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, 2001
[_] 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 $33,600,606, on March 15,
2002, 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 closing prices of
the common stock and the exchangeable shares as reported on The Nasdaq National
Market and The Toronto Stock Exchange, respectively, on March 15, 2002.
As of March 15, 2002, SMTC Corporation had 23,132,220 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 15, 2002, SMTC Corporation's
subsidiary, SMTC Manufacturing Corporation of Canada, had 5,557,559
exchangeable shares outstanding, excluding exchangeable shares owned by SMTC
Nova Scotia Company, 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 2002 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") provides advanced
electronics manufacturing services, or EMS, to electronics industry original
equipment manufacturers, or OEMs, primarily in the networking, industrial and
communications market segments. We service our customers through eight
manufacturing and technology centers strategically located in key technology
corridors in the United States, Canada, Europe and the cost-effective location
of Mexico. Our full range of value-added supply chain services include product
design, procurement, prototyping, 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.
We have customer relationships with industry leading OEMs such as IBM,
Alcatel, Dell, 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 work closely with our
customers and are highly responsive to them throughout the design,
manufacturing and distribution process, providing services that allow them to
focus on their core competencies of sales, marketing and research and
development. We seek 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 commodity
management capabilities, leading edge equipment and processes that are
consistent from site to site, customer focused team-based approach, global
supply chain management capabilities and web-based systems that electronically
link us with our customers and suppliers in real time, enhancing our supply
chain management capabilities.
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.
1
During fiscal year 2001, in response to excess capacity caused by the
slowing technology end market, we commenced a restructuring program aimed at
reducing our cost structure. Actions taken by management to improve capacity
utilization included closing our Denver, Colorado assembly facility and our
Haverhill, Massachusetts interconnect facility, re-sizing our Mexico and
Ireland facilities and addressing our excess equipment. Accordingly, in 2001,
we recorded restructuring charges of $67.6 million pre-tax consisting of a
write-down of goodwill and other intangible assets and the costs associated
with exiting or re-sizing facilities and other charges of $27.3 million pre-tax
consisting of accounts receivable, inventory and asset impairment charges. In
addition, in March 2002, we announced that we are closing our Cork, Ireland
facility and that we are taking steps to place the subsidiary that operates the
Cork facility in voluntary liquidation. We expect to take an $8-10 million
charge against earnings for the first quarter of 2002 as a result of such
closing.
Industry Background
The EMS industry provides manufacturing services to OEMs in the electronics
marketplace. During 2001, the EMS industry was adversely affected by the
reduced demand for electronics products. We believe the EMS market will return
to growth, fueled by the increased outsourcing of manufacturing by OEMs, by
OEMs' need for increasing flexibility to respond to rapidly changing markets,
technologies and accelerating product life cycles 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, improve supply chain efficiency, and access
worldwide manufacturing capabilities.
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 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.
2
. 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
SMTC has developed and implemented unique operating models and management
systems to offer greater efficiency, flexibility and cost effectiveness. The
goal of these systems is to provide a higher level of employee and team
accountability and an enhanced ability to exceed customer's expectations. Our
customers benefit from the following components of the SMTC solution:
Commodity Management. The Commodity Management Group provides customers
with product life cycle analysis identifying high risk components due to
obsolescence or technology upgrades and provides recommendations to maintain a
continuous production flow.
Copy Exact Model. All of SMTC's sites operate under the same model with
identical systems, processes and equipment. This enables customers to
seamlessly transfer their production to alternative sites to reduce costs and
meet shifts in demand.
Team Oriented Production System. Our customer focused model defines each
customer as a separate business unit with dedicated equipment, a dedicated
materials and program management team, quality personnel and focused business
systems. This approach enables teams to be tailored to specific customer
requirements, allowing the smallest and largest customers to receive the same
level of focus and breadth of service.
eBusiness. SMTC has implemented web-based systems through which it can
communicate, collaborate and plan throughout the entire supply chain in
real-time with its customers and suppliers. These systems accelerate the
timeliness and effectiveness of decision making and efficiently reach SMTC's
geographically dispersed facilities.
Supply Chain Management. SMTC works with its customers to set up customized
inventory, logistics and distribution services to ensure that any unique
delivery requirements are met. These systems focus on minimizing the risk of
inventory shortfalls or excesses and improve overall cost effectiveness.
The SMTC Strategy
Our objective is to provide OEM customers worldwide a complete EMS solution
which offers the advantages of electonics outsourcing, such as access to
advanced manufacturing technologies, reduced costs and faster time-to-market.
We intend to achieve this objective by pursuing the following business
strategies:
Leverage our Global Presence in Strategic Markets. We have established
facilities in several regions of the world. Each assembly facility we operate
is held to the same high standards of excellence and uses a similar plant
layout. This allows us to continue to enjoy the benefits of fully integrated
factories and allows our customers to have choices in manufacturing locations
to best suit their needs. Since 1995, we have expanded from our first facility
located in Toronto, Ontario to eight facilities located in the United States,
Canada, Europe and Mexico.
3
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 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.
Provide Advanced Technological Capabilities and Comprehensive Service
Offerings. We remain committed to enhancing our capabilities and value-added
services to become an integral part of our customers' operations. Through our
investment in leading-edge assembly and logistics technologies, as well as our
investment in design, engineering and test capabilities, we are able to supply
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.
Our Services
Our full range of value-added supply chain services include product design,
procurement, prototyping, 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. More specifically, our services include:
Product Development. We provide services across the entire product life
cycle including product design, prototyping, qualification testing, value and
sustaining engineering.
Product Assembly. We provide advanced product assembly and test services
combined with leading edge manufacturing equipment and processes. Our flexible
environment can support low to high volume production and a wide range of
product mix and complexity requirements.
Interconnect. We are experienced in the design, development and manufacture
of interconnect assemblies such as optical and electrical cable and harness
assemblies.
Enclosures. We offer customers sheet metal fabrication services used in the
assembly of a full range of electronic enclosures.
System Integration. We offer a broad range of full system build
capabilities to support our end-to-end solutions. The system integration
process is designed to meet all customer requirements and deliver a final
product directly to the end user.
Our Customers
We target OEMs primarily in the networking, industrial and communications
sectors. 2001 revenue from customers was allocated by industry as follows: 37%
from networking, 34% from industrial and 29% from communications.
4
We have customer relationships with industry leading OEMs such as IBM,
Alcatel, Dell, EMC and Lucent Technologies. The electronic products we assemble
and manufacture can be found in a wide array of end-products including:
. High-end storage
devices . Point of sale terminals . DSL equipment
. Mid-range servers . Power supplies . Switches
. High-end computing . Semiconductor test . Wireless handheld
components equipment devices
. Linux servers . Industrial controls . Voice-over IP gear
. Redundant backup . Currency recognition . Voice messaging
systems systems 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. We target prospective customers in the networking,
industrial and communications 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.
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. 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. 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. WebPLAN and Lotus
Notes are the foundation for our e-business solution.
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
5
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. We also work with a wide range of
substrate types from thin flexible printed circuit boards to highly complex,
dense multilayer boards. In addition, our assembly capabilities are
complemented by advanced test capabilities. We believe that our inspection
technology is among the most sophisticated in the EMS industry. In addition to
expertise in surface mount assembly, we have extensive capabilities in box and
system build, customer order fulfillment, design, enclosure and
cable/interconnect manufacturing.
Our Suppliers
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 2001 we purchased approximately $500 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 supplier owned inventory 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 2001, no supplier represented more than 10.0% of our total purchases.
Competition
The EMS industry is highly fragmented and comprised of a large number of
domestic and foreign companies, several of which have achieved substantial
market share. 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.,
Sanmina-SCI, Inc., Solectron Corporation, Benchmark and Plexus, 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 the principal competitive factors in our
segments of the EMS industry are 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. Failure to satisfy any of the
foregoing requirements could seriously harm our business.
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 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
6
are imposed on us, or if conditions requiring remediation are found to exist,
we may be required to incur substantial additional expenditures.
Recent Developments
In June 2001, we closed 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, has been migrated to SMTC facilities closer to customer
locations and to our recently retrofitted and expanded lower cost Chihuahua,
Mexico facility. In September 2001, we closed our Haverhill, Massachusetts
interconnect facility. During 2001, we took a one-time pre-tax charge of $67.6
million associated with our facility rationalization.
As a result of restructuring actions and market conditions we have incurred
a significant operating loss, which resulted in our non-compliance with certain
financial covenants contained in our credit agreement as at September 30, 2001.
On November 19, 2001, we and our lending group signed a definitive term sheet
for an agreement under which certain terms of the current credit facility would
be revised and the non-compliance as at September 30, 2001 would be waived. In
February 2002, we and our lending group executed an amendment to our credit
facility, substantially consistent with the term sheet, to waive the September
30, 2001 defaults and to revise the covenant tests to be consistent with both
current revenues and the forecast for 2002.
In March 2002, we announced that we are closing our facility in Cork,
Ireland and that we are taking steps to place the subsidiary that operates the
Cork facility in voluntary liquidation. We will continue to conduct European
operations through our Donegal, Ireland facility, a separately owned
subsidiary. We expect to take an $8-10 million charge against earnings for the
first quarter of 2002 as a result of such facility closing. In addition, in
March 2002 we were advised that Simoco, a customer we served from our facility
in Cork, had an Administrator appointed by the courts in the United Kingdom as
part of a financial restructuring. We are continuing discussions with the
Administrator to mitigate our risk and we remain prepared to provide
manufacturing services to the Simoco Administrator once Simoco's restructuring
is complete.
Employees
As of December 31, 2001, we employed approximately 2,600 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 a 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 fill open positions at our sites. Because of our training programs,
we have not experienced difficulty in adequately staffing skilled employees.
As of December 31, 2001 with the exception of approximately 415 of our
employees in Mexico and 230 of our employees in Ireland, none of our employees
are unionized. In March 2002, we terminated all of the 154 unionized employees
in Cork, Ireland. We have never experienced a work stoppage or strike and
believe that our employee relations are good.
During 2001, in connection with resizing due to the downturn in the
technology market, we eliminated 429 employees at the Denver facility which was
closed in June 2001, 26 plant and operational employees at the Haverhill
facility which was closed in September 2001, 915 plant and operational
employees at the Mexico facility, 47 plant and operational employees at the
Cork, Ireland facility and 68 plant and operational employees at the Donegal,
Ireland facility.
7
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)
SMTC Teoranta (Ireland)
SMTC Ireland Company (Ireland)
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. In June 2001, in response to the slowing technology
end market, we closed our Denver facility. In September 2001, we closed our
Haverhill facility. And in March 2002, we announced that we are closing our
Cork, Ireland facility.
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 900,000 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
8
electronic components, with the exception of the Boston facility where we
manufacture precision enclosures and Donegal, Ireland where we manufacture
cable and harness interconnect assemblies. Our operating facilities are as
follows:
Approx.
Square
Location Footage Leased/Owned
-------- ------- ------------
Toronto, Ontario......... 100,000 Leased
San Jose, California..... 75,000 Leased
Boston, Massachusetts.... 150,000 Leased
Charlotte, North Carolina 125,000 Leased
Austin, Texas............ 75,000 Leased
Appleton, Wisconsin...... 75,000 Owned
Chihuahua, Mexico........ 250,000 Owned
Donegal, Ireland......... 50,000 Leased
SMTC subsidiaries continue to have the following facilities under lease as
of March 20, 2002, but have exited operations and are seeking to exit the
leases:
Approx.
Square
Location Footage Leased/Owned
-------- ------- ------------
Denver, Colorado........ 100,000 Leased
Haverhill, Massachusetts 20,000 Leased
Cork, Ireland........... 50,000 Leased
In June 2001, we closed our assembly facility in Denver, Colorado, leaving
in place a sales and marketing presence to service the Rocky Mountain Region
and in September 2001, we closed our interconnect facility in Haverhill. In
March 2002, we announced that we are closing our facility in Cork, Ireland.
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
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.
Item 4: Submission of Matters to a Vote of Security Holders
None.
9
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. On March 15, 2002, the Company's common stock closed at
$2.31 per share and had a high price of $2.34 and a low price of $2.25 on that
date.
2000
-------------
High Low
- ------ ------
First Quarter........................... $ -- $ --
Second Quarter.......................... -- --
Third Quarter (commencing July 21, 2000) 28.06 16.56
Fourth Quarter.......................... 25.00 9.00
2001
-------------
High Low
------ ------
First Quarter........................... $17.38 $ 2.94
Second Quarter.......................... 5.20 1.50
Third Quarter........................... 3.11 1.00
Fourth Quarter.......................... 1.95 0.53
As of March 15, 2002, there were approximately 7,000 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 15, 2002,
23,132,220 shares were issued and outstanding; and 5,000,000 authorized shares
of preferred stock, par value $.01 per share, of which, as of March 15, 2002,
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.
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.
Selected Financial Data
The selected financial data includes the following:
. The results of operations, adjusted net earnings and other financial
data for 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.
10
. 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 results of operations, adjusted net earnings and other financial
data for 2001 include a full year of results for HTM, Surface Mount,
W.F. Wood, Pensar and Qualtron.
