<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 2, 2000
OR
[_] 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 333-33208
SMTC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 98-0197680
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
635 HOOD ROAD
MARKHAM, ONTARIO, CANADA L3R 4N6
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(905) 479-1810
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether SMTC Corporation: (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 [_] No [X]. SMTC Corporation filed
Form 8-A on July 18, 2000 and has filed all reports required to be filed since
such date.
As of July 2, 2000, SMTC Corporation had 2,443,310 shares of Class A-1 common
stock, par value $0.001 per share, and 267,575 shares of Class L common stock,
par value $0.001 per share, outstanding.
1
<PAGE>
SMTC Corporation
Form 10-Q
Table of Contents
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I Financial Information 3
Item 1. Financial Statements 3
Consolidated Balance Sheets as of July 2, 2000
and December 31, 1999 3
Consolidated Statements of Earnings (loss) for the three months
ended and the six months ended July 2, 2000 and June 30, 1999 4
Consolidated Statements of Changes in Stockholders' Equity for the
six months ended July 2, 2000 5
Consolidated Statements of Cash Flows for the three months ended and
the six months ended July 2, 2000 and June 30, 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 32
PART II Other Information 33
Item 1. Legal Proceedings 33
Item 2. Changes in Securities and Use of Proceeds 33
Item 3. Defaults upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
Signatures 35
</TABLE>
2
<PAGE>
PART I FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars)
(Unaudited)
------------------------------------------------------------------------------
July 2, December 31,
2000 1999
------------------------------------------------------------------------------
Assets
Current assets:
Cash and short-term investments $ 1,753 $ 2,083
Accounts receivable 120,540 71,597
Inventories 123,067 61,680
Prepaid expenses 5,117 3,647
Deferred income taxes 1,047 1,527
------------------------------------------------------------------------------
251,524 140,534
Capital assets 37,858 35,003
Goodwill 38,783 40,800
Other assets 11,758 11,145
Deferred income taxes 592 623
------------------------------------------------------------------------------
$ 340,515 $ 228,105
------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 104,940 $ 53,119
Accrued liabilities 53,208 29,307
Income taxes payable - 1,127
Current portion of long-term debt 4,000 2,000
Current portion of capital lease obligations 1,249 1,541
------------------------------------------------------------------------------
163,397 87,094
Capital lease obligations 1,649 1,537
Long-term debt 157,496 128,942
Deferred income taxes 2,700 2,733
Stockholders' loans payable 5,200 -
Stockholders' equity:
Capital stock 3 3
Warrants 3,965 367
Loans receivable (60) (60)
Additional paid-in-capital 11,804 11,804
Deficit (5,639) (4,315)
------------------------------------------------------------------------------
10,073 7,799
------------------------------------------------------------------------------
$ 340,515 $ 228,105
------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Statements of Earnings (Loss)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
(Unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
----------------------------- ------------------------------
July 2, June 30, July 2, June 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 167,136 $ 23,293 $ 291,469 $ 46,561
Cost of sales 153,391 21,841 266,518 43,407
--------------------------------------------------------------------------------------------------------------
Gross profit 13,745 1,452 24,951 3,154
Selling, general and
administrative expenses 7,265 802 14,944 1,572
Amortization 1,230 65 2,502 130
--------------------------------------------------------------------------------------------------------------
Operating income 5,250 585 7,505 1,452
Interest 4,115 734 7,904 1,529
--------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 1,135 (149) (399) (77)
Income tax expense (recovery) 1,016 (55) 925 (28)
--------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 119 $ (94) $ (1,324) $ (49)
--------------------------------------------------------------------------------------------------------------
Loss per Class A share:
Basic $ (0.53) $ (0.07) $ (1.69) $ (0.04)
Diluted (0.53) (0.07) (1.69) (0.04)
--------------------------------------------------------------------------------------------------------------
Weighted average number of Class A
shares used in the calculations of
loss per share:
Basic 2,422,927 1,393,971 2,422,927 1,393,971
Diluted 2,422,927 1,393,971 2,422,927 1,393,971
--------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Statements of Changes in Stockholders' Equity
(Expressed in thousands of U.S. dollars)
Six months ended July 2, 2000
(Unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Additional
Capital paid-in Loans Stockholders'
stock Warrants capital receivable Deficit equity
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 $ 3 $ 367 $ 11,804 $ (60) $ (4,315) $ 7,799
Warrants issued - 3,598 - - - 3,598
Loss for the six months - - - - (1,324) (1,324)
--------------------------------------------------------------------------------------------------------------
Balance, July 2, 2000 $ 3 $ 3,965 $ 11,804 $ (60) $ (5,639) $ 10,073
--------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Statements of Cash Flows
(Expressed in thousands of U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
------------------------- ---------------------------
July 2, June 30, July 2, June 30,
2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash provided by (used in):
Operations:
Net earnings (loss) $ 119 $ (94) $ (1,324) $ (49)
Items not involving cash:
Amortization 1,230 65 2,502 130
Depreciation 2,365 898 4,840 1,793
Deferred income taxes 253 (54) 478 (28)
Loss on disposition of capital assets - - (44) -
Change in non-cash operating working capital:
Accounts receivable (39,889) (1,359) (48,943) 6,224
Inventories (36,673) (1,354) (61,387) 1,367
Prepaid expenses 224 (257) (1,470) (357)
Accounts payable, accrued liabilities and
income taxes payable 67,201 2,528 74,595 (2,681)
----------------------------------------------------------------------------------------------------------------------
(5,170) 373 (30,753) 6,399
Financing:
Repayment of bank indebtedness - (414) - (5,019)
Net increase (decrease) in revolving
credit facility (921) - 30,554 -
Repayment of long-term debt - (81) - (162)
Principal payments on capital leases (303) (429) (721) (847)
Proceeds from warrants 2,500 - 2,500 -
Stockholders' loans payable 5,200 - 5,200 -
----------------------------------------------------------------------------------------------------------------------
6,476 (924) 37,533 (6,028)
Investments:
Purchase of capital assets (4,664) (69) (7,154) (131)
Proceeds from sale of capital assets - - 44 -
----------------------------------------------------------------------------------------------------------------------
(4,664) (69) (7,110) (131)
----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (3,358) (620) (330) 240
Cash and cash equivalents, beginning period 5,111 1,346 2,083 486
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,753 $ 726 $ 1,753 $ 726
----------------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Cash paid during the period:
Income taxes $ 6,765 $ - $ 1,602 $ -
Interest 3,976 672 7,895 1,128
Non-cash investing and financing activities:
Acquisition of equipment under
capital lease 248 - 541 -
Value of warrants in excess of
proceeds received 1,098 - 1,098 -
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Cash and cash equivalents is defined as cash and short-term investments.
See accompanying notes to consolidated financial statements.
6
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Notes to Financial Statements
(Expressed in thousands of U.S. dollars)
Three and six months ended July 2, 2000 and June 30, 1999
(Unaudited)
--------------------------------------------------------------------------------
1. Basis of presentation:
The Company's accounting principles are in accordance with accounting
principles generally accepted in the United States.
The accompanying unaudited consolidated balance sheets as at July 2, 2000
and December 31, 1999, and the related unaudited consolidated statements
of earnings (loss) for the three and six month periods ended July 2, 2000
and June 30, 1999, the unaudited consolidated statement of changes in
stockholders' equity for the six month period ended July 2, 2000; and the
unaudited consolidated statements of cash flows for the three and six
month periods ended July 2, 2000 and June 30, 1999 have been prepared on
substantially the same basis as the annual consolidated financial
statements. Management believes the financial statements reflect all
adjustments, consisting only of normal recurring accruals, which are, in
the opinion of management, necessary for a fair presentation of the
Company's financial position, operating results and cash flows for the
periods presented. The results of operations for the three and six month
periods ended July 2, 2000 are not necessarily indicative of results to
be expected for the entire year. These unaudited interim consolidated
financial statements should be read in conjunction with the annual
consolidated financial statements and notes thereto for the year ended
December 31, 1999.
2. Inventories:
---------------------------------------------------------
July 2, December 31,
2000 1999
---------------------------------------------------------
Raw materials $ 70,829 $ 35,371
Work in process 40,992 17,124
Finished goods 10,325 8,578
Other 921 607
---------------------------------------------------------
$ 123,067 $ 61,680
---------------------------------------------------------
7
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Notes to Financial Statements
(Expressed in thousands of U.S. dollars)
Three and six months ended July 2, 2000 and June 30, 1999
(Unaudited)
-------------------------------------------------------------------------------
3. Loss per share:
The following table sets forth the calculation of basic and diluted loss
per Class A share (in thousands, except share quantities and per share
data):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Three months ended Six months ended
---------------------------- ---------------------------
July 2, June 30, July 2, June 30,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net earnings (loss) $ 119 $ (94) $ (1,324) $ (49)
Less Class L preferred
entitlement (1,408) - (2,774) -
-------------------------------------------------------------------------------------------------------
Loss available to Class A
shareholders $ (1,289) $ (94) $ (4,098) $ (49)
-------------------------------------------------------------------------------------------------------
Denominator:
Weighted-average shares -
basic 2,422,927 1,393,971 2,422,927 1,393,971
-------------------------------------------------------------------------------------------------------
Loss per share:
Basic $ (0.53) $ (0.07) $ (1.69) $ (0.04)
-------------------------------------------------------------------------------------------------------
</TABLE>
For the three and six month periods ended July 2, 2000 and for the three
month and six month periods ended June 30, 1999, options and warrants to
purchase common stock were outstanding during those periods but were not
included in the computation of diluted loss per share because their
effect would be anti-dilutive on the loss per Class A share for the
period.
