisticated supply chain
management capabilities and can leverage significant component
procurement advantages to lower product costs.
. Accessing Advanced Manufacturing Capabilities and Process Technologies.
Electronics products and electronics manufacturing technology have
become increasingly sophisticated and complex, making it difficult for
many OEMs to maintain the necessary technology expertise and focus
required to efficiently manufacture products internally. By working
closely with EMS providers, OEMs gain access to high quality
manufacturing expertise and capabilities in the areas of advanced
process, interconnect and test technologies.
. Improving Access to Global Markets. OEMs are generally increasing their
international activities in an effort to expand sales through access to
foreign markets. EMS companies with worldwide capabilities are able to
offer such OEMs global manufacturing solutions enabling them to meet
local content requirements to distribute products efficiently around the
world at lower costs.
The SMTC Customer Solution
We believe that the key competitive advantages of our solution include our
customer-focused team based approach, comprehensive supply chain management
capabilities and fully integrated worldwide facilities. Our customers benefit
from the following components of the SMTC solution:
Customer-focused Team Oriented Production System, or T.O.P.S. Our cross-
functional teams work as customer-focused business units without departmental
barriers, which allows for faster and more direct communication between our
customers and the team responsible for their products. The removal of
departmental barriers minimizes time wasted by internal communication between
departments. Our teams provide the customer with the entire range of services
from prototype to production to distribution. In addition, our cross-functional
team structure enables us to tailor each team to specific custom requirements.
In some cases we have employees on-site at customer locations. The result is a
manufacturing process tailored to each customer, which we believe accelerates
time-to-market for our customers.
Comprehensive Supply Chain Management; Web-based System. The systems and
processes we employ in supply chain management enable us to rapidly scale
operations to meet customer needs, shift capacity in response to product demand
fluctuations, reduce material costs and effectively distribute products to our
customers or their end-customers. We have available and are implementing web-
based systems through which we communicate, collaborate and plan with our
customers and suppliers in real time. This web-based system enhances inventory
management through information sharing and access and is a valuable tool for
managing inventory risk and exposure. In addition, our customers can commit to
delivering products to their customers knowing that the
-4-
materials and capacity are available because they can monitor the status of our
materials and capacity in real time through use of our web-based collaborative
planning system.
Fully Integrated Worldwide Factories. Our global reach enables us to
provide OEMs with the flexibility to manufacture products locally in several
regions of the world. All of our assembly locations operate under the same model
and with the same systems allowing customers to seamlessly transfer their
production from one of our facilities to another. This gives our customers
greater flexibility and the opportunity to reduce their costs by transferring
production to the facility that suits their needs. The fact that each assembly
facility operates similarly also enhances communications among facilities,
allows our employees to work effectively at any of our sites, improves quality
control, allows us to acquire equipment at volume discounts and promotes
adoption of best practices at each of our facilities. These factors reduce
inefficiencies, improve product quality and ultimately reduce costs.
The SMTC Strategy
Our objective is to enhance our position as a leading EMS provider to OEMs
worldwide. We intend to achieve this objective by pursuing the following
business strategies:
Expand our Global Presence in Strategic Markets. In order to enhance our
existing high standards of service to our global customers, we intend to
continue to expand our global presence. We expect to tailor each assembly
facility we acquire to the same high standards of excellence and to a similar
plant layout as our current assembly facilities. This will allow us to continue
to enjoy the benefits of fully integrated factories. Since 1995, we have
expanded from our first facility located in Toronto, Ontario to eleven
facilities located in the United States, Canada, Europe and Mexico. We intend to
continue to expand our global infrastructure and are currently targeting Asia as
an area for future expansion.
Continue to Provide Leading Edge Supply Chain Management Capabilities. We
remain fully committed to maintaining our leadership position in supply chain
management through the use of innovative management strategies. We believe the
introduction of our web-based collaborative planning system is enabling us to
rapidly scale operations to meet customer needs, shift capacity in response to
product demand fluctuations, reduce material costs and effectively distribute
products to our customers or their end-customers.
Strengthen our Relationships with Leading and Emerging Global OEMs in
Attractive EMS Segments. We plan to continue to focus on providing advanced
electronic manufacturing services to industry leaders, particularly in the high
growth, high value-added communications and networking sectors. Communications
and networking companies, in particular, are dramatically increasing the amount
of manufacturing they are outsourcing, and we believe our technological
capabilities and global manufacturing platform are well suited to capitalize on
this opportunity. In addition to our industry leading customers such as Dell,
Alcatel, Motorola, IBM, EMC and Lucent Technologies, we have relationships with
a number of emerging companies in the communications and networking sectors
including Cobalt Networks (now part of Sun Microsystems), Netopia and Sycamore
Networks.
Provide Advanced Technological Capabilities and Comprehensive Service
Offerings. We remain committed to enhancing our capabilities and value-added
services to meet the ongoing needs of our customers. Through our continuing
investment in leading-edge assembly and logistics technologies, as well as our
investment in design, engineering and test capabilities, we are able to offer
our customers a variety of advanced design and manufacturing solutions. These
capabilities include micro ball grid arrays, complex circuitry layouts,
manufacturing and testing of wireless products and manufacturing of ethernet
cards, among others. Additionally, building on our integrated engineering and
manufacturing capabilities, we provide our customers with services ranging from
initial product design and prototype production to final product assembly, test
and distribution directly to our customers. We believe that this provides
greater control over quality, delivery and costs and enables us to offer our
customers a complete cost effective solution.
Pursue Selective Acquisition Opportunities, including Asset Divestitures by
OEMs. We intend to continue to target strategic acquisitions that will enable
us to expand our geographic reach, add manufacturing capacity,
-5-
secure key new customers, diversify into complementary product markets or
broaden our technological capabilities and value-added service offerings. We
have successfully completed eight acquisitions since 1995. As a result, we have
developed and deployed a comprehensive integration strategy which includes
establishing our team-oriented production system at all locations with broad-
based workforce participation, utilizing similar manufacturing equipment and
processes, deploying common information technology platforms, transferring best
practices among operations company wide and leveraging wide-scale procurement.
Our Services
Our full range of advanced value-added electronics manufacturing services
include:
New Product Development and Introduction. The key to our new product
approach is the cross-functionality of our teams. We integrate our design group,
materials group and manufacturing group into a new product development team
which works with our customers and suppliers throughout the development process
to ensure that new designs are efficiently transitioned into production. We use
advanced design tools to enable new product ideas to progress from design, to
simulation and physical layout, to design for manufacturability. We work with
our customers' product developers in the early stages of new product
development. Our new product development team also coordinates the prototyping
of new product designs, a critical stage in the development of new products. Our
prototyping and new product introduction centers are strategically located, and
we use electronic communications with our customers and suppliers in order to
provide a quick response to customer demands and to facilitate greater
collaboration between our new product development team, out customers and our
suppliers.
Supply Chain Management. We use our integrated resource planning and supply
chain management systems to optimize efficient materials management from
supplier to end-customer. We provide our customers with a complete supply chain
management solution, using advanced electronic schedule sharing methods with our
customers and suppliers to plan, purchase, expedite and warehouse components and
materials. We believe our inventory management and volume procurement
capabilities reduce costs and shorten total cycle time. Effective management of
the supply chain is critical to the success of OEMs because it reduces the time
required to deliver products to market and the capital requirements associated
with carrying inventory. The introduction of our web-based collaborative
planning system will further link our suppliers and customers in a real time
environment.
Assembly and Integration. We use state-of-the-art technology in the
assembly process, and continually focus, together with our customers and
suppliers, on developing assembly techniques, improving quality, improving time-
to-market of our customers' products and reducing costs. We are able to apply a
broad range of assembly techniques, from pin-through-hole and surface mount to
micro ball grid array assemblies. Our extensive test capabilities allow us to
identify the cause of defects and determine the most appropriate corrective
action. Our engineers work proactively with our customers and suppliers to
implement solutions to defects before products are shipped. We also design and
test packaging of products for bulk shipment or single end-customer use. We
provide fully-integrated system build services to our customers. These services
capitalize on our sophisticated logistical capabilities to rapidly acquire and
assemble source components, perform complex testing and deliver products to our
customers around the world. Our complete system integration capabilities,
coupled with our strength in supply chain management, position us to meet our
customers' growing demand for build-to-order system solutions.
Global Distribution and After-sales Support. We have a sophisticated
integrated system for managing complex international distribution, allowing us
to efficiently ship worldwide and, in many cases, directly to the OEMs' end-
customers. We also offer a wide range of after-sales support services including
field failure analyses, product upgrades and repair services. We also assist our
customers in improving design for manufacture.
Our Customers
We target industry leading OEMs primarily in the high growth networking and
fixed and wireless communications sectors. Pro forma 2000 revenue from customers
was allocated by industry as follows: 45% from networking, 34% from
communications and 21% from industrial, consumer and other.
-6-
We have customer relationships with over 50 OEMs, many of which date back
more than five years. Our customers include industry leading OEMs such at Dell,
Alcatel, Motorola, IBM, EMC and Lucent Technologies. We also have relationships
with a number of emerging companies in the high-growth communications and
networking sectors, including Cobalt Networks (now part of Sun Microsystems),
Netopia and Sycamore Networks. The electronic products we assemble and
manufacture can be found in a wide array of end-products including:
. PBX switches . Routers . Personal computers
. Wireless base stations . Hubs . Multimedia peripherals
. Wireless loop systems . Communications switches . Video broadcasting
. Modems . Mass storage devices . Ethernet PCMCIA cards
. Fax machines . Data servers . Semiconductor test equipment
. Components for T1 and T3 broadband . Workstations
equipment
Marketing and Sales
We market our services through a focused strategy that emphasizes our team
based approach to servicing our customers. In addition to developing
relationships with established industry leading OEMs, we also target selected
emerging companies in high growth market segments. We target prospective
customers in the networking, fixed and wireless communications, computing and
peripheral and other industries which are leaders in their markets. We are
focused on building relationships with customers that require a volume of
production that complements our customer-focused team-based approach and supply
chain offerings. In all cases, our goal is to allocate our program management,
engineering and manufacturing resources, business systems and assets on a
customer-by-customer basis, enabling each of our customers to have a dedicated
environment that operates as a virtual extension of its business.
We have a direct sales force with a global presence that focuses on new and
existing customers to take advantage of our worldwide capabilities. We also have
a mix of established direct sales representatives and manufacturer
representative companies throughout Canada, the United States and Europe. Our
sales offices are located within our manufacturing facilities. In addition, we
have a sales office in Boston, Massachusetts. When a customer opportunity is
identified by our direct or outside sales force, we dedicate a team to the
potential customer that becomes part of our marketing effort and will continue
to service the customer throughout our relationship.
Supply Chain Management
We believe that the basis of true collaboration is seamless integration
across the enterprise-wide system, encompassing the customers' worldwide
facilities, our global manufacturing sites, and our suppliers. We provide our
customers with a complete supply chain management solution, using advanced
electronic schedule sharing methods with our customers and suppliers to plan,
purchase, expedite and warehouse components and materials. The systems and
processes we currently employ in supply chain management enable us to rapidly
scale operations to meet customer needs, shift capacity in response to product
demand fluctuations, reduce material costs and effectively distribute products
to our customers or their end-customers.
In April 1999, we launched a major new initiative with the development of
our web-based collaborative planning systems. These systems were initially used
to enhance our manufacturing execution capabilities through the use of web-based
master scheduling, real time materials requirement planning and factory
scheduling software. In
-7-
conjunction with our enhanced manufacturing execution processes, during 2000, we
introduced our web-based collaborative planning tools for customer demand
management and supplier management.
We believe that in order to continue to offer our customers leading
services, we and our customers and suppliers must create virtual enterprises,
sharing information and making joint decisions to ensure a fast and cost-
effective response to the market. Our web-based collaborative planning tools
feature a "capable to promise" ability that we expect will improve flexibility
and reduce cycle times in the supply chain for our customers. Through a web-
based user interface, our customers and suppliers have direct access to our
supply chain management database. Customers are able to monitor the availability
and supply of component parts in real time. Simulation features allow customers
to explore "what-if" scenarios, enhancing our customers' forecasting and
planning efficiency. Communication is streamlined throughout the supply chain,
allowing our customers to receive timely feedback from us and allowing us to
receive real time input from our suppliers.
Our goal is to gauge and optimize performance in real time. As our web-
based tools are further deployed and enhanced, they enable all activities in the
supply chain to be synchronized, and enable us and our trading partners to
rapidly analyze, revise and fine-tune plans based on the latest customer
information. WebPLAN and Lotus Notes are the foundation for our e-business
solution.
Our web-based collaborative planning system is currently operating at all
of our locations. In the first half of 2000, we introduced the system to our
customers and suppliers. Because our customers and suppliers require only
standard, low-cost web access capabilities to access our collaborative planning
tool, and because the system represents a major advance over traditional
electronic data interchange systems, we believe our customers and suppliers will
continue to readily adopt our leading-edge e-business solution to supply chain
management.
Technology, Processes and Development
We use advanced technology in the assembly and testing of the products we
manufacture. We believe that our processes and skills are among the most
sophisticated in the industry.
Surface mount technology is the principal technology for the assembly of
printed circuit boards. Our customer-focused factories include predominantly
surface mount technology lines, which are highly flexible and are continually
reconfigured to meet customer-specific product requirements. In addition to
expertise in conventional surface mount technology, we have extensive
capabilities utilizing a broad range of technologies, including:
. chip scale packaging, which is a method of using integrated circuits
(chips) without encapsulating them in epoxy, thereby utilizing less
space on the circuit board;
. flip chips, which are structures that house interconnected circuits and
are utilized to minimize printed circuit board surface area when compact
packaging is required;
. tape automated bonding, which is a specialized assembly-process
technology that involves the application of components onto a circuit
board using temperature and pressure;
. multichip module-laminates, which are a type of printed circuit board
design that allows for the placement of multiple integrated circuits or
other components in a limited surface area; and
. micro ball grid array, which is a method of mounting an integrated
circuit or other component to a printed circuit board. Rather than using
pins, the component is attached with small balls of solder at each
contact. This method allows for greater component density and is used in
printed circuit boards with higher layer counts.
We also work with a wide range of substrate types from thin flexible
printed circuit boards to highly complex, dense multilayer boards.
-8-
Our assembly capabilities are complemented by advanced test capabilities.
These technologies include:
. high speed functional testing, a method of testing products by
simulating actual use modes in high volume;
. burn-in testing, a test method where products are powered on for 24
hours to ensure product functionality;
. vibration testing, a method that tests whether products can withstand
forces encountered under normal use;
. in-circuit testing, an automated test for workmanship defects; and
. in-situ dynamic thermal cycling stress testing, a test method of
exposing products from high to low temperature extremes for several
cycles, which identifies any early product failures.
We believe that our inspection technology is among the most sophisticated
in the EMS industry. Our inspection technology includes:
. x-ray laminograph, a method that utilizes an x-ray to view thin layers
of a circuit board;
. three-dimensional laser paste, a volumetric inspection method that
utilizes a microscope with lasers; and
. scanning electron microscopy, a scanning method that utilizes a
microscope with 200 times magnification or greater.
Our ongoing research and development activities include the development of
processes and test technologies as well as some focused product development. We
are proactive in developing manufacturing techniques which take advantage of the
latest component and product designs and packaging.
Our Suppliers
We currently use electronic data interchange with our key suppliers, and
ensure speed of supply through the use of automated receiving and full-service
distribution capabilities. With the implementation of our web-based
collaborative planning systems, our customers' needs are integrated with our
suppliers in a more efficient and cost effective manner than is achievable
through traditional electronic data interchange. In pro forma 2000 we purchased
approximately $685 million in materials. We believe this volume of procurement
enhances our ability to obtain better pricing, influence component packaging and
design and obtain supply of components in constrained markets.
We generally order materials and components under our agreements with
customers only to the extent necessary to satisfy existing customer orders or
forecasts. We have implemented specific inventory management strategies with
certain suppliers such as "line-side stocking" (pulling inventory at the
production line on an as needed basis) and other SMTC supply chain velocity and
flexibility programs. Fluctuations in material costs are typically passed
through to customers. We may agree, upon request from our customers, to
temporarily delay shipments, which causes a corresponding delay in our revenue
recognition. Ultimately, however, our customers are generally responsible for
all goods manufactured on their behalf.
During pro forma 2000, we did not rely significantly on any one supplier,
with no supplier representing more than 10.0% of total purchases, with the
exception of Arrow Electronics, Inc., which represented 10.9% of total
purchases.
-9-
Competition
The EMS industry is highly fragmented and comprised of a large number of
domestic and foreign companies. The intense competition we face is provided by
many independent companies as well as in-house manufacturing capabilities of
current and potential customers who evaluate our capabilities against the merit
of manufacturing products internally. We compete with different companies
depending on the type of service or geographic area. Our competitors include
Celestica Inc., Flextronics International Ltd., Jabil Circuit, Inc., SCI
Systems, Inc. and Solectron Corporation as well as numerous other smaller EMS
providers. Certain of our competitors may have greater manufacturing, financial,
research and development and marketing resources than we do. We believe that we
are a leading EMS provider and that we are well positioned to compete against
these larger competitors due to our product quality, flexibility and timeliness
in responding to design and schedule changes, reliability in meeting product
delivery schedules, pricing, technological sophistication, the provision of
value-added services and geographic locations.
Governmental Regulation
Our operations are subject to certain federal, state, provincial and local
regulatory requirements relating to environmental compliance and site cleanups,
waste management and health and safety matters. In particular, we are subject to
regulations promulgated by regulatory agencies pertaining to health and safety
in the workplace and the use, storage, discharge and disposal of hazardous
chemicals used in the manufacturing process.
To date, the costs of compliance and environmental remediation have not
been material to us. Nevertheless, additional or modified requirements may be
imposed in the future. If such additional or modified requirements are imposed
on us, or if conditions requiring remediation are found to exist, we may be
required to incur substantial additional expenditures.
Recent Developments
On July 27, 2000, simultaneously with the closing of our initial public
offering, we acquired Pensar Corporation, an EMS company specializing in design
services and located in Appleton, Wisconsin. The purchase consideration
consisted of $18 million in cash and the balance in shares of our common stock.
We issued 1,188,682 shares of common stock at a valuation of $16 per share to
finance the share portion of the purchase price of the Pensar acquisition. The
cash portion of the acquisition was financed with a portion of the proceeds from
the initial public offering. The total purchase price, including transaction
costs, was approximately $37 million.
On November 22, 2000, we acquired Qualtron Teoranta, a provider of
specialized custom-made cable harnesses and fiber optic assemblies located in
Donegal, Ireland, together with its subsidiary, Haverhill, Massachusetts based
Qualtron, Inc. The purchase consideration consisted of approximately $14.4
million in cash and the balance in exchangeable shares. Our subsidiary, SMTC
Manufacturing Corporation of Canada, issued 547,114 exchangeable shares valued
at Cdn. $22.93 per share to finance the share portion of the Qualtron Teoranta
acquisition. The total purchase price, including transaction costs, was
approximately $26.9 million.
We announced in a press release on March 30, 2001 that we will close our
assembly facility in Denver, Colorado, leaving in place a sales and marketing
presence to service the Rocky Mountain Region. Production at the Denver
facility, one of the last remaining SMTC sites not recently refurbished, will be
migrated to SMTC facilities closer to customer locations and to our recently
retrofitted and expanded lower cost Chihuahua, Mexico facility. We expect to
take a one-time pre-tax charge of approximately $15 million associated with our
facility rationalization.
Employees
As of December 31, 2000, we employed approximately 5,000 full time
employees worldwide. In addition, we employ varying levels of temporary
employees as our production demands. Given the variable nature of our project
flow and the quick response time required by our customers, it is critical that
we be able to quickly ramp-up and ramp-down our production to maximize
efficiency. To achieve this, our strategy has been to employ skilled temporary
labor force, as required. We use outside contractors to qualify our temporary
employees on a site-by-site basis. Our production level temporary employees are
compensated by the hour. We do not have any permanent leased employees. We
believe we are team-oriented, dynamic and results-oriented with an emphasis on
customer service and quality at all levels. We believe this environment is a
critical factor for us to be able to fully utilize the intellectual capital of
our employees. From time to time we relocate our management level employees as
needed to
-10-
fill open positions at our sites. Because of our training programs, we have not
experienced difficulty in adequately staffing skilled employees.
With the exception of approximately 500 of our employees in Mexico and 250
of our employees in Ireland, none of our employees is unionized. We have never
experienced a work stoppage or strike and believe that our employee relations
are good.
Our Structure and Our History
The SMTC family of companies includes the following companies, with their
jurisdictions of incorporation or organization in parentheses:
SMTC Corporation (Delaware)
HTM Holdings, Inc. (Delaware)
SMTC de Chihuahua S.A. de C.V. (Mexico)
SMTC Manufacturing Corporation of California (California)
SMTC Manufacturing Corporation of Canada (Ontario)
STMC Manufacturing Corporation of Colorado (Delaware)
SMTC Manufacturing Corporation of Ireland Limited (Ireland)
SMTC Manufacturing Corporation of Massachusetts (Massachusetts)
SMTC Manufacturing Corporation of North Carolina (North Carolina)
SMTC Manufacturing Corporation of Texas (Texas)
SMTC Manufacturing Corporation of Wisconsin (Wisconsin)
SMTC Mex Holdings, Inc. (Delaware)
SMTC Nova Scotia Company (Nova Scotia)
Qualtron, Inc. (Massachusetts)
Qualtron Teoranta (Ireland)
SMTC Corporation
Our company's present corporate structure resulted from the July 1999
combination of Surface Mount and HTM in a transaction accounted for under the
purchase method of accounting as the acquisition of Surface Mount by HTM. The
transaction provided us with increased strategic and operating scale, as well as
greater geographic breadth. Subsequent to the combination, all of Surface
Mount's operating subsidiaries, other than SMTC Canada, SMTC Manufacturing
Corporation of Ireland Limited, Qualtron Teoranta and Qualtron, Inc., have
become subsidiaries of HTM.
Since the combination, we acquired Zenith's facility in Chihuahua, Mexico,
a transaction which expanded our cost-effective manufacturing capabilities in an
important geographic region. In September 1999, we acquired the Boston,
Massachusetts based systems integration and precision enclosures business of
W.F. Wood, which expanded our operations into the Northeastern United States. In
July 2000, we acquired Appleton, Wisconsin based Pensar Corporation, which
provided us with an enhanced design engineering and test capability, additional
partnerships with leading technology suppliers, a diversification of our
customer base and an expanded geographic presence in the Midwestern United
States. In November 2000, we acquired Haverhill, Massachusetts based Qualtron,
Inc. in connection with the acquisition of its parent company, Qualtron
Teoranta, by SMTC Canada, as described below. We plan to continue to capitalize
on attractive acquisitions and internal growth opportunities in the EMS
marketplace and are presently targeting Asia as an area for future expansion.
SMTC Canada
SMTC Canada was incorporated in Canada in 1985 as The Surface Mount
Technology Centre Inc., or SMTCI, and continued as an Ontario company in 1994.