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 23 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 as follows: 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 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 unchanged at $3.7
million under Canadian GAAP. Also, in 2001 the amortization and the write-down
of goodwill related to the Qualtron Teoranta acquisition are $0.2 million and
$2.2 million lower, respectively, under Canadian GAAP. Under United States
GAAP, the shares issued as consideration in the Qualtron Teoranta acquisition
were valued using the share price at the announcement date of the acquisition
and under Canadian GAAP, the shares were valued on the consummation date.
11
Consolidated Statement of Operations Data: (in millions, except per share
amounts)
Year Ended
---------------------------------------------------------------
December 31, December 31, December 31, December 31, December 31,
1997 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
Revenue................................... $59.0 $ 89.7 $258.0 $782.7 $ 612.2
Cost of sales (including restructuring
charges of $25.4 million for the year
ended December 31, 2001)(a)............. 53.6 82.5 236.3 714.4 640.9
----- ------ ------ ------ -------
Gross profit (loss)....................... 5.4 7.2 21.7 68.3 (28.7)
Selling, general and administrative
expenses................................ 2.8 3.3 13.3 34.6 44.1
Amortization.............................. -- 0.2 2.0 6.2 9.5
Restructuring charges including the write-
down of intangible assets(a)............ -- -- -- -- 42.2
Recapitalization expenses(b).............. -- 2.2 -- -- --
----- ------ ------ ------ -------
Operating income (loss)................... 2.6 1.5 6.4 27.5 (124.5)
Interest.................................. 0.7 2.0 7.1 13.8 9.3
----- ------ ------ ------ -------
Earnings (loss) before income taxes(c).... 1.9 (0.5) (0.7) 13.7 (133.8)
Income tax expense (recovery)............. 0.7 (0.2) 0.1 7.4 (29.0)
----- ------ ------ ------ -------
Earnings (loss) before extraordinary loss. 1.2 (0.3) (0.8) 6.3 (104.8)
Extraordinary loss(d)..................... -- -- (1.3) (2.7) --
----- ------ ------ ------ -------
Net earnings (loss)....................... $ 1.2 $ (0.3) $ (2.1) $ 3.6 $(104.8)
===== ====== ====== ====== =======
Net earnings (loss) per common share:
Basic before extraordinary loss.......... $0.40 $(0.44) $(1.89) $ 0.24 $ (3.66)
Extraordinary loss....................... -- -- (0.79) (0.20) --
----- ------ ------ ------ -------
Basic.................................... $0.40 $(0.44) $(2.68) $ 0.04 $ (3.66)
Diluted.................................. $0.40 $(0.44) $(2.68) $ 0.03 $ (3.66)
===== ====== ====== ====== =======
Weighted average number of shares
outstanding:
Basic.................................... 3.1 2.1 1.6 13.2 28.6
Diluted.................................. 3.1 2.1 1.6 13.7 28.6
===== ====== ====== ====== =======
- --------
(a) During fiscal year 2001, in response to excess capacity caused by the
slowing technology end market, the company commenced a restructuring
program aimed at reducing its cost structure. Accordingly, the Company
recorded restructuring charges of $67.6 million consisting of a write-down
of goodwill and other intangible assets and the costs associated with
exiting or re-sizing facilities. Refer to note 21 to our consolidated
financial statements.
(b) Leveraged recapitalization expenses of $2.2 million include transaction
costs and compensation expense related to our leveraged recapitalization.
(c) Refer to Note 23 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.
12
Consolidated Adjusted Net Earnings (Loss): (in millions, except per share
amounts)
Year Ended
---------------------------------------------------------------
December 31, December 31, December 31, December 31, December 31,
1997 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
Net earnings (loss).................... $ 1.2 $(0.3) $ (2.1) $ 3.6 $(104.8)
Adjustments:
Extraordinary loss.................... -- -- 1.3 2.7 --
Amortization of goodwill.............. -- -- 1.5 5.3 8.4
Restructuring and other charges(a).... -- -- -- -- 94.8
Recapitalization expenses............. -- 2.2 -- -- --
Management fees....................... -- 0.1 0.7 -- --
Income tax effect..................... -- (0.9) (0.5) (1.1) (19.3)
----- ----- ------ ----- -------
Adjusted net earnings (loss)........... $ 1.2 $ 1.1 $ 0.9 $10.5 $ (20.9)
===== ===== ====== ===== =======
Adjusted net earnings (loss) per common
share:
Basic................................. $0.40 $0.52 $(0.80) $0.56 $ (0.73)
Diluted............................... $0.40 $0.52 $(0.80) $0.54 $ (0.73)
===== ===== ====== ===== =======
Weighted average number of shares
outstanding:
Basic................................. 3.1 2.1 1.6 13.2 28.6
Diluted............................... 3.1 2.1 1.6 13.7 28.6
===== ===== ====== ===== =======
- --------
(a) Includes $25.4 million of restructuring charges from inventory included in
cost of sales, $42.2 million of restructuring charges and $27.2 million of
other charges.
The Company has provided information on consolidated adjusted net earnings
to supplement its GAAP financial information. Consolidated adjusted net
earnings do not have any standardized meaning prescribed by GAAP and are not
necessarily comparable to similar measures presented by other issuers. The
management of the Company uses consolidated adjusted net earnings to monitor
its operations and believe it's a meaningful measure of operating performance
due to the history of acquisitions and recent restructurings. Consolidated
adjusted net earnings (loss) exclude the effects of amortization of goodwill,
restructuring and other charges (most significantly the write-down of goodwill,
the cost associated with closing facilities, inventory and accounts receivable
exposures and severance costs) management fees, recapitalization expenses and
income tax adjustments. Consolidated adjusted net earnings (loss) are not a
measure of performance under United States GAAP or Canadian GAAP and 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.
Consolidated Balance Sheet Data and Other Financial Data: (in millions)
December 31, December 31, December 31, December 31, December 31,
1997 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
Cash.................................... $ 0.4 $ 0.5 $ 2.1 $ 2.7 $ 12.1
Working capital......................... 4.1 8.1 53.4 188.3 75.3
Total assets............................ 31.7 44.2 228.1 547.5 341.4
Total debt, including current maturities 8.2 35.5 134.0 118.0 122.8
Shareholders' equity (deficiency)....... 8.4 (10.5) 7.8 228.5 124.7
Capital expenditures.................... 0.9 3.2 4.1 25.7 19.1
Cash flows from operating activities.... (0.4) (3.8) (6.6) (104.9) 28.3
Cash flows from financing activities.... 1.2 4.3 49.6 159.1 0.2
Cash flows from investing activities.... (0.4) (0.5) (41.4) (53.6) (19.2)
13
Quarterly Results
The following tables set forth our unaudited historical quarterly results
for the eight quarters ended December 31, 2001. 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,
2000 and 2001. The operating results for any previous quarter are not
necessarily indicative of results for any future periods.
(in millions, except per share amounts)
Historical Results Quarter Ended
--------------------------------------------------------------
Apr 2, July 2, Oct 1, Dec 31, Apr 1, July 1, Sept 30, Dec 31,
2000 2000 2000 2000 2001 2001 2001 2001
------ ------- ------ ------- ------ ------- -------- -------
Revenue............................. $124.3 $167.1 $231.5 $259.8 $200.9 $151.9 $126.9 $132.5
Gross profit (loss)(a).............. 11.1 13.7 19.6 23.9 1.5 (4.1) (20.6) (5.5)
Earnings (loss) before extraordinary
loss(b)........................... (1.4) 0.1 3.3 4.3 (20.0) (13.9) (34.2) (36.7)
Net earnings (loss)(b).............. (1.4) 0.1 0.6 4.3 (20.0) (13.9) (34.2) (36.7)
Adjusted net earnings (loss)........ (0.6) 1.0 4.4 5.7 (2.9) (5.0) (7.5) (5.5)
Net earnings (loss) per share before
extraordinary loss(c)............. $(1.16) $(0.53) $ 0.14 $ 0.16 $(0.71) $(0.48) $(1.19) $(1.28)
Adjusted net earnings (loss) per
share - diluted(c)................ $(0.81) $(0.18) $ 0.19 $ 0.20 $(0.10) $(0.17) $(0.26) $(0.19)
Weighted average number of shares
outstanding - diluted............. 2.4 2.4 21.1 28.7 28.4 28.7 28.7 28.7
- --------
(a) Includes restructuring charges of $6.9 million, $9.0 million, $7.2 million
and $2.3 million for the quarters ended April 1, 2001, July 1, 2001,
September 30, 2001 and December 31, 2001, respectively.
(b) Includes restructuring charges of $22.7 million, $9.0 million, $15.1
million and $20.8 million for the quarters ended April 1, 2001, July 1,
2001, September 30, 2001 and December 31, 2001, respectively.
(c) See reconciliation of net earnings (loss) under US GAAP to adjusted net
earnings (loss) on page 15.
14
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 provide advanced electronics manufacturing services, or EMS, to
electronics industry original equipment manufacturers, or OEMs, 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.
During fiscal year 2001, in response to excess capacity caused by the
slowing technology end market, we commenced a restructuring program aimed at
reducing our cost structure. Actions taken by management to improve capacity
utilization included closing our Denver, Colorado assembly facility and our
Haverhill, Massachusetts interconnect facility, re-sizing our Mexico and
Ireland facilities and addressing our excess equipment. Accordingly, we
recorded restructuring charges of $67.6 million pre-tax (consisting of a
write-down of goodwill and other intangible assets and the costs associated
with exiting or re-sizing facilities) and other charges of $27.3 million
pre-tax (consisting of accounts receivable, inventory and asset impairment
charges.) (see Restructuring Charges).
As a result of restructuring actions and market conditions we have incurred
a significant operating loss, which resulted in our non-compliance with certain
financial covenants contained in our credit agreement as at September 30, 2001.
On November 19, 2001, we and our lending group signed a definitive term sheet
for an agreement under which certain terms of the current credit facility would
be revised and the non-compliance as at September 30, 2001 would be waived. In
February 2002, we and our lending group executed an amendment to our credit
facility, substantially consistent with the term sheet, to waive the September
30, 2001 defaults and to revise the covenant tests to be consistent with both
current revenues and the forecast for 2002. (See Liquidity and Capital
Resources).
In addition, in March 2002, we announced that we are closing our facility in
Cork, Ireland and that we are taking steps to place the subsidiary that
operates that facility in voluntary liquidation. We will continue to conduct
European operations through our Donegal, Ireland facility, a separately owned
subsidiary. We expect to take an $8- 10 million restructuring charge against
earnings for the first quarter of 2002 as a result of such facility closing.
Also, in March 2002, we were advised that Simoco, a customer we served from our
facility in Cork, had an Administrator appointed by the courts in the United
Kingdom as part of a financial restructuring. We are continuing discussions
with the Administrator to mitigate our risk and remain prepared to provide
manufacturing services to the Simoco Administrator once Simoco's restructuring
is complete. (see Recent Developments).
Prior to taking steps to place the subsidiary that operates the Cork
facility in voluntary liquidation, we and our lending group executed an
amendment to our credit facility to waive the default that would have been
caused by this action and amend the agreement to permit such facility closure.
15
Corporate History
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.
The July 1999 combination of Surface Mount and HTM provided us with
increased customer relationships. 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, 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;
. 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;
16
. 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.
Results of Operations
We currently provide turnkey manufacturing services to the majority of our
customers. Turnkey manufacturing services typically result in higher revenue
and higher gross profits but lower gross profit margins when compared to
consignment services.
Our contractual arrangements with our key customers generally provide a
framework for our overall relationship with our customer. Revenue is recognized
upon shipment to the customer as performance has occurred, all customer
specified acceptance criteria have been tested and met, and the earnings
process is considered complete. Actual production volumes are based on purchase
orders for the delivery of products. These orders typically do not commit to
firm production schedules for more than 30 to 90 days in advance. In order to
minimize 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.
The 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. The
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. The
results of operations for the year ended December 31, 2001 include a full year
of operating results for HTM, Surface Mount, W.F. Wood, Pensar and Qualtron.
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
23 to the consolidated financial statements.
17
The following table sets forth certain operating data expressed as a
percentage of revenue for the years ended:
December 31, December 31, December 31,
1999 2000 2001
------------ ------------ ------------
Revenue................................................................ 100.0 % 100.0 % 100.0 %
Cost of sales (including restructuring charges of $25.4 million for the
year ended December 31, 2001)........................................ 91.6 91.3 104.7
----- ----- -----
Gross profit (loss).................................................... 8.4 8.7 (4.7)
Selling, general and administrative expenses........................... 5.2 4.4 7.2
Amortization........................................................... 0.8 0.8 1.6
Restructuring charges including the write-down of intangible assets.... -- -- 6.9
----- ----- -----
Operating income (loss)................................................ 2.4 3.5 (20.4)
Interest............................................................... 2.7 1.8 1.5
----- ----- -----
Earnings (loss) before income taxes.................................... (0.3) 1.7 (21.9)
Income tax expense (recovery).......................................... -- 0.9 (4.8)
----- ----- -----
Earnings (loss) before extraordinary loss.............................. (0.3) 0.8 (17.1)
Extraordinary loss..................................................... (0.5) (0.3) --
----- ----- -----
Net earnings (loss).................................................... (0.8)% 0.5% (17.1)%
===== ===== =====
Year ended December 31, 2001 compared to the year ended December 31, 2000
Revenue
Revenue decreased $170.5 million, or 21.8%, from $782.7 million for the year
ended December 31, 2000 to $612.2 million for the year ended December 31, 2001.