4. Income taxes:
The Company's effective tax rate exceeds the statutory rate primarily due
to non-deductible goodwill amortization and operating losses in certain
jurisdictions.
8
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Notes to Financial Statements
(Expressed in thousands of U.S. dollars)
Three and six months ended July 2, 2000 and June 30, 1999
(Unaudited)
--------------------------------------------------------------------------------
5. 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 eight facilities in the United States,
Canada, Europe and Mexico. The Company monitors the performance of its
geographic operating segments based on EBITA (earnings before interest,
taxes and amortization). Intersegment adjustments reflect intersegment
sales that are generally recorded at prices that approximate arm's-length
transactions. Information about the operating segments is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Three months ended July 2, 2000 Six months ended July 2, 2000
------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Net
Total Intersegment external Total Intersegment external
revenue revenue revenue revenue revenue revenue
-------------------------------------------------------------------------------------------------------
United States $ 133,224 $ (2,895) $ 130,329 $ 240,020 $ (3,569) $ 236,451
Canada 16,967 (1,437) 15,530 30,005 (2,422) 27,583
Europe 4,638 (685) 3,953 9,365 (2,161) 7,204
Mexico 18,549 (1,225) 17,324 21,470 (1,239) 20,231
-------------------------------------------------------------------------------------------------------
$ 173,378 $ (6,242) $ 167,136 $ 300,860 $ (9,391) $ 291,469
-------------------------------------------------------------------------------------------------------
EBITA:
United States $ 5,500 $ 9,077
Canada 1,500 2,228
Europe (728) (1,222)
Mexico 208 (76)
-------------------------------------------------------------------------------------------------------
6,480 10,007
Interest 4,115 7,904
Amortization 1,230 2,502
-------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes $ 1,135 $ (399)
-------------------------------------------------------------------------------------------------------
Capital expenditures:
United States $ 2,701 $ 3,965
Canada 192 857
Europe 41 219
Mexico 1,978 2,654
-------------------------------------------------------------------------------------------------------
$ 4,912 $ 7,695
-------------------------------------------------------------------------------------------------------
</TABLE>
Prior to July 30, 1999, the Company operated in one geographic segment -
the United States.
9
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Notes to Financial Statements
(Expressed in thousands of U.S. dollars)
Three and six months ended July 2, 2000 and June 30, 1999
(Unaudited)
--------------------------------------------------------------------------------
5. Segmented information (continued):
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.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Three months ended Six months ended
---------------------------- ----------------------------
July 2, June 30, July 2, June 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Geographic revenue:
United States $ 147,703 $ 22,610 $ 258,584 $ 44,544
Canada 5,190 - 8,494 -
Europe 10,655 521 18,450 1,646
Asia 3,588 162 5,941 371
-----------------------------------------------------------------------------------------
$ 167,136 $ 23,293 $ 291,469 $ 46,561
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
July 2, December 31,
2000 1999
-----------------------------------------------------------------------------------------
Long-lived assets:
United States $ 45,555 $ 40,304
Canada 24,654 25,585
Europe 802 735
Mexico 17,388 9,179
-----------------------------------------------------------------------------------------
$ 88,399 $ 75,803
-----------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Notes to Financial Statements
(Expressed in thousands of U.S. dollars)
Three and six months ended July 2, 2000 and June 30, 1999
(Unaudited)
--------------------------------------------------------------------------------
6. Subsequent events:
(a) Initial public offering:
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
U.S. $16.00 per share and 4,375,000 exchangeable shares at a price of
Canadian $23.60 per share. The total net proceeds to the Company from
the offering of approximately U.S. $156 million was used to reduce
its indebtedness under the senior credit facility, repay the
subordinated stockholders' notes issued in May 2000, repay the demand
notes issued in July 2000 and finance the cash portion of the
purchase price of the Pensar Corporation acquisition which closed
simultaneously with the initial public offering. The Company will
record an after-tax charge on repayment of the indebtedness and
subordinated notes amounting to approximately $2,000. The charge will
be recorded as an extraordinary loss.
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
U.S. $16.00 per share. The net proceeds to the Company from the sale
of those shares of $24.6 million were used to reduce indebtedness
under the senior credit facility.
(b) Share reclassification:
Concurrent with the effectiveness of the initial public offering,
SMTC Corporation completed a share capital reorganization effected as
follows:
. each outstanding Class Y share of the Company's subsidiary, SMTC
Manufacturing Corporation of Canada, was purchased in exchange
for shares of Class L common stock;
. 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 determined by dividing the
preference amount by the value of a share of Class A common stock
based on the initial public offering price;
11
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Notes to Financial Statements
(Expressed in thousands of U.S. dollars)
Three and six months ended July 2, 2000 and June 30, 1999
(Unaudited)
--------------------------------------------------------------------------------
6. Subsequent events (continued):
. each outstanding share of Class A common stock was converted into
approximately 3.67 shares of common stock;
. all outstanding Class N common stock were redeemed and one share
of special voting stock was issued which is held by a trustee for
the benefit of the holders of the exchangeable shares; and
. each Class L exchangeable share was converted into exchangeable
shares of the same class as those offered in the offering at the
same ratio that the shares of Class L common stock were converted
to shares of common stock.
Pro forma earnings (loss) per share:
The calculation of pro forma earnings (loss) per share to give effect
to the share reclassification was determined by dividing net earnings
(loss) by the pro forma weighted-average common shares outstanding
after giving retroactive effect to the conversion of all classes of
common stock into shares of common stock effective with the initial
public offering. The calculation of pro forma earnings (loss) per
share does not give effect to any other subsequent events described
in Note 6.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Three months ended Six months ended
------------------------------- -----------------------------
July 2, June 30, July 2, June 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net earnings (loss) $ 119 $ (94) $ (1,324) $ (49)
---------------------------------------------------------------------------------------------------
Denominator:
Weighted-average shares -
basic 13,347,947 5,122,146 13,347,947 5,122,146
Effect of dilutive securities:
Employee stock options 313,620 - - -
Warrants 932,173 - - -
---------------------------------------------------------------------------------------------------
Weighted-average shares -
diluted 14,593,740 5,122,146 13,347,947 5,122,146
---------------------------------------------------------------------------------------------------
Pro forma earnings (loss)
per share:
Basic $ 0.01 $ (0.02) $ (0.10) $ (0.01)
Diluted 0.01 (0.02) (0.10) (0.01)
----------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Notes to Financial Statements
(Expressed in thousands of U.S. dollars)
Three and six months ended July 2, 2000 and June 30, 1999
(Unaudited)
--------------------------------------------------------------------------------
6. Subsequent events (continued):
(c) Acquisition of Pensar Corporation:
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 approximately $36,600 resulting in a
premium over tangible net book value of approximately $26,800. The
purchase consideration consisted of $17,000 cash and the balance in
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.
(d) Demand notes:
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 are secured by a portion of the Company's
capital assets. The demand notes bore interest of 3% of the principal
amount accruing on the date of issuance and 13.75% per year
thereafter and were repaid with the proceeds of the offering.
(e) Credit facility:
In connection with the initial public offering, the Company entered
into a new credit agreement with its lenders which provides for term
loans up to $50,000 and revolving credit loans, swing line loans and
letters of credit up to $100,000.
(f) Management agreement termination fee:
On July 27, 2000, the Company paid an aggregate fee of $1,800 to Bain
Capital Partners VI, L.P., Celerity Partners, Inc., and Kilmer
Electronics Group Limited to terminate the Company's management
agreement.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SELECTED CONSOLIDATED FINANCIAL DATA
The pro forma results of operations included in this report for the quarter
ended July 2, 2000 and June 30, 1999 and the six month period ended July 2, 2000
and June 30, 1999 contain the results of Surface Mount, HTM, W.F. Wood, and
Pensar as if the combination of Surface Mount and HTM and the acquisitions of
W.F. Wood and Pensar had occurred on January 1, 1999. As such, the pro forma
results have been adjusted to reflect additional goodwill amortization related
to the combination of Surface Mount and HTM, additional goodwill amortization
related to the acquisition of W.F. Wood, additional goodwill amortization
related to the acquisition of Pensar, additional interest expense and income tax
effects related to the borrowings required to complete the Pensar acquisition,
and the effect of the initial public offering before the exercise of the
underwriters' over-allotment option. The effect of the exercise of the
over-allotment option has been excluded from the pro forma results in order to
facilitate comparability with the pro forma results reported in our Registration
Statement on Form S-1, No. 333-33208, as amended.
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.
