<PAGE>
As filed with the Securities and Exchange Commission on March 24, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SMTC Corporation
(Exact name of registrant as specified in its charter)
Delaware 3672 98-0197680
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification No.)
of incorporation or Classification Code
organization) Number)
635 Hood Road, Markham, Ontario, Canada, L3R 4N6
(905) 479-1810
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
---------------
Paul Walker
President
SMTC Corporation
635 Hood Road
Markham, Ontario, Canada L3R 4N6
(905) 479-1810
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies of all communications, including communications sent to agent for
service, should be sent to:
Alfred O. Rose, Esq. Phyllis G. Korff, Esq.
Ropes & Gray Skadden, Arps, Slate, Meagher & Flom
One International Place LLP
Boston, Massachusetts 02110-2624 Four Times Square
(617) 951-7000 New York, New York 10036-6522
(212) 735-3000
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Offering Maximum
Title of Each Class of Amount to be Price Per Aggregate Offering Amount of
Securities to be Registered Registered Share(1) Price(1) Registration Fee
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share........ $ $ $125,000,000 $33,000
- ----------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
---------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated March 24, 2000.
PROSPECTUS
Shares
SMTC CORPORATION
Common Stock
--------------------------------------------------------
This is our initial public offering of shares of common stock. We are
offering up to shares of common stock. No public market currently exists for
our shares.
We propose to list our common stock on the Nasdaq National Market under the
symbol "SMTX." The anticipated price range is $ to $ per share.
Investing in the shares involves risks. "Risk Factors" begin on page 9.
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price........................................... $ $
Underwriting Discounts and Commissions.......................... $ $
Proceeds, before expenses, to SMTC Corporation.................. $ $
</TABLE>
Concurrent with the offer and sale of shares of our common stock described in
this prospectus, our subsidiary, SMTC Manufacturing Corporation of Canada, or
SMTC Canada, is offering exchangeable shares for sale in an underwritten
offering in Canada. Each exchangeable share will be exchangeable by the holder
into one share of our common stock. We and SMTC Canada will sell a combined
total of shares of our common stock and exchangeable shares. We will reduce
the number of shares of common stock we sell in this offering by the number of
exchangeable shares sold by SMTC Canada in the concurrent offering. See
"Prospectus Summary--Concurrent Offering."
We have granted the underwriters a 30-day option to purchase up to
additional shares of common stock on the same terms and conditions as set forth
above to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers expects to deliver the common stock on or about , 2000.
--------------------------------------------------------
Joint Lead Managers and Joint Book-Running Managers
Lehman Brothers RBC Dominion Securities
-----------
Merrill Lynch & Co. Robertson Stephens
, 2000
<PAGE>
[COVER ART]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 9
Use of Proceeds..................... 16
The Reclassification................ 16
Dividend Policy..................... 17
Capitalization...................... 18
Dilution............................ 20
Unaudited Pro Forma Consolidated
Financial Information.............. 21
Selected Consolidated Financial
Data............................... 28
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 33
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 45
Management....................... 55
Related Party Transactions....... 65
Principal Stockholders........... 67
Description of Indebtedness...... 69
Description of Capital Stock..... 70
Shares Eligible for Future Sale.. 74
Underwriting..................... 77
Legal Matters.................... 79
Experts.......................... 80
Additional Information........... 81
Index to Financial Statements.... F-1
</TABLE>
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different
from that contained in this prospectus. We are offering to sell, and seeking
offers to buy, shares of our common stock only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of shares of our common stock.
This preliminary prospectus is subject to completion prior to this offering.
The industry statistical data presented in this prospectus, except where
otherwise noted, have been compiled from an electronics manufacturing services
industry report, "Contract Manufacturing from a Global Perspective-1999
Update," and other data prepared by Technology Forecasters, Inc., or TFI, a
California-based management consulting firm specializing in the electronics
manufacturing industry. Although we have not independently verified the data,
we believe that TFI is a reliable source of information. In addition, certain
statistical data relating to us presented in this prospectus have been compiled
from our internal surveys and schedules that, while believed by us to be
reliable, have not been verified by any independent sources.
Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are forward-looking statements. These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"anticipates," "believes," "continue," "could," "estimate," "expects,"
"intends," "may," "plans," "seeks," "should," or "will," or the negative of
these terms or similar expressions, are generally intended to identify forward-
looking statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including the factors discussed under "Risk Factors." You should
read this prospectus completely and with the understanding that our actual
future results may be materially different from what we expect. We may not
update these forward-looking statements after the date of this prospectus, even
though our situation will change in the future. All forward-looking statements
attributable to us are expressly qualified by these cautionary statements.