Prior to the July 1999 combination, SMTCI and its wholly-owned U.S. subsidiary,
Surface Mount, completed a reorganization as a result of which Surface Mount
became the parent of a group of companies which included SMTCI. In connection
with the July 1999 reorganization, SMTC
-11-
Nova Scotia Company, a wholly-owned subsidiary of SMTC, acquired all of the
outstanding voting shares of SMTCI. On October 29, 1999, SMTCI changed its name
to SMTC Manufacturing Corporation of Canada. On June 1, 2000, SMTCI adopted a
French form of its name and eliminated several classes of unissued shares from
its authorized capital. In November 2000, SMTC Canada acquired Ireland based
Qualtron Teoranta, a provider of specialized cable and harness assemblies.
HTM Holdings, Inc.
In June 1998, Hi-Tech Manufacturing Inc., or Hi-Tech Manufacturing, was
recapitalized by investors led by Bain Capital and Celerity Partners, Inc., and
HTM, a Delaware corporation, was organized such that Hi-Tech Manufacturing
became a wholly owned subsidiary of HTM. Organized in 1990, Thornton, Colorado
based Hi-Tech Manufacturing was a turnkey contract manufacturer which focused on
the assembly of completed printed circuit boards. Hi-Tech Manufacturing has
changed its name to SMTC Manufacturing Corporation of Colorado.
Legal Proceedings
We are a party to various legal actions arising in the ordinary course of
our business. We believe that the resolution of these legal actions will not
have a material adverse effect on our financial position or results of
operations.
Backlog
Although we obtain firm purchase orders from our customers, our customers
typically do not make firm orders for delivery of products more than 30 to 90
days in advance. We do not believe that the backlog of expected product sales
covered by firm purchase orders is a meaningful measure of future sales since
orders may be rescheduled or canceled.
Item 2: Properties
Facilities
We conduct our operations within approximately 1,070,000 square feet of
building space. We believe our facilities are currently adequate for our
operating needs. Our principal service at all locations is assembly of
electronic components, with the exception of the Boston facility where we
manufacture precision enclosures and Donegal, Ireland and Haverhill,
Massachusetts where we manufacture cable and harness interconnect assemblies. We
expect to transition our Denver facility from component production to sales and
marketing during the second or third quarter of 2001. Our facilities are as
follows:
Approx.
Location Square Footage Leased/Owned
- -------- -------------- ------------
Toronto, Ontario.................................................... 100,000 Leased
San Jose, California................................................ 75,000 Leased
Denver, Colorado.................................................... 100,000 Leased
Boston, Massachusetts............................................... 150,000 Leased
Haverhill, Massachusetts............................................ 20,000 Leased
Charlotte, North Carolina........................................... 125,000 Leased
Austin, Texas....................................................... 75,000 Leased
Appleton, Wisconsin................................................. 75,000 Owned
Chihuahua, Mexico................................................... 250,000 Owned
Cork, Ireland....................................................... 50,000 Leased
Donegal, Ireland.................................................... 50,000 Leased
We have exercised an option under our Austin, Texas lease to purchase 20
acres adjacent to our existing facility. We are in the process of selling the
property back to the developer.
-12-
We also are in the process of purchasing additional land and a facility
situated in Austin, Texas. We expect to move our Austin operations to the new
building and for that facility to be operational in the second or third quarter
of 2001. This sale and leaseback arrangement will require the approval of our
lenders under our senior credit facility.
All of our principal facilities are ISO certified to ISO 9001 or ISO 9002
standards. ISO 9001 and ISO 9002 are commonly recognized standards in the EMS
industry that are published by the International Standardization Organization
and relate to quality management systems. ISO 9001 contains requirements for
quality assurance in design, development, production, installation and
servicing. ISO 9002 contains requirements for quality assurance in production,
installation and servicing.
The principal executive office of SMTC and SMTC Canada is located at 635
Hood Road, Markham, Ontario, Canada L3R 4N6.
Item 3: Legal Proceedings
The Company is currently not a party to any material legal actions or
proceedings.
Item 4: Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock began trading on The Nasdaq National Market
under the symbol SMTX on July 21, 2000. The following table sets forth, for the
periods indicated, the high and low per share sales prices for the common stock
as reported on Nasdaq.
2000
---------------------------
High Low
---- ---
First Quarter........................................ $- $-
Second Quarter....................................... - -
Third Quarter (commencing July 21, 2000)............. 28.063 16.563
Fourth Quarter....................................... 25.000 9.000
As of March 26, 2001, there were approximately 5,000 holders of record of
the Company's common stock.
The Company's capital stock consists of 60,000,000 authorized shares of
common stock, par value $.01 per share, of which, as of March 26, 2001,
22,318,820 shares were issued and outstanding; and 5,000,000 authorized shares
of preferred stock, par value $.01 per share, of which, as of March 26, 2001,
one share was issued and outstanding.
The Company has never declared a cash dividend on its common stock. The
Board of Directors of the Company has no present intention to pay dividends on
common stock and does not anticipate doing so within the next several years. It
is the present policy of the Company to retain earnings, if any, to provide for
growth and working capital needs. Further, the Company's senior credit facility
restricts the Company's ability to pay dividends.
Since its incorporation in 1998, SMTC has issued the following securities
without registration under the Securities Act of 1933, as amended (the
"Securities Act"):
-13-
(1) In connection with the combination of Surface Mount and HTM, which was
completed on July 30, 1999, SMTC issued an aggregate of 2,447,782 shares of its
Class A common stock, 154,167.8 shares of its Class L common stock, 113,407.9
shares of its Class N common stock and warrants exercisable for an aggregate of
103,894.9 shares of its Class A common stock and 12,088.2 shares of its Class L
common stock to pre-combination stockholders of Surface Mount, including certain
members of management of Surface Mount and other investors and pre-combination
stockholders of HTM, including affiliates of Bain Capital, Inc., affiliates of
Celerity Partners, L.L.C., certain members of management of HTM and other
investors, in exchange for pre-combination securities of Surface Mount, pre-
combination securities of HTM and an aggregate of approximately $16.7 million.
(2) On July 30, 1999, pursuant to an employee stock option plan, SMTC
issued an aggregate of 33,140.2 options to purchase its Class A common stock and
3,855.9 options to purchase its Class L common stock. The options to purchase
Class A common stock were fully vested when granted, and were immediately
exercised for an aggregate of 33,140.2 shares of Class A common stock at an
aggregate exercise price of $60,374. These shares are subject to certain
restrictions on transferability and certain repurchase rights.
(3) On September 30, 1999, pursuant to an employee stock option plan, SMTC
issued an aggregate of 116,860 shares of its Class A common stock.
(4) On May 18, 2000, we issued warrants to purchase 41,666.67 shares of
Class L common stock and 375,000.03 shares of Class A common stock, subject to
adjustment provisions in the warrants and sold notes in the aggregate amount of
$5 million. The issuance of the notes and warrants was exempt from registration
under the Securities Act because the purchasers of the notes and warrants
included only foreign persons, qualified institutional buyers and three large
institutional accredited investors.
All shares referred to in (1) through (4) were exempt from registration
under the Securities Act pursuant to Section 4(2) thereof or Rule 701
thereunder.
(5) On July 27, 2000, simultaneously with the closing of our initial public
offering, we acquired Pensar Corporation (now SMTC Manufacturing Corporation of
Wisconsin), an EMS company specializing in design services and located in
Appleton, Wisconsin. The purchase consideration consisted of $18 million in cash
and the balance in shares of common stock of the Company. We issued 1,188,682
shares of common stock valued at $16 per share to five accredited investors to
finance the share portion of the purchase price of the Pensar Corporation
acquisition. The cash portion of the acquisition was financed with a portion of
the proceeds from the initial public offering. The total purchase price,
including transaction costs, was approximately $37 million. The 1,188,682
shares issued were exempt from registration under the Securities Act pursuant to
Section 4(2) thereof and Rule 506 thereunder.
-14-
Item 6: Selected Financial Data
SMTC Corporation, or SMTC, is the result of the July 1999 combination of
the former SMTC Corporation, or Surface Mount, and HTM Holdings, Inc., or HTM.
Upon completion of the combination and concurrent recapitalization, the former
stockholders of HTM held approximately 58.0% of the outstanding shares of SMTC.
We have accounted for the combination under the purchase method of accounting as
a reverse acquisition of Surface Mount by HTM. Because HTM acquired Surface
Mount for accounting purposes, HTM's assets and liabilities are included in our
consolidated financial statements at their historical cost and the comparative
figures for the periods prior to the combination reflect the results of
operations of HTM. The results of operations of Surface Mount are included in
our consolidated financial statements from the date of the combination.
Pro Forma Selected Financial Data (Unaudited)
The unaudited pro forma results of operations, adjusted net earnings and
other financial data included in this report for the years ended December 31,
1999 and December 31, 2000 contain the results of Surface Mount, HTM, W.F. Wood
Incorporated, or W.F. Wood, Pensar Corporation, or Pensar, and Qualtron
Teoranta, or Qualtron, as if the combination of Surface Mount and HTM and the
acquisitions of W.F. Wood, Pensar and Qualtron and the initial public offering
and application of proceeds to reduce indebtedness had occurred on January 1,
1999. As such, the pro forma results have been adjusted to reflect additional
goodwill amortization related to the combination of Surface Mount and HTM,
additional goodwill amortization related to the acquisitions of W.F. Wood,
Pensar and Qualtron, additional interest expense and income tax effects related
to the borrowings required to complete the Pensar and Qualtron acquisitions, and
the effect of the initial public offering including the exercise of the
underwriters' over-allotment option.
This pro forma selected financial data is presented as a supplement to our
actual selected financial data to provide a basis for analyzing and comparing
the results of operations of the combined and acquired companies.
Actual Selected Financial Data
The actual selected financial data includes the following:
. The results of operations, adjusted net earnings and other financial
data for 1996, 1997 and 1998 represent the results of operations,
adjusted net earnings and financial data for HTM. For accounting
purposes, HTM is considered to have acquired Surface Mount in the July
1999 combination.
. The results of operations, adjusted net earnings and other financial
data for 1999 include a full year of results of HTM, as well as the
results for Surface Mount from July 30, 1999 through to December 31,
1999 and results for W.F. Wood from September 4, 1999 through to
December 31, 1999.
. The results of operations, adjusted net earnings and other financial
data for 2000 include a full year of results for HTM, Surface Mount and
W.F. Wood as well as the results for Pensar from July 27, 2000 through
to December 31, 2000 and the results for Qualtron from November 22, 2000
through to December 31, 2000.
The data set forth below should be read in conjunction with our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes
thereto appearing elsewhere in this Annual Report.
Our consolidated financial statements and our selected consolidated
financial data have been prepared in accordance with United States GAAP. These
principles conform in all material respects to Canadian GAAP except as described
in Note 22 to our consolidated financial statements. The differences between
the line items under United States GAAP and those as determined under Canadian
GAAP are not significant except that under Canadian GAAP the 1999 and 2000
extraordinary losses would have been reported as pre-tax expenses of $2.1
million and $4.3 million, respectively. Accordingly, the 1999 loss before
income tax recovery would be $2.8 million, income tax
-15-
recovery would be $0.7 million and net loss would be unchanged at $2.1 million
under Canadian GAAP. The 2000 income before income taxes would be $9.4 million,
income tax expense would be $5.7 million and net earnings would be $3.7 million
under Canadian GAAP.
-16-
Consolidated Pro Forma Statement of Operations Data:
(in millions, except per share amounts)
----------------------------
December 31, December 31,
1999 2000
----------------------------
Revenue $530.7 $842.6
Cost of sales 472.6 764.3
----------------------------
Gross profit 58.1 78.3
Selling, general and administrative expenses 33.9 40.3
Amortization of intangible assets 8.7 9.2
Former shareholder compensation (a) 0.6 -
Acquisition-related bonuses paid to management and employees of
W.F.Wood (b) 2.6 -
----------------------------
Operating income 12.3 28.8
Interest 0.1 7.7
----------------------------
Earnings before income taxes (c) 12.2 21.1
Income taxes 5.4 10.5
----------------------------
Net earnings (c) $ 6.8 $ 10.6
============================
Net earnings per common share: (c)
Basic $ 0.24 $ 0.38
Diluted $ 0.24 $ 0.37
============================
(a) Reflects compensation paid to former shareholders of W.F. Wood and Pensar.
(b) Acquisition-related bonuses consist of one-time bonuses of $2.3 million
paid to management and $0.3 million paid to employees.
(c) Pro forma earnings before income taxes, net earnings and net earnings per
common share exclude extraordinary losses.
Consolidated Pro Forma Adjusted Net Earnings:
(in millions, except per share amounts)
---------------------------------------
December 31, December 31,
1999 2000
---------------------------------------
Net earnings $ 6.8 $10.6
Adjustments:
Amortization of goodwill 8.6 8.6
Management fees 0.7 -
Former shareholder compensation 0.6 -
Acquisition-related bonuses paid to management and employees of
W.F. Wood 2.6 -
Income tax effect (3.3) (1.7)
---------------------------------------
Adjusted net earnings $16.0 $17.5
=======================================
Adjusted net earnings per common share:
Basic $0.57 $0.62
Diluted $0.55 $0.60
=======================================
Weighted average number of shares outstanding:
Basic 28.2 28.2
Diluted 28.9 29.0
=======================================
As a result of the combination of Surface Mount and HTM and a number of
subsequent acquisitions, we use consolidated pro forma adjusted net earnings as
a measure of our operating performance. Consolidated pro forma adjusted net
earnings is consolidated pro forma net earnings adjusted for acquisition related
charges such as the amortization of goodwill, management fees, former
shareholders' compensation and other charges as described in the table, and the
related income tax effect of these adjustments. Consolidated pro forma adjusted
net earnings is not a measure of performance under United States GAAP or
Canadian GAAP. Consolidated pro forma adjusted net earnings should not be
considered in isolation or as a substitute for net earnings prepared in
accordance with United States GAAP or Canadian GAAP or as an alternative measure
of operating performance or profitability.
-17-
Pro Forma Other Financial Data:
(in millions)
------------------------------
December 31, December 31,
1999 2000
------------------------------
EBITDA $31.6 $48.7
Depreciation 10.6 10.7
Amortization of goodwill 8.6 8.6
Amortization of deferred financing costs 0.1 0.3
Amortization of deferred lease costs - 0.3
Capital expenditures 13.6 27.4
Note: EBITDA means earnings before interest expense, income taxes, depreciation
and amortization. EBITDA is presented because we believe it is a widely accepted
financial indicator of an entity's ability to incur and service debt. EBITDA
should not be considered as an alternative to cash flow from operating
activities, as a measure of liquidity or as an alternative to net income as a
measure of operating results in accordance with United States or Canadian GAAP.
-18-
Consolidated Actual Statement of Operations Data:
(in millions, except per share amounts)
-----------------------------------------------------------------
December December December December December
31, 31, 31, 31, 31,
1996 1997 1998 1999 2000
-----------------------------------------------------------------
Revenue $ 70.8 $59.0 $ 89.7 $258.0 $782.7
-----------------------------------------------------------------
Cost of sales 68.9 53.6 82.5 236.3 714.4
-----------------------------------------------------------------
Gross profit 1.9 5.4 7.2 21.7 68.3
Selling, general and administrative 2.8 2.8 3.3 13.3 34.6
expenses
Amortization of intangible assets - - 0.2 2.0 6.2
Relocation expenses (a) 0.5 - - - -
Recapitalization expenses (b) - - 2.2 - -
-----------------------------------------------------------------
Operating income (loss) (1.4) 2.6 1.5 6.4 27.5
Interest 0.7 0.7 2.0 7.1 13.8
-----------------------------------------------------------------
Earnings (loss) before income taxes (c) (2.1) 1.9 (0.5) (0.7) 13.7
Income taxes (recovery) (0.8) 0.7 (0.2) 0.1 7.4
-----------------------------------------------------------------
Earnings (loss) before extraordinary loss (1.3) 1.2 (0.3) (0.8) 6.3
Extraordinary loss (d) - - - (1.3) (2.7)
-----------------------------------------------------------------
Net earnings (loss) $ (1.3) $ 1.2 $ (0.3) $ (2.1) $ 3.6
=================================================================
Net earnings (loss) per common share:
Basic before extraordinary loss $(0.40) $0.40 $(0.44) $(1.89) $ 0.24
Extraordinary loss - - - (0.79) (0.20)
-----------------------------------------------------------------
Basic $(0.40) $0.40 $(0.44) $(2.68) $ 0.04
Diluted $(0.40) $0.40 $(0.44) $(2.68) $ 0.03
=================================================================
(a) Relocation expenses include costs incurred to move equipment and employees
from a facility in Longmont, Colorado to Denver, Colorado.
(b) Leveraged recapitalization expenses of $2.2 million include transaction
costs and compensation expense related to our leveraged recapitalization.
(c) Refer to Note 22 to our consolidated financial statements for a description
of differences between United States GAAP and Canadian GAAP.
(d) The extraordinary loss of $1.3 million in 1999 arises from debt prepayment
penalties of $0.8 million, the write-off of unamortized debt financing fees
of $1.0 million and the write off of the unamortized debt discount of $0.3
million, net of a tax recovery of $0.8 million. The extraordinary loss of
$2.7 million in 2000 arises from debt prepayment penalties of $0.3 million,
the write-off of unamortized debt financing fees of $2.9 million and the
write off of the value of the warrants issued in excess of the proceeds
received of $1.1 million, net of a tax recovery of $1.6 million.
-19-
Consolidated Actual Adjusted Net Earnings:
(in millions, except per share amounts)
---------------------------------------------------------------------
December December December December December
31, 31, 31, 31, 31,
1996 1997 1998 1999 2000
---------------------------------------------------------------------
Net earnings (loss) $ (1.3) $ 1.2 $(0.3) $ (2.1) $ 3.6
Adjustments:
Extraordinary loss - - - 1.3 2.7
Amortization of goodwill - - - 1.5 5.3
Relocation expenses 0.5 - - - -
Recapitalization expenses - - 2.2 - -
Management fees - - 0.1 0.7 -
Income tax effect (0.2) - (0.9) (0.5) (1.1)
---------------------------------------------------------------------
Adjusted net earnings (loss) $ (1.0) $ 1.2 $ 1.1 $ 0.9 $10.5
=====================================================================
Adjusted net earnings (loss) per
common share:
Basic $(0.32) $0.40 $0.52 $(0.80) $0.56
Diluted $(0.32) $0.40 $0.52 (0.80) $0.54
=====================================================================
Weighted average number of shares
outstanding:
Basic 3.1 3.1 2.1 1.6 13.2
Diluted 3.1 3.1 2.1 1.6 13.7
=====================================================================
As a result of the combination of Surface Mount and HTM and a number of
subsequent acquisitions, we use consolidated adjusted net earnings as a measure
of our operating performance. Consolidated adjusted net earnings is consolidated
net earnings (loss) adjusted for extraordinary items and acquisition related
charges such as the amortization of goodwill, management fees, former
shareholders' compensation and other charges as described in the above table,
and the related income tax effect of these adjustments. Consolidated adjusted
net earnings is not a measure of performance under United States GAAP or
Canadian GAAP. Consolidated adjusted net earnings should not be considered in
isolation or as a substitute for net earnings prepared in accordance with United
States GAAP or Canadian GAAP or as an alternative measure of operating
performance or profitability.
Actual Other Financial Data:
(in millions)
--------------------------------------------------------------------------
December December December December December
31, 31, 31, 31, 31,
1996 1997 1998 1999 2000
--------------------------------------------------------------------------
EBITDA $ 0.5 $ 4.8 $ 4.6 $ 14.9 $ 43.3
Depreciation 1.9 2.2 2.9 6.5 9.6
Amortization of goodwill - - - 1.5 5.3
Amortization of deferred financing costs - - 0.2 0.5 0.6
Amortization of deferred lease costs - - - - 0.3
Capital expenditures 0.6 0.9 3.2 4.1 25.7
Cash flows from operating activities 6.1 (0.4) (3.8) (6.6) (104.9)
Cash flows from financing activities (5.5) 1.2 4.3 49.6 159.1
Cash flows from investing activities (0.6) (0.4) (0.5) (41.4) (53.6)
Note: EBITDA means earnings before interest expense, income taxes, depreciation
and amortization. EBITDA is presented because we believe it is a widely accepted
financial indicator of an entity's ability to incur and service debt. EBITDA
should not be considered as an alternative to cash flow from operating
activities, as a measure of liquidity or as an alternative to net income as a
measure of operating results in accordance with United States or Canadian GAAP.
-20-
Consolidated Balance Sheet Data:
(in millions)
-----------------------------------------------------------------------
December December December December December
31, 31, 31, 31, 31,
1996 1997 1998 1999 2000
-----------------------------------------------------------------------
Cash and short-term investments $ 0.1 $ 0.4 $ 0.5 $ 2.1 $ 2.7
Working capital 1.7 4.1 8.1 53.4 188.3
Total assets 22.9 31.7 44.2 228.1 547.5
Total debt, including current maturities 7.0 8.2 35.5 134.0 118.0
Shareholders' equity 7.1 8.4 (10.5) 7.8 228.5
Quarterly Results
The following tables set forth our unaudited historical quarterly results and
pro forma quarterly results for the eight quarters ended December 31, 2000. This
information has been prepared on the same basis as our annual consolidated
financial statements and it includes all adjustments necessary for a fair
presentation of the financial results of such periods. This information should
be read in conjunction with our annual consolidated financial statements for the
years ended December 31, 1999 and 2000. The operating results for any previous
quarter are not necessarily indicative of results for any future periods.
(in millions, except per share amounts)
Pro Forma Results
Quarter Ended
-------------------------------------------------------------------------------------------------
Mar 31, Jun 30, Oct 3, Dec 31, Apr 2, July 2, Oct 1, Dec 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------------------------------------------------------------------------------------------------
Revenue $123.6 $119.6 $140.9 $146.6 $146.2 $190.0 $242.5 $263.9
Gross profit 14.8 12.3 14.1 16.9 14.7 17.3 21.3 25.0
Net earnings (loss) 2.9 2.1 (0.7) 2.5 0.3 1.9 3.7 4.7
Adjusted net earnings 4.6 3.9 2.9 4.6 2.0 3.6 5.4 6.5
Adjusted net earnings per
share - diluted $ 0.16 $ 0.13 $ 0.10 $ 0.16 $ 0.07 $ 0.12 $ 0.19 $ 0.22
Weighted average number
of shares outstanding- diluted 28.9 28.9 28.9 28.9 28.9 28.9 28.9 29.0
Historical Results
Quarter Ended
-------------------------------------------------------------------------------------------------
Mar 31, Jun 30, Oct 3, Dec 31, Apr 2, July 2, Oct 1, Dec 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------------------------------------------------------------------------------------------------
Revenue $ 23.3 $ 23.3 $ 88.0 $123.4 $124.3 $167.1 $231.5 $259.8
Gross profit 1.7 1.5 6.7 11.8 11.1 13.7 19.6 23.9
Earnings (loss) before
extraordinary loss - - (0.7) (0.1) (1.4) 0.1 3.3 4.3
Net earnings (loss) - - (2.0) (0.1) (1.4) 0.1 0.6 4.3
Adjusted net earnings (loss) 0.1 - (0.2) 1.0 (0.6) 1.0 4.4 5.7
Net earnings (loss) per
share before extraordinary
loss $ 0.03 $(0.07) $(0.73) $(0.61) $(1.16) $(0.53) $ 0.14 $ 0.16
Adjusted net earnings (loss)
per share - diluted $ 0.06 $(0.03) $(0.45) $(0.17) $(0.81) $(0.18) $ 0.19 $ 0.20
Weighted average number
of shares outstanding- diluted 1.4 1.4 2.1 2.4 2.4 2.4 21.1 28.7
-21-
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following discussion in conjunction with the "Selected
Consolidated Financial Data" section of this Annual Report, our consolidated
financial statements and notes to those statements included elsewhere is this
Annual Report. The forward-looking statements in this discussion regarding the
electronics manufacturing services industry, our expectations regarding our
future performance, liquidity and capital resources and other non-historical
statements in this discussion include numerous risks and uncertainties, as
described in the "Factors That May Affect Future Results" section below. You
should read this discussion completely and with the understanding that our
actual future results may be materially different from what we expect. We may
not update these forward-looking statements after the date of this Annual
Report, even though our situation will change in the future. All forward-looking
statements attributable to us are expressly qualified by these cautionary
statements.