Consolidated Pro forma Statement of Operations Data:
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------------------
July 2, June 30, July 2, June 30,
2000 1999 2000 1999
---------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 184.4 $ 111.7 $ 325.0 $ 227.0
Cost of sales 168.1 101.2 295.0 205.3
---------------------------------------
Gross profit 16.3 10.5 30.0 21.7
Selling, general and administrative expenses 8.7 6.5 17.9 13.7
Amortization of intangible assets 1.8 1.8 3.5 3.5
---------------------------------------
Operating income 5.8 2.2 8.6 4.5
Interest 1.6 0.1 2.9 0.2
---------------------------------------
Earnings before income taxes 4.2 2.1 5.7 4.3
Income taxes 2.2 1.2 3.4 2.4
---------------------------------------
Net earnings $ 2.0 $ 0.9 $ 2.3 $ 1.9
=======================================
Earnings per common share:
Basic $ 0.08 $ 0.03 $ 0.09 $ 0.07
=======================================
</TABLE>
Note: Pro forma results of operations exclude the overall effect of the August
18, 2000 issuance of an additional 1,650,000 common shares upon the exercise of
the underwriters' over-allotment option. The net proceeds from the sale of
shares upon the exercise of this option were $24.6 million. The effect on
interest expense for the quarter ended July 2, 2000 and the six months ended
July 2, 2000 would have been a reduction of $0.5 million and $1.0 million,
respectively. The effect on income taxes for the same periods would have been an
increase of $0.2 million and $0.4 million, respectively. The effect on net
earnings for the same periods would have been an increase of $0.3 million and
$0.6 million, respectively. The effect on earnings per share for the same
periods would have been an increase of $0.01 and $0.02, respectively.
14
<PAGE>
Consolidated Actual Statement of Operations Data:
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------------------
July 2, June 30, July 2, June 30,
2000 1999 2000 1999
---------------------------------------
<S> <C> <C> <C> <C>
Revenue $167.1 $ 23.3 $291.5 $ 46.5
Cost of sales 153.4 21.8 266.6 43.4
---------------------------------------
Gross profit 13.7 1.5 24.9 3.1
Selling, general and administrative expenses 7.2 0.8 14.9 1.6
Amortization of intangible assets 1.3 0.1 2.5 0.1
---------------------------------------
Operating income 5.2 0.6 7.5 1.4
Interest 4.1 0.7 7.9 1.5
---------------------------------------
Earnings (loss) before income taxes 1.1 (0.1) (0.4) (0.1)
Income taxes (recovery) 1.0 -- 0.9 --
---------------------------------------
Net earnings (loss) $ 0.1 $ (0.1) $ (1.3) $ (0.1)
=======================================
Pro forma earnings (loss) per common share:
Basic $ 0.01 $(0.02) $(0.10) $(0.01)
=======================================
</TABLE>
Note: Pro forma earnings (loss) per common share has been calculated by giving
retroactive effect to the share reclassification described in our
financial statements for the three and six months ended July 2, 2000 and
June 30, 1999.
Consolidated Balance Sheet Data:
(in millions)
<TABLE>
<CAPTION>
Actual Pro forma
As at July 2, As at July 2,
2000 2000
-------------------------------------
<S> <C> <C>
Cash and short-term investments $ 1.8 $ 1.8
Working Capital 88.1 102.9
Total Assets 340.5 387.5
Total debt, including current maturities 169.6 54.1
Shareholders' equity 10.1 165.3
</TABLE>
Other Financial Data - Pro forma consolidated adjusted net earnings:
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------
July 2, June 30, July 2, June 30,
2000 1999 2000 1999
------------------------------------
<S> <C> <C> <C> <C>
Net earnings $ 2.0 $ 0.9 $ 2.3 $ 1.9
Adjustments:
Amortization of goodwill 1.7 1.8 3.4 3.5
Income tax effect (0.5) (0.5) (0.8) (0.9)
------------------------------------
Adjusted net earnings $ 3.2 $ 2.2 $ 4.9 $ 4.5
====================================
Adjusted net earnings per common share $ 0.12 $ 0.08 $ 0.19 $ 0.17
====================================
</TABLE>
Other Financial Data - Actual consolidated adjusted net earnings:
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------------------
July 2, June 30, July 2, June 30,
2000 1999 2000 1999
--------------------------------------------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 0.1 $ (0.1) $ (1.3) $ (0.1)
Adjustments:
Amortization of goodwill 1.0 -- 2.0 --
Income tax effect (0.1) -- (0.3) --
--------------------------------------------
Adjusted net earnings (loss) $ 1.0 $ (0.1) $ 0.4 $ (0.1)
============================================
Pro forma adjusted net earnings
per common share $ 0.07 $ (0.02) $ 0.03 $ (0.01)
============================================
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading provider of advanced electronics manufacturing services, or
EMS, to electronics industry original equipment manufacturers, or OEM's,
worldwide. Our full range of value added services include product design,
procurement, prototyping, assembly, test, final system build, comprehensive
supply chain management, packaging, global distribution and after sales support.
SMTC Corporation, or SMTC, is the result of the July 1999 combination of the
former SMTC Corporation, or Surface Mount, and HTM Holdings, Inc., or HTM. Upon
completion of the combination, 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 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 1998.
Our revenue has grown from approximately $59.0 million in 1997 to pro forma
revenue of $502.7 million in 1999 through both internal growth and strategic
acquisitions. Surface Mount developed a strategically located new site in San
Jose, California in 1995. The July 1999 combination of Surface Mount and HTM
provided us with increased strategic and operating scale and greater geographic
breadth. In addition, as a result of the combination, we gained Carrier Access,
Netopia, IBM and Lucent Technologies as customers. Collectively, since 1995 we
have completed the following six acquisitions:
. Radian Electronics' operations, which enabled our expansion into
Austin, Texas, and established our relationship with Dell, in 1996;
. Ogden Atlantic Design's operations in Charlotte, North Carolina,
which provided us with a facility in a major technology center in the
Southeastern United States, in 1997;
. Ogden International Europe's operations in Cork, Ireland, which
expanded our global presence into Europe, in 1998;
. Zenith Electronics' facility in Chihuahua, Mexico, which expanded our
cost-effective manufacturing capabilities and added Zenith as a
customer, in July 1999;
. W.F. Wood, based outside Boston, Massachusetts, which provided us
with a manufacturing presence in the Northeastern United States,
expanded our value-added services to include high precision
enclosures capabilities, and added EMC and Sycamore Networks as
customers, in September 1999; and
. Subsequent to the six month period ended July 2, 2000, on July 27,
2000 and concurrent with the closing of our initial public offering
(described below), Pensar Corporation, an electronics manufacturing
services company specializing in design services and located in
Appleton, Wisconsin.
In addition, subsequent to July 2, 2000, we completed the following financing
activities:
. On July 3, 2000, we issued demand notes in the aggregate principal
amount of $9.925 million, which were repaid with the proceeds of our
initial public offering;
16
<PAGE>
. 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
$156.0 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 a new
credit agreement with our lenders, which provides for term loans up
to $50.0 million and revolving credit loans, swing line loans and
letters of credit up to $100.0 million;
. On July 27, 2000, we paid a fee of $1.8 million to terminate a
management agreement under which we paid quarterly fees of $156,250;
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.
We seek acquisition opportunities that enable us to expand our geographic reach,
add manufacturing capacity and diversify into new markets. Presently, we are
actively considering potential acquisitions in North America and Europe, and we
are targeting Asia for future expansion. We intend to continue to capitalize on
attractive acquisition opportunities in the EMS marketplace, and our goal is
generally to have each acquisition be accretive to earnings after a transition
period of approximately one year. We also plan to continue our strategy of
augmenting our existing EMS capabilities with the addition of related
value-added services. By expanding the services we offer, we believe that we
will be able to expand our business with our existing customers and develop new
opportunities with potential customers.
Consistent with our past practices and normal course of business, we engage from
time to time in discussions with respect to potential acquisitions. While we
have identified several opportunities that would expand our global presence, add
to our value-added services and establish strategic relationships with new
customers, we are not currently party to any definitive acquisition agreements.
The July 1999 combination of Surface Mount and HTM and the acquisitions we
completed in 1999 were financed with funds borrowed under the $155.0 million
senior credit facility, which we established in July 1999. On May 15, 2000, we
amended this facility to increase funds available for borrowings to $162.5
million. As at July 2, 2000, we had borrowed $161.5 million under this facility.
We reduced our indebtedness under this facility from the net proceeds of the
initial public offering. We intend to borrow under our new credit facility to
finance working capital growth and any cash portion of future acquisitions.
The EMS industry generally does not operate under long-term contracts. We have
only one long-term customer production contract with Zenith Electronics that
resulted from our acquisition of Zenith's facility in Chihuahua, Mexico. Our
production agreement with Zenith, which expires in October 2000, requires Zenith
to purchase minimum volumes on a quarterly basis and over the term of the
agreement. If Zenith fails to achieve such volume targets, funds currently held
in escrow will be remitted to us.