The decrease in revenue is due to the effects of the general decline in the
technology market. During 2001 we recorded approximately $32.4 million of sales
of raw materials inventory to customers, which carried no margin, compared to
$58.7 million for the same period in 2000.
Revenue from IBM of $120.6 million, Alcatel of $63.8 million and Dell of
$61.9 million for the year ended December 31, 2001 was 19.7%, 10.4% and 10.1%,
respectively, of total revenue for the period. Revenue from Dell of $124.0
million and Alcatel of $79.8 million for the year ended December 31, 2000 was
15.8% and 10.2%, respectively, of total revenue for the period. No other
customers represented more than 10% of revenue in either period.
For the year ended December 31, 2001, 70.2% of our revenue was generated
from operations in the United States, 17.4% from Mexico, 8.7% from Canada and
3.7% from Europe. During the year ended December 31, 2000, 77.8% of our revenue
was generated from operations in the United States, 9.8% from Mexico, 9.8% from
Canada, and 2.6% from Europe. We expect to continue to increase the portion of
revenue attributable to our Chihuahua facility, with the transfer of certain
production from other facilities and with the addition of new business and
increased volume from our current business.
Gross Profit
Gross profit decreased $97.0 million from $68.3 million for the year ended
December 31, 2000 to a loss of $28.7 million for the year ended December 31,
2001. The decline in the gross profit is due to the $25.4 million portion of
our restructuring charge related to a write-down of inventory in connection
with the closure of our Denver facility, $18.5 million of other charges related
to inventory recorded during 2001 in response to the decline in the technology
markets, and the lower sales base and an under-absorption of fixed production
overhead costs. The Company writes down estimated obsolete or excess inventory
for the difference between the cost of inventory and estimated market value
based upon customer forecasts and the ability to sell back inventory to
customers or suppliers. If these assumptions change, additional write-downs may
be required.
18
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased $9.5 million from
$34.6 million for the year ended December 31, 2000 to $44.1 million for the
year ended December 31, 2001. This increase is primarily due to $8.2 million of
charges related to accounts receivable (of which $7.9 million is considered
other charges related to accounts receivable exposures and $0.9 million relates
to one-time asset impairment charges that were recorded in 2001 in response to
the decline in the technology markets) compared to $2.0 million charges for
such items in 2000. The Company determines the allowance for doubtful accounts
for estimated credit losses based on the financial condition of its customers,
concentration of credit risk and industry conditions.
Excluding the increase in accounts receivable and other one time charges,
selling general and administrative expenses increased $2.4 million from $32.6
million in the year ended December 31, 2000 to $35.0 million for the year ended
December 31, 2001 due to the acquisitions of Pensar and Qualtron. As a
percentage of revenue, excluding the accounts receivable and other one time
charges, selling general and administrative expenses increased from 4.4% for
the year ended December 31, 2000 to 5.8% for the year ended December 31, 2001
due to the $2.4 million increase in selling general and administrative expenses
and due to the lower sales base.
Amortization
Amortization of intangible assets of $9.5 million for fiscal 2001 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, $2.7 million related to the acquisition of Pensar and $1.6 million
related to the acquisition of Qualtron. We were 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 $18.2 million resulting from the acquisition of
Qualtron, over a period of ten years. During fiscal year 2001, the Company
recorded a write-down of goodwill associated with the acquisition of Qualtron
of $16.6 million (see discussion of restructuring charges below). Amortization
of intangible assets in 2001 also included the amortization of $0.7 million of
deferred finance costs related to the establishment of our senior credit
facility in July 2000 and $0.3 million of deferred equipment lease costs and
$0.1 million of other deferred costs. The costs associated with our amended and
restated senior credit facility are being amortized over the three year
remaining term of the debt.
Amortization of intangible assets for fiscal 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. 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.
Recent accounting pronouncements will change the way we account for goodwill
in future periods by requiring us to no longer amortize goodwill. We will also
be required to test goodwill for impairment on an annual basis. We are
currently reviewing the new pronouncements to determine the impact its adoption
will have on our financial position, results of operations and cash flow. (See
Recent Accounting Pronouncements).
Restructuring Charges including the Write-down of Intangible Assets
During fiscal year 2001, in response to excess capacity caused by the
slowing technology end market, the Company commenced a restructuring program
aimed at reducing its cost structure. Accordingly, the Company recorded
restructuring charges of $67.6 million consisting of a write-down of goodwill
and other intangible assets and the costs associated with exiting or re-sizing
facilities. In addition, the Company recorded other charges of $27.3 million
related primarily to accounts receivable, inventory and asset impairment
charges.
19
The following tables detail the components of the restructuring charges, and
the related amounts included in accrued liabilities:
(in millions)
Accrual at
Total Non-cash Cash December
charges charges payment 31, 2001
------- -------- ------- ----------
Inventory write-downs included in cost of sales $25.4 $(25.4) $ -- $ --
----- ------ ----- ----
Lease and other contract obligations........... 8.7 -- (2.5) 6.2
Severance...................................... 3.8 -- (3.2) 0.6
Asset impairment............................... 5.6 (5.6) -- --
Write-down of intangible assets................ 17.8 (17.8) -- --
Other facility exit costs...................... 6.3 (3.0) (2.5) 0.8
----- ------ ----- ----
42.2 (26.4) (8.2) 7.6
----- ------ ----- ----
67.6 (51.8) (8.2) 7.6
Other charges.................................. 27.3 (27.3) -- --
----- ------ ----- ----
$94.9 $(79.1) $(8.2) $7.6
===== ====== ===== ====
Restructuring charges:
The write-down of inventory of $25.4 million is associated with the closure
of the assembly facility in Denver.
Lease and other contractual obligations of $8.7 million include the costs
associated with decommissioning, exiting and subletting the Denver facility and
the costs of exiting equipment and facility leases at various other locations.
Severance costs of $3.8 million are associated with the closure of the
Denver assembly facility and the Haverhill interconnect facility and the
re-sizing of the Mexican and Irish facilities. The severance costs relate to
all 429 employees at the Denver facility, 26 plant and operational employees at
the Haverhill facility, 915 plant and operational employees at the Mexico
facility, 47 plant and operational employees at the Cork, Ireland facility and
68 plant and operational employees at the Donegal, Ireland facility.
Asset impairment charges of $5.6 million reflect the write-down of certain
long-lived assets, primarily at the Denver location, that became impaired as a
result of the rationalization of facilities. The asset impairment was
determined based on undiscounted projected future net cash flows relating to
the assets resulting in a write-down to estimated salvage values.
Other facility exit costs include personnel costs and other fees directly
related to exit activities at the Denver and Haverhill locations.
Write-down of intangible assets:
During fiscal year 2001, the Company recorded a write-down of intangible
assets of $17.8 million which includes the write-down of goodwill associated
with the Qualtron acquisition of $16.3 million and the write-down of intangible
assets of $1.5 million. In accordance with SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
current accounting guidance requires that long-lived assets and certain
identifiable intangible assets, including goodwill, held and used by an entity,
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Due to the
downturn in the EMS industry, the significant operating loss incurred in fiscal
2001 and the restructuring and other charges recorded in 2001, the Company
reviewed the recoverability of
20
the carrying value of long-lived assets, including allocated goodwill and other
intangible assets. An evaluation under SFAS No. 121 indicated that the
estimated future net cash flows associated with the long-lived assets acquired
as part of the Qualtron acquisition were less than their carrying value and
accordingly, a write-down to estimated fair values was recorded for unamortized
goodwill associated with the acquisition of Qualtron and certain intangible
assets.
The Company will be required to perform a transitional goodwill impairment
evaluation as of January 1, 2002 as a result of recent accounting
pronouncements. The change to assessing fair value by reporting unit could
result in an impairment charge. (See Recent Accounting Pronouncements).
In March 2002, we announced that we are closing our Cork, Ireland facility
and that we are taking steps to place the subsidiary that operates the Cork
facility in voluntary liquidation. We expect to take an $8-10 million charge
against earnings for the first quarter of 2002 as a result of such closing.
The major components of the restructuring are estimated to be complete
during fiscal year 2002. The restructuring charges are based on certain
estimates and assumptions using the best available information at the time and
are subject to change.
Interest Expense
Interest expense decreased $4.5 million from $13.8 million for the year
ended December 31, 2000 to $9.3 million for the year ended December 31, 2001
due to lower average debt outstanding during 2001 combined with lower interest
rates. A portion of the proceeds from the initial public offering were used to
reduce the debt outstanding in fiscal year 2000, coupled with lower working
capital requirements during fiscal year 2001, resulted in lower average debt
outstanding during fiscal year 2001. The weighted average interest rates with
respect to the debt for the years ended December 31, 2000 and December 31, 2001
were 9.9% and 8.3%, respectively.
Income Tax Expense
For the year ended December 31, 2001 an income tax recovery of $29.0 million
was recorded on a pre-tax loss of $133.8 million resulting in an effective tax
recovery rate of 21.7%, as losses in certain jurisdictions were not tax
effected due to the uncertainty of our ability to utilize such losses. We also
are unable to deduct $4.0 million of goodwill amortization and $17.8 million of
goodwill and intangible asset write-downs.
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 losses in certain jurisdictions were not tax effected due
to the uncertainty of our ability to utilize such losses. We also are unable to
deduct $2.5 million of goodwill amortization.
At December 31, 2001, the Company had total net operating loss carryforwards
of approximately $105.0 million of which $3.0 million and $88.0 million will
begin to expire in 2013 and 2022, respectively. 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. 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 is appropriate. However, in the event that actual
results differ from estimates or management adjusts these estimates in future
periods, the Company may need to establish an additional valuation allowance
which could materially impact its financial position and results of operations.
21
Year ended December 31, 2000 compared to the year ended December 31, 1999
Revenue
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, 77.8% of our revenue was generated
from operations in the United States, 9.8% from Canada, 2.6% from Europe and
9.8% 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.
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%.
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.
22
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 losses in certain jurisdictions were not tax effected due
to the uncertainty of our ability to utilize such losses. We also are unable to
deduct $2.5 million of goodwill amortization.
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 amortization.
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 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.
Liquidity and Capital Resources
Our principal sources of liquidity are cash provided from operations and
borrowings under our senior credit facility. In the past, we have also relied
on 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
our principal uses of cash in the future will be to meet debt service
requirements and to finance capital expenditures and working capital
requirements.
23
2001 Liquidity: Net cash provided by operating activities for the year
ended December 31, 2001 was $28.3 million. Lower levels of activity and our
continued focus on improving our accounts receivable and inventory levels
during the year led to the reduced working capital usage. Inventory turns
improved in the fourth quarter of 2001 from the third quarter of 2001 and the
fourth quarter of 2000 to 6.4 times from 5.5 times and 4.9 times respectively.
Accounts receivable days sales outstanding improved in the fourth quarter of
2001 from the third quarter of 2001 and the fourth quarter of 2000 to 56 days
from 65 days and 68 days respectively.
Net cash provided by financing activities for year ended December 31, 2001
was $0.2 million due to an increase in long-term debt of $7.0 million and
proceeds from the issuance of capital stock on the exercise of options of $0.3
million, both of which were offset by repayment of capital leases of $0.4
million, loans issued to shareholders of $5.2 million and the costs associated
with the amendment to our credit agreement of $1.5 million.
Net cash used in investing activities for the year ended December 31, 2001
was $19.2 million due to the net purchase of capital and other assets.
2000 Liquidity: Net cash used for operating activities for the year ended
December 31, 2000 was $104.9 million. The growth of both existing and new
customers during fiscal year 2000 led to our increased working capital needs.
Net cash provided by financing activities for the 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, 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.
24
Capital Resources
As a result of restructuring actions and market conditions we have incurred
a significant operating loss, which resulted in our non-compliance with certain
financial covenants contained in our credit agreement as at September 30, 2001.
On November 19, 2001, we and our lending group signed a definitive term sheet
for an agreement under which certain terms of the current credit facility would
be revised and the non-compliance as at September 30, 2001 would be waived. In
February 2002, we and our lending group executed an amendment to our credit
facility, substantially consistent with the term sheet, to waive the September
30, 2001 defaults and to revise the covenant tests to be consistent with both
current revenues and the forecast for 2002.