Overview
We are a leading provider of advanced electronics manufacturing services,
or EMS, to electronics industry original equipment manufacturers, or OEM's,
worldwide. Our full range of value-added services include product design,
procurement, prototyping, advanced cable and harness interconnect, high-
precision enclosures, printed circuit board assembly, test, final system build,
comprehensive supply chain management, packaging, global distribution and after
sales support.
SMTC Corporation, or SMTC, is the result of the July 1999 combination of
the former SMTC Corporation, or Surface Mount, and HTM Holdings, Inc., or HTM.
Upon completion of the combination and concurrent recapitalization, the former
stockholders of HTM held approximately 58.0% of the outstanding shares of SMTC.
We have accounted for the combination under the purchase method of accounting as
a reverse acquisition of Surface Mount by HTM. Because HTM acquired Surface
Mount for accounting purposes, HTM's assets and liabilities are included in our
consolidated financial statements at their historical cost and the comparative
figures for the periods prior to the combination reflect the results of
operations of HTM. The results of operations of Surface Mount are included in
our consolidated financial statements from the date of the combination. Surface
Mount was established in Toronto, Ontario in 1985. HTM was established in
Denver, Colorado in 1990. SMTC was established in Delaware in 1998.
Our revenue has grown from approximately $59.0 million in 1997 to pro forma
revenue of $842.6 million in 2000 through both internal growth and strategic
acquisitions. The July 1999 combination of Surface Mount and HTM provided us
with increased strategic and operating scale and greater geographic breadth.
Collectively, since 1995 we have completed the following seven acquisitions:
. Radian Electronics' operations, which enabled our expansion into Austin,
Texas, and established our relationship with Dell, in 1996;
. Ogden Atlantic Design's operations in Charlotte, North Carolina, which
provided us with a facility in a major technology center in the
Southeastern United States, in 1997;
. Ogden International Europe's operations in Cork, Ireland, which expanded
our global presence into Europe, in 1998;
. Zenith Electronics' facility in Chihuahua, Mexico, which expanded our
cost-effective manufacturing capabilities and added Zenith (now
Motorola) as a customer, in July 1999;
. W.F. Wood, based outside Boston, Massachusetts, which provided us with a
manufacturing presence in the Northeastern United States, expanded our
value-added services to include high precision enclosures capabilities,
and added EMC and Sycamore Networks as customers, in September 1999;
-22-
. Pensar Corporation, located in Appleton, Wisconsin, which provided us
with a wide range of electronics and design manufacturing services, on
July 27, 2000 and concurrent with the closing of the initial offering;
and
. Qualtron Teoranta, with sites in both Donegal, Ireland and Haverhill,
Massachusetts, which allowed us to expand our ability to provide
customers with a broad range of services focusing on fiber optic
connector assemblies and volume cable assemblies, on November 22, 2000.
In addition, we completed the following financing activities in 2000:
Initial Public Offering
. On July 27, 2000, we completed an initial public offering of our common
stock in the United States and the exchangeable shares of our
subsidiary, SMTC Manufacturing Corporation of Canada, in Canada, raising
net proceeds (not including proceeds from the sale of shares upon the
exercise of the underwriters' over-allotment option) of $157.1 million;
. Concurrent with the effectiveness of the initial public offering, we
completed a share capital reorganization;
. In connection with the initial public offering, we entered into an
amended and restated credit agreement with our lenders, which provided
for an initial term loan of $50.0 million and revolving credit loans,
swing line loans and letters of credit up to $100.0 million;
. On July 27, 2000, we paid a fee of $1.8 million to terminate a
management agreement under which we paid quarterly fees of approximately
$0.2 million; and
. On August 18, 2000, we sold additional shares of common stock upon
exercise of the underwriters' over-allotment option, raising net
proceeds of $24.6 million.
Pre Initial Public Offering
. In May 2000, we issued senior subordinated notes to certain shareholders
for proceeds of $5.0 million, which were repaid with the proceeds of our
initial public offering;
. On May 18, 2000, we issued 41,667 warrants for $2.5 million cash
consideration in connection with the May 2000 issue of $5.0 million in
senior subordinated notes; and
. On July 3, 2000, we issued demand notes in the aggregate principal
amount of $9.9 million, which were repaid with the proceeds of our
initial public offering.
We continue to seek acquisition opportunities that enable us to expand our
geographic reach, add manufacturing capacity and diversify into new markets. We
are considering potential acquisitions in North America and Europe, and we are
targeting Asia for future expansion. We intend to continue to capitalize on
attractive acquisition opportunities in the EMS marketplace, and our goal is
generally to have each acquisition be accretive to earnings after a transition
period of approximately one year. We also plan to continue our strategy of
augmenting our existing EMS capabilities with the addition of related value-
added services. By expanding the services we offer, we believe that we will be
able to expand our business with our existing customers and develop new
opportunities with potential customers.
Consistent with our past practices and normal course of business, we engage
from time to time in discussions with respect to potential acquisitions. While
we have identified several opportunities that would expand our global presence,
add to our value-added services and establish strategic relationships with new
customers, we are not currently party to any definitive acquisition agreements.
-23-
We used approximately $143.7 million of the proceeds from our initial
public offering to reduce indebtedness under our credit facility. On July 27,
2000, we entered into an amended and restated credit facility with our lenders,
which provided for an initial term loan of $50.0 million and revolving credit
loans, swing line loans and letters of credit up to $100.0 million. As at
December 31, 2000, we had borrowed $115.8 million under this facility. We
intend to continue to borrow under our new credit facility to finance working
capital growth and any cash portion of future acquisitions; however we generally
intend to keep our debt at approximately 30% of our total capitalization.
We currently provide turnkey manufacturing services to the majority of our
customers. In 2000, 98.8% of our pro forma revenue was from turnkey
manufacturing services compared to 97.1 % in 1999. From July 1999 to March 2000,
under the terms of a production agreement with Zenith, we manufactured products
for Zenith on a consignment basis. In a consignment arrangement, we provide
manufacturing services only, while the customer purchases the materials and
components necessary for production. In April 2000, we began to purchase
materials for Zenith, and as a result, our relationship with Zenith evolved into
a turnkey manufacturing relationship. Turnkey manufacturing services typically
result in higher revenue and higher gross profits but lower gross profit margins
when compared to consignment services.
With our turnkey manufacturing customers, we generally operate under
contracts that provide a general framework for our business relationship. Our
actual production volumes are based on purchase orders under which our customers
do not commit to firm production schedules more than 30 to 90 days in advance.
In order to minimize customers' inventory risk, we generally order materials and
components only to the extent necessary to satisfy existing customer forecasts
or purchase orders. Fluctuations in material costs are typically passed through
to customers. We may agree, upon request from our customers, to temporarily
delay shipments, which causes a corresponding delay in our revenue recognition.
Ultimately, however, our customers are generally responsible for all goods
manufactured on their behalf.
We service our customers through a total of eleven facilities located in
the United States, Canada, Europe and Mexico. In 2000, approximately 80.0% of
our pro forma revenue was generated from operations in the United States,
approximately 9.0% from Canada, approximately 3.0% from Europe and approximately
8.0% from Mexico. Our facility in Chihuahua was acquired in July 1999 from
Zenith Electronics Corporation. We expect to continue to increase revenue from
this facility, with the transfer of certain production from other facilities and
with the addition of new business and increased volume from our current
business.
The unaudited pro forma results of operations are presented as a supplement
to our actual results of operations to provide a basis for analyzing and
comparing the results of operations of the combined and acquired companies. As
such, the pro forma results of operations for the year ended December 31, 1999
contain the results of Surface Mount, HTM, W.F. Wood, Pensar and Qualtron as if
the combination of Surface Mount and HTM, the acquisitions of W.F. Wood, Pensar
and Qualtron and the initial public offering and application of proceeds to
reduce indebtedness had occurred on January 1, 1999. The historical results of
operations for the year ended December 31, 1999 include a full year of operating
results for HTM, as well as the operating results for Surface Mount from July
30, 1999 through to December 31, 1999 and operating results for W.F. Wood from
September 3, 1999 through to December 31, 1999. As such, the 1999 pro forma
results have been adjusted to reflect seven months of additional goodwill
amortization related to the acquisition of Surface Mount by HTM, eight months of
additional goodwill amortization related to the acquisition of W.F. Wood, twelve
months of additional goodwill amortization related to the acquisitions of Pensar
and Qualtron, additional interest expense and income tax effects related to the
borrowings required to complete the acquisitions of Pensar and Qualtron and the
effects of the initial public offering including the exercise of the
underwriters' over-allotment option.
The unaudited pro forma results of operations for the year ended December
31, 2000 contain the results of Surface Mount, HTM, W.F. Wood, Pensar and
Qualtron as if the combination of Surface Mount and HTM, the acquisitions of
W.F. Wood, Pensar and Qualtron and the initial public offering and application
of proceeds to reduce indebtedness had occurred on January 1, 1999. The
historical results of operations for the year ended December 31, 2000 include a
full year of operating results for HTM, Surface Mount and W.F. Wood as well as
the results of Pensar from July 27, 2000 through to December 31, 2000 and the
results of Qualtron from November 22, 2000 through to December 31, 2000. As
such, the 2000 pro forma results have been adjusted to reflect seven months of
additional goodwill amortization related to the acquisition of Pensar, eleven
months of additional goodwill
-24-
amortization related to the acquisition of Qualtron, the additional interest
expense and income tax effects related to the borrowings required to complete
the acquisitions of Pensar and Qualtron and the effects of the initial public
offering including the exercise of the underwriters' over-allotment option.
Our fiscal year end is December 31. The consolidated financial statements
of SMTC, including the consolidated financial statements of HTM for periods
prior to the combination, are prepared in accordance with United States GAAP,
which conforms in all material respects to Canadian GAAP, except as disclosed in
Note 22 to the consolidated financial statements.
We begin our Management's Discussion and Analysis of Financial Condition
and Results of Operations with a discussion of the pro forma year ended December
31, 2000 compared to the pro forma year ended December 31, 1999. Because our
historical financial statements do not fully reflect the July 1999 combination
of HTM and Surface Mount, our September 1999 acquisition of W.F. Wood, our July
2000 acquisition of Pensar and our November 2000 acquisition of Qualtron or the
completion of our initial public offering, a discussion of our historical
operations does not provide a sufficient understanding of the financial
conditions and results of operations of our business. Following our discussion
of the pro forma results of operations, we discuss our historical financial
condition and results of operations for the year ended December 31, 2000
compared to the year ended December 31, 1999 and for the year ended December 31,
1999 compared to the year end December 31, 1998.
-25-
SMTC Corporation
Pro Forma Results of Operations
The following table sets forth certain pro forma operating data expressed as a
percentage of revenue for the periods indicated:
December 31, December 31,
1999 2000
----------------------------------
Revenue 100.0% 100.0%
Cost of sales 89.1 90.7
----------------------------------
Gross profit 10.9 9.3
Selling, general and administrative expenses 7.0 4.8
Amortization of intangible assets 1.6 1.1
----------------------------------
Operating income 2.3 3.4
Interest 0.0 0.9
----------------------------------
Earnings before income taxes 2.3 2.5
Income taxes 1.0 1.2
----------------------------------
Net earnings 1.3% 1.3%
==================================
Pro forma year ended December 31, 2000 compared to the pro forma year ended
December 31, 1999
Pro Forma Revenue
Pro forma revenue increased $311.9 million, or 58.8%, from $530.7 million
for the year ended December 31, 1999, to $842.6 million for the year ended
December 31, 2000. This increase resulted primarily from the growth of pro forma
revenue generated by our United States operations and our Chihuahua facility.
For the year ended December 31, 2000, 80.3% of our pro forma revenue was
generated from operations in the United States, 8.9% from Canada, 3.0% from
Europe and 7.8% from Mexico. For the year ended December 31, 1999, 83.5% of our
pro forma revenue was generated from operations in the United States, 9.4% from
Canada, 5.2% from Europe and 1.9% from Mexico.
Pro forma revenue from Dell for the year ended December 31, 2000 was $124.0
million, or 14.7% of total pro forma revenue. For the year ended December 31,
1999, pro forma revenue from Dell was $157.5 million, or 29.7%, of total pro
forma revenue. The 1999 revenue from Dell consisted primarily of personal
computer based products, whereas the 2000 revenue from Dell consisted primarily
of the high growth, networking based products. No other customer represented
more than 10% of pro forma revenue in the years ended December 31, 1999 and
December 31, 2000.
Pro Forma Gross Profit
Pro forma gross profit increased $20.2 million, or 34.8%, from $58.1
million for the year ended December 31, 1999 to $78.3 million for the year ended
December 31, 2000. Our pro forma gross profit margin declined from 10.9% for the
year ended December 31, 1999 to 9.3% for the year ended December 31, 2000. The
decline in the pro forma gross margin is due to a shift from lower
revenue/higher gross margin consignment revenue to higher revenue/lower gross
margin turnkey revenue at the Chihuahua facility, the underutilization of our
fixed costs in the Chihuahua facility due to delays in the transition of certain
customers to that facility and change in customer mix. We continue to seek to
improve our overall profit margins by offering our customers a wider range of
services, better utilizing our fixed manufacturing costs and by pursuing
acquisitions of businesses that provide value-added services.
-26-
Pro Forma Selling, General & Administrative Expenses
Pro forma selling, general and administrative expenses increased $3.2
million, or 8.6%, from $37.1 million for the year ended December 31, 1999 to
$40.3 million for the year ended December 31, 2000. As a percentage of pro forma
revenue, pro forma selling, general and administrative expenses decreased from
7.0% to 4.8% because of the higher pro forma revenue base. Pro forma selling,
general and administrative expenses for the year ended December 31, 1999
included management fees of $0.7 million, one time payments of $0.6 million as
compensation to former W.F. Wood and Pensar shareholders and $2.6 million as
acquisition related bonuses paid to management and employees of W.F. Wood. We
expect pro forma selling, general and administrative expenses to continue to
decline as a percentage of pro forma revenue as we continue to grow our revenue
base.
Pro Forma Amortization
Pro forma amortization of intangible assets increased $0.5 million, or
5.7%, from $8.7 million for the year ended December 31, 1999 to $9.2 million for
the year ended December 31, 2000. Pro forma amortization for the year ended
December 31, 1999 included amortization of $2.4 million of goodwill related to
the combination of Surface Mount and HTM, amortization of $1.7 million of
goodwill related to the acquisition of W.F. Wood, amortization of $2.7 million
of goodwill related to the acquisition of Pensar, amortization of $1.8 million
of goodwill related to the acquisition of Qualtron and amortization of $0.1
million of deferred finance costs related to the establishment of our senior
credit facility in July 1999.
Pro forma amortization for the year ended December 31, 2000 included
amortization of $2.4 million of goodwill related to the combination of Surface
Mount and HTM, amortization of $1.7 million of goodwill related to the
acquisition of W.F. Wood, amortization of $2.7 million of goodwill related to
the acquisition of Pensar, amortization of $1.8 million of goodwill related to
the acquisition of Qualtron, amortization of $0.3 million of deferred finance
costs related to our senior credit facility of July 2000 and amortization of
$0.3 million of deferred equipment lease costs.
Pro Forma Interest Expense
Pro forma interest expense increased $7.6 million from $0.1 million for the
year ended December 31, 1999 to $7.7 million for the year ended December 31,
2000 due to the interest expense related to debt incurred to meet increased
working capital requirements to fund the growth of our business.
Pro Forma Income Tax Expense
For the year ended December 31, 2000, we had a pro forma income tax expense
of $10.5 million on pro forma income before taxes of $21.1 million, producing an
effective pro forma tax rate of 49.8%. The effective rate of tax was higher than
the statutory rate as we were not able to claim a recovery of losses of $1.1
million incurred by our subsidiary, SMTC Manufacturing Corporation of Ireland
Limited, or deduct $4.2 million of goodwill related to the combination of
Surface Mount and HTM and the acquisition of Qualtron.
For the year ended December 31, 1999, we had a pro forma income tax expense
of $5.4 million on pro forma income before taxes of $12.2 million, producing an
effective pro forma tax rate of 44.3%. The effective rate of tax was higher than
the statutory rate as we were not able to claim a recovery of losses of $0.5
million incurred by our subsidiary, SMTC Manufacturing Corporation of Ireland
Limited, or to deduct $4.2 million of goodwill related to the combination of
Surface Mount and HTM and the acquisition of Qualtron.
-27-
SMTC Corporation (formerly HTM Holdings, Inc.)
Results of Operations
The following table sets forth certain operating data expressed as a percentage
of revenue for the years ended:
December 31, December 31, December 31,
1998 1999 2000
--------------------------------------------
Revenue 100.0% 100.0% 100.0%
Cost of sales 92.0 91.6 91.3
--------------------------------------------
Gross profit 8.0 8.4 8.7
Selling, general and administrative expenses 3.7 5.2 4.4
Amortization of intangible assets 0.2 0.8 0.8
Recapitalization expenses 2.5 - -
--------------------------------------------
Operating income 1.6 2.4 3.5
Interest 2.2 2.7 1.8
--------------------------------------------
Earnings (loss) before income taxes (0.6) (0.3) 1.7
Income taxes (recovery) (0.2) - 0.9
--------------------------------------------
Earnings (loss) before extraordinary loss (0.4) (0.3) 0.8
Extraordinary loss - (0.5) (0.3)
--------------------------------------------
Net earnings (loss) (0.4)% (0.8)% 0.5%
============================================
Year ended December 31, 2000 compared to the year ended December 31, 1999
Revenue increased $524.7 million, or 203.4%, from $258.0 million for the
year ended December 31, 1999 to $782.7 million for the year ended December 31,
2000. This increase resulted from both organic growth and from the combination
of Surface Mount and HTM, the acquisition of our Chihuahua facility in July
1999, our acquisition of W.F. Wood in September 1999, the acquisition of Pensar
in July 2000 and the acquisition of Qualtron in November 2000. Acquisition
revenue contributed $226.5 million, or 43.2%, of the increase. Organic revenue
from both existing customers and new customers increased $298.2 million, or
61.5%, during 2000.
Revenue from Dell of $124.0 million and from Alcatel of $79.8 million for
the year ended December 31, 2000 was 15.8% and 10.2%, respectively, of total
revenue. Revenue from Dell of $76.3 million, from Carrier Access of $27.1
million and from IBM of $25.7 million was 29.6%, 10.5% and 10.0%, respectively,
of total revenue for the year ended December 31, 1999. Alcatel was not a
customer of ours in 1999. No other customer represented more than 10% of revenue
in the years ended December 31, 1999 and December 31, 2000.
For the year ended December 31, 2000, 79.8% of our revenue was generated
from operations in the United States, 9.5% from Canada, 2.3% from Europe and
8.4% from Mexico. For the year ended December 31, 1999, 85.9% of our revenue was
generated from operations in the United States, 7.4% from Canada, 2.9% from
Europe and 3.8% from Mexico. We intend to enhance our position as a leading EMS
provider by expanding our global presence in strategic markets with the addition
of facilities in new cost effective regions and geographic locations, and
through the expansion of our international sales efforts.
Gross Profit
Gross profit increased $46.6 million from $21.7 million for the year ended
December 31, 1999 to $68.3 million for the year ended December 31, 2000. Our
gross profit margin improved from 8.4% for the year ended December 31, 1999 to
8.7% for the year ended December 31, 2000. The improvement in gross profit was
due to both organic growth and the combination of Surface Mount and HTM and the
acquisitions we completed in 1999 and 2000. The increase in the gross margin was
due to the positive impact of the acquisitions. Gross profit from acquisitions
contributed $25.0 million at a gross margin of 11.0% to the increase. Organic
growth contributed $21.6 million to the increase at a gross margin of 7.2%.
-28-
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased $21.3 million from
$13.3 million for the year ended December 31, 1999 to $34.6 million for the year
ended December 31, 2000. As a percentage of revenue, selling, general and
administrative expenses decreased from 5.2% to 4.4%. The combination of Surface
Mount and HTM and the subsequent acquisitions contributed $21.3 million to the
increase in selling, general and administrative expenses. At our Denver
facility, selling, general, and administrative expenses increased $0.4 million
from $3.3 million for the year ended December 31, 1999 to $3.7 million for the
year ended December 31, 2000 but declined as a percentage of that site's revenue
from 3.2% to 2.0%.
Amortization
Amortization of intangible assets for the year ended December 31, 2000 of
$6.2 million included the amortization of $2.4 million of goodwill related to
the combination of Surface Mount and HTM, $1.7 million of goodwill related to
the acquisition of W.F. Wood, $1.1 million related to the acquisition of Pensar
and $0.1 million related to the acquisition of Qualtron. We are amortizing
goodwill of $24.9 million resulting from the combination of Surface Mount and
HTM, $17.4 million resulting from the acquisition of W.F. Wood, $26.6 million
resulting from the acquisition of Pensar and $18.1 million resulting from the
acquisition of Qualtron, over a period of ten years. Amortization of intangible
assets for the year ended December 31, 2000 also included the amortization of
$0.6 million of deferred finance costs related to the establishment of our
amended and restated senior credit facility in July 2000 and $0.3 million of
deferred equipment lease costs. The costs associated with our amended and
restated senior credit facility are being amortized over the four year remaining
term of the debt.
Amortization of $2.0 million for the year ended December 31, 1999 included
the amortization of $0.9 million of goodwill related to the combination of
Surface Mount and HTM, $0.6 million of goodwill related to the acquisition of
W.F. Wood, $0.3 million of deferred finance costs related to the establishment
of our senior credit facility in July 1999 and $0.2 million of deferred
financing costs related to HTM's credit facility prior to the refinancing.
Interest Expense
Interest expense increased $6.7 million from $7.1 million for the year
ended December 31, 1999 to $13.8 million for the year ended December 31, 2000
due to interest expense related to debt incurred in connection with the
combination of Surface Mount and HTM, debt incurred to purchase our Chihuahua
facility and W.F. Wood and debt incurred to meet increased working capital
requirements to fund the growth of our business. The weighted average interest
rates with respect to the debt for the years ended December 31, 1999 and 2000
were 9.5% and 9.9%, respectively.
Income Tax Expense
For the year ended December 31, 2000, we recorded an income tax expense of
$7.4 million on pre-tax income of $13.7 million, which produced an effective
tax rate of 54.0% as we were not able to claim a recovery on losses of $1.1
million by our subsidiary, SMTC Manufacturing Corporation of Ireland Limited, or
deduct $2.4 million of goodwill related to the combination of Surface Mount and
HTM.