We currently provide turnkey manufacturing services to the majority of our
customers. In 1999, 96.9% of our pro forma revenue was from turnkey
manufacturing services. By contrast, from July 1999 to March 2000, under the
terms of our production agreement with Zenith, we manufactured products for
Zenith on a consignment basis. In a consignment arrangement, we provide
manufacturing services only, while the customer purchases the materials and
components necessary for production. In April 2000, we began to purchase
materials for Zenith, and as a result, our relationship with Zenith evolved into
a turnkey manufacturing relationship. Turnkey manufacturing services typically
result in higher revenue and higher gross profits but lower gross profit margins
when compared to consignment services.
17
<PAGE>
With our turnkey manufacturing customers, we generally operate under contracts
that provide a general framework for our business relationship. Our actual
production volumes are based on purchase orders under which our customers do not
commit to firm production schedules more than 30 to 90 days in advance. In order
to minimize customers' inventory risk, we generally order materials and
components only to the extent necessary to satisfy existing customer purchase
orders. We do not generally undertake inventory risk. 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 materials purchased and all goods manufactured on
their behalf.
A recent trend in the EMS industry has emerged in which customers are seeking to
consolidate suppliers and are seeking manufacturers who can provide complete
manufacturing solutions. In connection with Dell's realignment of its
production, Dell selected us to be its sole global manufacturing provider for
its high value-added, high profit margin server business, which represented
approximately $69.0 million, or 13.7%, of our 1999 pro forma revenue of
approximately $503.0 million. We believe that Dell's decision will allow us to
capitalize on a high growth market opportunity, and we believe our revenue for
our Dell server business will grow accordingly. Dell has advised us, however,
that it plans to discontinue using us to build their relatively lower profit
margin riser card, a component used in personal computers. While our Dell riser
card business represented approximately $88.0 million, or 17.6%, of our 1999 pro
forma revenue, we believe this realignment will provide us with an opportunity
to focus our efforts on providing our services in a significantly more
attractive market sector. Dell riser card revenue for the first six months of
2000 was $18.3 million. We expect that the Dell riser card business will not
contribute any revenue beyond the second half of 2000. We believe that in 2000
approximately 50.0% of the lost revenue from the discontinuation of our Dell
riser card business will be replaced by additional Dell server business, and we
anticipate that by 2002 the volume of manufacturing services we will provide to
Dell in connection with Dell's servers will more than offset the loss of Dell's
riser card business.
We service our customers through a total of nine facilities (including our July
27, 2000 acquisition of Pensar) located in the United States, Canada, Europe and
Mexico. In 1999, approximately 85.0% of our pro forma revenue was generated from
operations in the United States, approximately 9.0% from Canada, approximately
4.0% from Europe and approximately 2.0% from Mexico. Our facility in Chihuahua
was acquired in July 1999 from Zenith Electronics Corporation. We expect to
increase revenue from this facility in 2000 with the inclusion of a full year of
operations, with the transfer of certain production from other facilities and
with the addition of new business and increased volume from our current
business.
The pro forma results of operations included in this report for the quarter
ended July 2, 2000 and June 30, 1999 and the six month period ended July 2, 2000
and June 30, 1999 contain the results of Surface Mount, HTM, W.F. Wood, and
Pensar as if the combination of Surface Mount and HTM and the acquisitions of
W.F. Wood and Pensar had occurred on January 1, 1999. As such, the pro forma
results have been adjusted to reflect additional goodwill amortization related
to the combination of Surface Mount and HTM, additional goodwill amortization
related to the acquisition of W.F. Wood, additional goodwill amortization
related to the acquisition of Pensar, additional interest expense and income tax
effects related to the borrowings required to complete the Pensar acquisition,
and the effect of the initial public offering before the exercise of the
underwriters' over-allotment option. The effect of the exercise of the
over-allotment option has been excluded from the pro forma results in order to
facilitate comparability with the pro forma results reported in our Registration
Statement on Form S-1, No. 333-33208, as amended.
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.
We begin our Management's Discussion and Analysis of Financial Condition and
Results of Operations with a discussion of the pro forma quarter ended July 2,
2000 compared to the quarter ended June 30, 1999 and with a discussion of the
pro forma six month period ended July 2, 2000 compared to the six month period
ended June 30, 1999. Because our historical financial statements do not reflect
the July 1999 combination of HTM and Surface Mount, our September 1999
acquisition of W.F. Wood and our acquisition of Pensar or the completion of our
initial public offering, a discussion of our historical operations does not
provide a sufficient understanding of the financial conditions and results of
operations of our business. Our pro forma results of operations include the
results of operations of each of the businesses that comprise our company
including Pensar. Following our discussion of the pro
18
<PAGE>
forma results of operations, we discuss our historical financial condition and
results of operations for the quarter ended July 2, 2000 compared to the quarter
ended June 30, 1999 and with a discussion of the six month period ended July 2,
2000 compared to the six month period ended June 30, 1999.
SMTC Corporation
Pro Forma Results of Operations
The following table sets forth certain pro forma operating data expressed as a
percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------------------------------------
July 2, June 30, July 2, June 30,
2000 1999 2000 1999
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales 91.2 90.6 90.8 90.5
------------------------------------------------------------------
Gross profit 8.8 9.4 9.2 9.5
Selling, general and administrative expenses 4.7 5.8 5.5 6.0
Amortization of intangible assets 1.0 1.6 1.1 1.5
------------------------------------------------------------------
Operating income 3.1 2.0 2.6 2.0
Interest 0.8 0.1 0.9 0.1
------------------------------------------------------------------
Earnings before income taxes 2.3 1.9 1.7 1.9
Income taxes 1.2 1.1 1.0 1.1
------------------------------------------------------------------
Net earnings 1.1% 0.8% 0.7% 0.8%
==================================================================
</TABLE>
Pro Forma quarter ended July 2, 2000 compared to the quarter ended June 30, 1999
Pro Forma Revenue
Revenue increased $72.7 million, or 65.1%, from $111.7 million in the second
quarter of 1999 to $184.4 million in the second quarter of 2000. This increase
resulted from the growth of revenue generated by our United States operations
and the acquisition of our Chihuahua facility in July 1999. In the second
quarter of 2000, 80.0% of our revenue was generated from operations in the
United States, 8.5% from Canada, 2.1% from Europe and 9.4% from Mexico. In the
second quarter of 1999, 85.5% of our revenue was generated from operations in
the United States, 10.8% from Canada, 3.7% from Europe and none from Mexico.
Revenue from Dell for the second quarter of 2000 was $32.7 million, or 17.7% of
total revenue. In the second quarter of 1999, revenue from Dell was $38.5
million or 34.5% of total revenue. No other customer represented more than 10%
of revenue in the second quarter of 1999 or 2000.
Pro Forma Gross Profit
Gross profit increased $5.8 million from $10.5 million in the second quarter of
1999 to $16.3 million in the second quarter of 2000. The improvement in gross
profit was due to the effect of the growth in revenue and the addition of our
Chihuahua facility. The gross margin was lower in the second quarter of 2000
because our Chihuahua facility was operating below capacity and under-utilizing
the fixed costs of operations.
Pro Forma Selling, General & Administrative Expenses
Selling, general and administrative expenses increased $2.2 million from $6.5
million in the second quarter of 1999 to $8.7 million in the second quarter of
2000. As a percentage of revenue, selling, general and administrative expenses
decreased from 5.8% to 4.7% because of the higher revenue base.
19
<PAGE>
Pro Forma Amortization
Amortization of intangible assets of $1.8 million was expensed in both the
second quarters of 1999 and 2000. Amortization for the second quarter of 2000
includes the amortization of $0.6 million of goodwill related to the combination
of Surface Mount and HTM, $0.4 million of goodwill related to the acquisition of
W.F. Wood and $0.5 million related to the acquisition of Pensar. Amortization of
intangible assets for the second quarter of 2000 also included the amortization
of $0.2 million of deferred finance costs related to the establishment of our
senior credit facility in July 1999 and $0.1 million of deferred equipment lease
costs.
Pro Forma Interest Expense
Interest expense increased $1.5 million from $0.1 million in the second quarter
of 1999 to $1.6 million in the same period in 2000 due to interest expense
related to debt incurred to purchase our Chihuahua facility and to meet
increased working capital requirements to fund the growth of our business.
Pro Forma Income Tax Expense
In the second quarter of 1999, we had an income tax expense of $1.2 million on
income before taxes of $2.1 million, producing an effective tax rate of 57.4%.
The effective rate of tax was higher than the statutory rate as we were not able
to claim a recovery of losses of $0.4 million incurred by our Irish subsidiary
or deduct $0.6 million of goodwill related to the combination of Surface Mount
and HTM.
In the second quarter of 2000, we had an income tax expense of $2.2 million on
income before taxes of $4.2 million, producing an effective tax rate of 53.2%.
The effective rate of tax was higher than the statutory rate as we were not able
to claim a recovery of losses of $0.7 million incurred by our Irish subsidiary
or deduct $0.6 million of goodwill related to the combination of Surface Mount
and HTM.