The amended financial covenants included in the revised credit facility
include monthly and quarterly minimum cumulative consolidated EBITDA (earnings
before interest, taxes, depreciation an amortization) targets, a maximum daily
and monthly revolving credit loan balance based on accounts receivable and
inventory levels and maximum quarterly capital expenditures. The Company was in
compliance with the amended financial covenants at December 31, 2001 and at
month's end on January 27, 2002 and February 24, 2002. Continued compliance
with the amended financial covenants through December 31, 2002, the end of the
amendment period, is dependent on the Company achieving its forecasts inherent
in our current business plan. The Company believes the forecasts are based on
reasonable assumptions and are achievable, however, the forecasts are dependent
on a number of factors, some of which are outside the control of the Company.
These include, but are not limited to, general economic conditions and
specifically the strength of the electronics industry and the related demand
for products and services by the Company's customers.
During the amendment period, the facility bears interest at the U.S. base
rate as defined in the credit agreement plus 2.5%. As at December 31, 2001, we
had borrowed $122.8 million under this facility.
In connection with the amendment, the Company agreed to issue to the lenders
warrants to purchase common stock of the Company at an exercise price equal to
the fair market value (defined as average of the last reported sales price of
the common stock of the company for twenty consecutive trading days commencing
22 trading days before the date in question) at the date of the grant for 1.5%
of the total outstanding shares on February 11, 2002 and 0.5% of the total
outstanding shares on December 31, 2002. If an event of default occurs during
the period from the effective amendment date to December 31, 2002, and has been
continuing for more than 30 days, the lenders will receive warrants to purchase
an additional 1% of the total outstanding shares at an exercise price equal to
the fair market value (as defined above) at the date of grant. If all amounts
outstanding under the credit agreement are repaid in full on or before March
31, 2003, all warrants received by the lenders, other than the warrants
received on February 11, 2002, shall be returned to the Company. The warrants
will not be tradable separate from the related debt until the later of December
31, 2002 or nine months after the issuance of the warrants being transferred.
After the debt under the credit agreement has been paid in full, the Company
may repurchase the warrants or warrant shares at a price that values the
warrant shares at three times the exercise price.
The Company also paid amendment fees of $1.5 million comprised of $0.7
million representing 0.5% of the lender's commitments under the revolving
credit facilities and term loans outstanding at February 11, 2002 and other
amendment related fees of $0.8 million. The Company may be required to pay
default fees if it violates certain covenants after the effective date of the
amendment. The amendment fees and the fair value of the warrants to be issued
in connection with amending the agreement have been accounted for as deferred
financing fees.
In March 2002, we and our lenders executed an amendment to our credit
facility to waive the default that would have been caused by placing the
subsidiary that operates the Cork, Ireland facility in voluntary liquidation.
We paid $140,000 in amendment fees in connection with such amendment.
25
As at December 31, 2001, contractual repayments due within each of the next
five years are as follows:
(in millions)
2006 and
Contractual obligations 2002 2003 2004 2005 thereafter Total
----------------------- ----- ----- ------ ---- ---------- ------
Long-term debt.................... $12.5 $17.5 $ 92.8 $ -- $ -- $122.8
Capital lease obligations......... 0.3 0.2 0.2 -- -- 0.7
Operating lease obligations....... 21.2 16.8 11.5 3.5 5.9 58.9
----- ----- ------ ---- ---- ------
Total contractual cash obligations $34.0 $34.5 $104.5 $3.5 $5.9 $182.4
===== ===== ====== ==== ==== ======
Our management believes that cash generated from operations, available cash
and amounts available under our senior credit facility will be adequate to meet
our 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, particularly with respect to amounts available
under our credit facility, as discussed above. 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.
Recently Issued Accounting Standards
In July 2001, the FASB issued Statement No. 141, "Business Combinations"
("Statement 141"), and Statement No. 142, "Goodwill and Other Intangible
Assets" ("Statement 142"). Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
as well as all purchase method business combinations completed after June 30,
2001. Statement 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of Statement
142. Statement 142 will also require that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
Statement 121.
Statement 141 will require, upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition
apart from goodwill. Upon adoption of Statement 142 on January 1, 2002, the
Company will be required to reassess the useful lives and residual values of
all intangible assets acquired in purchase business combinations, and make any
necessary amortization period adjustments by March 31, 2002.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether
there is an indication that goodwill is impaired as of January 1, 2002. To
accomplish this, the Company must identify its reporting units and determine
the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of January 1, 2002. The Company will then have until June
30, 2002 to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price
allocation in accordance with Statement 141, to its carrying amount, both of
which would be measured as of January 1, 2002. This second step is required to
be completed as soon as possible, but no later than December 31, 2002. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Company's statements of operations.
26
As of January 1, 2002, the Company has unamortized goodwill in the amount of
$55.6 million. Amortization expense related to goodwill for the years ended
December 31, 1999, 2000 and 2001 was $1.5 million, $5.3 million and $8.4
million, respectively. Because of the extensive effort needed to comply with
adopting Statements 141 and 142, the Company has not estimated the impact of
these provisions on its financial statements, beyond discontinuing goodwill
amortization. The change to a methodology that assesses fair value by reporting
unit could result in an impairment charge.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("Statement 144"), which
supersedes both Statement 121 and the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" ("Opinion 30"), for the
disposal of a segment of a business (as previously defined in that Opinion).
Statement 144 retains the fundamental provisions in Statement 121 for
recognizing and measuring impairment losses on long-lived assets held for use
and long-lived assets to be disposed of by sale. Statement 144 retains the
basic provisions of Opinion 30 on how to present discontinued operations in the
income statement but broadens that presentation to include a component of an
entity (rather than a segment of a business).
The Company is required to adopt Statement 144 for the quarter ending March
31, 2002. Management does not expect the adoption of Statement 144 for
long-lived assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under Statement 144 is
largely unchanged from Statement 121.
In August 2001, the FASB issued Statement No. 143 "Accounting for Asset
Retirement Obligations" which requires that the fair value of an asset
retirement obligation be recorded as a liability, at fair value, in the period
in which the Company incurs the obligation. The Statement is effective for
fiscal 2003 and the Company expects no material effect as a result of this
Statement.
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 implement our business
plan and maintain covenant compliance under our credit agreement; (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.
27
FACTORS THAT MAY AFFECT FUTURE RESULTS
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
We are exposed to general economic conditions, which could have a material
adverse impact on our business, operating results and financial condition.
As a result of recent unfavorable economic conditions and reduced capital
spending, our sales have declined from 2000 to 2001. In particular, sales to
OEMs in the telecommunications and networking industries worldwide were
impacted during the second half of 2001. If economic conditions worsen, we may
experience a material adverse impact on our business, operating results and
financial condition.
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 three customers in 2001 were IBM, Alcatel and Dell which
represented approximately 19.7%, 10.4% and 10.1%, respectively, of our total
revenue in 2001. Our top ten largest customers (including IBM, Dell and
Alcatel) collectively represented approximately 70% of our total revenue in
2001. 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.
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;
28
. 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 economic cycles and has in
the past experienced downturns. A continued 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.
29
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 and significant retrenchment in a short
period of time.
Since 1995, we have completed seven 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.
In 2001 we implemented a restructuring plan that called for significant
retrenchment. We closed our Denver and Haverhill facilities and resized
operations in Mexico and Ireland in an effort to reduce our cost structure.
Retrenchment has caused, and is expected to continue to cause, strain on our
infrastructure, including our managerial, technical and other resources. We may
experience inefficiencies as we integrate operations from closed facilities to
currently operating facilities and may experience delays in meeting the needs
of transferred customers. In addition, we are reducing the geographic
dispersion of our operations which may make it harder for us to compete and may
cause us to lose customers. The loss of customers could have a material adverse
effect on our business, financial condition and results of operations.
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 and subsequent
retrenchment 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 effectively, it may have a
material adverse effect on our business, financial condition and results of
operations.
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
30
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 implement our business plan depends in part on our
ability to retain key management and existing employees. 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. In connection with our
restructuring, we significantly reduced our workforce. If we receive a
significant volume of new orders, we may have difficulty recruiting skilled
workers back into our workforce to respond to such orders and accordingly may
experience delays that could adversely effect our ability to meet customers'
delivery schedules.
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.
Revenue generated outside of the United States and Canada was approximately
12.4% in 2001. 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;
. trade restrictions; and
. dependence on key customers.
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
31
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.
RISKS RELATED TO OUR CAPITAL STRUCTURE
Our 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, 2001, we had $122.8 million of indebtedness under our senior
credit facility. 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 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. As at September 30, 2001, we were in violation
of financial covenants contained in our credit agreement. Such violation
was waived and the credit agreement was amended to provide financial
covenants consistent with our current revenues and our forecast for
2002. However, there can be no assurance that we will maintain
compliance with the covenants under our credit agreement.
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, complete acquisitions, 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,
32
convey or otherwise dispose of all or substantially all of our assets. We are
also required to maintain specified financial ratios and satisfy certain
monthly and quarterly financial condition tests, which further restrict our
ability to operate as we choose. As at September 30, 2001, we were in violation
of financial covenants contained in our credit agreement. Such violation was
waived and the credit agreement was amended to provide financial covenants
consistent with our current revenues and our forecast for 2002. As a result of
our non-compliance, customers may lose confidence in us and reduce or eliminate
their orders with us which may have a material adverse effect on our business,
financial condition and results of operations.
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, LLC, 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, LLC, investment funds
affiliated with Celerity Partners, Inc., Kilmer Electronics Group Limited and
certain members of management held approximately 13.4%, 12.1%, 7.1% and 16.7%,
respectively, of our outstanding shares as of March 15, 2002. In addition, two
of the nine directors who serve on our board are representatives of the Bain
funds, two are representatives of the Celerity funds, one is a representative
of Kilmer Electronics Group Limited and two are members of management. By
virtue of such 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 the year ended December
31, 2001 was 7.7%. Our debt of $122.8 million bore interest at 5.2% on December
31, 2001 based on the U.S. base rate. If the U.S. base rate increased by 10%
our interest rate would have risen to 5.7% and our interest expense would have
increased by approximately $0.6 million for fiscal year 2001.
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.
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-40.
33
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10: Directors and Executive Officers of the Registrant
The information required by this Item is included under the captions "The
Proposal: 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
2002 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.
34
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Expressed in thousands of U.S. dollars)
Years ended December 31,
-----------------------
Reserves for Accounts Receivable 1999 2000 2001
-------------------------------- ----- ------- -------
Balance, beginning of year... $(195) $ (514) $(2,368)
Charge to expense............ (120) (2,003) (8,218)
Written off.................. 50 169 3,328
Added through acquisition.... (249) (20) --
----- ------- -------
Balance, end of year......... $(514) $(2,368) $(7,258)
===== ======= =======
35
Report Of Independent Public Accountants
[KPMG LETTERHEAD]
To the Board of Directors of SMTC Corporation
Under date of February 12, 2002, except as to note 24 which is as of March
19, 2002, we reported on the consolidated balance sheets of SMTC Corporation
(formerly HTM Holdings, Inc.) and subsidiaries as at December 31, 2000 and
2001, and the related consolidated statements of operations, changes in
shareholders' equity (deficiency) and cash flows for each of the years in the
three-year period ended December 31, 2001, 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 three-year period ended December 31, 2001 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 three-year period ended December 31, 2001.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
February 12, 2002
36
(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. (9)
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. (9)
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)
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)
37
Exhibit # Description
- --------- -----------
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. (9)
10.1.8 Second Amendment dated as of December 28, 2000 to the Amended and Restated Credit and
Guarantee Agreement. (9)
10.1.9 Third Amendment dated as of February 6, 2001 to the Amended and Restated Credit and Guarantee
Agreement. (9)
10.1.10 Fourth Amendment and First Waiver dated as of February 11, 2002 to the Amended and Restated
Credit and Guarantee Agreement.
10.1.11 First Amendment dated as of February 11, 2002 to the Amended and Restated Guarantee and
Collateral Agreement.
10.1.12 Fifth Amendment and Second Waiver dated as of March 8, 2002 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)
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)
38
Exhibit # Description
- --------- -----------
10.12 Derrick 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. (9)*
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. (9)
10.23 Lease Agreement dated as of May 12, 1998 between the Haverdyne Company, LLC and Qualtron,
Inc. (9)
10.24.1 Management Agreement dated July 30, 1999. (1)
10.24.2 Termination Agreement dated as of July 27, 2000. (9)
10.25 Share Purchase Agreement dated July 26, 2000 for the purchase of Gary Walker's Class Y shares.
(9)
10.26 Funding Agreement dated July 26, 2000. (9)
10.27 Promissory Note dated July 26, 2000. (9)
10.28 Pledge Agreement dated July 26, 2000 with respect to shares of common stock of SMTC owned by
Gary Walker. (9)
10.29 Class N Common Stock Redemption Agreement dated July 26, 2000. (9)
10.30.1 Real Estate Sale Agreement between Flextronics International USA, Inc., as Seller, and SMTC
Manufacturing Corporation of Texas, as Purchaser, dated February 23, 2001. (9)
10.30.2 First Amendment to Sale Agreement. (10)
10.31 Real Property Lease dated as of November 24, 2000 between Udaras Na Gaeltachta and Qualtron
Teoranta. (10)
10.32.1 Lease Agreement between Flextronics International USA, Inc. and SMTC Manufacturing
Corporation of Texas. (11)
10.32.2 First Amendment to Lease. (10)
10.33 Employment offer letter from SMTC to Frank Burke dated July 26, 2001. (11)*
10.34 Pledge Agreement dated April 16, 2001 between the Company and Stanley Plzak.
10.35 Secured Promissory Note dated April 16, 2001 from Stanley Plzak to the Company.
10.36 Pledge Agreement dated April 16, 2001 between the Company and Richard V. Baxter, Jr.
10.37 Secured Promissory Note dated April 16, 2001 from Richard V. Baxter, Jr. to the Company.
39
10.38 Pledge Agreement dated April 16, 2001 between the Company and William M. Moeller.
10.39 Secured Promissory Note dated April 16, 2001 from William M. Moeller to the Company.
10.40 Pledge Agreement dated April 16, 2001 between the Company and Bruce D. Backer.
10.41 Secured Promissory Note dated April 16, 2001 from Bruce D. Backer to the Company.
10.42 Pledge Agreement dated April 16, 2001 between the Company and David E. Steel.
10.43 Secured Promissory Note dated April 16, 2001 from David E. Steel to the Company.
10.44 Registration Rights Agreement dated February 8, 2002 between the Company and Lehman
Commercial Paper Inc.