For the year ended December 31, 1999, an income tax expense of $0.1 million
was recorded on a loss before taxes of $0.7 million as we were not able to claim
a recovery of losses of $0.5 million by our subsidiary, SMTC Manufacturing
Corporation of Ireland Limited, or deduct $0.9 million of goodwill related to
the combination of Surface Mount and HTM.
Extraordinary Loss
Approximately $143.7 million of the proceeds of the initial public offering
were used to reduce our indebtedness under our credit facility. In connection
with the initial public offering, we entered into an amended and
-29-
restated credit agreement with our lenders. As a result, an extraordinary loss
of $2.7 million ($4.3 million before tax), related to early payment penalties,
the write-off of a portion of the unamortized deferred financing fees and the
write-off of the value of the warrants issued in excess of the proceeds
received, was recorded for the year ended December 31, 2000. The $2.7 million
charge would not be presented as an extraordinary loss in accordance with
Canadian GAAP. Rather, the $4.3 million pre-tax expense would be reported in
income before taxes and the tax benefit of $1.6 million would be reported as tax
recovery.
As a result of the early payment of the senior notes payable and
subordinated notes that occurred concurrent with the business combination of
Surface Mount and HTM, an extraordinary charge of $1.3 million ($2.1 million
before tax), related to early payment penalties, the write-off of unamortized
deferred financing fees, and the write-off of the unamortized debt discount, was
recorded for the year ended December 31, 1999. The $1.3 million charge would not
be presented as an extraordinary loss in accordance with Canadian GAAP. Rather,
the $2.1 million pre-tax expense would be reported in loss before taxes and the
tax benefit of $0.8 million would be reported as tax recovery.
Year ended December 31, 1999 compared to the year ended December 31, 1998
Revenue
Revenue increased $168.3 million, or 187.6% from $89.7 million in 1998 to
$258.0 million in 1999. This increase resulted largely from the combination of
Surface Mount and HTM, the acquisition of our Chihuahua facility in July 1999
and our acquisition of W.F. Wood in September 1999. Surface Mount, W.F. Wood and
our Chihuahua facility contributed $134.5 million, $11.0 million and $9.9
million, respectively, to the increase in revenue. Surface Mount's largest
customer was Dell. Revenue from Dell for the five month period from the date of
the combination of Surface Mount and HTM to December 31, 1999 was $76.3 million,
or 29.6% of total revenue for 1999. Revenue generated by our Denver facility,
formerly HTM, increased $12.9 million, or 14.4%, from $89.7 million in 1998 to
$102.6 million in 1999. In 1999, revenue from Carrier Access of $27.1 million
and revenue from IBM of $25.7 million represented 10.5% and 10.0% of total
revenue, respectively. No other customer represented more than 10.0% of our
revenue in 1999.
In 1999, 85.9% of our revenue was generated from operations in the United
States, 7.4% from Canada, 3.8% from Mexico and 2.9% from Europe. Revenue
generated from outside the United States increased from zero in 1998 to $36.4
million or 14.1% of revenue in 1999. The increase was due to the combination of
Surface Mount and HTM and the acquisition of our Chihuahua facility.
Gross Profit
Gross profit increased $14.5 million from $7.2 million in 1998 to $21.7
million in 1999. Our gross margin improved from 8.0% in 1998 to 8.4% in 1999.
The improvements in gross profit and gross margin were due to the acquisitions
completed in 1999 as well as the combination of Surface Mount and HTM. The
combination of Surface Mount and HTM added $11.1 million of gross profit at a
gross margin of 8.3%, our Chihuahua facility contributed $1.1 million of gross
profit at a gross margin of 11.1% and our W.F. Wood business added $1.8 million
of gross profit at a gross margin of 16.4%.
Our Chihuahua facility provided us with higher gross margins because it had
a higher percentage of consignment sales, which typically result in lower
revenue and higher gross profit margins but lower gross profit compared to
turnkey services.
Our W.F. Wood business contributes higher gross margins because the high
precision enclosure products manufactured by that business have higher profit
margins than the products we have historically manufactured.
At our Denver facility, formerly HTM, gross profit increased $0.5 million,
from $7.2 million in 1998 to $7.7 million in 1999, but the gross margin declined
from 8.0% to 7.5% due to a change in our business at that facility toward
manufacturing products with higher volumes and lower profit margins.
-30-
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $10.0 million from
$3.3 million in 1998 to $13.3 million in 1999. As a percentage of revenue,
selling, general and administrative expenses increased from 3.7% in 1998 to 5.2%
in 1999 because the facilities added through our acquisitions and the
combination of Surface Mount and HTM were operating at a lower rate of capacity
than our Denver facility. Included in selling, general and administrative
expense in 1999 were management fees of $0.7 million paid to our principal
stockholders. In 1998, $0.1 million of management fees were paid to the
principal stockholders of HTM. Selling, general and administrative expenses
were unchanged from 1998 to 1999 at our Denver facility.
Amortization
Amortization of intangible assets in 1999 includes the amortization of $0.9
million of goodwill related to the combination of Surface Mount and HTM and $0.6
million of goodwill related to the acquisition of W.F. Wood. There were no
intangible items amortized in 1998. Also included in the amortization of
intangible assets is the amortization of $0.3 million of deferred finance costs
related to the establishment of our $155.0 million senior credit facility in
July 1999 and $0.2 million of deferred finance costs related to HTM's credit
facility prior to refinancing. In 1998, amortization of deferred finance costs
was $0.2 million.
Interest Expense
Interest expense increased $5.1 million from $2.0 million in 1998 to $7.1
million in 1999, primarily as a result of the increase in debt incurred in
connection with the combination of Surface Mount and HTM and the debt incurred
to purchase our Chihuahua facility and W.F. Wood. Debt of $35.5 million and
$134.0 million was outstanding at December 31, 1998 and December 31, 1999,
respectively. The weighted average interest rates with respect to such debt for
1998 and 1999 were 10.1% and 9.5%, respectively.
Income Tax Expense
Income tax expense in 1999 amounted to $0.1 million on a loss before tax of
$0.7 million, at an effective rate of 14.1%, as we were not able to claim a
recovery on losses of $0.5 million incurred by our subsidiary SMTC Manufacturing
Corporation of Ireland Limited, and we were not able to deduct $0.9 million of
goodwill expense related to the combination of Surface Mount and HTM. We were
able to reduce our tax expense by $0.4 million by applying $1.0 million of net
operating tax losses available to our subsidiaries in the United States. Income
tax expense in 1998 amounted to a recovery of $0.2 million on a loss before tax
of $0.5 million, at an effective tax rate of 37.0%.
Extraordinary Loss
The extraordinary loss of $1.3 million in 1999, net of the tax benefit of
$0.8 million, arose from early payment penalties of $0.8 million, the write-off
of $1.0 million of unamortized deferred financing fees and the write-off of the
unamortized debt discount of $0.3 million associated with the repayment of
senior and subordinated notes which were refinanced under the $155.0 million
senior credit facility entered into in connection with the July 1999 combination
of Surface Mount and HTM. There were no extraordinary gains or losses in 1998.
The $1.3 million charge would not be presented as an extraordinary loss in
accordance with Canadian GAAP. Rather, the $2.1 million pre-tax expense would be
reported in loss before taxes and the tax benefit of $0.8 million would be
reported as tax recovery.
Liquidity and Capital Resources
Our principal sources of liquidity are cash provided from borrowings under
our senior credit facility and our access to the capital markets. Our principal
uses of cash have been to finance mergers and acquisitions, to meet debt service
requirements and to finance capital expenditures and working capital
requirements. We anticipate that these will continue to be our principal uses
of cash in the future.
-31-
Net cash used for operating activities for the year ended December 31, 1999
was $6.6 million compared to net cash used for operating activities of $104.9
million for the year ended December 31, 2000. The growth of both existing and
new customers during 2000 led to our increased working capital needs.
Net cash provided by financing activities for the year ended December 31,
1999 was $49.6 million due to the net increase of borrowings of $55.1 million,
which was offset by capital lease payments of $1.6 million and debt issuance
costs of $4.0 million. Net cash provided by financing activities for year ended
December 31, 2000 was $159.1 million due to the net proceeds from issuance of
capital stock of $179.2 million, and proceeds from the issue of warrants of $2.5
million, which was offset by repayment of long-term debt and capital leases and
debt issuance costs of $19.7 million, $1.4 million and $1.5 million
respectively.
Net cash used in investing activities for the year ended December 31, 1999
was $41.4 million due to the net purchase of capital and other assets of $4.1
million, the combination of SMTC and HTM and the acquisitions of W.F. Wood and
the Chihuahua facility for a total of $31.6 million and cash held in escrow
related to the acquisition of the Chihuahua facility of $5.7 million. Net cash
used in investing activities for the year ended December 31, 2000 was $53.6
million due to net purchases of capital and other assets of $25.9 million and
the acquisitions of Pensar and Qualtron for a total of $27.7 million.
In May 2000, we issued senior subordinated notes to certain shareholders
for proceeds of $5.0 million, which were repaid, with proceeds from the initial
public offering. In conjunction with the subordinated notes, on May 18, 2000 we
issued 41,667 warrants for cash consideration of $2.5 million which were
converted into warrants to purchase 477,049 shares upon our initial public
offering.
On July 3, 2000, in order to provide us with additional working capital and
to finance the growth of our business, certain of our stockholders purchased
demand notes from us in the amount of $9.9 million. These notes were paid on
July 27, 2000 with proceeds from our initial public offering.
On July 27, 2000, we entered into an amended and restated credit agreement
with our lenders, which provided for an initial term loan of $50.0 million and
revolving credit loans, swing line loans and letters of credit up to $100.0
million. As of December 31, 2000, we had borrowings of $115.8 million under our
senior credit facility.
On July 27, 2000, we completed an initial public offering of our shares of
common stock in the United States and exchangeable shares of our subsidiary,
SMTC Manufacturing Corporation of Canada, in Canada. The offering consisted of
6,625,000 shares of common stock at a price of $16.00 per share and 4,375,000
exchangeable shares at a price of Canadian $23.60 per share. The net proceeds
from the offering (not including proceeds from the sale of shares upon the
exercise of the underwriters' over-allotment option) of approximately $157.1
million were used to reduce our indebtedness under the senior credit facility,
to repay outstanding notes, to repay debt of Pensar and to finance the cash
portion of the purchase price of Pensar, which closed simultaneously with the
initial public offering. On August 18, 2000, an additional 1,650,000 of shares
of our common stock were issued at a price of $16.00 upon the exercise of the
underwriters' over-allotment option. The net proceeds of $24.6 million from the
sale of shares upon the exercise of the underwriters' over-allotment option were
used to reduce our indebtedness under the senior credit facility.
Our management believes that cash generated from operations, available cash
and amounts available under our senior credit facility will be adequate to meet
the debt service requirements, capital expenditures and working capital needs at
our current level of operations and organic growth, although no assurance can be
given in this regard. If we experience unusually strong growth or pursue
significant acquisition, we will likely require additional capital. There can be
no assurance that our business will generate sufficient cash flow from
operations or that future borrowings will be available to enable us to service
our indebtedness. Our future operating performance and ability to service or
refinance indebtedness will be subject to future economic conditions and to
financial, business and other factors, certain of which are beyond our control.
-32-
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101 and
in March 2000 issued SAB 101A "Revenue Recognition," which provide guidelines in
applying U.S. generally accepted accounting principles to revenue recognition in
financial statements. As a consequence of the issuance of SAB 101B in June 2000,
we were required to implement SAB 101 as of the fourth quarter of 2000. We
believe that our revenue recognition practices are consistent with the
guidelines.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. SFAS No. 133 requires all derivatives to be recognized either as
assets or liabilities and measured at fair value. SFAS No. 137 delays the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. We
will implement SFAS No. 133 for our first quarter ended March 31, 2001. In
accordance with the new standard, we will account for our existing interest rate
swaps as cash flow hedges. If we applied the new standard at December 31, 2000
we would record a $0.1 million liability on our balance sheet and a $0.1 million
charge to other comprehensive income as a cumulative effect type adjustment to
reflect the initial mark to market on the interest rate swaps.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. As required, we implemented this standard in
1999. The implementation did not have a material impact on our financial
position, results of operations or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities." SOP 98-5 requires that all start-up costs related to the new
operations must be expensed as incurred. In addition, all start-up costs that
were capitalized in the past must be written off when SOP 98-5 is adopted. As
required, we implemented this standard in 1999. The implementation did not have
a material impact on our financial position, results of operations or cash
flows.
-33-
FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Form 10-K are
forward-looking in nature. The discussion of such matters and subject areas is
qualified by the inherent risks and uncertainties surrounding future
expectations generally; these expectations may differ materially from SMTC's
actual future experience involving any one or more of such matters and subject
areas. SMTC cautions readers that all statements other than statements of
historical facts included in this annual report on Form 10-K regarding SMTC's
financial position and business strategy may constitute forward-looking
statements. All of these forward-looking statements are based upon estimates and
assumptions made by SMTC's management, which although believed to be reasonable,
are inherently uncertain. Therefore, undue reliance should not be placed on such
estimates and statements. No assurance can be given that any of such estimates
or statements will be realized, and it is likely that actual results will differ
materially from those contemplated by such forward-looking statements. Factors
that may cause such differences include: (1) increased competition; (2)
increased costs; (3) the inability to consummate business acquisitions on
attractive terms; (4) the loss or retirement of key members of management; (5)
increases in SMTC's cost of borrowings or lack of availability of additional
debt or equity capital on terms considered reasonable by management; (6) adverse
state, federal or foreign legislation or regulation or adverse determinations by
regulators; (7) changes in general economic conditions in the markets in which
SMTC may compete and fluctuations in demand in the electronics industry; (8) the
inability to manage inventory levels efficiently in light of changes in market
conditions; and (9) the inability to sustain historical margins as the industry
develops. SMTC has attempted to identify certain of the factors that it
currently believes may cause actual future experiences to differ from SMTC's
current expectations regarding the relevant matter or subject area. In addition
to the items specifically discussed in the foregoing, SMTC's business and
results of operations are subject to the risks and uncertainties described under
the heading "Factors That May Affect Future Results" below. The operations and
results of SMTC's business may also be subject to the effect of other risks and
uncertainties. Such risks and uncertainties include, but are not limited to,
items described from time to time in SMTC's reports filed with the Securities
and Exchange Commission.
FACTORS THAT MAY AFFECT FUTURE RESULTS
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
A majority of our revenue comes from a small number of customers; if we lose any
of our largest customers, our revenue could decline significantly.
Our largest customer in 2000 was Dell, which represented approximately
14.7% of our total pro forma revenue in 2000. Our next five largest customers
collectively represented an additional 35.1% of our total pro forma revenue in
2000. We expect to continue to depend upon a relatively small number of
customers for a significant percentage of our revenue. In addition to having a
limited number of customers, we manufacture a limited number of products for
each of our customers. If we lose any of our largest customers or any product
line manufactured for one of our largest customers, we could experience a
significant reduction in our revenue. Also, the insolvency of one or more of our
largest customers or the inability of one or more of our largest customers to
pay for its orders could decrease revenue. As many of our costs and operating
expenses are relatively fixed, a reduction in net revenue can decrease our
profit margins and adversely affect our business, financial condition and
results of operations.
Our industry is very competitive and we may not be successful if we fail to
compete effectively.
The electronics manufacturing services (EMS) industry is highly
competitive. We compete against numerous domestic and foreign EMS providers
including Celestica Inc., Flextronics International Ltd., Jabil Circuit, Inc.,
SCI Systems, Inc. and Solectron Corporation. In addition, we may in the future
encounter competition from other large electronics manufacturers that are
selling, or may begin to sell, electronics manufacturing services. Many of our
competitors have international operations, and some may have substantially
greater manufacturing, financial research and development and marketing
resources and lower cost structures than we do. We also face competition from
the manufacturing operations of current and potential customers, which are
continually evaluating the merits of manufacturing products internally versus
the advantages of using external manufacturers.
-34-
We may experience variability in our operating results, which could negatively
impact the price of our shares.
Our annual and quarterly results have fluctuated in the past. The reasons
for these fluctuations may similarly affect us in the future. Historically, our
calendar fourth quarter revenue has been highest and our calendar first quarter
revenue has been lowest. Prospective investors should not rely on results of
operations in any past period to indicate what our results will be for any
future period. Our operating results may fluctuate in the future as a result of
many factors, including:
. variations in the timing and volume of customer orders relative to our
manufacturing capacity;
. variations in the timing of shipments of products to customers;
. introduction and market acceptance of our customers' new products;
. changes in demand for our customers' existing products;
. the accuracy of our customers' forecasts of future production
requirements;
. effectiveness in managing our manufacturing processes and inventory
levels;
. changes in competitive and economic conditions generally or in our
customers' markets;
. changes in the cost or availability of components or skilled labor;
and
. the timing of, and the price we pay for, acquisitions and related
integration costs.
In addition, most of our customers typically do not commit to firm
production schedules more than 30 to 90 days in advance. Accordingly, we cannot
forecast the level of customer orders with certainty. This makes it difficult to
schedule production and maximize utilization of our manufacturing capacity. In
the past, we have been required to increase staffing, purchase materials and
incur other expenses to meet the anticipated demand of our customers. Sometimes
anticipated orders from certain customers have failed to materialize, and
sometimes delivery schedules have been deferred as a result of changes in a
customer's business needs. Any material delay, cancellation or reduction of
orders from our largest customers could cause our revenue to decline
significantly. In addition, as many of our costs and operating expenses are
relatively fixed, a reduction in customer demand can decrease our gross margins
and adversely affect our business, financial condition and results of
operations. On other occasions, customers have required rapid and unexpected
increases in production, which have placed burdens on our manufacturing
capacity.
Any of these factors or a combination of these factors could have a
material adverse effect on our business, financial condition and results of
operations.
We are dependent upon the electronics industry, which produces technologically
advanced products with short life cycles.
Substantially all of our customers are in the electronics industry, which
is characterized by intense competition, short product life-cycles and
significant fluctuations in product demand. In addition, the electronics
industry is generally subject to rapid technological change and product
obsolescence. If our customers are unable to create products that keep pace with
the changing technological environment, their products could become obsolete and
the demand for our services could significantly decline. Our success is largely
dependent on the success achieved by our customers in developing and marketing
their products. Furthermore, this industry is subject to
-35-
economic cycles and has in the past experienced downturns. A recession or a
downturn in the electronics industry would likely have a material adverse effect
on our business, financial condition and results of operations.
Shortage or price fluctuation in component parts specified by our customers
could delay product shipment and affect our profitability.
A substantial portion of our revenue is derived from "turnkey"
manufacturing. In turnkey manufacturing, we provide both the materials and the
manufacturing services. If we fail to manage our inventory effectively, we may
bear the risk of fluctuations in materials costs, scrap and excess inventory,
all of which can have a material adverse effect on our business, financial
condition and results of operations. We are required to forecast our future
inventory needs based upon the anticipated demands of our customers.
Inaccuracies in making these forecasts or estimates could result in a shortage
or an excess of materials. In addition, delays, cancellations or reductions of
orders by our customers could result in an excess of materials. A shortage of
materials could lengthen production schedules and increase costs. An excess of
materials may increase the costs of maintaining inventory and may increase the
risk of inventory obsolescence, both of which may increase expenses and decrease
profit margins and operating income.
Many of the products we manufacture require one or more components that we
order from sole-source suppliers. Supply shortages for a particular component
can delay productions of all products using that component or cause cost
increases in the services we provide. In addition, in the past, some of the
materials we use, such as memory and logic devices, have been subject to
industry-wide shortages. As a result, suppliers have been forced to allocate
available quantities among their customers and we have not been able to obtain
all of the materials desired. Our inability to obtain these needed materials
could slow production or assembly, delay shipments to our customers, increase
costs and reduce operating income. Also, we may bear the risk of periodic
component price increases. Accordingly, some component price increases could
increase costs and reduce operating income. Also we rely on a variety of common
carriers for materials transportation, and we route materials through various
world ports. A work stoppage, strike or shutdown of a major port or airport
could result in manufacturing and shipping delays or expediting charges, which
could have a material adverse effect on our business, financial condition and
results of operations.
We have experienced significant growth in a short period of time and may have
trouble integrating acquired businesses and managing our expansion.
Since 1996, we have completed eight acquisitions. Acquisitions may involve
numerous risks, including difficulty in integrating operations, technologies,
systems, and products and services of acquired companies; diversion of
management's attention and disruption of operations; increased expenses and
working capital requirements; entering markets in which we have limited or no
prior experience and where competitors in such markets have stronger market
positions; and the potential loss of key employees and customers of acquired
companies. In addition, acquisitions may involve financial risks, such as the
potential liabilities of the acquired businesses, the dilutive effect of the
issuance of additional equity securities, the incurrence of additional debt, the
financial impact of transaction expenses and the amortization of goodwill and
other intangible assets involved in any transactions that are accounted for
using the purchase method of accounting, and possible adverse tax and accounting
effects.
We have a limited history of owning and operating our acquired businesses
on a consolidated basis. There can be no assurance that we will be able to meet
performance expectations or successfully integrate our acquired businesses on a
timely basis without disrupting the quality and reliability of service to our
customers or diverting management resources. Our rapid growth has placed and
will continue to place a significant strain on management, on our financial
resources, and on our information, operating and financial systems. If we are
unable to manage this growth effectively, it may have a material adverse effect
on our business, financial condition and results of operations.
-36-
Our acquisition strategy may not succeed.
As part of our business strategy, we expect to continue to grow by pursuing
acquisitions of other companies, assets or product lines that complement or
expand our existing business. Competition for attractive companies in our
industry is substantial. We cannot assure you that we will be able to identify
suitable acquisition candidates or finance and complete transactions that we
select. Our failure to execute our acquisition strategy may have a material
adverse effect on our business, financial condition and results of operation.
Also, if we are not able to successfully complete acquisitions, we may not be
able to compete with larger EMS providers who are able to provide a total
customer solution.
If we do not effectively manage the expansion of our operations, our business
may be harmed.
We have grown rapidly in recent periods, and this growth may be difficult
to sustain. Internal growth and further expansion of services may require us to
expand our existing operations and relationships. We plan to expand our design
and development services and our manufacturing capacity by expanding our
facilities and by adding new equipment. Expansion has caused, and is expected to
continue to cause, strain on our infrastructure, including our managerial,
technical, financial and other resources. Our ability to manage future growth
effectively will require us to attract, train, motivate and manage new employees
successfully, to integrate new employees into our operations and to continue to
improve our operational and information systems. We may experience
inefficiencies as we integrate new operations and manage geographically
dispersed operations. We may incur cost overruns. We may encounter construction
delays, equipment delays or shortages, labor shortages and disputes, and
production start-up problems that could adversely affect our growth and our
ability to meet customers' delivery schedules. We may not be able to obtain
funds for this expansion on acceptable terms or at all. In addition, we expect
to incur new fixed operating expenses associated with our expansion efforts,
including increases in depreciation expense and rental expense. If our revenue
does not increase sufficiently to offset these expenses, our business, financial
condition and results of operations would be materially adversely affected.
If we are unable to respond to rapidly changing technology and process
development, we may not be able to compete effectively.