Pro Forma six month period ended July 2, 2000 compared to the six month period
ended June 30, 1999
Pro Forma Revenue
Pro forma revenue increased $98.0 million, or 43.2%, from $227.0 million for the
six month period ended June 30, 1999, to $325.0 million for the six month period
ended July 2, 2000. This increase resulted from the growth of revenue generated
by our United States operations and the acquisition of our Chihuahua facility in
July 1999. For the six month period ended July 2, 2000, 83.1% of our revenue was
generated from operations in the United States, 8.5% from Canada, 2.2% from
Europe and 6.2% from Mexico. For the first three months of 2000, our Chihuahua
facility's sales were on a consignment basis. On April 1, 2000, our Chihuahua
facility converted to a turnkey operation, which typically produces higher gross
revenues than a consignment operation. For the six month period ended June 30,
1999, 85.6% of our revenue was generated from operations in the United States,
10.5% from Canada, 3.9% from Europe and none from Mexico.
Revenue from Dell for the six month period ended July 2, 2000 was $65.3 million,
or 20.1% of total revenue. In the six month period ended June 30, 1999, revenue
from Dell was $70.7 million or 31.1 % of total revenue. No other customer
represented more than 10% of revenue in the second quarter of 1999 or 2000.
Pro Forma Gross Profit
Gross profit increased $8.3 million from $21.7 million in the six month period
ended June 30, 1999 to $30.0 million in the six month period ended July 2, 2000.
The improvement in gross profit was due to the effect of the growth in revenue
and the addition of our Chihuahua facility. Our gross profit margin declined
from 9.5% for the six month period ended June 30, 1999 to 9.2% in for the six
month period ended July 2, 2000. The gross margin was lower for the six month
period ended July 2, 2000 due to a change in the customer mix.
20
<PAGE>
Pro Forma Selling, General & Administrative Expenses
Selling, general and administrative expenses increased $4.2 million from $13.7
million for the six month period ended June 30, 1999 to $17.9 million for the
six month period ended July 2, 2000. As a percentage of revenue, selling,
general and administrative expenses decreased from 6.0% to 5.5% because of the
higher revenue base.
Pro Forma Amortization
Amortization of intangible assets of $3.5 million was expensed for the six month
period ended June 30, 1999 and for the six month period ended July 2, 2000.
Amortization for the six month period ended July 2, 2000 includes the
amortization of $1.2 million of goodwill related to the combination of Surface
Mount and HTM, $0.8 million of goodwill related to the acquisition of W.F. Wood
and $1.1 million of goodwill related to the acquisition of Pensar. Amortization
of intangible assets for the six month period ended July 2, 2000 also included
the amortization of $0.3 million of deferred finance costs related to the
establishment of our senior credit facility in July 1999 and $0.1 million of
deferred equipment lease costs.
Pro Forma Interest Expense
Interest expense increased $2.7 million from $0.2 million for the six month
period ended June 30, 1999 to $2.9 million for the six month period ended
July 2, 2000 due to the interest expense related to debt incurred to purchase
our Chihuahua facility and to meet increased working capital requirements to
fund the growth of our business.
Pro Forma Income Tax Expense
For the six month period ended June 30, 1999, we had an income tax expense of
$2.4 million on income before taxes of $4.3 million, producing an effective tax
rate of 53.8%. The effective rate of tax was higher than the statutory rate as
we were not able to claim a recovery of losses of $0.8 million incurred by our
Irish subsidiary or deduct $1.2 million of goodwill related to the combination
of Surface Mount and HTM.
For the six-month period ended July 2, 2000, we had an income tax expense of
$3.4 million on income before taxes of $5.7 million, producing an effective tax
rate of 58.8%. The effective rate of tax was higher than the statutory rate as
we were not able to claim a recovery of losses of $1.2 million incurred by our
Irish subsidiary or deduct $1.2 million of goodwill related to the combination
of Surface Mount and HTM.
SMTC Corporation (formerly HTM Holdings, Inc.)
Results of Operations
The following table sets forth certain operating data expressed as a percentage
of revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------------------------------------
July 2, June 30, July 2, June 30,
2000 1999 2000 1999
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales 91.8 93.8 91.4 93.2
------------------------------------------------------------------
Gross profit 8.2 6.2 8.6 6.8
Selling, general and administrative expenses 4.3 3.4 5.1 3.4
Amortization of intangible assets 0.7 0.3 0.9 0.3
------------------------------------------------------------------
Operating income 3.2 2.5 2.6 3.1
Interest 2.5 3.1 2.7 3.3
------------------------------------------------------------------
Earnings (loss) before income taxes 0.7 (0.6) (0.1) (0.2)
Income taxes (recovery) 0.6 (0.2) 0.3 (0.1)
------------------------------------------------------------------
Net earnings (loss) 0.1 (0.4) (0.4) (0.1)
==================================================================
</TABLE>
21
<PAGE>
Quarter ended July 2, 2000 compared to the quarter ended June 30, 1999
Revenue
Revenue increased $143.8 million, or 617.2%, from $23.3 million in the second
quarter of 1999 to $167.1 million in the second quarter of 2000. This increase
resulted from the combination of Surface Mount and HTM, the acquisition of our
Chihuahua facility in July 1999 and the acquisition of W.F. Wood in September
1999. Surface Mount, W.F. Wood and our Chihuahua facility contributed $92.3
million, $13.9 million and $18.6 million, respectively to the increase in
revenue. Revenue generated from our Denver facility, formerly HTM, increased
$19.0 million or 81.4% from $23.3 million in the second quarter of 1999 to $42.3
million in the second quarter of 2000. In the second quarter of 1999, revenue
from IBM of $6.4 million, from Carrier Access of $5.3 million and from Netopia
of $5.4 million represented 27.5%, 22.7% and 23.2%, respectively, of total
revenue. Revenue from Dell for the second quarter of 2000 was $32.7 million, or
19.6% of total revenue. No other customers represented more than 10% of revenue.
In the second quarter of 2000, 78.0% of our revenue was generated from
operations in the United States, 9.3% from Canada, 2.3% from Europe and 10.4%
from Mexico. In the second quarter of 1999, all of HTM's revenue was generated
from our Denver facility in the United States.
Gross Profit
Gross profit increased $12.2 million from $1.5 million in the second quarter of
1999 to $13.7 million in the second quarter of 2000. Our gross profit margin
improved from 6.2% in the second quarter of 1999 to 8.2% in the second quarter
of 2000. The improvements in gross profit and gross margin were due to the
combination of Surface Mount and HTM as well as the acquisitions we completed in
1999. The combination of Surface Mount and HTM added $7.7 million of gross
profit at a gross margin of 8.3%, W.F. Wood's operation contributed $2.5 million
at a gross margin of 18.8%, and our Chihuahua facility added $1.1 million of
gross profit at a gross margin of 5.6%. Our W.F. Wood operation contributed
higher gross margins because the high precision enclosure products manufactured
by that facility have higher profit margins than the products we have
historically manufactured. Our Chihuahua facility provided us with lower gross
margins because it was not operating at full capacity during the second quarter
of 2000.
At our Denver facility, formerly HTM, gross profit increased $0.9 million from
$1.4 million in the second quarter of 1999 to $2.3 million in the second quarter
of 2000 but the gross margin declined from 6.2% to 5.5% due to a change in
customer mix.
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased $6.4 million from $0.8
million in the second quarter of 1999 to $7.2 million in the second quarter of
2000. As a percentage of revenue, selling, general and administrative expenses
increased from 3.4% to 4.3% because the facilities added in the combination of
Surface Mount and HTM and through acquisitions were operating at a lower
capacity than our Denver facility. At our Denver facility, selling, general, and
administrative expenses were unchanged at $0.8 million for both the second
quarter of 1999 and the second quarter of 2000 but declined as a percentage of
revenue from 3.1% to 1.9%.
Amortization
Amortization of intangible assets in the second quarter of 2000 included the
amortization of $0.6 million of goodwill related to the combination of Surface
Mount and HTM and $0.4 million of goodwill related to the acquisition of W.F.
Wood. Amortization of intangible assets in the second quarter of 2000 also
included the amortization of $0.2 million of deferred finance costs related to
the establishment of our senior credit facility in July 1999 and $0.1 million of
deferred equipment lease costs. The 1999 amortization included $0.1 million in
amortization of deferred finance costs.
22
<PAGE>
Interest Expense
Interest expense increased $3.4 million from $0.7 million in the second quarter
of 1999 to $4.1 million in the second quarter of 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 second quarter of 1999 and the second quarter of 2000 were 9.7% and 9.6%,
respectively.
Income Tax Expense
In the second quarter of 2000, an income tax expense of $1.0 million on pre-tax
income of $1.1 million produced an effective tax rate of 89.5% as we were not
able to claim a recovery of losses of $0.7 million by our Irish subsidiary or
deduct $0.6 million of goodwill related to the combination of Surface Mount and
HTM. The effective tax rate in the second quarter of 1999 was 36.9% on a loss
before taxes of $0.1 million recorded by our Denver facility, formerly HTM.