10.45 Warrant Agreement dated as of February 8, 2002 between the Company and Mellon Investor Services
LLC.
21.1 Subsidiaries of the registrant. (9)
23.1 Consent of KPMG LLP, Independent Auditors.
- --------
(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.
(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.
(9) Filed as an Exhibit to the Company's Report on Form 10-K for the yearly
period ended December 31, 2000 filed on April 2, 2001 (File No. 0-31051)
and incorporated by reference herein.
(10) Filed as an Exhibit to the Company's Report on Form 10-Q for the quarterly
period ended July 1, 2001 filed on August 15, 2001 (File No. 0-31051) and
incorporated by reference herein.
(11) Filed as an Exhibit to the Company's Report on Form 10-Q for the quarterly
period ended September 30, 2001 filed on November 19, 2001 (File No.
0-31051) and incorporated by reference herein.
* Management contract or compensatory plan
(b) None.
40
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
By: /s/ Paul Walker
-------------------------
Paul Walker
President and Chief Executive
Officer
Date: March 29, 2002
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 29, 2002
- ----------------------------- Officer and Director
Paul Walker (Principal Executive
Officer)
/S/ FRANK BURKE Vice President and Chief March 29, 2002
- ----------------------------- Financial Officer
Frank Burke (Principal Financial and
Accounting Officer)
- ----------------------------- Director March 29, 2002
Stephen Adamson
/S/ BLAIR HENDRIX Director March 29, 2002
- -----------------------------
Blair Hendrix
/S/ MARK BENHAM Director March 29, 2002
- -----------------------------
Mark Benham
/S/ MICHAEL GRIFFITHS Director March 29, 2002
- -----------------------------
Michael Griffiths
/S/ IAN LORING Director March 29, 2002
- -----------------------------
Ian Loring
/S/ KHALIL BARSOUM Director March 29, 2002
- -----------------------------
Khalil Barsoum
/S/ GARY WALKER Director March 29, 2002
- -----------------------------
Gary Walker
/S/ WILLIAM BROCK Director March 29, 2002
- -----------------------------
William Brock
41
SMTC CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.......................................................................... F-2
Consolidated Balance Sheets as of December 31, 2000 and 2001.......................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1999, 2000 and 2001............ F-4
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1999, 2000
and 2001............................................................................................ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000 and 2001............ F-7
Notes to Consolidated Financial Statements............................................................ F-8
F-1
AUDITORS' REPORT
To the Board of Directors and Shareholders of SMTC Corporation
We have audited the accompanying consolidated balance sheets of SMTC
Corporation (formerly HTM Holdings, Inc.) and subsidiaries as at December 31,
2000 and 2001, and the related consolidated statements of operations, changes
in shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform an 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 the Company
and its subsidiaries as at December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001 in accordance with United States of America generally
accepted accounting principles.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
February 12, 2002, except as to note 24 which is as of March 19, 2002
F-2
SMTC CORPORATION
(FORMERLY HTM HLDINGS, INC.)
Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars)
December 31, 2000 and 2001
2000 2001
-------- ---------
Assets
Current assets:
Cash and short-term investments................................ $ 2,698 $ 12,103
Accounts receivable (note 4)................................... 194,749 81,374
Inventories (note 5)........................................... 191,821 80,900
Prepaid expenses............................................... 5,233 4,782
Income taxes recoverable....................................... -- 997
Deferred income taxes (note 10)................................ 1,044 632
-------- ---------
395,545 180,788
Capital assets (note 6)........................................... 58,564 60,416
Goodwill (note 7)................................................. 80,149 55,560
Other assets (note 8)............................................. 9,859 11,538
Deferred income taxes (note 10)................................... 3,359 33,118
-------- ---------
$547,476 $ 341,420
======== =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable............................................... $141,574 $ 56,487
Accrued liabilities............................................ 51,695 36,276
Income taxes payable........................................... 5,458 --
Current portion of long-term debt (note 9)..................... 7,500 12,500
Current portion of capital lease obligations (note 9).......... 995 198
-------- ---------
207,222 105,461
Long-term debt (note 9)........................................... 108,305 110,297
Capital lease obligations (note 9)................................ 1,242 406
Deferred income taxes (note 10)................................... 2,221 595
Shareholders' equity:
Capital stock (note 11)........................................ 77,427 68,496
Warrants (note 11)............................................. 367 --
Loans receivable (note 11)..................................... (27) (13)
Additional paid-in-capital (note 11)........................... 151,396 161,666
Deficit........................................................ (677) (105,488)
-------- ---------
228,486 124,661
Commitments and contingencies (notes 15 and 16)...................
United States and Canadian accounting policy differences (note 23)
Subsequent event (note 24)........................................
-------- ---------
$547,476 $ 341,420
======== =========
See accompanying notes to consolidated financial statements.
F-3
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, 1999, 2000 and 2001
1999 2000 2001
-------- -------- ---------
Revenue............................................................ $257,962 $782,763 $ 612,181
Cost of sales, including restructuring and other charges (note 21). 236,331 714,420 640,842
-------- -------- ---------
Gross profit (loss)................................................ 21,631 68,343 (28,661)
Selling, general and administrative expenses (note 21)............. 13,332 34,614 44,173
Amortization....................................................... 1,990 6,229 9,518
Restructuring charges including the write-down of intangible assets
(note 21)........................................................ -- -- 42,160
-------- -------- ---------
Operating income (loss)............................................ 6,309 27,500 (124,512)
Interest (note 9).................................................. 7,066 13,837 9,330
-------- -------- ---------
Earnings (loss) before income taxes and extraordinary loss......... (757) 13,663 (133,842)
Income taxes (recovery) (note 10):
Current......................................................... 442 7,954 1,942
Deferred........................................................ (335) (607) (30,973)
-------- -------- ---------
107 7,347 (29,031)
-------- -------- ---------
Earnings (loss) before extraordinary loss.......................... (864) 6,316 (104,811)
Extraordinary loss, net of income tax recovery.....................
of 1999 - $811; 2000 - $1,640 (note 17)............................ (1,279) (2,678) --
-------- -------- ---------
Net earnings (loss)................................................ $ (2,143) $ 3,638 $(104,811)
======== ======== =========
See accompanying notes to consolidated financial statements.
F-4
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, 1999, 2000 and 2001
1999 2000 2001
---------- ----------- -----------
Earnings (loss) per common share (note 20):
Earnings (loss) before extraordinary loss....................... $ (864) $ 6,316 $ (104,811)
Class L preferred entitlement................................... (2,185) (3,164) --
---------- ----------- -----------
Earnings (loss) before extraordinary loss attributable to common
shareholders.................................................. (3,049) 3,152 (104,811)
Extraordinary loss.............................................. (1,279) (2,678) --
---------- ----------- -----------
Earnings (loss) attributable to common shareholders............. $ (4,328) $ 474 $ (104,811)
========== =========== ===========
Earnings (loss) per common share before extraordinary loss...... $ (1.89) $ 0.24 $ (3.66)
Extraordinary loss per common share............................. (0.79) (0.20) --
---------- ----------- -----------
Basic earnings (loss) per common share.......................... $ (2.68) $ 0.04 $ (3.66)
========== =========== ===========
Diluted earnings (loss) per common share........................ $ (2.68) $ 0.03 $ (3.66)
---------- ----------- -----------
Weighted average number of shares outstanding:
Basic........................................................ 1,617,356 13,212,076 28,608,072
Diluted...................................................... 1,617,356 13,736,616 28,608,072
See accompanying notes to consolidated financial statements.
F-5
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Years ended December 31, 1999, 2000 and 2001
Additional Total
Capital Treasury paid-in Loans shareholders'
stock Warrants stock capital receivable Deficit equity
--------- -------- -------- ---------- ---------- --------- -------------
(note 11)
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) -- --
Net loss................................ -- -- -- -- -- (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
Warrants to be issued................... -- -- -- 659 -- -- 659
Warrants exercised...................... 4 (367) -- 363 -- -- --
Options exercised....................... -- -- -- 313 -- -- 313
Conversion of shares from exchangeable
to common stock........................ (8,935) -- -- 8,935 -- -- --
Repayment of loans receivable........... -- -- -- -- 14 -- 14
Net loss................................ -- -- -- -- (104,811) (104,811)
------- ------- -------- -------- ---- --------- ---------
Balance, December 31, 2001.............. $68,496 $ -- $ -- $161,666 $(13) $(105,488) $ 124,661
======= ======= ======== ======== ==== ========= =========
See accompanying notes to consolidated financial statements.
F-6
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Statements of Cash Flows
(Expressed in thousands of U.S. dollars)
Years ended December 31, 1999, 2000 and 2001
1999 2000 2001
-------- --------- ---------
Cash provided by (used in):
Operations:
Net earnings (loss)............................................. $ (2,143) $ 3,638 $(104,811)
Items not involving cash:
Amortization................................................ 1,990 6,229 9,518
Depreciation................................................ 6,452 9,595 12,102
Deferred income tax benefit................................. (335) (71) (30,973)
Loss (gain) on disposition of capital assets................ 160 (60) 30
Loss on early extinguishment of debt........................ 1,279 2,461 --
Impairment of assets........................................ -- -- 6,474
Write-down of goodwill and intangible assets................ -- -- 17,765
Change in non-cash operating working capital:
Accounts receivable......................................... 4,441 (110,131) 113,375
Inventories................................................. (15,217) (118,455) 110,921
Prepaid expenses and other.................................. (1,705) (1,316) (468)
Accounts payable and accrued liabilities.................... (1,487) 103,200 (105,603)
-------- --------- ---------
(6,565) (104,910) 28,330
Financing:
Repayment of bank indebtedness.................................. (6,559) -- --
Increase in long-term debt...................................... 130,942 -- 14,492
Repayment of long-term debt..................................... (69,261) (19,717) (7,500)
Principal payments on capital lease obligations................. (1,571) (1,427) (354)
Loans to shareholders........................................... -- -- (5,236)
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 issuance of common stock.......................... -- 202,560 313
Stock issuance costs............................................ -- (23,400) --
Repayment of loans receivable................................... -- 33 14
Debt issuance costs............................................. (3,975) (1,450) (1,500)
-------- --------- ---------
49,576 159,099 229
Investments:
Acquisitions, net of cash acquired (1999 - $698; 2000 - $4,672). (31,619) (27,683) --
Purchases of capital assets..................................... (4,130) (25,676) (19,119)
Proceeds from sale of capital assets............................ 8 278 89
Cash in escrow.................................................. (5,735) -- --
Purchase of other assets........................................ 62 (493) --
Other........................................................... -- -- (124)
-------- --------- ---------
(41,414) (53,574) (19,154)
-------- --------- ---------
Increase in cash and cash equivalents.............................. 1,597 615 9,405
Cash and short-term investments, beginning of year................. 486 2,083 2,698
-------- --------- ---------
Cash and short-term investments, end of year....................... $ 2,083 $ 2,698 $ 12,103
======== ========= =========
Supplemental cash flow information (note 14)
See accompanying notes to consolidated financial statements.
F-7
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, 1999, 2000 and 2001
1. Nature of the business:
SMTC Corporation and its subsidiaries (the "Company") is a worldwide
provider of advanced electronics manufacturing services to original equipment
manufacturers. The Company services its customers through nine 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 23, are, in all material respects, in accordance with accounting
principles generally accepted in Canada.
2. Significant accounting policies:
(a) Basis of presentation:
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:
(i) 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.).
(ii) 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.
(iii) 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
=========
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, 1999, 2000 and 2001
2. Significant accounting policies (continued):
(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. Significant estimates include the allowance
for doubtful accounts, inventory valuation, deferred tax asset valuation
allowance, restructuring accruals and the useful lives and valuation of
intangible assets. Actual results may differ from those estimates.
(d) Revenue recognition:
Revenue from the sale of products and excess inventory 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 and finished goods.