The market for our products and services is characterized by rapidly
changing technology and continuing process development. The future success of
our business will depend in large part upon our ability to maintain and enhance
our technological capabilities, to develop and market products and services that
meet changing customer needs, and to successfully anticipate or respond to
technological changes on a cost-effective and timely basis. In addition, the EMS
industry could in the future encounter competition from new or revised
technologies that render existing technology less competitive or obsolete or
that reduce the demand for our services. There can be no assurance that we will
effectively respond to the technological requirements of the changing market. To
the extent we determine that new technologies and equipment are required to
remain competitive, the development, acquisition and implementation of such
technologies and equipment may require us to make significant capital
investments. There can be no assurance that capital will be available for these
purposes in the future or that investments in new technologies will result in
commercially viable technological processes.
Our business will suffer if we are unable to attract and retain key personnel
and skilled employees.
We depend on the services of our key senior executives, including Paul
Walker, Philip Woodard, Gary Walker and Derrick D'Andrade. Our business also
depends on our ability to continue to recruit, train and retain skilled
employees, particularly executive management, engineering and sales personnel.
Recruiting personnel in our industry is highly competitive. In addition, our
ability to successfully integrate acquired companies depends in part on our
ability to retain key management and existing employees at the time of the
acquisition. There can be no assurance that we will be able to retain our
executive officers and key personnel or attract qualified management in the
future.
-37-
Risks particular to our international operations could adversely affect our
overall results.
Our success will depend, among other things, on successful expansion into
new foreign markets in order to offer our customers lower cost production
options. Entry into new foreign markets may require considerable management time
as well as start-up expenses for market development, hiring and establishing
office facilities before any significant revenue is generated. As a result,
operations in a new foreign market may operate at low profit margins or may be
unprofitable.
Pro forma revenue generated outside of the United States and Canada was
approximately 11% in 2000. International operations are subject to inherent
risks, including:
. fluctuations in the value of currencies and high levels of inflation;
. longer payment cycles and greater difficulty in collecting amounts
receivable;
. unexpected changes in and the burdens and costs of compliance with a
variety of foreign laws;
. political and economic instability;
. increases in duties and taxation;
. inability to utilize net operating losses incurred by our foreign
operations to reduce our U.S. and Canadian income taxes;
. imposition of restrictions on currency conversion or the transfer of
funds; and
. trade restrictions.
We are subject to a variety of environmental laws, which expose us to potential
financial liability.
Our operations are regulated under a number of federal, state, provincial,
local and foreign environmental and safety laws and regulations, which govern,
among other things, the discharge of hazardous materials into the air and water
as well as the handling, storage and disposal of such materials. Compliance with
these environmental laws is a major consideration for us because we use metals
and other hazardous materials in our manufacturing processes. We may be liable
under environmental laws for the cost of cleaning up properties we own or
operate if they are or become contaminated by the release of hazardous
materials, regardless of whether we caused such release. In addition we, along
with any other person who arranges for the disposal of our wastes, may be liable
for costs associated with an investigation and remediation of sites at which we
have arranged for the disposal of hazardous wastes, if such sites become
contaminated, even if we fully comply with applicable environmental laws. In the
event of a contamination or violation of environmental laws, we could be held
liable for damages including fines, penalties and the costs of remedial actions
and could also be subject to revocation of our discharge permits. Any such
revocations could require us to cease or limit production at one or more of our
facilities, thereby having a material adverse effect on our operations.
Environmental laws could also become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with any
violation, which could have a material adverse effect on our business, financial
condition and results of operations.
-38-
RISKS RELATED TO OUR CAPITAL STRUCTURE
Our future indebtedness could adversely affect our financial health and severely
limit our ability to plan for or respond to changes in our business.
At December 31, 2000, we had $115.8 million of indebtedness under our
senior credit facility. We plan to incur additional indebtedness from time to
time to finance acquisitions or capital expenditures or for other purposes.
This debt could have adverse consequences for our business, including:
. We will be more vulnerable to adverse general economic conditions;
. We will be required to dedicate a substantial portion of our cash flow
from operations to repayment of debt, limiting the availability of
cash for other purposes;
. We may have difficulty obtaining additional financing in the future
for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes;
. We may have limited flexibility in planning for, or reacting to,
changes in our business and industry;
. We could be limited by financial and other restrictive covenants in
our credit arrangements in our borrowing of additional funds; and
. We may fail to comply with the covenants under which we borrowed our
indebtedness which could result in an event of default. If an event of
default occurs and is not cured or waived, it could result in all
amounts outstanding, together with accrued interest, becoming
immediately due and payable. If we were unable to repay such amounts,
the lenders could proceed against any collateral granted to them to
secure that indebtedness.
There can be no assurance that our leverage and such restrictions will not
materially adversely affect our ability to finance our future operations or
capital needs or to engage in other business activities. In addition, our
ability to pay principal and interest on our indebtedness to meet our financial
and restrictive covenants and to satisfy our other debt obligations will depend
upon our future operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, certain of which
are beyond our control, as well as the availability of revolving credit
borrowings under our senior credit facility or successor facilities.
The terms of our credit agreement impose significant restrictions on our ability
to operate.
The terms of our current credit agreement restrict, among other things, our
ability to incur additional indebtedness, pay dividends or make certain other
restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, merge, consolidate or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of our assets.
We are also required to maintain specified financial ratios and satisfy certain
financial condition tests, which further restrict our ability to operate as we
choose. Substantially all of our assets and those of our subsidiaries are
pledged as security under our senior credit facility.
Investment funds affiliated with Bain Capital, Inc., investment funds affiliated
with Celerity Partners, Inc., Kilmer Electronics Group Limited and certain
members of management have significant influence over our business, and could
delay, deter or prevent a change of control or other business combination.
Investment funds affiliated with Bain Capital, Inc., investment funds
affiliated with Celerity Partners, Inc., Kilmer Electronics Group Limited and
certain members of management held approximately 12.9%, 12.1%, 7.1% and 13.2%,
respectively, of our outstanding shares as of March 16, 2001. In addition,
three of the nine directors who serve on our board are, or were, representatives
of the Bain funds, two are representatives of the Celerity funds, two are
representatives of Kilmer Electronics Group Limited and two are members of
management. By virtue of such
-39-
stock ownership and board representation, the Bain funds, the Celerity funds,
Kilmer Electronics Group Limited and certain members of management have a
significant influence over all matters submitted to our stockholders, including
the election of our directors, and exercise significant control over our
business policies and affairs. Such concentration of voting power could have the
effect of delaying, deterring or preventing a change of control or other
business combination that might otherwise be beneficial to our stockholders.
Provisions in our charter documents and state law may make it harder for others
to obtain control of us even though some stockholders might consider such a
development favorable.
Provisions in our charter, by-laws and certain provisions under Delaware
law may have the effect of delaying or preventing a change of control or changes
in our management that stockholders consider favorable or beneficial. If a
change of control or change in management is delayed or prevented, the market
price of our shares could suffer.
Item 7A: Quantitative and Qualitative Disclosure about Market Risk
Interest Rate Risk
Our senior credit facility bears interest at a floating rate. The weighted
average interest rate on our senior credit facility for 2000 was 9.6%. We
reduce our exposure to interest rate risks through swap agreements. We have
entered into swap agreements to hedge $65.0 million of our outstanding debt.
Under the terms of our current swap agreement expiring on September 22, 2001,
the maximum annual rate we would pay on approximately $65.0 million of our debt
is 9.16%, as of December 31, 2000. The remainder of our debt of $50.8 million
bore interest based on the Eurodollar base rate, which was 6.7% on December 31,
2000. If the Eurodollar base rate increased by 10% to 7.4%, our interest
expense would increase by approximately $0.4 million in 2000. The unhedged
portion of our senior credit facility of $50.8 million bore interest at 9.2% per
annum, as of December 31, 2000.
Foreign Currency Exchange Risk
Most of our sales and purchases are denominated in U.S. dollars, and as a
result we have relatively little exposure to foreign currency exchange risk with
respect to sales made. As a result of our Qualtron acquisition, we have assumed
forward exchange contracts to sell U.S. dollars for Irish punts. The aggregate
principal amount of the contracts was $6.25 million at December 31, 2000 and was
valued at the closing dollar exchange rate of $1.19 for financial statement
purposes. These contracts mature at various dates through July 31, 2001. If
the U.S. dollar strengthened by 10% against the Irish punt, we would experience
an exchange loss of approximately $0.7 million in 2000.
Item 8: Financial Statements and Supplementary Data
The information called for by this item is indexed on page F-1 of this
Report and is contained on pages F-2 through F-49.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On September 20, 1999, we notified KPMG LLP that it would be engaged as our
independent auditors, replacing Arthur Andersen LLP, who were dismissed as our
independent auditors on September 20, 1999. KPMG LLP was the independent
auditor for Surface Mount prior to the July 1999 combination of Surface Mount
and HTM. The decision to change independent auditors was approved by our board
of directors on September 17, 1999. During their engagement, Arthur Andersen
LLP issued no audit report which was qualified or modified as to uncertainty,
audit scope or accounting principles, no adverse opinions or disclaimers of
opinion on any of our financial statements, and there were no disagreements with
Arthur Andersen LLP on any mater of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures.
-40-
PART III
Item 10: Directors and Executive Officers of the Registrant
The information required by this Item is included under the captions
"Proposal One: Election of Directors," "Directors and Executive Officers" and
"Additional Information - Section 16(a) Beneficial Ownership Reporting
Compliance" in the proxy statement for use in connection with the Company's 2001
Annual Meeting of Stockholders (the "Proxy Statement") and is incorporated
herein by reference.
Item 11: Executive Compensation
The information required by this Item is included under the caption
"Executive Compensation and Related Information" in the Proxy Statement and is
incorporated herein by reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is included under the caption
"Securities Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement and is incorporated herein by reference.
Item 13: Certain Relationships and Related Transactions
The information required by this Item is included under the caption
"Directors and Executive Officers - Related Party Transactions" in the Proxy
Statement and is incorporated herein by reference.
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements.
The financial statements filed as part of this Report are listed and
indexed at page F-1.
(a) (2) Financial Statement Schedules.
The following financial statement schedule is filed as part of this
current report. All other financial statement schedules have been omitted
because they are not applicable or are not required or the information required
to be set forth therein is included in the Company's consolidated financial
statements set forth in this Annual Report on Form 10-K and the notes thereto.
-41-
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Expressed in thousands of U.S. dollars)
Reserves for Inventory Years ended December 31,
----------------------------------------------------------
1998 1999 2000
------------- ------------- ------------------
Balance, beginning of year $(354) $ (521) $(1,828)
Charge to expense (255) (915) (2,222)
Written off 88 560 272
Added through acquisition (952) (261)
------------- ------------- ------------------
Balance, end of year $(521) $(1,828) $(4,039)
============= ============= ==================
Reserves for Accounts Receivable Years ended December 31,
----------------------------------------------------------
1998 1999 2000
------------- ------------- ------------------
Balance, beginning of year $(180) $ (195) $ (514)
Charge to expense (120) (120) (2,003)
Written off 105 50 169
Added through acquisition (249) (20)
------------- ------------- ------------------
Balance, end of year $(195) $ (514) $(2,368)
============= ============= ==================
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of SMTC Corporation (formerly HTM Holdings, Inc.):
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements as of and for the year
ended December 31, 1998, of SMTC Corporation (a Delaware corporation, formerly
HTM Holdings, Inc.) and its subsidiary included in this registration statement
and have issued our report thereon dated March 10, 1999. Our audit was made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The Schedule II -- Valuation and Qualifying Accounts is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the 1998 financial data required
to be set forth therin in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
March 10, 1999
[KPMG LETTERHEAD]
The Board of Directors of SMTC Corporation
Under date of February 9, 2001, we reported on the consolidated balance sheets
of SMTC Corporation (formerly HTM Holdings, Inc.) and subsidiaries as at
December 31, 1999 and 2000, and the related consolidated statements of
operations, changes in shareholders' equity (deficiency) and cash flows for each
of the years in the two-year period ended December 31, 2000, which are included
in the annual report on Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule -- Valuation and Qualifying Accounts
for each of the years in the two-year period ended December 31, 2000 included in
the annual report on Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein for each of the years
in the two-year period ended December 31, 2000.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
February 9, 2001
(a) (3) Exhibits.
Listed below are all exhibits filed as part of this Report. Certain
exhibits are incorporated herein by reference to (i) the Company's Registration
Statement on Form S-1 originally filed on March 24, 2000 (File No. 333-33208),
and (ii) documents previously filed by the Company with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended.
- ----------------------------------------------------------------------------------------
Exhibit # Description
- ----------------------------------------------------------------------------------------
2.1.1 Reorganization and Merger Agreement dated as of July 26, 1999. (4)
- ----------------------------------------------------------------------------------------
2.1.2 Amendment to Reorganization and Merger Agreement, dated as of July 27,
2000.
- ----------------------------------------------------------------------------------------
2.2 Stock Purchase Agreement dated as of May 23, 2000 (Pensar Corporation).
(3)
- ----------------------------------------------------------------------------------------
2.3 Stock Purchase Agreement dated as of November 22, 2000 (Qualtron
Teoranta and Qualtron, Inc.). (8)
- ----------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation. (7)
- ----------------------------------------------------------------------------------------
3.2 Amended and Restated By-Laws. (7)
- ----------------------------------------------------------------------------------------
3.3 Certificate of Designation. (7)
- ----------------------------------------------------------------------------------------
4.1.1 Stockholders Agreement dated as of July 27, 2000. (6)
- ----------------------------------------------------------------------------------------
4.1.2 Amended and Restated Stockholders Agreement dated as of November 22,
2000.
- ----------------------------------------------------------------------------------------
4.2 Form of certificate representing shares of common stock. (3)
- ----------------------------------------------------------------------------------------
4.3 Warrant to purchase shares of Class L common stock and schedule of
warrants attached thereto. (5)
- ----------------------------------------------------------------------------------------
42
- ----------------------------------------------------------------------------------------
Exhibit # Description
- ----------------------------------------------------------------------------------------
4.4 Warrant to purchase shares of Class A-1 common stock and schedule of
warrants attached thereto. (5)
- ----------------------------------------------------------------------------------------
4.5 Warrant to purchase shares of Class A-1 and Class L common stock and
schedule of warrants attached thereto. (5)
- ----------------------------------------------------------------------------------------
4.6 15% Senior Subordinated Note and schedule of notes attached thereto. (5)
- ----------------------------------------------------------------------------------------
4.7 Exchangeable Share Provisions attaching to the exchangeable shares of
SMTC Manufacturing Corporation of Canada. (7)
- ----------------------------------------------------------------------------------------
4.8 Exchangeable Share Support Agreement dated as of July 27, 2000 among
SMTC, SMTC Manufacturing Corporation of Canada and SMTC Nova Scotia
Company. (7)
- ----------------------------------------------------------------------------------------
4.9 Voting & Exchange Trust Agreement dated as of July 27, 2000 among SMTC,
SMTC Manufacturing Corporation of Canada, CIBC Mellon Trust Company and
SMTC Nova Scotia Company. (7)
- ----------------------------------------------------------------------------------------
4.10 Secured Demand Note of SMTC Manufacturing Corporation of Canada dated
July 3, 2000. (4)
- ----------------------------------------------------------------------------------------
4.11 Secured Demand Note of HTM Holdings, Inc. dated July 3, 2000. (4)
- ----------------------------------------------------------------------------------------
4.12 Secured Demand Note of HTM Holdings, Inc. dated July 3, 2000. (4)
- ----------------------------------------------------------------------------------------
4.13 Demand Note of SMTC Manufacturing Corporation of Canada dated July 3,
2000. (4)
- ----------------------------------------------------------------------------------------
4.14 Secured Demand Note of HTM Holdings, Inc. dated July 3, 2000. (4)
- ----------------------------------------------------------------------------------------
4.15 Secured Demand Note of HTM Holdings, Inc. dated July 3, 2000. (4)
- ----------------------------------------------------------------------------------------
4.16 Demand Note of HTM Holdings, Inc. dated July 3, 2000. (4)
- ----------------------------------------------------------------------------------------
10.1.1 Credit and Guarantee Agreement dated as of July 28, 1999. (4)
- ----------------------------------------------------------------------------------------
10.1.2 First Amendment to Credit and Guarantee Agreement, dated as of November
4, 1999. (5)
- ----------------------------------------------------------------------------------------
10.1.3 Second Amendment to Credit and Guarantee Agreement, dated as of December
14, 1999. (5)
- ----------------------------------------------------------------------------------------
10.1.4 Third Amendment to Credit and Guarantee Agreement, dated as of May 15,
2000. (4)
- ----------------------------------------------------------------------------------------
10.1.5 Amended and Restated Credit and Guarantee Agreement, dated as of July
27, 2000. (7)
- ----------------------------------------------------------------------------------------
10.1.6 Amended and Restated Guarantee and Collateral Agreement dated as of July
27, 2000. (7)
- ----------------------------------------------------------------------------------------
10.1.7 First Amendment dated as of November 17, 2000 to the Amended and
Restated Credit and Guarantee Agreement.
- ----------------------------------------------------------------------------------------
10.1.8 Second Amendment dated as of December 28, 2000 to the Amended and
Restated Credit and Guarantee Agreement.
- ----------------------------------------------------------------------------------------
10.1.9 Third Amendment dated as of February 6, 2001 to the Amended and
Restated Credit and Guarantee Agreement.
- ----------------------------------------------------------------------------------------
10.2 Amended and Restated SMTC (HTM) 1998 Equity Incentive Plan. (1)
- ----------------------------------------------------------------------------------------
10.3 SMTC Corporation/SMTC Manufacturing Corporation of Canada 2000 Equity
Incentive Plan. (7)
- ----------------------------------------------------------------------------------------
10.4.1 Real Property Lease dated as of September 1, 1993 between Ogden Atlantic
Design Co., Inc. and Garrett and Garrett . (5)
- ----------------------------------------------------------------------------------------
10.4.2 Lease Renewal Agreement dated as of September 1, 1996 between Atlantic
Design Co., Inc. and Garrett and Garrett. (5)
- ----------------------------------------------------------------------------------------
10.4.3 Assignment of Lease dated as of September 16, 1997 between Ogden
Atlantic Design Co., Inc. and The SMT Centre S.E. Inc. (5)
- ----------------------------------------------------------------------------------------
10.5 Form of Real Property Lease dated December 22, 1998 between Third
Franklin Trust and W.F. Wood, Inc. (4)
- ---------------------------------------------------------------------------------------
43
- ----------------------------------------------------------------------------------------
Exhibit # Description
- ----------------------------------------------------------------------------------------
10.6 Real Property Lease dated May 9, 1995 between Logitech Ireland Limited
and Ogden Atlantic Design (Europe) Limited. (5)
- ----------------------------------------------------------------------------------------
10.7 Real Property Sublease Agreement dated March 29, 1996 between Radian
International, LLC and The SMT Centre of Texas Inc. (5)
- ----------------------------------------------------------------------------------------
10.8 Real Property Lease, Work Letter Agreement and Lease Addendum between
Edwin A. Helwig and Barbara G. Helwig and The SMT Centre of Texas Inc.
(5)
- ----------------------------------------------------------------------------------------
10.9 Real Property Lease dated as of September 15, 1998 between
Warden-McPherson Developments Ltd. and The Surface Mount Technology
Centre Inc. (5)
- ----------------------------------------------------------------------------------------
10.10 Real Property Lease dated September 3, 1999 between Airedale Realty
Trust and W.F. Wood, Inc. (5)
- ----------------------------------------------------------------------------------------
10.11.1 Real Property Revised Lease Agreement dated January 14, 1994 between HTM
Building Investors LLC and Hi-Tech Manufacturing, Inc. (2)
- ----------------------------------------------------------------------------------------
10.11.2 First Amendment to Lease. (2)
- ----------------------------------------------------------------------------------------
10.11.3 Second Amendment to Lease. (2)
- ----------------------------------------------------------------------------------------
10.12 Derek D'Andrade Employment Agreement dated July 30, 1999. (1)*
- ----------------------------------------------------------------------------------------
10.13 Edward Johnson Employment Agreement dated May 18, 2000. (5)*
- ----------------------------------------------------------------------------------------
10.14 Gary Walker Employment Agreement dated July 30, 1999. (1)*
- ----------------------------------------------------------------------------------------
10.15 Paul Walker Employment Agreement dated July 30, 1999. (1)*
- ----------------------------------------------------------------------------------------
10.16 Philip Woodard Employment Agreement dated July 30, 1999. (1)*
- ----------------------------------------------------------------------------------------
10.17 Stanley Plzak Employment Agreement dated as of July 27, 2000.*
- ----------------------------------------------------------------------------------------
10.18 Warrant Subscription Agreement dated as of May 18, 2000. (3)
- ----------------------------------------------------------------------------------------
10.19 Senior Subordinated Loan Agreement dated as of May 18, 2000. (3)
- ----------------------------------------------------------------------------------------
10.20 Lease Agreement dated as of June 1, 2000 between SMTC Manufacturing
Corporation of North Carolina and Garrett and Garrett. (7)
- ----------------------------------------------------------------------------------------
10.21 Lease Agreement dated as of August 11, 2000 between SMTC Manufacturing
Corporation of Massachusetts and Lincoln-Franklin LLC. (7)
- ----------------------------------------------------------------------------------------
10.22 Class N Common Stock Redemption Agreement dated July 26, 2000.
- ----------------------------------------------------------------------------------------
10.23 Lease Agreement dated as of May 12, 1998 between the Haverdyne Company,
LLC and Qualtron, Inc.
- ----------------------------------------------------------------------------------------
10.24.1 Management Agreement dated July 30, 1999. (1)
- ----------------------------------------------------------------------------------------
10.24.2 Termination Agreement dated as of July 27, 2000.
- ----------------------------------------------------------------------------------------
10.25 Share Purchase Agreement dated July 26, 2000 for the purchase of Gary
Walker's Class Y shares.
- ----------------------------------------------------------------------------------------
10.26 Funding Agreement dated July 26, 2000.
- ----------------------------------------------------------------------------------------
10.27 Promissory Note dated July 26, 2000.
- ----------------------------------------------------------------------------------------
10.28 Pledge Agreement dated July 26, 2000 with respect to shares of common
stock of SMTC owned by Gary Walker.
- ----------------------------------------------------------------------------------------
10.29 Class N Common Stock Redemption Agreement dated July 26, 2000.
- ----------------------------------------------------------------------------------------
10.30 Real Estate Sale Agreement between Flextronics International USA, Inc.,
as Seller, and SMTC Manufacturing Corporation of Texas, as Purchaser,
dated February 23, 2001.
- ----------------------------------------------------------------------------------------
16.1 Letter from Arthur Andersen regarding change in certifying accountants.
- ----------------------------------------------------------------------------------------
21.1 Subsidiaries of the registrant.
- ----------------------------------------------------------------------------------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1
filed on March 24, 2000 (File No. 333-33208) and incorporated by reference
herein.
(2) Filed as an Exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed on May 24, 2000 (File No. 333-33208) and
incorporated by reference herein.
(3) Filed as an Exhibit to Amendment No. 2 to the Company's Registration
Statement on Form S-1 filed on June 19, 2000 (File No. 333-33208) and
incorporated by reference herein.