Six month period ended July 2, 2000 compared to the six month period ended June
30, 1999
Revenue
Revenue increased $245.0 million, or 526.9% from $46.5 million for the six month
period ended June 30, 1999 to $291.5 million for the six month period ended July
2, 2000. This increase resulted from the combination of Surface Mount and HTM,
the acquisition of our Chihuahua facility in July 1999 and our acquisition of
W.F. Wood in September 1999. Surface Mount, W.F. Wood and our Chihuahua facility
contributed $167.8 million, $25.3 million and $21.5 million, respectively, to
the increase in revenue. Revenue generated from our Denver facility, formerly
HTM, increased $30.4 million or 65.2% from $46.6 million in the six month period
ended June 30, 1999 to $76.9 million in the six month period ended July 2, 2000.
In the six month period ended June 30, 1999, revenue from IBM of $17.4 million,
from Carrier Access of $9.3 million and from Netopia of $8.2 million represented
37.4%, 20.0% and 17.6%, respectively, of total revenue. Revenue from Dell for
the six month period ended July 2, 2000 was $65.3 million, or 22.4% of total
revenue. No other customers represented more than 10% of revenue.
For the six month period ended July 2, 2000, 81.1% of our revenue was generated
from operations in the United States, 9.5% from Canada, 2.5% from Europe and
6.9% from Mexico. During the six month period ended June 30, 1999, all of HTM's
revenue was generated from our Denver facility in the United States.
Gross Profit
Gross profit increased $21.8 million from $3.1 million for the six month period
ended June 30, 1999 to $24.9 million in the six month period ended July 2, 2000.
Our gross profit margin improved from 6.8% for the six month period ended June
30, 1999 to 8.6 % in for the six month period ended July 2, 2000. The
improvements in gross profit and gross margin were due to the combination of
Surface Mount and HTM as will as the acquisitions we completed in 1999. The
combination of Surface Mount and HTM added $12.5 million of gross profit at a
gross margin of 7.5%, our W.F. Wood operation contributed $5.0 million at a
gross margin of 19.6% and our Chihuahua facility added $2.8 million of gross
profit at a gross margin of 13.1%.
Our W.F. Wood operation contributed higher gross margins because the high
precision enclosure products manufactured by that facility have higher profit
margins than products we have historically manufactured.
Our Chihuahua facility provided us with higher gross margins because all of its
sales were on a consignment basis during the first quarter. Consignment sales
typically result in lower revenue and higher gross profit margins but lower
gross profit compared to turnkey services. On April 1, 2000, our Chihuahua
facility became a turnkey operation.
At our Denver facility, formerly HTM, gross profit increased $1.5 million from
$3.2 million for the six month period ended June 30,1999 to $4.7 million for the
six month period ended July 2, 2000 but the gross margin declined from 6.8% to
6.1% due to a change in customer mix.
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Selling, General & Administrative Expenses
Selling, general and administrative expenses increased $13.3 million from $1.6
million for the six month period ended June 30, 1999 to $14.9 million for the
six month period ended July 2, 2000. As a percentage of revenue, selling,
general and administrative expenses increased from 3.4% to 5.1% because the
facilities added in the combination of Surface Mount and HTM and through
acquisitions were operating at a lower capacity than our Denver facility. At our
Denver facility, selling, general, and administrative expenses were unchanged at
$1.5 million but declined as a percentage of revenue from 3.4% to 1.9%.
Amortization
Amortization of intangible assets for the six month period ended July 2, 2000
included the amortization of $1.2 million of goodwill related to the combination
of Surface Mount and HTM and $0.8 million of goodwill related to the acquisition
of W.F. Wood. Amortization of intangible assets for the six month period ended
July 2, 2000 also included the amortization of $0.4 million of deferred finance
costs related to the establishment of our senior credit facility in July 1999
and $0.1 million of deferred equipment lease costs.
Interest Expense
Interest expense increased $6.4 million from $1.5 million for the six month
period ended June 30, 1999 to $7.9 million for the six month period ended July
2, 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 six month period ended June 30, 1999 and
the six month period ended July 2, 2000 were both 9.8%.
Income Tax Expense
For the six month period ended July 2, 2000, we recorded an income tax expense
of $0.9 million on a loss of $0.4 million as we were not able to claim a
recovery on losses of $1.2 million by our Irish subsidiary or deduct $1.2
million of goodwill related to the combination of Surface Mount and HTM. For the
six month period ended June 30, 1999, an income tax recovery of $0.03 million
was recorded on a loss before taxes of $0.1 million by our Denver facility,
formerly HTM.
Liquidity and Capital Resources
Our principal source of liquidity is cash provided from borrowings under our
senior credit facility. Our principal uses of cash have been to finance mergers
and acquisitions, to meet debt service requirements and to finance capital
expenditures and working capital requirements. We anticipate that these will
continue to be our principal uses of cash in the future.
Net cash provided by operating activities for the six month period ended June
30, 1999 was $6.4 million compared to net cash used in operating activities of
$30.8 million for the six month period ended July 2, 2000. In 1999, our Denver
facility, formerly HTM, reduced its working capital requirements while the
growth of the combined companies in 2000 led to increased working capital
needs.
Net cash used by financing activities for the six month period ended June 30,
1999 was $6.0 million due to the repayment of borrowings and capital lease
payments. Net cash provided by financing activities for the six month period
ended July 2, 2000 was $37.5 million due to increased borrowings under the
revolving line of credit, proceeds from the exercise of warrants, and proceeds
from stockholder loans.
Net cash used in investing activities for capital expenditures was $0.1 million
for the six month period ended June 30, 1999 compared to $7.1 million for the
six month period ended July 2, 2000. This increase resulted from the combination
of Surface Mount and HTM, our acquisition of the Chihuahua facility in July 1999
and our acquisition of W.F. Wood in September 1999.
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As of July 2, 2000, we had borrowings of $161.5 million under our senior credit
facility. On April 26, 2000, we sold demand notes to certain of our stockholders
in an aggregate principal amount of $4.738 million. The demand notes were
repurchased on May 18, 2000 with a portion of the cash proceeds from the sale of
notes and warrants pursuant to a senior subordinated loan agreement and a
warrant subscription agreement, each dated May 18, 2000. In order to provide us
with additional working capital and to finance the growth of our business,
certain of our stockholders purchased subordinated notes in the amount of $5.0
million and warrants in the amount of $2.5 million in connection with the senior
subordinated loan agreement and the warrant subscription agreement. 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 $9.925 million.
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 U.S. $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 $156.0
million were used to reduce our indebtedness under the senior credit facility,
to repay outstanding notes, to pay debt of Pensar Corporation and to finance the
cash portion of the purchase price of Pensar Corporation, which closed
simultaneously with the initial public offering. On August 18, 2000, an
additional 1,650,000 of shares of common stock were issued at a price of U.S.
$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.
On July 27, 2000, we entered into a new credit agreement with our lenders, which
provides for term loans up to $50.0 million and revolving credit loans, swing
line loans and letters of credit up to $100.0 million.
Based upon the current level of operations, 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 for the foreseeable future, although no
assurance can be given in this regard. Accordingly, 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 December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101 and in
March 2000 issued SAB 101A "Revenue Recognition," which provide guidelines in
applying U.S. generally accepted accounting principles to revenue recognition in
financial statements. As a consequence of the issuance of SAB 101B in June 2000,
we are required to implement SAB 101 as of the fourth quarter of 2000. We
believe that our revenue recognition practices are consistent with the
guidelines.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. SFAS No. 133 requires all derivatives to be recognized either as
assets or liabilities and measured at fair value. SFAS No. 137 delays the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. We
will be required to implement SFAS No. 133 for our fiscal year ended December
31, 2001. We have not assessed the impact of the adoption of SFAS No. 133 on our
financial position, results of operations or cash flows.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires that
entities capitalize certain costs related to internal-use software once certain
criteria have been met. As required, we implemented this standard in 1999. The
implementation did not have a material impact on our financial position, results
of operations or cash flows.
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In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires that all start-up costs related to the new
operations must be expensed as incurred. In addition, all start-up costs that
were capitalized in the past must be written off when SOP 98-5 is adopted. As
required, we implemented this standard in 1999. The implementation did not have
a material impact on our financial position, results of operations or cash
flows.
FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Form 10-Q 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 quarterly report on Form 10-Q regarding SMTC's
financial position and business strategy may constitute forward-looking
statements. All of these forward-looking statements are based upon estimates and
assumptions made by SMTC's management, which although believed to be reasonable,
are inherently uncertain. Therefore, undue reliance should not be placed on such
estimates and statements. No assurance can be given that any of such estimates
or statements will be realized, and it is likely that actual results will differ
materially from those contemplated by such forward-looking statements. Factors
that may cause such differences include: (1) increased competition; (2)
increased costs; (3) the inability to consummate business acquisitions on
attractive terms; (4) the loss or retirement of key members of management; (5)
increases in SMTC's cost of borrowings or lack of availability of additional
debt or equity capital on terms considered reasonable by management; (6) adverse
state, federal or foreign legislation or regulation or adverse determinations by
regulators; (7) changes in general economic conditions in the markets in which
SMTC may compete and fluctuations in demand in the electronics industry; and (8)
the ability 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" contained herein. The
operations and results of SMTC's business may also be subject to the effect of
other risks and uncertainties. Such risks and uncertainties include, but are not
limited to, items described from time to time in SMTC's reports filed with the
Securities and Exchange Commission.