Inventories include an application of relevant overhead. The Company
writes down estimated obsolete or excess inventory for the difference
between the cost of inventory and estimated market value based upon
customer forecasts and the ability to sell back inventory to customers
or suppliers. If these assumptions change, additional write-downs may be
required.
(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-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, 1999, 2000 and 2001
2. Significant accounting policies (continued):
(h) Goodwill:
Goodwill represents the excess of cost over the fair value of net
tangible assets acquired in 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.
(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 Board ("FASB")
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement
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:
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("Statement 133").
Statement 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments, as well
as other hedging activities. Statement 133 requires all derivatives to
be recognized either as assets or liabilities and
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, 1999, 2000 and 2001
2. Significant accounting policies (continued):
measured at fair value. The Company implemented Statement 133 for its
first quarter ended March 31, 2001 and marked to market its interest
rate swaps. The initial adjustment was not material.
In 2000, the Company entered into interest rate swap contracts to
hedge its exposure to changes in interest rates on its long-term debt.
The swaps expired on September 22, 2001. The contracts had the effect of
converting the floating rate of interest on $65,000 of the senior credit
facility to a fixed rate. Prior to 2001, net receipts, payments and
accruals under the swap contracts were recorded as adjustments to
interest expense. During 2001, the swap contracts were marked to market
and the corresponding amounts recorded in the statement of operations,
as the Company did not qualify for hedge accounting under Statement 133.
In 2000, one of the Company's subsidiaries entered into forward
foreign currency contracts to hedge foreign currency exposures on future
anticipated sales. These contracts matured at various dates through July
31, 2001. As the contracts did not meet the criteria for hedge
accounting, the Company recorded those contracts on the balance sheet at
their fair values and any corresponding unrealized gains or losses were
recognized in the statements of operations.
There are no derivative financial instruments outstanding at December
31, 2001.
(n) Impairment of long-lived assets:
The Company accounts for long-lived assets in accordance with the
provisions of FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("Statement 121"). Statement 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
exceeds 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, 2001, comprehensive income was
equal to net earnings (loss).
(p) Recently issued accounting pronouncements:
In July 2001, the FASB issued Statement No. 141, "Business
Combinations" ("Statement 141"), and Statement No. 142, "Goodwill and
Other Intangible Assets" ("Statement 142"). Statement 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets required in a purchase method business
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, 1999, 2000 and 2001
2. Significant accounting policies (continued):
combination must meet to be recognized and reported apart from goodwill.
Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of
Statement 142. Statement 142 will also require that intangible assets
with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for
impairment in accordance with Statement 121.
Statement 141 will require, upon adoption of Statement 142, that the
Company evaluate its existing intangible assets and goodwill that were
acquired in prior purchase business combinations, and to make necessary
reclassifications in order to conform with the new criteria in Statement
141 for recognition apart from goodwill. Upon adoption of Statement 142
on January 1, 2002, the Company will be required to reassess the useful
lives and residual values of all intangible assets acquired in purchase
business combinations, and make any necessary amortization period
adjustments by March 31, 2002.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of January
1, 2002. To accomplish this, the Company must identify its reporting
units and determine the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill
and intangible assets, to those reporting units as of January 1, 2002.
The Company will then have until June 30, 2002 to determine the fair
value of each reporting unit and compare it to the reporting unit's
carrying amount. To the extent a reporting unit's carrying amount
exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. In the second step, the Company must
compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of its
assets (recognized and unrecognized) and liabilities in a manner similar
to a purchase price allocation in accordance with Statement 141, to its
carrying amount, both of which would be measured as of January 1, 2002.
This second step is required to be completed as soon as possible, but no
later than December 31, 2002. Any transitional impairment loss will be
recognized as the cumulative effect of a change in accounting principle
in the Company's statements of operations.
As of January 1, 2002, the Company has unamortized goodwill in the
amount of $55,560. Amortization expense related to goodwill for the
years ended December 31, 1999, 2000 and 2001 was $1,531, $5,289 and
$8,448, respectively. Because of the extensive effort needed to comply
with adopting Statements 141 and 142, the Company has not estimated the
impact of these provisions on its financial statements, beyond
discontinuing goodwill amortization. The change to a methodology that
assesses fair value by reporting unit could result in an impairment
charge.
In October 2001, the FASB issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("Statement 144"),
which supersedes both Statement 121 and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions" ("Opinion 30"), for the disposal of a segment of a
business (as previously defined in that Opinion). Statement 144 retains
the fundamental provisions in Statement 121 for recognizing and
measuring impairment losses on long-lived assets held for use
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, 1999, 2000 and 2001
2. Significant accounting policies (continued):
and long-lived assets to be disposed of by sale. Statement 144 retains
the basic provisions of Opinion 30 on how to present discontinued
operations in the income statement but broadens that presentation to
include a component of an entity (rather than a segment of a business).
The Company is required to adopt Statement 144 for the quarter ending
March 31, 2002. Management does not expect the adoption of Statement 144
for long-lived assets held for use to have a material impact on the
Company's financial statements because the impairment assessment under
Statement 144 is largely unchanged from Statement 121.
In August 2001, the FASB issued Statement No. 143 "Accounting for
Asset Retirement Obligations" which requires that the fair value of an
asset retirement obligation be recorded as a liability, at fair value,
in the period in which the Company incurs the obligation. The Statement
is effective for fiscal 2003 and the Company expects no material effect
as a result of this Statement.
3. Acquisitions:
The Company completed 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.
(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 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:
Pensar Qualtron
Corporation Teoranta
----------- --------
Current assets........ $ 16,609 $13,041
Capital assets........ 5,299 1,858
Other long-term assets 581 --
Goodwill.............. 26,563 18,075
Liabilities assumed... (12,033) (6,074)
-------- -------
Net assets acquired... $ 37,019 $26,900
======== =======
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, 1999, 2000 and 2001
3. Acquisitions (continued):
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:
(Unaudited)
-----------
Revenue........................... $842,563
Earnings before extraordinary loss 5,662
Net earnings...................... 2,984
Basic earnings per share.......... 0.22
Diluted earnings per share........ 0.21
4. Accounts receivable:
Accounts receivable at December 31, 2001 and 2000 are net of an allowance
for doubtful accounts of $7,258 in 2001 and $2,368 in 2000. The Company
determines an allowance for doubtful accounts for estimated credit losses based
on the financial condition of its customers, concentrations of credit risk and
industry conditions.
5. Inventories:
2000 2001
-------- -------
Raw materials... $107,767 $38,289
Work in progress 56,521 24,984
Finished goods.. 25,493 16,230
Other........... 2,040 1,397
-------- -------
$191,821 $80,900
======== =======
6. Capital assets:
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
======= ======= =======
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, 1999, 2000 and 2001
6. Capital assets (continued):
Accumulated Net book
2001 Cost depreciation value
---- ------- ------------ --------
Land.......................... $ 3,134 $ -- $ 3,134
Buildings..................... 12,834 735 12,099
Machinery and equipment....... 33,350 10,586 22,764
Office furniture and equipment 4,673 1,526 3,147
Computer hardware and software 9,839 5,099 4,740
Leasehold improvements........ 17,800 3,268 14,532
------- ------- -------
$81,630 $21,214 $60,416
======= ======= =======
Property and equipment under capital leases included in capital assets at
December 31, 2000 and 2001 was $2,027 and $1,583, respectively and accumulated
depreciation of equipment under capital leases at December 31, 2000 and 2001
was $917 and $802, respectively.
Included in the total depreciation expense for the years ended December 31,
1999, 2000 and 2001 of $6,452; $9,595 and $12,102 is $1,358; $273 and $211,
respectively relating to the depreciation of equipment under capital leases.
7. Goodwill:
Accumulated Net book
2000 Cost amortization value
---- ------- ------------ --------
Goodwill $86,969 $6,820 $80,149
Accumulated Net book
2001 Cost amortization value
---- ------- ------------ --------
Goodwill $68,770 $13,210 $55,560
Amortization expense related to goodwill for the years ended December 31,
1999, 2000 and 2001 was $1,531, $5,289 and $8,448, respectively.
During 2001, the Company wrote off the remaining balance of unamortized
goodwill related to the Qualtron Teoranta acquisition (note 21).
8. Other assets:
2000 2001
------ -------
Deferred financing costs, net of accumulated amortization of 2000 -
$868 and 2001 - $1,571........................................... $1,696 $ 3,152
Restricted cash and cash held in escrow............................ 5,985 2,402
Deferred lease costs, net of accumulated amortization of 2000 -
$37 and 2001 - $394.............................................. 1,072 715
Loans to shareholders.............................................. -- 5,236
Other.............................................................. 1,106 33
------ -------
$9,859 $11,538
====== =======
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, 1999, 2000 and 2001
8. Other assets (continued):
Loans to shareholders:
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,
$690 to a certain shareholder to fund the tax liability incurred as a result of
the reorganization. The loan is 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 on a pro rata basis at such time and to the extent that
the shareholder receives after-tax cash proceeds in respect of such shares.
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 lent, on an interest-free basis,
$4,546 to the former shareholders of Pensar Corporation to fund the tax
liability incurred as a result of the election. The loans are 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 on a pro rata basis at
such time and to the extent that the shareholders receive cash proceeds in
respect of such shares, with the balance due on July 27, 2004.
9. Long-term debt and capital leases:
2000 2001
-------- --------
Subordinated debt(a).......... $ -- $ --
Revolving credit facilities(b) 68,305 82,797
Term loans(b)................. 47,500 40,000
-------- --------
115,805 122,797
Less current portion.......... 7,500 12,500
-------- --------
$108,305 $110,297
======== ========
(a) For the period from January 1, 1999 to July 26, 2000:
(i) 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 all assets and required the Company to meet
certain financial ratios and benchmarks and to comply with certain
restrictive covenants. The revolving credit facilities were to
terminate in July 2004. The term loans were to mature 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 to be
payable in one instalment on September 30, 2006 and was repaid from
proceeds of the initial public offering.
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, 1999, 2000 and 2001
9. Long-term debt and capital leases (continued):
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%.
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.
(ii) 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.
(iii) Subordinated notes outstanding in 1998 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.
(iv) 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.
(b) For the period from July 27, 2000 to November 18, 2001:
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 bore 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 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 Company is required to pay the lenders a commitment fee of 0.5%
of the average unused portion of the revolving credit facility.
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, 1999, 2000 and 2001
9. Long-term debt and capital leases (continued):
For the period from November 19, 2001 to December 31, 2001:
The Company has incurred recent operating losses, which resulted in
its non-compliance with certain financial covenants contained in its
current credit agreement as at September 30, 2001. On November 19, 2001,
the Company and its lending group signed a definitive term sheet for an
agreement under which certain terms of the current credit facility would
be revised and the non-compliance as at September 30, 2001 would be
waived. The final amended agreement was signed on February 11, 2002 and
is consistent with the terms and conditions in the term sheet. The
revised terms establish amended financial and other covenants covering
the period up to December 31, 2002, based on the Company's current
business plan. During this time period, the facility bears interest at
the U.S. base rate plus 2.5%.
The Company is in compliance with the amended financial covenants at
December 31, 2001. Continued compliance with the amended financial
covenants through December 31, 2002 is dependant on the Company
achieving the forecasts inherent in its current business plan. The
Company believes the forecasts are based on reasonable assumptions and
are achievable however, the forecasts are dependant on a number of
factors some of which are outside the control of the Company. These
include, but are not limited to, general economic conditions and
specifically the strength of the electronics industry and the related
demand for the products and services by the Company's customers. In the
event of non-compliance, the Company's lenders have the ability to
demand repayment of the outstanding amounts under the amended credit
facility.
In connection with the amended agreement, the Company is committed to
issue to the lenders warrants to purchase common stock of the Company
(note 11).
The Company also paid amendment fees of $1,500, comprised of $700
representing 0.5% of the lenders' commitments under the revolving credit
facilities and term loans outstanding of $140,000 at February 11, 2002
and other amendment related fees of $800, and may be required to pay
default fees if it violates certain covenants after the effective date
of the amendment. The amendment fees and the fair value of the warrants
to be issued in connection with amending the agreement have been
accounted for as deferred financing fees and will be deferred and
amortized over the remaining term of the facility.
Commitment fees of $128 and $60 were incurred in 2000 and 2001,
respectively. The weighted average interest rates on the borrowings was
9.9% and 7.7% in 2000 and 2001, respectively.
As at December 31, 2001, principal repayments due within each of the
next three years are as follows:
2002 $ 12,500
2003 17,500
2004 92,797
--------
$122,797
========
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, 1999, 2000 and 2001
9. Long-term debt and capital leases (continued):
(c) Capital lease obligations:
Minimum lease payments for capital leases consist of the following at
December 31, 2001:
2002.......................................... $254
2003.......................................... 237
2004.......................................... 152
2005.......................................... 46
----
Total minimum lease payments.................. 689
Less amount representing interest of 8% to 11% 85
----
604
Less current portion.......................... 198
----
$406
====
The Company is required to maintain $250 in a certificate of deposit
in connection with certain capital lease obligations.