44
(4) Filed as an Exhibit to Amendment No. 3 to the Company's Registration
Statement on Form S-1 filed on July 10, 2000 (File No. 333-33208) and
incorporated by reference herein.
(5) Filed as an Exhibit to Amendment No. 4 to the Company's Registration
Statement on Form S-1 filed on July 18, 2000 (File No. 333-33208) and
incorporated by reference herein.
(6) Filed as an Exhibit to the Company's Registration Statement on Form S-8
filed on August 22, 2000 (File No. 333-44250) and incorporated by reference
herein.
(7) Filed as an Exhibit to the Company's Report on Form 10-Q for the quarterly
period ended October 1, 2000 filed on November 15, 2000 (File No. 0-31051)
and incorporated by reference herein.
(8) Filed as an Exhibit to the Company's Current Report on Form 8-K filed on
December 7, 2000 (File No. 0-31051) and incorporated by reference herein.
* Management contract or compensatory plan
(b) A current report on Form 8-K was filed by the Company on December 7,
2000. In that report, the Company reported its November 22, 2000 acquisition of
Qualtron under Item 2.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SMTC Corporation
/s/ Paul Walker
By: _____________________________________
Paul Walker
President and Chief Executive Officer
Date: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ Paul Walker
______________________________ President, Chief Executive March 30, 2001
Paul Walker Officer and Director
(Principal Executive Officer)
/s/ Richard Smith
______________________________ Vice President and Chief March 30, 2001
Richard Smith Financial Officer
(Principal Financial and
Accounting Officer)
______________________________ Director March 30, 2001
Stephen Adamson
/s/ Prescott Ashe
______________________________ Director March 30, 2001
Prescott Ashe
______________________________ Director March 30, 2001
Mark Benham
/s/ David Dominik
______________________________ Director March 30, 2001
David Dominik
/s/ Michael Griffiths
______________________________ Director March 30, 2001
Michael Griffiths
/s/ Ian Loring
______________________________ Director March 30, 2001
Ian Loring
46
Signature Title Date
- --------- ----- ----
/s/ Anthony Sigel
- ------------------------------ Director March 30, 2001
Anthony Sigel
/s/ Gary Walker
- ------------------------------ Executive Vice President, Business March 30, 2001
Gary Walker Programs Management and Director
47
SMTC CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1999 and 2000 F-2
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000 F-3
Consolidated Statements of Changes in Shareholders' Equity (Deficiency) for the
years ended December 31, 1998, 1999 and 2000 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000 F-6
Notes to Consolidated Financial Statements F-7
AUDITORS' REPORT
To the Board of Directors of SMTC Corporation
We have audited the accompanying consolidated balance sheets of SMTC Corporation
(formerly HTM Holdings, Inc.) and subsidiaries as at December 31, 1999 and 2000,
and the related consolidated statements of operations, changes in shareholders'
equity (deficiency), and cash flows for each of the years in the two-year period
ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The accompanying
consolidated financial statements of SMTC Corporation for the year ended
December 31, 1998 were audited by other auditors whose report dated March 10,
1999 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SMTC Corporation and
subsidiaries as at December 31, 1999 and 2000, and the results of its operations
and its cash flows for each of the years in the two-year period ended December
31, 2000 in accordance with United States generally accepted accounting
principles.
United States generally accepted accounting principles vary in certain
significant respects from accounting principles generally accepted in Canada.
Application of accounting principles generally accepted in Canada would have
affected results of operations for each of the years in the three-year period
ended December 31, 2000 and shareholders' equity (deficiency) as at December 31,
1999 and 2000 to the extent summarized in note 22 to the consolidated financial
statements.
/s/ KPMG LLP
- ------------------------
Chartered Accountants
Toronto, Canada
February 9, 2001
F-1
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars)
December 31, 1999 and 2000
===============================================================================
1999 2000
- -------------------------------------------------------------------------------
Assets
Current assets:
Cash and short-term investments $ 2,083 $ 2,698
Accounts receivable (note 4) 71,597 194,749
Inventories (note 5) 61,680 191,821
Prepaid expenses 3,647 5,233
Deferred income taxes (note 10) 1,527 1,044
----------------------------------------------------------------------------
140,534 395,545
Capital assets (note 6) 35,003 58,564
Goodwill (note 7) 40,800 80,149
Other assets (note 8) 11,145 9,859
Deferred income taxes (note 10) 623 3,359
- -------------------------------------------------------------------------------
$ 228,105 $ 547,476
===============================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 53,119 $ 141,574
Accrued liabilities 29,307 51,695
Income taxes payable 1,127 5,458
Current portion of long-term debt (note 9) 2,000 7,500
Current portion of capital lease obligations
(note 9) 1,541 995
-----------------------------------------------------------------------------
87,094 207,222
Capital lease obligations (note 9) 1,537 1,242
Long-term debt (note 9) 128,942 108,305
Deferred income taxes (note 10) 2,733 2,221
Shareholders' equity:
Capital stock (note 11) 3 77,427
Warrants (note 11) 367 367
Loans receivable (note 11) (60) (27)
Additional paid-in-capital 11,804 151,396
Deficit (4,315) (677)
----------------------------------------------------------------------------
7,799 228,486
Commitments and contingencies (notes 15 and 16)
United States and Canadian accounting policy
differences (note 22)
- -------------------------------------------------------------------------------
$ 228,105 $ 547,476
===============================================================================
See accompanying notes to consolidated financial statements.
F-2
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Statements of Operations
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
=========================================================================================
1998 1999 2000
- -----------------------------------------------------------------------------------------
Revenue $ 89,687 $ 257,962 $ 782,763
Cost of sales 82,528 236,331 714,420
- -----------------------------------------------------------------------------------------
Gross profit 7,159 21,631 68,343
Selling, general and administrative expenses 3,280 13,332 34,614
Amortization 151 1,990 6,229
Leveraged recapitalization expenses (note 2(a)(ii)) 2,219 -- --
- -----------------------------------------------------------------------------------------
Operating income 1,509 6,309 27,500
Interest (note 9) 2,030 7,066 13,837
- -----------------------------------------------------------------------------------------
Earnings (loss) before income taxes (521) (757) 13,663
Income taxes (recovery) (note 10):
Current 15 442 7,954
Deferred (208) (335) (607)
--------------------------------------------------------------------------------------
(193) 107 7,347
- -----------------------------------------------------------------------------------------
Earnings (loss) before extraordinary loss (328) (864) 6,316
Extraordinary loss, net of income tax recovery
of 1999 - $811; 2000 - $1,640 (note 17) -- (1,279) (2,678)
- -----------------------------------------------------------------------------------------
Net earnings (loss) $ (328) $ (2,143) $ 3,638
=========================================================================================
F-3
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Statements of Operations (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
==========================================================================================
1998 1999 2000
- ------------------------------------------------------------------------------------------
Earnings (loss) per common share (note 20):
Earnings (loss) before extraordinary loss $ (328) $ (864) $ 6,316
Preferred share dividends (609) -- --
Class L preferred entitlement -- (2,185) (3,164)
- ------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary loss
attributable to common shareholders (937) (3,049) 3,152
Extraordinary loss -- (1,279) (2,678)
- ------------------------------------------------------------------------------------------
Earnings (loss) attributable to common
shareholders $ (937) $ (4,328) $ 474
==========================================================================================
Earnings (loss) per common share before
extraordinary loss $ (0.44) $ (1.89) $ 0.24
Extraordinary loss per common share -- (0.79) (0.20)
- ------------------------------------------------------------------------------------------
Basic earnings (loss) per common share $ (0.44) $ (2.68) $ 0.04
==========================================================================================
Diluted earnings (loss) per common share $ (0.44) $ (2.68) $ 0.03
==========================================================================================
Weighted average number of shares outstanding:
Basic 2,147,130 1,617,356 13,212,076
Diluted 2,147,130 1,617,356 13,736,616
==========================================================================================
See accompanying notes to consolidated financial statements.
F-4
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Statements of Changes in Shareholders' Equity (Deficiency)
(Expressed in thousands of U.S. dollars)
Years ended December 31, 1998, 1999 and 2000
==================================================================================================================================
Total
Additional shareholders'
Capital Treasury paid-in Loans equity
stock Warrants stock capital receivable Deficit (deficiency)
- ----------------------------------------------------------------------------------------------------------------------------------
(note 11)
Balance, December 31, 1997 $ 5 $ -- $ -- $ 5,971 $ -- $ (1,844) $ 4,132
Shares issued 2 -- -- 7,907 -- -- 7,909
Warrants issued -- 367 -- -- -- -- 367
Preferred share dividends -- -- -- (609) -- -- (609)
Shares repurchased (1) -- (21,938) -- -- -- (21,939)
Loss for the year -- -- -- -- -- (328) (328)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 6 367 (21,938) 13,269 -- (2,172) (10,468)
Acquisition of
SMTC Corporation (3) -- 21,938 (1,525) -- -- 20,410
Options exercised -- -- -- 60 (60) -- --
Loss for the year -- -- -- -- -- (2,143) (2,143)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 3 367 -- 11,804 (60) (4,315) 7,799
Warrants issued -- 3,598 -- -- -- -- 3,598
Warrants exercised 4 (3,598) -- 3,594 -- -- --
Share reorganization 116 -- -- (116) -- -- --
Shares issued on
completion of
initial public
offering, net of
costs of $20,706 64,976 -- -- 116,718 -- -- 181,694
Shares issued on
acquisition of
Pensar Corporation 12 -- -- 19,007 -- -- 19,019
Options exercised -- -- -- 160 -- -- 160
Shares issued on
acquisition of
Qualtron Teoranta 12,545 -- -- -- -- -- 12,545
Conversion of shares
from exchangeable
to common stock (229) -- -- 229 -- -- --
Repayment of loans
receivable -- -- -- -- 33 -- 33
Net earnings -- -- -- -- -- 3,638 3,638
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 77,427 $ 367 $ -- $ 151,396 $ (27) $ (677) $ 228,486
==================================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Statements of Cash Flows
(Expressed in thousands of U.S. dollars)
Years ended December 31, 1998, 1999 and 2000
==============================================================================================
1998 1999 2000
- ----------------------------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net earnings (loss) $ (328) $ (2,143) $ 3,638
Items not involving cash:
Amortization 151 1,990 6,229
Depreciation 2,869 6,452 9,595
Deferred income tax provision (benefit) (208) (335) (71)
Loss (gain) on disposition of capital assets (6) 160 (60)
Loss on early extinguishment of debt -- 1,279 2,461
Change in non-cash operating working capital:
Accounts receivable (9,895) 4,441 (110,131)
Inventories (1,170) (15,217) (118,455)
Prepaid expenses and other 105 (1,705) (1,316)
Accounts payable and accrued liabilities 4,709 (1,487) 103,200
-------------------------------------------------------------------------------------------
(3,773) (6,565) (104,910)
Financing:
Increase in bank indebtedness 1,212 -- --
Repayment of bank indebtedness -- (6,559) --
Increase in restricted cash (250) -- --
Increase in long-term debt -- 130,942 --
Repayment of long-term debt -- (69,261) (19,717)
Principal payments on notes payable (175) -- --
Principal payments on capital lease obligations (1,319) (1,571) (1,427)
Proceeds from warrants -- -- 2,500
Issuance of subordinated notes -- -- 5,000
Repayment of subordinated notes -- -- (5,000)
Issuance of demand notes -- -- 9,925
Repayment of demand notes -- -- (9,925)
Proceeds from notes payable 25,000 -- --
Proceeds from issuance of common stock 9,252 -- 202,560
Dividends paid on preferred stock (609) -- --
Stock issuance costs (1,342) -- (23,400)
Repurchase of stock (26,160) -- --
Repayment of loans receivable -- -- 33
Debt issuance costs (1,296) (3,975) (1,450)
-------------------------------------------------------------------------------------------
4,313 49,576 159,099
Investments:
Acquisitions, net of $4,672 (1999 - $698)
cash acquired -- (31,619) (27,683)
Purchases of capital assets (505) (4,130) (25,676)
Proceeds from sale of capital assets 30 8 278
Cash in escrow -- (5,735) --
Purchase of other assets -- 62 (493)
-------------------------------------------------------------------------------------------
(475) (41,414) (53,574)
- ----------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 65 1,597 615
Cash and cash equivalents, beginning of year 421 486 2,083
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 486 $ 2,083 $ 2,698
==============================================================================================
Supplemental cash flow information (note 14)
See accompanying notes to consolidated financial statements.
F-6
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
1. Nature of business:
The Company is a worldwide provider of advanced electronics manufacturing
services to original equipment manufacturers. The Company services its
customers through eleven manufacturing and technology centres located in
the United States, Canada, Europe and Mexico.
The Company's accounting principles are in accordance with accounting
principles generally accepted in the United States and, except as outlined
in note 22, are, in all material respects, in accordance with accounting
principles generally accepted in Canada.
2. Significant accounting policies:
(a) Basis of presentation:
(i) Business combination between HTM Holdings, Inc. and SMTC
Corporation:
Effective July 30, 1999, SMTC Corporation acquired 100% of the
outstanding common shares of HTM Holdings, Inc. SMTC
Corporation issued 1,393,971 Class A shares and 154,168 Class
L shares to the shareholders of HTM Holdings, Inc. for $16,739
cash consideration and 100% of the outstanding shares of HTM
Holdings, Inc. Simultaneously, the former shareholders of SMTC
Corporation subscribed for an additional 26,701 Class N shares
for nominal consideration. Upon completion of these
transactions, the former HTM Holdings, Inc. shareholders held
58% of the outstanding shares of SMTC Corporation.
Accordingly, the acquisition is recorded as a reverse takeover
of SMTC Corporation by HTM Holdings, Inc. and accounted for
using the purchase method. Application of reverse takeover
accounting results in the following:
(a) The consolidated financial statements of the combined
entity are issued under the name of the legal parent
(SMTC Corporation) but are considered a continuation of
the financial statements of the legal subsidiary (HTM
Holdings, Inc.).
(b) As HTM Holdings, Inc. is deemed to be the acquiror for
accounting purposes, its assets and liabilities are
included in the consolidated financial statements of the
continuing entity at their carrying values and the
comparative figures reflect the results of operations of
HTM Holdings, Inc.
F-7
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
2. Significant accounting policies (continued):
(c) Control of the net assets and operations of SMTC
Corporation is deemed to be acquired by HTM Holdings,
Inc. effective July 30, 1999. For purposes of this
transaction, the deemed consideration is $24,703, being
the $20,410 fair value of the outstanding common shares
of SMTC Corporation immediately prior to the business
combination plus transaction costs of $4,293.
Details of net assets acquired at fair value are as
follows:
=======================================================
Current assets $ 84,423
Capital assets 21,093
Goodwill 24,863
Liabilities assumed (105,676)
-------------------------------------------------------
Net assets acquired $ 24,703
=======================================================
(ii) Recapitalization transaction:
On June 8, 1998, HTM Holdings, Inc. completed a leveraged
recapitalization and reorganization in which it sold 1,800,424
new shares to an investment company, reacquired 92% of its
then outstanding common shares, retired its preferred stock
and settled all options outstanding under its 1993 stock
option plan.
In connection with the recapitalization, the Company
contributed substantially all of its assets and liabilities to
a newly formed subsidiary in exchange for 100% of the
subsidiary's stock, and changed its name from Hi-Tech
Manufacturing, Inc. to HTM Holdings, Inc. The subsidiary
adopted the Hi-Tech Manufacturing, Inc. name. The subsidiary
borrowed $13,000 in senior debt and $12,000 in subordinated
debt and entered into a $15,000 revolving line of credit
agreement. The stock of the subsidiary was pledged as
collateral for the senior debt and line of credit. The
subsidiary loaned approximately $21,000 to the Company.
F-8
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
2. Significant accounting policies (continued):
The net sources and uses of proceeds were as follows:
=============================================================
Borrowings $ 23,700
Stock proceeds 7,900
Repurchase of stock (26,800)
-------------------------------------------------------------
$ 4,800
=============================================================
Subsequent to the leveraged recapitalization, an investment
company held 92% of the outstanding common stock of the
parent.
Transaction costs related to the leveraged recapitalization
and compensation expense arising from the settlement of stock
options resulted in a $2,219 charge to operating income in
fiscal 1998.
(b) Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated on
consolidation.
(c) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting year. Actual results may
differ from those estimates.
F-9
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
2. Significant accounting policies (continued):
(d) Revenue recognition:
Revenue from the sale of products is recognized when goods are
shipped to customers. Revenue from the provision of services is
recognized when services are provided. The earnings process is
complete upon shipment of products and provision of services.
(e) Cash and short-term investments:
Cash and short-term investments include cash on hand and deposits
with banks with original maturities of less than three months.
(f) Inventories:
Inventories are valued on a first-in, first-out basis at the lower
of cost and replacement cost for raw materials and at the lower of
cost and net realizable value for work in progress. Inventories
include an application of relevant overhead.
(g) Capital assets:
Capital assets are recorded at cost and depreciated on a
straight-line basis over their estimated useful lives as follows:
===================================================================
Buildings 20 years
Machinery and equipment 7 years
Office furniture and equipment 7 years
Computer hardware and software 3 years
Leasehold improvements Over term of lease
===================================================================
F-10
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
2. Significant accounting policies (continued):
(h) Goodwill:
Goodwill represents the excess of cost over the fair value of net
tangible assets acquired in facility acquisitions and other business
combinations. Goodwill is amortized on a straight-line basis over 10
years. The recoverability of goodwill is reviewed whenever events or
changes in circumstances indicate that the carrying amount may not
be recoverable. An impairment of value is recorded if undiscounted
projected future net cash flows of the acquired operation are
determined to be insufficient to recover goodwill. The amount of
goodwill impairment, if any, is measured based on projected
discounted future net cash flows using a discount rate reflecting
the Company's average cost of funds.
(i) Other assets:
Costs incurred relating to the issuance of debt are deferred and
amortized over the term of the related debt. Amortization of debt
issuance costs is included in amortization expense in the
consolidated statements of operations. Deferred lease costs are
amortized over the term of the lease.
(j) Income taxes:
Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year end,
based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable
earnings. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount more likely than not to be
realized. The effect of changes in tax rates is recognized in the
period in which the rate change occurs.
F-11
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
2. Significant accounting policies (continued):
(k) Stock-based compensation:
The Company accounts for stock options issued to employees using the
intrinsic value method of Accounting Principles Board Opinion No.
25. Compensation expense is recorded on the date stock options are
granted only if the current fair value of the underlying stock
exceeds the exercise price. The Company has provided the pro forma
disclosures required by Statement of Financial Accounting Standards
No. 123.
(l) Foreign currency translation:
The functional currency of all foreign subsidiaries is the U.S.
dollar. Monetary assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at the year-end rates of
exchange. Non-monetary assets and liabilities denominated in foreign
currencies are translated at historic rates and revenue and expenses
are translated at average exchange rates prevailing during the month
of the transaction. Exchange gains or losses are reflected in the
consolidated statements of operations.
(m) Financial instruments and hedging:
The Company enters into interest rate swap contracts to hedge its
exposure to changes in interest rates on its long-term debt. The
contracts have the effect of converting the floating rate of
interest on $65,000 of the senior credit facility to a fixed rate.
Net receipts, payments and accruals under the swap contracts are
recorded as adjustments to interest expense.
If a swap is terminated prior to its maturity, the gain or loss is
recognized over the remaining original life of the swap if the item
hedged remains outstanding or immediately, if the item hedged does
not remain outstanding. If the swap is not terminated prior to
maturity, but the underlying hedged item is no longer outstanding,
the interest rate swap is marked to market and any unrealized gain
or loss is recognized immediately.
F-12
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
2. Significant accounting policies (continued):
One of the Company's subsidiaries has entered into forward foreign
currency contracts to hedge foreign currency exposures on future
sales. As the contracts do not meet the criteria for hedge
accounting, the Company records those contracts on the balance sheet
at their fair values and any corresponding unrealized gains or
losses are recognized in the statements of operations.
(n) Impairment of long-lived assets:
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairments whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the
fair value of the assets.
(o) Comprehensive income:
Comprehensive income includes all changes in equity (net assets)
during a period from non-owner sources. During each of the years in
the three-year period ended December 31, 2000 comprehensive income
was equal to net earnings (loss).
F-13
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
2. Significant accounting policies (continued):
(p) Recently issued accounting pronouncements:
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 establishes methods of accounting for derivative
financial instruments and hedging activities related to those
instruments as well as other hedging activities. SFAS No. 133
requires all derivatives to be recognized either as assets or
liabilities and measured at fair value. The Company will implement
SFAS No. 133 for its first quarter ended March 31, 2001. In
accordance with the new standard, the Company will account for its
existing interest rate swaps as cash flow hedges. If the Company
applied the new standard at December 31, 2000, the Company would
record an $85 liability on its balance sheet and an $85 charge to
other comprehensive income as a cumulative effect type adjustment to
reflect the initial mark to market on the interest rate swaps.
3. Acquisitions:
In addition to the business combination between HTM Holdings, Inc. and
SMTC Corporation (note 2(a)(i)), the Company completed two acquisitions
during 1999 and two acquisitions during 2000, which were accounted for as
purchases. The results of operations of the facilities acquired are
included in these financial statements from their respective dates of
acquisition.
Acquisitions completed in 1999:
(a) In July 1999, the Company acquired a manufacturing facility operated
by Zenith Electronics Corporation in Chihuahua, Mexico. Zenith used
the facility to manufacture components included in Zenith products.
The transaction was effected through the acquisition of the
outstanding shares of Cableproducts de Chihuahua, S.A. de C.V.
("Cableproducts") and Radio Components de Mexico, S.A. de C.V.
("Radio"). The total purchase price of $8,352 was financed with
cash. Under the provisions of the purchase agreement, Zenith may
claim additional consideration in the form of cash if certain
production volumes are achieved. The contingent consideration will
be amortized over the remaining term of the supply contract with
Zenith if and when paid. Of the purchase price, $5,735 is being held
in escrow and will be released pending the resolution of certain
liabilities, including the settlement of a portion of the contingent
consideration.
F-14
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
3. Acquisitions (continued):
(b) In September 1999, the Company acquired 100% of the issued and
outstanding shares of W.F. Wood, Incorporated. W.F. Wood,
Incorporated operates a manufacturing facility that provides high
precision enclosures, located in Boston, Massachusetts. The total
purchase price of $19,672 was financed with cash.
Acquisitions completed in 2000:
(a) On July 27, 2000, simultaneously with the closing of the initial
public offering, the Company acquired Pensar Corporation, an
electronics manufacturing services company specializing in design
services and located in Appleton, Wisconsin. The total purchase
price including transaction costs was $37,019 resulting in goodwill
of approximately $26,563. The purchase consideration consisted of
$18,000 cash and the balance in 1,188,682 shares of common stock of
the Company. The cash portion of the acquisition was financed with a
portion of the proceeds from the initial public offering.
(b) On November 22, 2000, the Company acquired Qualtron Teoranta, a
provider of specialized custom made cable harnesses and fibre optic
assemblies located in Donegal, Ireland. The total purchase price
including transaction costs was $26,900 resulting in goodwill of
approximately $18,075. The final purchase price is subject to a
working capital adjustment. The purchase consideration consisted of
$14,355 cash and the balance in 547,114 exchangeable shares of SMTC
Manufacturing Corporation of Canada, a subsidiary of the Company.