FACTORS THAT MAY AFFECT FUTURE RESULTS
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
A majority of our revenue comes from a small number of customers; if we lose any
of our largest customers, our revenue could decline significantly.
Our largest customer in 1999 was Dell, which represented approximately 31.3% of
our total pro forma revenue in 1999. Our next five largest customers
collectively represented an additional 26.4% of our total pro forma revenue in
1999. 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. For example, in 1999 we manufactured two
products for Dell, servers, which represented 13.7%, or approximately $69
million, of our total pro forma revenue in 1999 of approximately $503 million,
and riser cards, which represented 17.6%, or approximately $88 million, of our
total pro forma revenue in 1999. In 1999 Dell informed us that, as part of its
efforts to rationalize its supplier network, it intends to consolidate its
server product manufacturing by shifting additional business to us while at the
same time it intends to discontinue using us to manufacture its riser cards, a
component used in personal computers. We expect that the Dell riser card
business will not contribute any revenue beyond the second half of 2000. 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.
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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;
. changes in demand for our customers' existing products;
. the accuracy of our customers' forecasts of future production
requirements;
. effectiveness in managing our manufacturing processes;
. 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.
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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. A shortage of
materials could lengthen production schedules and increase costs. An excess of
materials may increase the costs of maintaining inventory and may increase the
risk of inventory obsolescence, both of which may increase expenses and decrease
profit margins and operating income.
Many of the products we manufacture require one or more components that we order
from sole-source suppliers. Supply shortages for a particular component can
delay productions of all products using that component or cause cost increases
in the services we provide. In addition, in the past, some of the materials we
use, such as memory and logic devices, have been subject to industry-wide
shortages. As a result, suppliers have been forced to allocate available
quantities among their customers and we have not been able to obtain all of the
materials desired. Our inability to obtain these needed materials could slow
production or assembly, delay shipments to our customers, increase costs and
reduce operating income. Also, we may bear the risk of periodic component price
increases. Accordingly, some component price increases could increase costs and
reduce operating income. Also we rely on a variety of common carriers for
materials transportation, and we route materials through various world ports. A
work stoppage, strike or shutdown of a major port or airport could result in
manufacturing and shipping delays or expediting charges, which could have a
material adverse effect on our business, financial condition and results of
operations.
We have experienced significant growth in a short period of time and may have
trouble integrating acquired business and managing our expansion.
Since 1996, we and our predecessor, The Surface Mount Technology Centre Inc.,
have together completed seven acquisitions (including the acquisition of Pensar
Corporation on July 27, 2000). Acquisitions may involve numerous risks,
including difficulty in integrating operations, technologies, systems, and
products and services of acquired companies; diversion of management's attention
and disruption of operations; increased expenses and working capital
requirements; entering markets in which we have limited or no prior experience
and where competitors in such markets have stronger market positions; and the
potential loss of key employees and customers of acquired companies. In
addition, acquisitions may involve financial risks, such as the potential
liabilities of the acquired businesses, the dilutive effect of the issuance of
additional equity securities, the incurrence of additional debt, the financial
impact of transaction expenses and the amortization of goodwill and other
intangible assets involved in any transactions that are accounted for using the
purchase method of accounting, and possible adverse tax and accounting effects.
We have a limited history of owning and operating our acquired businesses on a
consolidated basis. There can be no assurance that we will be able to meet
performance expectations or successfully integrate our acquired businesses on a
timely basis without disrupting the quality and reliability of service to our
customers or diverting management resources. Our rapid growth has placed and
will continue to place a significant strain on management, on our financial
resources, and on our information, operating and financial systems. If we are
unable to manage this growth effectively, it may have an adverse effect on our
business, financial condition and results of operations.
Our acquisition strategy may not succeed.
As part of our business strategy, we expect to continue to grow by pursuing
acquisitions of other companies, assets or product lines that complement or
expand our existing business. Competition for attractive companies in our
industry is substantial. We cannot assure you that we will be able to identify
suitable acquisition candidates or finance and complete transactions that we
select. Our failure to execute our acquisition strategy may have a material
adverse effect on our business, financial condition and results of operation.
Also, if we are not able to successfully complete acquisitions, we may not be
able to compete with larger EMS providers who are able to provide a total
customer solution.
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If we do not effectively manage the expansion of our operations, our business
may be harmed.
We have grown rapidly in recent periods, and this growth may be difficult to
sustain. Internal growth and further expansion of services may require us to
expand our existing operations and relationships. We plan to expand our design
and development services and our manufacturing capacity by expanding our
facilities and by adding new equipment. Expansion has caused, and is expected to
continue to cause, strain on our infrastructure, including our managerial,
technical, financial and other resources. Our ability to manage future growth
effectively will require us to attract, train, motivate and manage new employees
successfully, to integrate new employees into our operations and to continue to
improve our operational and information systems. We may experience
inefficiencies as we integrate new operations and manage geographically
dispersed operations. We may incur cost overruns. We may encounter construction
delays, equipment delays or shortages, labor shortages and disputes, and
production start-up problems that could adversely affect our growth and our
ability to meet customers' delivery schedules. We may not be able to obtain
funds for this expansion on acceptable terms or at all. In addition, we expect
to incur new fixed operating expenses associated with our expansion efforts,
including increases in depreciation expense and rental expense. If our revenue
does not increase sufficiently to offset these expenses, our business, financial
condition and results of operations would be adversely affected.
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 recession or a downturn in the electronics
industry would likely 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 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,
Edward Johnson, Philip Woodard, Gary Walker and Derek D'Andrade. Our business
also depends on our ability to continue to recruit, train and retain skilled
employees, particularly executive management, engineering and sales personnel.
Recruiting personnel in our industry is highly competitive. In addition, our
ability to successfully integrate acquired companies depends in part on our
ability to retain key management and existing employees at the time of the
acquisition. There can be no assurance that we will be able to retain our
executive officers and key personnel or attract qualified management in the
future.
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Risks particular to our international operations could adversely affect our
overall results.
Our success will depend, among other things, on successful expansion into new
foreign markets in order to offer our customers lower cost production options.
Entry into new foreign markets may require considerable management time as well
as start-up expenses for market development, hiring and establishing office
facilities before any significant revenue is generated. As a result, operations
in a new foreign market may operate at low profit margins or may be
unprofitable.
Pro forma revenue generated outside of the United States and Canada was
approximately 5.5% in 1999. International operations are subject to inherent
risks, including:
. fluctuations in the value of currencies and high levels of inflation;
. longer payment cycles and greater difficulty in collecting amounts
receivable;
. unexpected changes in and the burdens and costs of compliance with a
variety of foreign laws;
. political and economic instability;
. increases in duties and taxation;
. inability to utilize net operating losses incurred by our foreign
operations to reduce our U.S. and Canadian income taxes;
. imposition of restrictions on currency conversion or the transfer of
funds; and
. trade restrictions.
We are subject to a variety of environmental laws, which expose us to potential
financial liability.
Our operations are regulated under a number of federal, state, provincial, local
and foreign environmental and safety laws and regulations, which govern, among
other things, the discharge of hazardous materials into the air and water as
well as the handling, storage and disposal of such materials. Compliance with
these environmental laws is a major consideration for us because we use metals
and other hazardous materials in our manufacturing processes. We may be liable
under environmental laws for the cost of cleaning up properties we own or
operate if they are or become contaminated by the release of hazardous
materials, regardless of whether we caused such release. In addition we, along
with any other person who arranges for the disposal of our wastes, may be liable
for costs associated with an investigation and remediation of sites at which we
have arranged for the disposal of hazardous wastes, if such sites become
contaminated, even if we fully comply with applicable environmental laws. In the
event of a contamination or violation of environmental laws, we could be held
liable for damages including fines, penalties and the costs of remedial actions
and could also be subject to revocation of our discharge permits. Any such
revocations could require us to cease or limit production at one or more of our
facilities, thereby having a material adverse effect on our operations.
Environmental laws could also become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with any
violation, which could have a material adverse effect on our business, financial
condition and results of operations.
RISKS RELATED TO OUR CAPITAL STRUCTURE
Our future indebtedness could adversely affect our financial health and severely
limit our ability to plan for or respond to changes in our business.
We plan to incur indebtedness from time to time to finance acquisitions or
capital expenditures or for other purposes. This debt could have adverse
consequences for our business, including:
. We will be more vulnerable to adverse general economic conditions;
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. We will be required to dedicate a substantial portion of our cash
flow from operations to repayment of debt, limiting the availability
of cash for other purposes;
. We may have difficulty obtaining additional financing in the future
for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes;
. We may have limited flexibility in planning for, or reacting to,
changes in our business and industry;
. We could be limited by financial and other restrictive covenants in
our credit arrangements in our borrowing of additional funds; and
. We may fail to comply with the covenants under which we borrowed our
indebtedness which could result in an event of default. If an event
of default occurs and is not cured or waived, it could result in all
amounts outstanding, together with accrued interest, becoming
immediately due and payable. If we were unable to repay such amounts,
the lenders could proceed against any collateral granted to them to
secure that indebtedness.