(d) Interest expense:
1999 2000 2001
------ ------- ------
Short-term obligations.......... $ 702 $ - $ -
Long-term debt.................. 6,061 13,765 9,227
Obligations under capital leases 303 72 103
------ ------- ------
$7,066 $13,837 $9,330
====== ======= ======
10. Income taxes:
The components of income taxes are:
1999 2000 2001
----- ------ --------
Current:
Federal. $ - $3,448 $ 2,211
Foreign. 442 4,506 (269)
----- ------ --------
442 7,954 1,942
Deferred:
Federal. (267) (582) (29,713)
State... (47) (68) (1,596)
Foreign. (21) 43 336
----- ------ --------
(335) (607) (30,973)
----- ------ --------
$ 107 $7,347 $(29,031)
===== ====== ========
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, 1999, 2000 and 2001
10. Income taxes (continued):
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:
1999 2000 2001
----- ---- ----
Federal tax rate............................................. 34.0% 34.3% 34.0%
State income tax, net of federal tax benefit................. 6.0% 4.0% 1.2%
Income of international subsidiaries taxed at different rates 4.9% 4.2% (0.8)%
Change in valuation allowance................................ (6.3)% 1.5% (2.8)%
Non-deductible goodwill amortization......................... (50.1)% 6.8% (5.5)%
Other........................................................ (2.6)% 3.0% (4.4)%
----- ---- ----
Effective income tax rate.................................... (14.1)% 53.8% 21.7%
===== ==== ====
A tax benefit of $811 in 1999 and $1,640 in 2000 has been allocated to the
extraordinary loss.
A tax benefit of $2,694 relating to share issue costs was recorded in
capital stock and additional paid-in capital in the year ended December 31,
2000.
Worldwide earnings (loss) before income taxes consisted of the following:
1999 2000 2001
------- ------- ---------
U.S..... $(1,269) $ 5,651 $(102,139)
Non-U.S. 512 8,012 (31,703)
------- ------- ---------
$ (757) $13,663 $(133,842)
======= ======= =========
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:
2000 2001
------- -------
Deferred tax assets:
Net operating loss carryforwards.. $ 1,485 $33,815
Reserves, allowances and accruals. 3,682 4,487
------- -------
5,167 38,302
Valuation allowance............... (764) (4,552)
------- -------
4,403 33,750
Deferred tax liabilities:
Capital and other assets.......... (2,221) (595)
------- -------
Net deferred tax assets.............. $ 2,182 $33,155
======= =======
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, 1999, 2000 and 2001
10. Income taxes (continued):
At December 31, 2001, the Company had total net operating loss carryforwards
of approximately $105,000, of which $3,000 and $88,000 will begin to expire in
2013 and 2022, respectively. 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. 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 is appropriate. However, in the event that actual
results differ from estimates or management adjusts these estimates in future
periods, the Company may need to establish an additional valuation allowance
which could materially impact its financial position and results of operations.
The valuation allowance in 2000 is $210 higher than 1999 due to losses
generated in one of the Company's subsidiaries in 2000. The valuation allowance
in 2001 is $3,788 higher than 2000 due to losses generated in one of the
Company's subsidiaries and losses in certain jurisdictions.
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;
(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), 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.
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, 1999, 2000 and 2001
11. Capital stock (continued):
(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.
(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 and 2001 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-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, 1999, 2000 and 2001
11. Capital stock (continued):
(b) Issued and outstanding:
HTM Holdings Inc. had 1,946,404 common shares outstanding (recorded
value of $6) at December 31, 1999 and July 30, 1999. 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 30, 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 (iv)........ (2,447,782) (154,168) (113,408) 1,356,037 11,871,517 1
Warrants exercised (v)........... -- -- -- -- 477,049 --
Shares issued on completion of
initial public offering (vi)... -- -- -- 4,375,000 8,275,000 --
Acquisition of Pensar
Corporation (vii).............. -- -- -- -- 1,188,682 --
Acquisition of Qualtron
Teoranta (viii)................ -- -- -- 547,114 - --
Conversion of shares from
exchangeable to common
stock (ix)..................... -- -- -- (20,600) 20,600 --
Options exercised................ -- -- -- -- 20,053 --
---------- -------- -------- --------- ---------- ----
Balance, December 31, 2000....... -- -- -- 6,370,959 21,852,901 1
Warrants exercised (x)........... -- -- -- -- 427,915 --
Conversion of shares from
exchangeable to common
stock (xi)..................... -- -- -- (737,900) 737,900 --
Options exercised................ -- -- -- -- 38,003 --
---------- -------- -------- --------- ---------- ----
Balance, December 31, 2001....... -- -- -- 5,633,059 23,056,719 1
========== ======== ======== ========= ========== ====
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, 1999, 2000 and 2001
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 (iv)................ (3) -- -- -- 119 --
Warrants exercised (v)................... -- -- -- -- 4 --
Shares issued on completion of initial
public offering (vi)................... -- -- -- 64,893 83 --
Shares issued on acquisition of Pensar
Corporation (vii)...................... -- -- -- -- 12 --
Shares issued on acquisition of Qualtron
Teoranta (viii)........................ -- -- -- 12,545 -- --
Conversion of shares from exchangeable
to common stock (ix)................... -- -- -- (229) -- --
Options exercised........................ -- -- -- -- -- --
----- ----- ----- ------- ----- -----
Balance, December 31, 2000............... -- -- -- 77,209 218 --
Warrants exercised (x)................... -- -- -- -- 4 --
Conversion of shares from exchangeable
to common stock (xi)................... -- -- -- (8,943) 8 --
Options exercised........................ -- -- -- -- -- --
----- ----- ----- ------- ----- -----
Balance, December 31, 2001............... $ $ -- $ -- $68,266 $ 230 $ --
===== ===== ===== ======= ===== =====
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 January 1, 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.
(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 were subject to restrictions.
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, 1999, 2000 and 2001
11. Capital stock (continued):
Capital transactions from January 1, 2000 to December 31, 2000:
(iv) Concurrent with the effectiveness of the initial public offering (see
(vi) 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.
(v) On July 27, 2000, the Company issued 477,049 shares of common stock
on the exercise of 41,667 warrants.
(vi) 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 shareholders' 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.
(vii) 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.
(viii) 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.
(ix) During 2000, 20,600 exchangeable shares were exchanged for common
stock.
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, 1999, 2000 and 2001
11. Capital stock (continued):
Capital transactions from January 1, 2001 to December 31, 2001:
(x) During February and March, 2001, the Company issued 427,915 shares of
common stock on the exercise of 578,441 warrants.
(xi) During 2001, 737,900 exchangeable shares were exchanged for common
stock with a par value of $8 with the difference recorded as
additional paid-in-capital.
(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.
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.
During 2000, 20,600 exchangeable shares were exchanged for common stock.
(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
Warrants exercised........ -- -- (578,441)
-------- ------- --------
Balance, December 31, 2001 -- -- --
======== ======= ========
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, 1999, 2000 and 2001
11. Capital stock (continued):
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.
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 41,667 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.
2001 transactions:
(iv) During February and March, 2001, the Company issued 427,915 shares of
common stock on the exercise of 578,411 warrants.
(v) In connection with the amended credit agreement (note 9(b)), the
Company agreed to issue to the lenders warrants to purchase common
stock of the Company at an exercise price equal to the fair market
value (defined as the average of the last reported sales price of the
common stock of the Company for 20 consecutive trading days
commencing 22 trading days before the date in question) at the date
of the grant for 1.5% of the total outstanding shares on February 11,
2002 and 0.5% of the total outstanding shares on December 31, 2002.
If an event of default occurs during the period from the effective
amendment date to December 31, 2002, and has been continuing for more
than 30 days, the lenders will receive warrants to purchase an
additional 1% of the total outstanding shares at an exercise price
equal to the fair market value (as defined above) at the date of the
grant. If all amounts outstanding under the credit agreement are
repaid in full on or before March 31, 2003, all warrants received by
the lenders, other than the warrants received on February 11, 2002,
shall be returned to the Company. The warrants will not be tradable
separate from the related debt until the later of December 31, 2002
or nine months after the issuance of the warrants being transferred.
After the debt under the credit agreement has been paid in full, the
Company may repurchase the warrants or warrant shares at a price that
values the warrant shares at three times the exercise price.
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, 1999, 2000 and 2001
11. Capital stock (continued):
The fair value of the warrants was initially measured using a Black-Scholes
model at November 19, 2001 and will be remeasured each reporting period until
issued.
(e) Stock options:
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.
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
of Directors but not to exceed 1% of the total number of shares outstanding
per year. Options generally vest over a four-year period and expire 10 years
from their respective date of grant.
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, 1999, 2000 and 2001
11. Capital stock (continued):
Stock option transactions were as follows:
1998 HTM Plan 1998 SMTC Plan 2000 Equity Incentive Plan
----------------- ----------------------------------- -------------------------------------
Weighted Weighted Weighted Weighted Weighted
average average average average average
exercise Class A exercise Class L exercise Common exercise Common exercise
Shares price shares price shares price stock price stock price
-------- -------- -------- -------- ------- -------- -------- -------- --------- --------
Balance,
December 31,
1998............. 115,603 $ 5.14 -- $ -- -- -- -- $ -- -- $ --
Exchanged and
issued at
combination date. (115,603) (5.14) 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 -- -- -- --
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
Issued............ -- -- -- -- -- -- -- 225,000 6.12
Exercised......... -- -- -- -- -- -- (38,003) 5.78 -- --
Cancelled......... -- -- -- -- -- -- (139,332) 5.78 -- --
-------- ------ -------- ------ ------ ------ -------- ----- --------- ------
Balance,
December 31,
2001............. -- -- -- -- -- -- 289,060 5.78 1,622,000 17.25
======== ====== ======== ====== ====== ====== ======== ===== ========= ======
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, 1999, 2000 and 2001
11. Capital stock (continued):
The following options were outstanding as at December 31, 2001:
Weighted Weighted
average average Remaining
Outstanding exercise Exercisable exercise contractual
Option plan options price options price life
----------- ----------- -------- ----------- -------- -----------
1998 SMTC Plan. 289,060 $ 5.78 145,800 $ 5.78 2
2000 Equity
Incentive Plan 1,622,000 17.25 379,250 17.75 3
========= ====== ======= ====== =
The weighted average grant date fair value of options granted for the years
ended December 31, 1999, 2000 and 2001 are $17.13; $19.05 and $6.12
respectively.
The table below 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 Statement 123.
1999 2000 2001
------- ------ ---------
Earnings (loss) before extraordinary loss:
As reported.............................. $ (864) $6,316 $(104,811)
Pro forma................................ (1,122) 4,934 (107,912)
------- ------ ---------
Basic earnings (loss) per share before
extraordinary loss:
As reported.............................. $ (1.89) $ 0.24 $ (3.66)
Pro forma................................ (2.04) 0.13 (3.77)
======= ====== =========
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 years ended
December 31, 2000 and 2001, the Black-Scholes option pricing model was used.
Assumptions used to calculate the fair value were:
1999 2000 2001
---- ---- -----
Risk-free interest rate 6.0% 5.2% 4.9%
Dividend yield......... -- -- --
Expected life.......... 3-4 4 4
Volatility............. n/a 79.0% 147.0%
=== ==== =====
In January 2002, the Board of Directors gave the holders of options to
purchase an aggregate of 1,097,000 shares of common stock of the Company the
opportunity to return their options to the Company for cancellation. These
options, which were granted on August 30, 2000, had an exercise price of $19.88
(the "$19.88 options"). The Board of Directors believed that the $19.88 options
were unlikely to be exercised in the foreseeable future as the exercise price
was significantly above the Company's trading price at that time and during
several months prior to that time and as a result, they did not function as an
adequate management incentive. Upon cancellation of the $19.88 options
surrendered by various holders, the pool of shares as to which options may be
granted under the 2000 Equity Incentive Plan was increased by 1,087,000.
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, 1999, 2000 and 2001
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
expired on September 22, 2001 and involved 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.
(b) Forward exchange contracts:
In previous years, one of the Company's subsidiaries 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 matured 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 and capital lease obligations,
including the current portions, 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 2001, are as follows:
2000 2001
-------------------- --------------------
Carrying Carrying
Asset (liability) amount Fair value amount Fair value
----------------- --------- ---------- --------- ----------
Long-term debt..... $(115,805) $(115,805) $(122,797) $(122,797)
Capital lease
obligations....... (2,237) (2,237) (604) (604)
Interest rate swaps -- (85) -- --
Forward exchange
contracts......... (855) (855) -- --
========= ========= ========= =========
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, 1999, 2000 and 2001
13. Related party transactions:
The Company entered into related party transactions with certain
shareholders as follows:
1999 2000 2001
------ ------ ----
Management fees expensed under formal
management agreements........................ $ 717 $ 74 $--
Share issue costs incurred.................... -- 1,800 --
Financing and acquisition related fees paid... 1,741 674 --
Lease costs expensed for the Colorado facility 535 -- --
====== ====== ===
These transactions were recorded at the exchange amount, being the amounts
agreed to by the related parties.