Details of the net assets acquired in these acquisitions, at fair value,
are as follows:
=============================================================================
Chihuahua
Manufacturing W.F. Wood, Pensar Qualtron
Facility Incorporated Corporation Teoranta
-----------------------------------------------------------------------------
Current assets $ -- $ 6,354 $ 16,609 $ 13,041
Capital assets 9,094 1,695 5,299 1,858
Other long-term assets -- 20 581 --
Goodwill -- 17,468 26,563 18,075
Liabilities assumed -- (5,865) (12,033) (6,074)
Deferred income taxes (742) -- -- --
-----------------------------------------------------------------------------
Net assets acquired $ 8,352 $ 19,672 $ 37,019 $ 26,900
=============================================================================
F-15
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
3. Acquisitions (continued):
The following unaudited pro forma consolidated financial information for
the year ended December 31, 1999 reflects the impact of the business
combination with SMTC Corporation and the acquisitions of W.F. Wood,
Incorporated, Pensar Corporation and Qualtron Teoranta assuming the
acquisitions had occurred at the beginning of 1999. The following
unaudited pro forma consolidated financial information for the year ended
December 31, 2000 reflects the impact of the acquisitions of Pensar
Corporation and Qualtron Teoranta assuming the acquisitions had occurred
at the beginning of 2000. This unaudited pro forma consolidated financial
information has been provided for information purposes only and is not
necessarily indicative of the results of operations or financial condition
that actually would have been achieved if the acquisitions had been on the
date indicated, or that may be reported in the future:
==========================================================================
1999 2000
--------------------------------------------------------------------------
(Unaudited)
Revenue $ 530,690 $ 842,563
Earnings (loss) before extraordinary loss (1,767) 5,662
Net earnings (loss) (3,046) 2,984
Basic earnings (loss) per share (1.46) 0.22
Diluted earnings (loss) per share (1.46) 0.21
==========================================================================
4. Accounts receivable:
Accounts receivable at December 31, 2000 are net of an allowance for
doubtful accounts of $2,368 (1999 - $514).
5. Inventories:
==========================================================================
1999 2000
--------------------------------------------------------------------------
Raw materials $ 35,371 $107,767
Work in progress 17,124 56,521
Finished goods 8,578 25,493
Other 607 2,040
--------------------------------------------------------------------------
$ 61,680 $191,821
==========================================================================
F-16
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
6. Capital assets:
==========================================================================
Accumulated Net book
1999 Cost depreciation value
--------------------------------------------------------------------------
Land $ 2,060 $ -- $ 2,060
Buildings 5,099 59 5,040
Machinery and equipment 31,150 12,789 18,361
Office furniture and equipment 2,540 479 2,061
Computer hardware and software 3,838 1,371 2,467
Leasehold improvements 6,065 1,051 5,014
--------------------------------------------------------------------------
$50,752 $15,749 $35,003
==========================================================================
==========================================================================
Accumulated Net book
2000 Cost depreciation value
--------------------------------------------------------------------------
Land $ 3,134 $ -- $ 3,134
Buildings 11,653 313 11,340
Machinery and equipment 41,301 17,953 23,348
Office furniture and equipment 3,965 1,091 2,874
Computer hardware and software 8,004 3,339 4,665
Leasehold improvements 15,726 2,523 13,203
--------------------------------------------------------------------------
$83,783 $25,219 $58,564
==========================================================================
Property and equipment under capital leases included in capital assets at
December 31, 2000 was $2,027 (1999 - $ 8,981) and accumulated depreciation
of equipment under capital leases at December 31, 2000 was $917 (1999 -
$8,123).
Included in the total depreciation expense for the year ended December 31,
2000 of $9,595 (1999 - $6,452; 1998 - $2,869) is $273 (1999 - $1,358; 1998
- $1,305) relating to the depreciation of equipment under capital leases.
F-17
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
7. Goodwill:
==========================================================================
Accumulated Net book
1999 Cost amortization value
--------------------------------------------------------------------------
Goodwill $42,331 $ 1,531 $40,800
==========================================================================
==========================================================================
Accumulated Net book
2000 Cost amortization value
--------------------------------------------------------------------------
Goodwill $86,969 $ 6,820 $80,149
==========================================================================
8. Other assets:
==========================================================================
1999 2000
--------------------------------------------------------------------------
Deferred financing costs, net of accumulated
amortization of $868 (1999 - $277) $ 3,698 $ 1,696
Restricted cash and cash held in escrow 5,985 5,985
Deferred lease costs, net of accumulated
amortization of $379 (1999 - $30) 1,430 1,072
Other 32 1,106
--------------------------------------------------------------------------
$11,145 $ 9,859
==========================================================================
F-18
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
9. Long-term debt and capital leases:
==========================================================================
1999 2000
--------------------------------------------------------------------------
Revolving credit facilities (a) $ 35,942 $ 68,305
Term loans (a) 85,000 47,500
Subordinated debt 10,000 --
--------------------------------------------------------------------------
130,942 115,805
Less current portion 2,000 7,500
--------------------------------------------------------------------------
$128,942 $108,305
==========================================================================
For the period from January 1, 1999 to July 26, 2000:
Concurrent with the business combination of HTM Holdings, Inc. and SMTC
Corporation, the Company and certain of its subsidiaries entered into a
senior credit facility that provided for $85,000 in terms loans, $10,000
in subordinated debt and $60,000 in revolving credit loans, swing-line
loans and letters of credit. The senior credit facility was secured by a
security agreement over all assets and required the Company to meet
certain financial ratios and benchmarks and to comply with certain
restrictive covenants. The revolving credit facilities terminated in July
2004. The term loans matured in quarterly instalments from September 2000
to June 2004 for $35,000 of the term loans and from September 2000 to
December 2005 for $50,000 of the term loans. Term loans totalling $35,000
were repaid from proceeds of the initial public offering. The $10,000
subordinated debt was payable in one instalment on September 30, 2006 and
was repaid from proceeds of the initial public offering.
The revolving credit loans and term loans bore interest at varying rates
based on either the Eurodollar base rate plus 2.25% to 3.50%, the U.S.
base rate plus 0.50% to 1.75% or the Canadian prime rate plus 0.50% to
1.75%.
The subordinated debt bore interest at the Eurodollar base rate plus 4.75%
or the U.S. base rate plus 3.00%.
F-19
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
9. Long-term debt and capital leases (continued):
In May 2000, the Company's lenders increased the revolving credit facility
from $60,000 to $67,500. The Company issued senior subordinated notes to
certain shareholders for proceeds of $5,000. The notes bore interest at
15% per annum. The notes were repaid from proceeds of the initial public
offering.
On July 3, 2000, the Company issued demand notes in the aggregate
principal amount of $9,925. Of these demand notes, $5,925 in aggregate
principal amount was secured by a portion of the capital assets of the
Company and certain of its subsidiaries. The demand notes bore a fee of 3%
of the principal amount accruing on the date of issuance and interest of
13.75% per year and were payable to the holders of the notes at any time
upon demand. The demand notes were repaid of proceeds of the initial
public offering.
For the period from July 27, 2000 to December 31, 2000:
(a) In connection with the initial public offering, the Company and
certain of its subsidiaries entered into an amended and restated
credit agreement that provides for $50,000 in an initial term loan
and $100,000 in revolving credit loans, swing-line loans and letters
of credit. The senior credit facility is secured by a security
agreement over all assets and requires the Company to meet certain
financial ratios and benchmarks and to comply with certain
restrictive covenants. The revolving credit facilities terminate in
July 2004. The term loans mature in quarterly instalments from
September 2000 to June 2004.
The revolving credit loans and term loans bear interest at varying
rates based on either the Eurodollar base rate plus 2.00% to 3.00%,
the U.S. base rate plus 0.25% to 1.25% or the Canadian prime rate
plus 0.25% to 1.25%.
The Company has entered into interest rate swaps to exchange the
90-day floating LIBOR rates on $65,000 of borrowings for a two-year
fixed interest rate of 6.16% (before credit spread) per annum (note
12).
The weighted average interest rate on the borrowings in 2000 was
9.9%.
F-20
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
9. Long-term debt and capital leases (continued):
The Company is required to pay the lenders a commitment fee of 0.5%
of the average unused portion of the revolving credit facility.
Commitment fees of $128 were incurred in 2000.
As at December 31, 2000, principal repayments due within each of the
next four years are as follows:
====================================================================
2001 $ 7,500
2002 12,500
2003 17,500
2004 78,305
--------------------------------------------------------------------
$115,805
====================================================================
(b) Senior notes payable outstanding in 1998 and through to July 30,
1999 bore interest based on the prime rate or LIBOR. The weighted
average interest rate was 7.64% in 1999.
(c) Subordinated notes outstanding in 1998 and through July 30, 1999
were held by affiliates of certain shareholders of HTM Holdings,
Inc. The weighted average interest rate was 11.5% in 1999.
(d) Lines of credit:
For the period up to July 30, 1999, the Company had a line of credit
for borrowings up to a maximum of $15,000. The weighted average
interest rate on the line of credit was 7.35% in 1999.
F-21
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
9. Long-term debt and capital leases (continued):
(e) Capital lease obligations:
Minimum lease payments for capital leases consist of the following
at December 31, 2000:
====================================================================
2001 $ 1,143
2002 619
2003 551
2004 152
2005 46
--------------------------------------------------------------------
Total minimum lease payments 2,511
Less amount representing interest of 8% to 11% 274
--------------------------------------------------------------------
2,237
Less current portion 995
--------------------------------------------------------------------
$ 1,242
====================================================================
The Company is required to maintain $250 in a certificate of deposit
in connection with certain capital lease obligations.
(f) Interest expense:
====================================================================
1998 1999 2000
--------------------------------------------------------------------
Short-term obligations $ 584 $ 702 $ --
Long-term debt 1,105 6,061 13,765
Obligations under capital leases 341 303 72
--------------------------------------------------------------------
$ 2,030 $ 7,066 $13,837
====================================================================
F-22
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
10. Income taxes:
The components of income taxes are:
=========================================================================
1998 1999 2000
-------------------------------------------------------------------------
Current:
Federal $ 15 $ -- $ 3,448
Foreign -- 442 4,506
-------------------------------------------------------------------------
15 442 7,954
Deferred:
Federal (198) (267) (582)
State (10) (47) (68)
Foreign -- (21) 43
-------------------------------------------------------------------------
(208) (335) (607)
-------------------------------------------------------------------------
$ (193) $ 107 $ 7,347
=========================================================================
The overall effective income tax rate (expressed as a percentage of
financial statement earnings (loss) before income taxes) varied from the
U.S. statutory income tax rate as follows:
=========================================================================
1998 1999 2000
-------------------------------------------------------------------------
Federal tax rate 34.0% 34.0% 34.3%
State income tax, net of federal tax benefit 3.0 6.0 4.0
Income of international subsidiaries taxed
at different rates -- 4.9 4.2
Change in valuation allowance -- (6.3) 1.5
Non-deductible goodwill amortization -- (50.1) 6.8
Other -- (2.6) 3.0
-------------------------------------------------------------------------
Effective income tax rate 37.0% (14.1)% 53.8%
=========================================================================
A tax benefit of $1,640 (1999 - $811) has been allocated to the
extraordinary loss.
A tax benefit of $2,694 relating to share issue costs has been recorded in
capital stock and additional paid-in capital.
F-23
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
10. Income taxes (continued):
Worldwide earnings (loss) before income taxes consisted of the following:
==========================================================================
1998 1999 2000
--------------------------------------------------------------------------
U.S $ (521) $ (1,269) $ 5,651
Non-U.S -- 512 8,012
--------------------------------------------------------------------------
$ (521) $ (757) $ 13,663
==========================================================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
Company's deferred tax liabilities and assets are comprised of the
following at December 31:
=========================================================================
1999 2000
-------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 1,275 $ 1,485
Reserves, allowances and accruals 1,429 3,682
----------------------------------------------------------------------
2,704 5,167
Valuation allowance (554) (764)
----------------------------------------------------------------------
2,150 4,403
Deferred tax liabilities:
Capital and other assets (2,733) (2,221)
-------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ (583) $ 2,182
=========================================================================
F-24
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
10. Income taxes (continued):
At December 31, 2000, the Company had total net operating loss
carryforwards of approximately $9,300, which begin to expire in 2013.
Losses of $1,400 in one of the subsidiaries may only be used against
taxable income generated by that subsidiary. In assessing the realization
of deferred tax assets, management considers whether it is more likely
than not that some portion or all of its deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income by the appropriate
subsidiaries during those periods when the temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, change of control limitations, projected future taxable
income and tax planning strategies in making this assessment. Based upon
consideration of these factors, management believes the recorded valuation
allowance related to the loss carryforwards of a specific subsidiary is
appropriate.
The valuation allowance in 1999 is higher than 1998 by $554 due to the
acquisition of certain loss carryforwards in the business combination
between HTM Holdings, Inc. and SMTC Corporation. The valuation allowance
in 2000 is $210 higher than 1999 due to losses generated in one of the
Company's subsidiaries in 2000.
11. Capital stock:
(a) Authorized:
To July 30, 1999:
The authorized share capital of HTM Holdings, Inc. consisted of:
(i) 10,000,000 common shares, $0.01 par value per share;
(ii) 100,000 Series A preferred shares, convertible, $0.001 par
value per share, mandatorily redeemable for $11.48 per share;
F-25
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
11. Capital stock (continued):
(iii) 100,000 Series B preferred shares - $0.001 par value per
share, mandatorily redeemable for $11.48 per share; and
(iv) 250,000 Series C preferred shares, convertible, $0.001 par
value per share, mandatorily redeemable for $11.25 per share.
As a result of the business combination, described in note 2(a)(i),
HTM Holdings, Inc. became a wholly owned subsidiary of SMTC
Corporation on July 30, 1999. The authorized share capital of SMTC
Corporation at December 31, 1999 consists of:
(i) 11,720,000 Class A-1 voting common shares, par value $0.001
per share:
Holders are entitled to one vote per share and to share in
dividends pro rata subject to any preferential rights of the
Class L shares.
(ii) 1,100,000 Class A-2 voting common shares, par value $0.001 per
share:
Holders are entitled to one vote per share and to share in
dividends pro rata subject to any preferential rights of the
Class L shares.
(iii) 300,000 Class L voting common shares, par value $0.001 per
share:
The number of votes per share is determined by a prescribed
formula and the holders are entitled to receive all dividends
declared on common stock until there has been paid a specified
amount based on an internal rate of return of 12% compounded
quarterly and a recovery of the initial amount of $162 per
Class L share, after which point, they are entitled to receive
dividends pro rata.
F-26
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
11. Capital stock (continued):
(iv) 125,000 Class N voting common shares, par value $0.001 per
share:
The number of votes per share are determined by a prescribed
formula and the holders are not entitled to receive dividends.
The holders of the Class N shares hold the exchangeable shares
described in note 11(c).
Each share of Class L and Class A-2 stock shall convert
automatically, under certain conditions, into Class A-1 shares
based on a prescribed formula for Class L shares and on a
one-for-one basis for Class A-2 shares.
As a result of the share reclassification and the initial public
offering, the authorized share capital of SMTC Corporation at
December 31, 2000 consists of:
(i) 60,000,000 shares of common stock, par value $0.01 per share:
Holders are entitled to one vote per share and to share in
dividends pro rata subject to any preferential dividend rights
of any then outstanding preferred stock.
(ii) 5,000,000 shares of preferred stock, par value $0.01 per
share:
The Company may from time to time issue preferred stock in one
or more series and fix the terms of that series at the time it
is created.
F-27
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
11. Capital stock (continued):
(b) Issued and outstanding:
HTM Holdings, Inc. to July 30, 1999:
===================================================================
Common Preferred
Number of shares shares shares
-------------------------------------------------------------------
Balance, December 31, 1997 4,361,621 450,000
Shares issued 1,800,424 --
Shares repurchased (4,215,641) (450,000)
-------------------------------------------------------------------
Balance, December 31, 1998,
being balance, July 30, 1999 1,946,404 --
===================================================================
The 4,215,641 common shares repurchased were held in treasury stock.
===================================================================
Common Preferred
Amount shares shares
-------------------------------------------------------------------
Balance, December 31, 1997 $ 4 $ 1
Shares issued 2 --
Shares repurchased -- (1)
-------------------------------------------------------------------
Balance, December 31, 1998, being
balance, July 30, 1999 $ 6 $--
===================================================================
In connection with the recapitalization, the Company contributed
substantially all of its assets and liabilities to a newly formed
subsidiary in exchange for 100% of the subsidiary's stock and
changed its name from Hi-Tech Manufacturing, Inc. The subsidiary
borrowed $13,000 in senior debt and $12,000 in subordinated debt and
entered into a $15,000 revolving line of credit agreement. The stock
of the subsidiary was pledged as collateral for the senior debt and
line of credit. The subsidiary loaned approximately $21,000 to the
Company.
F-28
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
11. Capital stock (continued):
SMTC Corporation from July 30, 1999 to December 31, 2000:
As a result of the application of reverse acquisition accounting to
the business combination with HTM Holdings, Inc., the number of
outstanding shares of the continuing consolidated entity consists of
the number of outstanding shares of SMTC Corporation outstanding at
July 30, 1999.
=======================================================================================================================
Special
Class A Class L Class N Exchangeable Common voting
Number of shares shares shares shares shares stock stock
-----------------------------------------------------------------------------------------------------------------------
Balance, July 29, 1999 1,020,671 -- 86,707 -- -- --
Issued to existing
shareholders (i) -- -- 26,701 113,408 -- --
Share transactions
related to the reverse
acquisition (ii) 1,393,971 154,168 -- -- -- --
Options exercised (iii) 33,140 -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 2,447,782 154,168 113,408 113,408 -- --
Share reorganization (i) (2,447,782) (154,168) (113,408) 1,356,037 11,871,517 1
Warrants exercised (ii) -- -- -- -- 477,049 --
Shares issued on
completion of initial
public offering (iii) -- -- -- 4,375,000 8,275,000 --
Acquisition of Pensar
Corporation (iv) -- -- -- -- 1,188,682 --
Options exercised (v) -- -- -- -- 20,053 --
Acquisition of Qualtron
Teoranta (vi) -- -- -- 547,114 -- --
Conversion of shares
from exchangeable
to common stock (vii) -- -- -- (20,600) 20,600 --
-----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- -- -- 6,370,959 21,852,901 1
=======================================================================================================================
F-29
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
11. Capital stock (continued):
======================================================================================================================
Special
Class A Class L Class N Exchangeable Common voting
Amount shares shares shares shares stock stock
----------------------------------------------------------------------------------------------------------------------
Ascribed value at the
date of the reverse
takeover (ii) $ 3 $ -- $ -- $ -- $ -- $ --
Options exercised (iii) -- -- -- -- -- --
----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 3 -- -- -- -- --
Share reorganization (i) (3) -- -- -- 119 --
Warrants exercised (ii) -- -- -- -- 4 --
Shares issued on
completion of initial
public offering (iii) -- -- -- 64,893 83 --
Shares issued on
acquisition of Pensar
Corporation (iv) -- -- -- -- 12 --
Options exercised (v) -- -- -- -- -- --
Shares issued on
acquisition of
Qualtron Teoranta (vi) -- -- -- 12,545 -- --
Conversion of shares
from exchangeable
to common stock (vii) -- -- -- (229) -- --
----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ -- $ -- $ -- $ 77,209 $ 218 $ --
======================================================================================================================
The difference between the par value of the capital stock and the
accounting value ascribed at the date of the reverse takeover has
been credited to additional paid-in capital.
Capital transactions from July 30, 1999 to December 31, 1999:
(i) In connection with the business combination on July 30, 1999,
SMTC Corporation issued 26,701 Class N shares to its existing
shareholders for nominal cash consideration. The existing
shareholders also received the exchangeable shares described
in (c) below.
(ii) On July 30, 1999, SMTC Corporation issued 1,393,971 Class A-1
shares and 154,168 Class L shares to the shareholders of HTM
Holdings, Inc. in exchange for $16,739 cash consideration and
100% of the outstanding shares of HTM Holdings, Inc. The
ascribed value of the shares issued is equal to the $20,410
fair value of SMTC Corporation at the time of the transaction.
F-30
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
11. Capital stock (continued):
(iii) On July 30, 1999, 33,140 Class A-1 restricted shares were
granted upon the exercise of options for consideration of $60
in promissory notes receivable. The notes are secured by the
shares granted and bear interest at 5.7%. The notes have been
recorded as a reduction of shareholders' equity. The
restrictions vest over the original vesting period of the
underlying 1998 HTM Plan options. At December 31, 1999, 24,855
of the issued Class A shares are subject to restrictions.
Capital transactions from January 1, 2000 to December 31, 2000:
(i) Concurrent with the effectiveness of the initial public
offering (see (iii) below), the Company completed a share
capital reorganization as follows:
(a) Each outstanding Class Y share of SMTC Corporation's
subsidiary, SMTC Manufacturing Corporation of Canada,
was purchased in exchange for shares of Class L common
stock.
(b) Each outstanding share of Class L common stock was
converted into one share of Class A common stock plus an
additional number of shares of Class A common stock.
(c) Each outstanding share of Class A common stock was
converted into 3.6745 shares of common stock.
(d) All outstanding shares of Class N common stock were
redeemed and one share of special voting stock was
issued and is held by a trustee for the benefit of the
holders of the exchangeable shares.
(e) Each SMTC Canada Class L exchangeable share was
converted into exchangeable shares of the same class as
those being offered in the offering in the same ratio as
shares of Class L common stock which were converted to
shares of common stock.
(ii) On July 27, 2000, the Company issued 477,049 shares of common
stock on the exercise of 41,667 warrants.
F-31
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
11. Capital stock (continued):
(iii) On July 27, 2000, the Company completed an initial public
offering of its common stock in the United States and
exchangeable shares of its subsidiary, SMTC Manufacturing
Corporation of Canada, in Canada. The offering consisted of
6,625,000 shares of common stock at a price of $16.00 per
share and 4,375,000 exchangeable shares at a price of Cdn.
$23.60 per share (described in (c) below). The total net
proceeds to the Company from the offering of approximately
$157,400 were used to reduce its indebtedness under the senior
credit facility, repay the subordinated stockholders' notes
issued in May 2000, repay the demand notes issued in July 2000
and finance the cash portion of the purchase price of the
Pensar Corporation acquisition. On August 18, 2000, the
underwriters exercised their over-allotment option with
respect to 1,650,000 shares of common stock at a price of
$16.00 per share. The net proceeds to the Company from the
sales of those shares of $24,600 were used to reduce
indebtedness under the senior credit facility.
(iv) On July 27, 2000, simultaneously with the closing of the
initial public offering, the Company issued 1,188,682 shares
of common stock at a price of $16.00 per share to finance the
share portion of the purchase price of the Pensar Corporation
acquisition.
(v) Pursuant to employee share purchase and option plans, the
Company issued 20,053 shares from treasury for cash of $160.
(vi) On November 22, 2000, the Company issued 547,114 exchangeable
shares at a price of $22.93 per share to finance the share
portion of the Qualtron Teoranta acquisition.
(vii) During the year, 20,600 exchangeable shares were exchanged for
common stock.