There can be no assurance that our leverage and such restrictions will not
materially adversely affect our ability to finance our future operations or
capital needs or to engage in other business activities. In addition, our
ability to pay principal and interest on our indebtedness to meet our financial
and restrictive covenants and to satisfy our other debt obligations will depend
upon our future operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, certain of which
are beyond our control, as well as the availability of revolving credit
borrowings under our senior credit facility or successor facilities.
The terms of our indebtedness agreement impose significant restrictions on our
ability to operate.
The terms of our current indebtedness agreement restricts, among other things,
our ability to incur additional indebtedness, pay dividends or make certain
other restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, merge, consolidate or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of our assets. We
are also required to maintain specified financial ratios and satisfy certain
financial condition tests, which further restrict our ability to operate as we
choose. Substantially all our assets and those of our subsidiaries are pledged
as security under our senior credit facility.
Investment funds affiliated with Bain Capital, Inc., investment funds affiliated
with Celerity Partners, Inc., Kilmer Electronics Group Limited and certain
members of management have significant influence over our business, and could
delay, deter or prevent a change of control or other business combination.
Investment funds affiliated with Bain Capital, Inc., investment funds affiliated
with Celerity Partners, Inc., Kilmer Electronics Group Limited and certain
members of management hold approximately 14.8%, 13.5%, 7.9% and 13.8%,
respectively, of our outstanding shares. In addition, three of the ten directors
who serve on our board are representatives of the Bain funds, two are
representatives of the Celerity funds, two are representatives of Kilmer
Electronics Group Limited and three 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 1999 was 9.5%. We reduce
our exposure to interest rate risks through swap agreements. We have entered
into swap agreements to hedge $65.0 million of our outstanding debt. Under the
terms of our current swap agreement expiring on September 22, 2001, the maximum
annual rate we would pay on the approximately $65.0 million of our debt is
9.66%, as of July 2, 2000. The remainder of our debt of $96.5 million bore
interest based on the Eurodollar base rate, which was 6.5% on July 2, 2000. If
the Eurodollar base rate increased by 10% to 7.2%, our interest expense would
increase by approximately $1.1 million in 2000.
The revolving credit facility portion of our senior credit facility of $161.5
million bore interest at 9.5% per annum, as of July 2, 2000. Assuming we do not
have a material outstanding balance on this facility during the year ending
December 31, 2000, a 10% change in interest rates as of July 2, 2000 is not
expected to materially affect the interest expense to be incurred on this
facility during such period.
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. We do not use forward exchange contracts to hedge
exposures denominated in foreign currencies or any other derivative financial
instrument for trading or speculative purposes. Therefore, the effect of a 10.0%
change in exchange rates as of December 31, 1999 would not have a material
impact on our operating results for the year ending December 31, 2000.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is currently not a party to any material legal actions or
proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) None.
(b) None.
(c) Under a warrant subscription agreement dated May 18, 2000, we sold
warrants for $2.5 million that were exercised on July 27, 2000 for an
aggregate of 477,050 shares of common stock. With respect to each
warrant, the right to exercise the warrant and the subsequent
conversion into common stock were triggered by the occurrence of our
initial public offering. The issuance of warrants was exempt from
registration under the Securities Act of 1933 pursuant to
Section 4(2). The purchasers of the warrants included only foreign
persons, qualified institutional buyers and three large institutional
accredited investors.
(d) Pursuant to Rule 463 and Item 701 (f) of Regulation S-K promulgated
under the Securities Act of 1933, as amended, the following
information is provided in this report:
(1) The Registration Statement on Form S-1 of SMTC Corporation (File
No. 333-33208) (the "Registration Statement") was declared
effective by the Securities and Exchange Commission on July 20,
2000.
(2) The offering contemplated by the prospectus contained in the
Registration Statement (the "Offering") was consummated on July
27, 2000 with respect to the initial sale of shares and on August
18, 2000 with respect to shares purchased upon exercise of the
underwriters' over-allotment option.
(3) The managing underwriters in the Offering were Lehman Brothers,
Inc., RBC Dominion Securities, Merrill Lynch & Co., and
FleetBoston Robertson Stephens Inc.
(4) The Registration Statement related to shares of common stock,
$0.01 par value ("Common Stock"), of SMTC Corporation.
(5) The Registration Statement registered an aggregate of 12,650,000
shares of Common Stock; the aggregate gross offering price of the
amount of shares registered was $202.0 million. SMTC Corporation
sold 8,275,000 shares pursuant to the Registration Statement for
an aggregate gross offering price of $132.0 million. The number
of shares of Common Stock sold included 1,650,000 of shares of
Common Stock registered under the Registration Statement subject
to an underwriters' over-allotment option that was exercised by
the underwriters. Concurrent with the Offering, SMTC's
subsidiary, SMTC Manufacturing Corporation of Canada, offered
4,375,000 exchangeable shares for sale in an underwritten
offering in Canada for a gross offering price of $70.0 million.
These exchangeable shares are exchangeable for shares of SMTC's
Common Stock.
(6) Through the date this report was filed, SMTC incurred estimated
expenses (including underwriters' discount) of approximately
$21.9 million in connection with the Offering, which included
approximately $14.2 million in underwriters' discount and
commissions and approximately $7.7 million of other expenses
(including filing fees related to the Registration Statement and
the National Association of Securities Dealers, Inc. and
accounting, legal, printing and engraving and miscellaneous
expenses).
(7) Through the date this report was filed, of the net proceeds of
approximately $180.6 million,
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approximately $143.7 million was used to reduce indebtedness,
approximately $14.9 million was used to repay outstanding notes,
approximately $5.0 million was used to pay debt of Pensar
Corporation, and approximately $17.0 million was used to pay cash
consideration in connection with the acquisition of Pensar
Corporation.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION.
On July 27, 2000, we completed an initial public offering of our 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 U.S. $16.00
per share and 4,375,000 exchangeable shares at a price of Canadian
$23.60 per share. On August 18, 2000, we sold an additional 1,650,000
shares of common stock at a price of U.S. $16.00 per share upon the
exercise of the underwriters' over-allotment option.
On July 27, 2000, simultaneously with the closing of the initial public
offering, we 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 approximately $36.6 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
----------------
Certain of the following exhibits have been previously filed with the
Commission pursuant to the requirements of the Securities Act. Such exhibits are
identified by the parenthetical references following the listing of each such
exhibit and are incorporated herein by reference.
Exhibit Description
------- -----------
2.1 Stock Purchase Agreement among SMTC Corporation, Pensar Corporation and
the Selling Stockholders dated as of May 23, 2000. (Incorporated by
reference to Exhibit 2.3 of SMTC's Registration Statement on Form S-1,
No. 333-33208, as amended.)
4.1 Warrant to purchase units of Class A-1 common stock and Class L common
stock and schedule of warrants attached thereto. (Incorporated by
reference to Exhibit 4.5 of SMTC's Registration Statement on Form S-1,
No. 333-33208, as amended.)
4.2 15% Senior Subordinated Note and schedule of notes attached thereto.
(Incorporated by reference to Exhibit 4.6 of SMTC's Registration
Statement on Form S-1, No. 333-33208, as amended.)
10.1 Third Amendment dated as of May 15, 2000 to the Credit and Guarantee
Agreement dated as of July 28, 1999. (Incorporated by reference to
Exhibit 10.1.4 of SMTC's Registration Statement on Form S-1, No.
333-33208, as amended.)
10.2 Edward Johnson Employment Agreement dated May 18, 2000. (Incorporated by
reference to Exhibit 10.13 of SMTC's Registration Statement on Form S-1,
No. 333-33208, as amended.)
10.3 Warrant Subscription Agreement dated as of May 18, 2000. (Incorporated
by reference to Exhibit 10.17 of SMTC's Registration Statement on Form
S-1, No. 333-33208, as amended.)
10.4 Senior Subordinated Loan Agreement dated as of May 18, 2000.
(Incorporated by reference to Exhibit 10.18 of SMTC's Registration
Statement on Form S-1, No. 333-33208, as amended.)
10.5 Letter Agreement dated June 19, 2000 regarding Stockholders Agreement
Lock-Up. (Incorporated by reference to Exhibit 10.20 of SMTC's
Registration Statement on Form S-1, No. 333-33208, as amended.)
27.1 Financial Data Schedule for SMTC Corporation.
(b) Reports on Form 8-K: None.
--------------------
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, SMTC Corporation has duly caused this quarterly report to be signed
on its behalf by the undersigned, thereto duly authorized, in the city of
Markham, province of Ontario, on the 5th day of September, 2000.
SMTC CORPORATION
By: /s/ Paul Walker
-----------------------------
Name: Paul Walker
Title: President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Richard Smith Vice President, Finance September 5, 2000
-------------------
Richard Smith and Administration
(principal financial and
chief accounting officer)
35