14. Supplemental cash flow information:
1999 2000 2001
------ ------- ------
Interest paid.... $6,767 $13,064 $9,573
Income taxes paid 1,460 1,983 8,397
====== ======= ======
Non-cash financing and investing activities:
1999 2000 2001
------- ------- ------
Acquisition of equipment under capital leases.............. $ -- $ 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 --
Cash released from escrow.................................. -- -- 3,583
======= ======= ======
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, 1999, 2000 and 2001
15. Commitments:
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:
2002...... $21,154
2003...... 16,776
2004...... 11,534
2005...... 3,456
2006...... 3,060
Thereafter 2,924
-------
$58,904
=======
Operating lease expense for the years ended December 31, 1999, 2000 and 2001
was $4,585; $12,864 and $17,443 respectively.
16. Contingencies:
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-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, 1999, 2000 and 2001
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 nine 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) before restructuring charges and extraordinary items.
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 2001
------------------------------ ------------------------------ ------------------------------
Net Net Net
Total Intersegment external Total Intersegment external Total Intersegment external
revenue revenue revenue revenue revenue revenue revenue revenue revenue
-------- ------------ -------- -------- ------------ -------- -------- ------------ --------
United
States. $223,006 $(1,419) $221,587 $633,959 $ (9,403) $624,556 $540,353 $ (43,425) $496,928
Canada... 21,675 (2,676) 18,999 79,923 (5,165) 74,758 66,632 (3,778) 62,854
Europe... 9,507 (1,995) 7,512 21,037 (2,997) 18,040 28,525 (1,445) 27,080
Mexico... 9,864 - 9,864 79,612 (14,203) 65,409 134,061 (108,742) 25,319
-------- ------- -------- -------- -------- -------- -------- --------- --------
$264,052 $(6,090) $257,962 $814,531 $(31,768) $782,763 $769,571 $(157,390) $612,181
======== ======= ======== ======== ======== ======== ======== ========= ========
1999 2000 2001
------ ------- ---------
EBITA:
United States............................................ $6,917 $24,813 $ (24,875)
Canada................................................... 2,107 10,638 (6,271)
Europe................................................... (222) (1,053) (2,474)
Mexico................................................... (503) (669) (13,826)
------ ------- ---------
8,299 33,729 (47,446)
Interest.................................................. 7,066 13,837 9,330
Amortization.............................................. 1,990 6,229 9,518
Restructuring charges..................................... -- -- 67,548
------ ------- ---------
Earnings (loss) before income taxes and extraordinary loss $ (757) $13,663 $(133,842)
------ ------- ---------
Capital expenditures:
United States............................................ $2,713 $16,456 $ 11,043
Canada................................................... 840 3,141 2,001
Europe................................................... 30 724 644
Mexico................................................... 547 5,896 5,431
------ ------- ---------
$4,130 $26,217 $ 19,119
====== ======= =========
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, 1999, 2000 and 2001
18. Segmented information (continued):
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 16 years, 6 years and 4 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.
1999 2000 2001
-------- -------- --------
Geographic revenue:
United States... $225,772 $694,290 $491,836
Canada.......... 8,983 18,844 38,334
Europe.......... 19,965 53,588 60,318
Asia............ 3,242 16,041 21,693
-------- -------- --------
$257,962 $782,763 $612,181
======== ======== ========
2000 2001
-------- --------
Long-lived assets:
United States.. $ 79,136 $ 73,269
Canada......... 24,540 21,832
Europe......... 20,410 1,998
Mexico......... 14,627 18,877
-------- --------
$138,713 $115,976
======== ========
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.
The Company expects to continue to depend upon a relatively small number of
customers for a significant percentage of its revenue. In addition to having a
limited number of customers, the Company manufactures a limited number of
products for each customer. If the Company loses any of its largest customers
or any product line manufactured for one of its largest customers, it could
experience a significant reduction in revenue. Also, the insolvency of one or
more of its largest customers or the inability of one or more of its largest
customers to pay for its orders could decrease revenue. As many costs and
operating expenses are relatively fixed, a reduction in net revenue can
decrease profit margins and adversely affect business, financial condition and
results of operations.
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.
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, 1999, 2000 and 2001
19. Significant customers and concentration of credit risk (continued):
During 2000, two customers individually comprised 16% and 10% of total
revenue across all geographic segments. At December 31, 2000, these customers
each represented 10% of the Company's accounts receivable.
During 2001, three customers individually comprised 20%, 10% and 10% of
total revenue across all geographic segments. At December 31, 2001, these
customers represented 34%, 10% and 5% respectively, of the Company's accounts
receivable.
20. Earnings (loss) per common share:
The following table sets forth the computation of basic net earnings (loss)
per common share before extraordinary loss:
1999 2000 2001
---------- ----------- -----------
Numerator:
Earnings (loss) before extraordinary loss. $ (864) $ 6,316 $ (104,811)
Class L preferred entitlement............. (2,185) (3,164) --
---------- ----------- -----------
Earnings (loss) before extraordinary loss
attributable to common shareholders...... $ (3,049) $ 3,152 $ (104,811)
---------- ----------- -----------
Denominator:
Weighted average shares--basic 1,617,356 13,212,076 28,608,072
Effect of dilutive securities:
Employee stock options.............. -- 155,744 --
Warrants............................ -- 368,796 --
---------- ----------- -----------
Weighted average shares--diluted........... 1,617,356 13,736,616 28,608,072
========== =========== ===========
Net earnings (loss) per common share before
extraordinary loss:
Basic..................................... $ (1.89) $ 0.24 $ (3.66)
Diluted................................... (1.89) 0.23 (3.66)
========== =========== ===========
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.
During fiscal 1999, 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.
During 2001, the calculation did not include 1,911,060 options as the effect
would have been anti-dilutive.
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, 1999, 2000 and 2001
21. Restructuring and other charges:
During fiscal year 2001, in response to excess capacity caused by the
slowing technology end market, the Company commenced a restructuring program
aimed at reducing its cost structure. Accordingly, the Company recorded
restructuring charges of $67,548 consisting of a write-down of goodwill and
other intangible assets and the costs associated with existing or re-sizing
facilities. In addition, the Company recorded other charges of $27,298 related
primarily to accounts receivable, inventory and asset impairment charges.
The following table details the components of the restructuring and other
charges, and the related amounts included in accrued liabilities:
Accrual at
Total Non-cash Cash December 31,
charges charges payments 2001
------- -------- -------- ------------
Inventory write-downs included in cost of
sales(a)............................... $25,388 $(25,388) $ -- $ --
Lease and other contract obligations(a).. 8,678 -- (2,514) 6,164
Severance(a)............................. 3,830 -- (3,205) 625
Asset impairment(a)...................... 5,609 (5,609) -- --
Write-down of intangible assets(b)....... 17,765 (17,765) -- --
Other facility exit costs(a)............. 6,278 (3,059) (2,446) 773
------- -------- ------- ------
42,160 (26,433) (8,165) 7,562
------- -------- ------- ------
67,548 (51,821) (8,165) 7,562
Other charges(c)......................... 27,298 (27,298) -- --
------- -------- ------- ------
$94,846 $(79,119) $(8,165) $7,562
======= ======== ======= ======
(a) Restructuring charges:
The write-down of inventory of $25,388 is associated with the closure of
the assembly facility in Denver.
Lease and other contract obligations of $8,678 include the costs
associated with decommissioning, exiting and subletting the Denver facility
and the costs of exiting equipment and facility leases at various other
locations.
Severance costs of $3,830 are associated with the closure of the Denver
assembly facility and the Haverhill interconnect facility and the re-sizing
of the Mexico and Ireland facilities. The severance costs relate to all 429
employees at the Denver facility, 26 plant and operational employees at the
Haverhill facility, 915 plant and operational employees at the Mexico
facility, 47 plant and operational employees at the Cork, Ireland facility
and 68 plant and operational employees at the Donegal, Ireland facility.
Asset impairment charges of $5,609 reflect the write-down of certain
long-lived assets, primarily at the Denver location, that became impaired as
a result of the rationalization of facilities. The asset impairment was
determined based on undiscounted projected future net cash flows relating to
the assets resulting in a write-down to estimated salvage values.
Other facility exit costs include personnel costs and other fees directly
related to exit activities at the Denver and Haverhill locations.
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, 1999, 2000 and 2001
21. Restructuring and other charges (continued):
The major components of the restructuring are estimated to be complete
during fiscal year 2002.
(b) Write-down of intangible assets:
During fiscal year 2001, the Company recorded a write-down of intangible
assets of $17,765 which includes the write-down of goodwill associated with
the Qualtron Teoranta acquisition of $16,265 and the write-down of
intangible assets of $1,500. In accordance with SFAS No. 121, "Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed
of", current accounting guidance requires that long-lived assets and certain
identifiable intangible assets, including goodwill, held and used by an
entity, be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Due to the downturn in the electronics manufacturing services
industry, the significant operating loss incurred in fiscal 2001 and the
restructuring and other charges recorded in 2001, the Company reviewed the
recoverability of the carrying value of long-lived assets, including
allocated goodwill and other intangible assets. An evaluation under SFAS No.
121 indicated that the estimated future net cash flows associated with the
long-lived assets acquired as part of the Qualtron Teoranta acquisition were
less than their carrying value and, accordingly, a write-down to estimated
fair values was recorded for unamortized goodwill associated with the
acquisition of Qualtron Teoranta and certain intangible assets.
(c) Other charges:
During fiscal year 2001, the Company recorded other charges totaling
$27,298 pre-tax related primarily to accounts receivable, inventory and
asset impairment charges, resulting from the current downturn in the
technology sector. Included in cost of sales are other charges of $18,496
related to inventory and included in selling, general and administrative
expenses are other charges of $7,937 related to accounts receivable
exposures and other charges of $865 related to asset impairment charges, at
various facilities other than the Denver and Haverhill facilities.
22. Comparative figures:
Certain 1999 comparative figures have been reclassified to conform with the
current year's financial statement presentation.
23. 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:
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, 1999, 2000 and 2001
23. United States and Canadian accounting policy differences (continued):
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:
1999 2000 2001
------- ------ ---------
Net earnings (loss) in accordance with U.S. GAAP.... $(2,143) $3,638 $(104,811)
Amortization(a)..................................... -- 20 220
Write-down of goodwill(a)........................... -- -- 2,205
------- ------ ---------
Net earnings (loss) in accordance with Canadian GAAP $(2,143) $3,658 $(102,386)
======= ====== =========
Net earnings (loss) for the year under Canadian GAAP is comprised of the
following:
1999 2000 2001
------- --------- ---------
Operating income (loss).............................. $ 6,309 $ 27,520 $(122,087)
Interest............................................. 7,066 13,837 9,330
Debt extinguishment costs (b)........................ 2,090 4,318 --
------- --------- ---------
Earnings (loss) before income taxes.................. (2,847) 9,365 (131,417)
Income taxes (recovery).............................. (704) 5,707 (29,031)
------- --------- ---------
Net earnings (loss).................................. $(2,143) $ 3,658 $(102,386)
======= ========= =========
Shareholders' equity in accordance with U.S. GAAP.... $ 7,799 $ 228,486 $ 124,661
Shares issued to acquire Qualtron Teoranta (a)....... -- (2,445) (2,445)
Amortization of goodwill (a)......................... -- 20 240
Write-down of goodwill (a)........................... -- -- 2,205
------- --------- ---------
Shareholders' equity in accordance with Canadian GAAP $ 7,799 $ 226,061 $ 124,661
======= ========= =========
(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, at the date of acquisition, the shares
were 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. Goodwill amortization in fiscal 2001 under
U.S. GAAP was $1,783 (2000--$151) and under Canadian GAAP was $1,563
(2000--$131). The write-down of goodwill during 2001 relating to Qualtron
Teoranta was $16,265 under U.S. GAAP and $14,060 under Canadian GAAP.
(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.
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, 1999, 2000 and 2001
23. United States and Canadian accounting policy differences (continued):
(c) Earnings per share:
In fiscal 2000, the Company retroactively adopted the new accounting
standard approved by The Canadian Institute of Chartered Accountants
("CICA") dealing with the computation of earnings per share which requires
the use of the treasury stock method and is substantially consistent with
U.S. GAAP.
(d) New accounting pronouncements:
In July 2001, the CICA issued new standards that are substantially
consistent with Statements No. 141 and 142 (note 2(p)) except that under
Canadian GAAP, any transitional impairment charge is recognized in opening
retained earnings, under U.S. GAAP the cumulative adjustment is recognized
in earnings.
24. Subsequent event:
Subsequent to December 31, 2001, the main customer of the Company's Cork,
Ireland facility was placed into administration as part of a financial
restructuring. As a result, on March 19, 2002, the Company announced that it
was taking steps to place the Cork, Ireland facility in voluntary
administration. The Company anticipates that it will take a charge of $8,000 to
$10,000 in the first quarter of 2002 related to the closure of the facility.
SMTC will continue to conduct European operations through its Donegal, Ireland
facility.
F-40