(c) Exchangeable shares:
On July 30, 1999, SMTC Manufacturing Corporation of Canada, a 100%
owned subsidiary of the Company, issued two classes of non-voting
shares which can be exchanged into 113,408 Class L common shares of
the Company on a one-for-one basis. The holders of the exchangeable
shares are entitled to receive dividends equivalent to the dividends
declared on Class L shares. The holders of exchangeable shares
exercise, through the special voting stock, essentially the same
voting rights in respect of the Company as they would if they had
exchanged their shares into shares of the Company's common stock.
F-32
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
11. Capital stock (continued):
On July 27, 2000, pursuant to the initial public offering, the
exchangeable shares convertible into 113,408 Class L common shares,
were converted to 1,469,445 exchangeable shares. The shares are
exchangeable into shares of the Company's common stock on a
one-for-one basis.
On July 27, 2000, pursuant to the initial public offering, SMTC
Manufacturing Corporation of Canada issued an additional 4,375,000
exchangeable shares at a price of Cdn. $23.60 per share.
On November 22, 2000, 547,114 exchangeable shares were issued to
finance the share portion of the purchase price of the Qualtron
Teoranta acquisition.
(d) Warrants:
===================================================================
Common
Class A Class L stock
Number warrants warrants warrants
-------------------------------------------------------------------
Balance, December 31, 1999 103,895 12,088 --
Warrants issued (i) -- -- 41,667
Warrants conversion (ii) (103,895) (12,088) 578,441
Warrants exercised (iii) -- -- (41,667)
-------------------------------------------------------------------
Balance, December 31, 2000 -- -- 578,441
===================================================================
1999 transactions:
In connection with the business combination between SMTC Corporation
and HTM Holdings, Inc., each existing warrant holder of HTM
Holdings, Inc. was granted equivalent warrants in SMTC Corporation
and the previous HTM Holdings, Inc. warrants were cancelled.
F-33
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
11. Capital stock (continued):
2000 transactions:
(i) On May 18, 2000, the Company issued 41,667 warrants for $2,500
cash consideration in connection with the issue of $5,000 in
subordinated notes (note 9). The value of the warrants in
excess of proceeds received, $1,098, was recorded as a
deferred financing cost and was written off upon early
repayment of the subordinated notes as an extraordinary loss
(note 17).
(ii) On July 27, 2000, pursuant to the initial public offering, the
Class A and Class L warrants were converted into common stock
warrants.
(iii) On July 27, 2000, the Company issued 477,049 shares of common
stock on the exercise of warrants.
The Class A warrants and Class L warrants had an exercise price of
$1.82 and $147.57, respectively. The common stock warrants have a
weighted average exercise price of $3.41. The warrants have a term
of 10 years and are exercisable from the date of grant. Each common
stock warrant is convertible into one common share.
(e) Stock options:
1993 HTM Holdings Equity Plan:
In connection with the leveraged recapitalization in 1998, the stock
option plan adopted by HTM Holdings, Inc. in 1993 (the "1993 Plan")
was cancelled. HTM Holdings, Inc. permitted its employees to
exercise all outstanding options prior to the cancellation of the
1993 Plan by executing notes payable for the exercise price. The
shares issued to the exercising employees were reacquired in
connection with the leveraged recapitalization and both the shares
issued and the notes payable were retired, resulting in a $2,108
non-recurring charge.
The weighted average grant date fair value of options granted during
1998 was $3.46 per share.
F-34
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
11. Capital stock (continued):
1998 HTM Plan:
In June 1998, HTM Holdings, Inc. adopted a new stock option plan
(the "1998 Plan") pursuant to which incentive stock options and
non-qualified stock options to purchase shares of common stock may
be issued. The Board of Directors authorized 122,685 shares to be
issued under the 1998 Plan. Incentive stock options are granted at
an exercise price not less than the fair market value of the common
stock on the date of grant, as determined by the Board of Directors.
Options generally vest over four years and expire 10 years from
their respective dates of grant.
1998 SMTC Plan:
In July 1999, the Company replaced the 1998 Plan with an equivalent
stock option plan. Each HTM option holder was granted equivalent
options in SMTC Corporation's stock. The Board of Directors
authorized 165,000 Class A and 4,000 Class L options to be issued
under the plan. The Class A options vest immediately and are
exercisable for Class A restricted shares. The restrictions expire
on the same basis as the Class L vesting periods. The Class L
options vest over a four-year period and expire after 10 years from
the original grant date of the 1998 Plan options.
F-35
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
11. Capital stock (continued):
2000 Equity Incentive Plan:
In July 2000, the Company approved a new stock option plan, the
SMTC/SMTC Manufacturing Corporation of Canada 2000 Equity Incentive
Plan (the "2000 Equity Incentive Plan"), pursuant to which a variety
of stock-based incentive awards may be granted. The plan permits the
issuance of up to 1,727,052 shares plus an additional number of
shares determined by the Board but not to exceed 1% of the total
number of shares outstanding per year. Options generally vest over a
four-year period and expire ten years from their respective date of
grant.
Stock option transactions were as follows:
================================================================================
1993 Plan 1998 Plan
--------------------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
--------------------------------------------------------------------------------
Balance, December 31, 1997 1,250,492 $ 3.48 -- $ --
Granted 33,212 3.10 115,603 5.14
Forfeited (26,000) 3.67 -- --
Exercised (1,257,704) 3.46 -- --
--------------------------------------------------------------------------------
Balance, December 31, 1998 -- -- 115,603 5.14
Exchanged and
issued at
combination date -- -- (115,603) (5.14)
Issued -- -- -- --
Exercised -- -- -- --
--------------------------------------------------------------------------------
Balance, December 31, 1999 -- $ -- -- $ --
================================================================================
=============================================================================
1998 SMTC Plan
-----------------------------------------------------------------------------
Weighted Weighted
average average
Class A exercise Class L exercise
shares price shares price
-----------------------------------------------------------------------------
Balance, December 31, 1997 -- $ -- -- $ --
Granted -- -- -- --
Forfeited -- -- -- --
Exercised -- -- -- --
-----------------------------------------------------------------------------
Balance, December 31, 1998 -- -- -- --
Exchanged and
issued at
combination date 33,140 1.82 3,856 147.57
Issued 116,860 19.68 -- --
Exercised (33,140) (1.82) -- --
-----------------------------------------------------------------------------
Balance, December 31, 1999 116,860 $ 19.68 3,856 $ 147.57
=============================================================================
F-36
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
11. Capital stock (continued):
========================================================================================================================
2000 Equity
1998 SMTC Plan Incentive Plan
------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
average average average average
Class A exercise Class L exercise Common exercise Common exercise
shares price shares price stock price stock price
------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 116,860 $ 19.68 3,856 $ 147.57 -- $ -- -- $ --
Converted pursuant to
initial public offering (116,860) 19.68 (3,856) 147.57 486,448 5.78 -- --
Issued -- -- -- -- -- -- 1,397,000 19.05
Exercised -- -- -- -- (20,053) 5.78 -- --
------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- $ -- -- $ -- 466,395 $ 5.78 1,397,000 $ 19.05
========================================================================================================================
The following options were outstanding as at December 31, 2000:
===============================================================================
Weighted Weighted
average average Remaining
Outstanding exercise Exercisable exercise contractual
Option plan options price options price life
-------------------------------------------------------------------------------
1998 SMTC Plan 466,395 $ 5.78 135,393 $ 5.78 3
2000 Equity
Incentive Plan 1,397,000 19.05 -- 19.05 4
===============================================================================
The Company accounts for its employee stock plans using the
intrinsic value method under APB No. 25. Compensation expense
related to these plans has been recognized in the Company's
financial statements as follows:
====================================================================
1998 1999 2000
--------------------------------------------------------------------
Compensation expense $2,108 $ -- $ --
====================================================================
The weighted average grant date fair value of options granted for
the year ended December 31, 2000 was $19.05 (1999 - $17.13; 1998 -
$0.95).
F-37
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
11. Capital stock (continued):
The following table sets out the pro forma amounts of net earnings
(loss) before extraordinary loss and net earnings (loss) per share
that would have resulted if the Company had accounted for its
employee stock plans under the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation."
==========================================================================
1998 1999 2000
--------------------------------------------------------------------------
Earnings (loss) before extraordinary loss:
As reported $ (328) $ (864) $ 6,316
Pro forma 975 (1,122) 4,934
==========================================================================
Basic earnings (loss) per share before
extraordinary loss:
As reported $ (0.44) $ (1.89) $ 0.24
Pro forma 0.16 (2.04) 0.13
==========================================================================
For purposes of computing pro forma net earnings prior to January 1,
2000, the fair value of each option grant is estimated on the date
of grant using the minimum value method under which no volatility is
assumed. For the year ended December 31, 2000, the Black-Scholes
option pricing model was used. Assumptions used to calculate the
fair value were:
====================================================================
1998 1999 2000
--------------------------------------------------------------------
Risk-free interest rate 5.5% 6.0% 5.2%
Dividend yield -- -- --
Expected life 4 3 - 4 4
Volatility N/A N/A 79.0%
====================================================================
12. Financial instruments:
(a) Interest rate swaps:
On September 30, 1999, the Company entered into two interest rate
swap transactions with a Canadian chartered bank for hedging
purposes. The swaps expire on September 22, 2001 and involve the
exchange of 90-day floating LIBOR rates for a two-year fixed
interest rate of 6.16% before credit spread of 2.00% to 3.00% per
annum on a notional amount of $65,000.
F-38
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
12. Financial instruments (continued):
(b) Forward exchange contracts:
One of the Company's subsidiaries has entered into forward foreign
currency contracts with a foreign bank to sell U.S. dollars for
Irish punts. The aggregate principal amount of the contracts was
$6,250 at December 31, 2000 with an average contract rate of $1.38
compared to a closing dollar exchange rate of $1.19. These contracts
mature at various dates through July 31, 2001.
(c) Fair values:
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument:
(i) The carrying amounts of cash and short-term investments,
restricted cash, accounts receivable, accounts payable and
accrued liabilities approximate fair values due to the
short-term nature of these instruments.
(ii) The fair value of long-term debt, including the current
portion, is based on rates currently available to the Company
for debt with similar terms and maturities.
(iii) The fair values of interest rate swap contracts and forward
exchange contracts are estimated by obtaining quotes from a
financial institution.
The carrying amounts and fair values of the Company's
financial instruments, where there are differences at December
31, 2000 and 1999, are as follows:
======================================================================
1999 2000
----------------------------------------------------------------------
Carrying Fair Carrying Fair
Asset (liability) amount value amount value
----------------------------------------------------------------------
Long-term debt $(130,942) $(130,942) $(115,805) $(115,805)
Interest rate swaps -- 478 -- (85)
Forward exchange
contracts -- -- (855) (855)
======================================================================
F-39
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
13. Related party transactions:
The Company entered into related party transactions with certain
shareholders as follows:
==========================================================================
1998 1999 2000
--------------------------------------------------------------------------
Management fees expensed under
formal management agreements $ 136 $ 717 $ 74
Share issue costs incurred 650 -- 1,800
Financing and acquisition related
fees paid -- 1,741 674
Lease costs expensed for the
Colorado facility 535 535 --
==========================================================================
14. Supplemental cash flow information:
==========================================================================
1998 1999 2000
--------------------------------------------------------------------------
Interest paid $ 1,627 $ 6,767 $13,064
Income taxes paid 15 1,460 1,983
==========================================================================
Non-cash financing and investing activities:
==========================================================================
1998 1999 2000
--------------------------------------------------------------------------
Acquisition of equipment under
capital leases $ 2,673 $ -- $ 541
Acquisition of SMTC Corporation for
capital stock -- 20,410 --
Acquisition of Pensar Corporation for
capital stock -- -- 19,019
Acquisition of Qualtron Teoranta for
exchangeable shares -- -- 12,545
Deferred lease costs arising from
trade in of equipment -- 1,460 --
Issuance of capital stock for notes
receivable under option plan -- 60 --
Value of warrants issued in excess
of proceeds received -- -- 1,098
Tax benefit of share issues costs -- -- 2,694
==========================================================================
F-40
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
15. Commitments:
(a) The Company leases manufacturing equipment and office space under
various non-cancellable operating leases. Minimum future payments
under non-cancellable operating lease agreements are as follows:
====================================================================
2001 $19,152
2002 17,529
2003 13,755
2004 8,814
2005 1,312
Thereafter 1,638
--------------------------------------------------------------------
$62,200
====================================================================
Operating lease expense was $12,864 for the year ended December 31,
2000 (1999 - $4,585; 1998 - $1,414).
(b) Pursuant to an agreement in connection with the share
reorganization, as described in note 11(b), the Company agreed to
lend, on an interest free basis, approximately $2,000 to a certain
shareholder to fund any tax liability incurred as a result of the
reorganization. The loan will be secured by a first priority
security interest over all of the shares of capital stock of the
Company held by the shareholder, and will be repayable at such time
and to the extent that the shareholder receives after-tax proceeds
in respect of such shares.
(c) Pursuant to an agreement in connection with the acquisition of
Pensar Corporation, as described in note 3, the Company requested
that the former shareholders of Pensar Corporation file an election,
allowing the Company to deduct for income tax purposes the goodwill
related to the acquisition. In conjunction with this agreement, the
Company agreed to lend, on an interest-free basis, approximately
$4,500 to the former shareholders of Pensar Corporation to fund any
tax liability incurred as a result of the election. The loans will
be secured by a first priority security interest over all of the
shares of capital stock of the Company held by the shareholders, and
will be repayable at such time and to the extent that the
shareholders receive after-tax proceeds in respect of such shares.
F-41
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
16. Contingencies:
General:
In the normal course of business, the Company may be subject to litigation
and claims from customers, suppliers and former employees. Management
believes that adequate provisions have been recorded in the accounts where
required. Although it is not possible to estimate the extent of potential
costs, if any, management believes that ultimate resolution of such
contingencies would not have a material adverse effect on the financial
position, results of operations and cash flows of the Company.
17. Extraordinary loss:
(a) 1999:
As a result of the early payment of the senior notes payable and
subordinated notes that occurred concurrent with the business
combination between SMTC Corporation and HTM Holdings, Inc., the
Company incurred charges of $2,090 ($1,279 after tax) in 1999
related to early payment penalties, the write-off of unamortized
deferred financing fees and the write-off of the unamortized debt
discount.
(b) 2000:
Approximately $143,700 of the proceeds of the initial public
offering were used to reduce the Company's indebtedness under its
credit facility. As a result, the Company incurred charges of $4,318
($2,678 after tax) in 2000 related to early payment penalties, the
write-off of a portion of the unamortized deferred financing fees
and the write-off of the value of the warrants issued in May 2000 in
excess of the proceeds received in connection with the subordinated
notes.
F-42
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
18. Segmented information:
The Company derives its revenue from one dominant industry segment, the
electronics manufacturing services industry. The Company is operated and
managed geographically and has eleven facilities in the United States,
Canada, Europe and Mexico. The Company monitors the performance of its
geographic operating segments based on EBITA (earnings before interest,
taxes and amortization). Intersegment adjustments reflect intersegment
sales that are generally recorded at prices that approximate arm's-length
transactions. Information about the operating segments is as follows:
=================================================================================================================
1999 2000
-----------------------------------------------------------------------------------------------------------------
Total Intersegment Net external Total Intersegment Net external
revenue revenue revenue revenue revenue revenue
-----------------------------------------------------------------------------------------------------------------
United States $ 223,006 $ (1,419) $ 221,587 $ 633,959 $ (9,403) $ 624,556
Canada 21,675 (2,676) 18,999 79,923 (5,165) 74,758
Europe 9,507 (1,995) 7,512 21,037 (2,997) 18,040
Mexico 9,864 -- 9,864 79,612 (14,203) 65,409
-----------------------------------------------------------------------------------------------------------------
$ 264,052 $ (6,090) $ 257,962 $ 814,531 $ (31,768) $ 782,763
=================================================================================================================
=========================================================================
1999 2000
-------------------------------------------------------------------------
EBITA:
United States $ 6,917 $ 24,813
Canada 2,107 10,638
Europe (222) (1,053)
Mexico (503) (669)
----------------------------------------------------------------------
8,299 33,729
Interest 7,066 13,837
Amortization 1,990 6,229
-------------------------------------------------------------------------
Earnings (loss) before
income taxes $ (757) $ 13,663
=========================================================================
Capital expenditures:
United States $ 2,713 $ 16,456
Canada 840 3,141
Europe 30 724
Mexico 547 5,896
-------------------------------------------------------------------------
$ 4,130 $ 26,217
=========================================================================
F-43
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
18. Segmented information (continued):
Prior to 1999, the Company operated in one geographic segment - the United
States.
This segmented information incorporates the operations of SMTC Corporation
as discussed in note 2(a). SMTC Corporation has operated facilities in
Canada, the United States and Europe for 15 years, 5 years and 3 years,
respectively.
The following enterprise-wide information is provided. Geographic revenue
information reflects the destination of the product shipped. Long-lived
assets information is based on the principal location of the asset.
==========================================================================
1998 1999 2000
--------------------------------------------------------------------------
Geographic revenue:
United States $ 84,668 $225,772 $694,290
Canada -- 8,983 18,844
Europe 5,019 19,965 53,588
Asia -- 3,242 16,041
--------------------------------------------------------------------------
$ 89,687 $257,962 $782,763
==========================================================================
==========================================================================
1999 2000
--------------------------------------------------------------------------
Long-lived assets:
United States $ 40,304 $ 79,136
Canada 25,585 24,540
Europe 735 20,410
Mexico 9,179 14,627
--------------------------------------------------------------------------
$ 75,803 $138,713
==========================================================================
In 1998, all of the Company's long-lived assets were located in the United
States.
F-44
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
19. Significant customers and concentration of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Sales of the Company's products are concentrated among specific customers
in the same industry. The Company generally does not require collateral.
The Company considers concentrations of credit risk in establishing the
reserves for bad debts and believes the recorded reserves are adequate.
During 1998, one customer individually comprised 43% of total revenue
generated in the U.S. At December 31, 1998, this customer represented 48%
of the Company's accounts receivable.
During 1999, three customers individually comprised 29%, 10% and 10% of
total revenue across all geographic segments. At December 31, 1999, these
customers represented 33%, 6% and 3%, respectively, of the Company's
accounts receivable.
During 2000, two customers individually comprised 16% and 10% of total
revenue across all geographic segments. At December 31, 2000, these
customers represented 10% and 10%, respectively, of the Company's accounts
receivable.
F-45
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
20. Earnings per share:
The following table sets forth the computation of basic net earnings
(loss) per share before extraordinary loss:
===============================================================================================
1998 1999 2000
-----------------------------------------------------------------------------------------------
Numerator:
Earnings (loss) before
extraordinary loss $ (328) $ (864) $ 6,316
Preferred share dividends (609) -- --
Class L preferred entitlement -- (2,185) (3,164)
-----------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary
loss available to common
shareholders $ (937) $ (3,049) $ 3,152
===============================================================================================
Denominator:
Weighted average shares - basic 2,147,130 1,617,356 13,212,076
Effect of dilutive securities:
Employee stock options -- -- 155,744
Warrants -- -- 368,796
-----------------------------------------------------------------------------------------------
Weighted average shares - diluted 2,147,130 1,617,356 13,736,616
===============================================================================================
Net earnings (loss) per share
before extraordinary loss:
Basic $ (0.44) $ (1.89) $ 0.24
Diluted (0.44) (1.89) 0.23
===============================================================================================
For purposes of calculating the basic number of weighted average shares
outstanding, the Class A restricted shares have been excluded. Under
reverse takeover accounting, the number of shares outstanding prior to
July 30, 1999 is deemed to be the number of shares of SMTC Corporation
issued to the shareholders of HTM Holdings, Inc., appropriately adjusted
to take into account the effect of any change in the number of HTM
Holdings, Inc. shares outstanding in that period.
F-46
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
20. Earnings per share (continued):
During fiscal 1999 and fiscal 1998, the exercise prices of the options and
warrants were less than the average fair value price and were not included
in the calculation of diluted loss per share as the effect would have been
anti-dilutive. In addition, in fiscal 1999, the calculation did not
include the Class A shares issuable upon conversion of the Class L shares
and exchangeable shares as the effect would have been anti-dilutive.
During fiscal 2000, the calculation did not include 1,097,000 options as
the effect would have been anti-dilutive.
21. Comparative figures:
Certain of the 1999 and 1998 figures presented for comparative purposes
have been reclassified to conform with the current year's presentation.
F-47
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
22. United States and Canadian accounting policy differences:
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles ("GAAP") as
applied in the United States ("U.S."). The significant differences between
U.S. GAAP and Canadian GAAP and their effect on the consolidated financial
statements of the Company are described below:
The following table reconciles net earnings (loss) as reported in the
accompanying consolidated statements of operations to net earnings (loss)
that would have been reported under Canadian GAAP:
==========================================================================
1998 1999 2000
--------------------------------------------------------------------------
Net earnings (loss) in accordance with
U.S. GAAP $ (328) $(2,143) $ 3,638
Amortization (a) -- -- 20
--------------------------------------------------------------------------
Net earnings (loss) in accordance with
Canadian GAAP $ (328) $(2,143) $ 3,658
==========================================================================
Net earnings (loss) for the year under Canadian GAAP is comprised of the
following:
==========================================================================
1998 1999 2000
--------------------------------------------------------------------------
Operating income $ 1,509 $ 6,309 $27,520
Interest 2,030 7,066 13,837
Debt extinguishment costs (b) -- 2,090 4,318
--------------------------------------------------------------------------
Earnings (loss) before income taxes (521) (2,847) 9,365
Income taxes (recovery) (193) (704) 5,707
--------------------------------------------------------------------------
Net earnings (loss) $ (328) $(2,143) $ 3,658
==========================================================================
F-48
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1998, 1999 and 2000
================================================================================
22. United States and Canadian accounting policy differences (continued):
=========================================================================
1998 1999 2000
-------------------------------------------------------------------------
Shareholders' equity (deficiency), in
accordance with U.S. GAAP $ (10,468) $ 7,799 $ 228,486
Shares issued to acquire Qualtron
Teoranta (a) -- -- (2,445)
Amortization of goodwill (a) -- -- 20
-------------------------------------------------------------------------
Shareholders' equity (deficiency) in
accordance with Canadian GAAP $ (10,468) $ 7,799 $ 226,061
=========================================================================
(a) Acquisitions:
Under U.S. GAAP, shares issued as consideration in a business
combination are valued using the share price at the announcement
date of the acquisition. Under Canadian GAAP the shares are valued
on the consummation date. As a result, under Canadian GAAP, the
total purchase price for Qualtron Teoranta would be $24,455,
resulting in goodwill of $15,630. Under the U.S. GAAP, the purchase
price was $26,900, resulting in goodwill of $18,075.
(b) Extraordinary loss:
Under U.S. GAAP, the charges incurred as a result of the early
payment of the senior notes payable and subordinated notes described
in note 17 are recorded as an extraordinary loss. Under Canadian
GAAP, the charges would have been included in earnings (loss) before
income taxes and the related tax benefit recorded in income tax
expense.
(c) Earnings per share:
In fiscal 2000, the Company adopted the new accounting standard
approved by The Canadian Institute of Chartered Accountants dealing
with the computation of earnings per share.
F-49