We have applied for trademark protection for SMTC and the SMTC logo. This
prospectus contains trademarks, service marks and trade names of companies and
organizations other than SMTC Corporation.
<PAGE>
Except where the context otherwise requires,
. references in this prospectus to "SMTC," "we," " our," "us" and similar
expressions are references to SMTC Corporation, together with its direct
and indirect subsidiaries (and for periods prior to the July 1999
combination of our predecessors, SMTC Corporation and HTM Holdings, Inc.,
include both of our predecessors and their respective subsidiaries),
. references in this prospectus to "Predecessor SMTC" are references to SMTC
Corporation and its affiliated companies, including The Surface Mount
Technology Centre Inc., prior to the July 1999 combination of SMTC
Corporation and HTM Holdings, Inc.,
. references in this prospectus to "shares" are references, collectively, to
shares of common stock offered by SMTC and the exchangeable shares offered
by SMTC Canada in the concurrent offering described under "Concurrent
Offering,"
. references to this "offering" are references to SMTC's offering of common
stock and SMTC Canada's offering of exchangeable shares, and
. all references to "US$" or "$" are to U.S. dollars and all references to
"C$" are to Canadian dollars.
Unless otherwise indicated, the information in this prospectus is presented
as though (i) the reclassification described under "The Reclassification" has
occurred, (ii) the exchangeable shares of SMTC Canada outstanding on the
closing of this offering have been exchanged for our common stock, and (iii)
the underwriters' over-allotment option is not exercised.
Until 2000, all dealers that buy, sell or trade in shares of our
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This requirement is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information we present in greater detail elsewhere
in this prospectus. This prospectus contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from those discussed in the forward-looking statements as a result of factors
described under "Risk Factors" and elsewhere in this prospectus.
SMTC Corporation
We are a leading provider of advanced electronics manufacturing services, or
EMS, to electronics industry original equipment manufacturers, or OEMs,
worldwide. We service our customers through eight manufacturing and technology
centers strategically located in key technology corridors in the United States,
Canada, Europe and a cost-effective region of Mexico. Our full range of value-
added services include product design, procurement, prototyping, assembly,
test, final system build, comprehensive supply chain management, packaging,
global distribution and after-sales support. Our business is focused on the
fast-growing communications, networking and computing sectors. Based upon a
comparison of our 1999 revenue of approximately $450 million, after giving pro
forma effect to the combination and acquisitions we completed in 1999, with
1999 EMS industry revenue data provided by Technology Forecasters, Inc., or
TFI, we are among the 15 largest EMS companies worldwide. We believe we are
well-positioned to capitalize on the significant and growing market opportunity
to provide advanced EMS solutions to OEMs on a global basis.
We have customer relationships with over 50 OEMs, many of which date back
more than five years. Our customers include industry leading OEMs such as ATI,
Dell Computer, EMC, IBM and Lucent Technologies. We developed these
relationships by capitalizing on the continuing trend of OEMs to outsource
manufacturing services, to consolidate their supply base and to form long-term
strategic partnerships with selected high quality EMS providers. We also have
relationships with a number of emerging companies in the high-growth
communications and networking sectors, including Carrier Access, Cobalt
Networks, Netopia and Sycamore Networks. In 1999, approximately 57% of our pro
forma revenue was generated from the communications and networking sectors. We
expect to continue to grow our business both through the addition of new, high
quality customers and the expansion of our relationships with our existing
customers.
The EMS market is large and continues to grow rapidly. According to TFI,
global EMS industry revenue is forecasted to grow at a compounded annual rate
of approximately 20%, from $60.0 billion in 1998 to $149.4 billion in 2003. TFI
forecasts that larger EMS companies with revenue of approximately $500 million
or greater will grow at 30% or more annually during the same period. We believe
that the growth for larger EMS companies is projected to be greater than the
industry average because OEMs are increasingly outsourcing production to larger
manufacturers that have the ability to provide a total service solution.
Industry growth is being fueled by the overall growth of the electronics
industry, the increased outsourcing of manufacturing by OEMs and the
divestiture of OEM manufacturing assets to EMS businesses. We believe that OEMs
decide to outsource in order to take advantage of the technology and
manufacturing expertise of EMS companies, eliminate manufacturing overhead,
reduce time-to-market of products and improve supply chain efficiency. TFI
estimates that the percentage of total cost of goods sold in the electronics
industry which is outsourced for manufacture by OEMs will increase from 9.5% in
1998 to 17.1% by 2003. According to TFI, the EMS industry is highly fragmented
with over 3,000 independent EMS companies in existence and the 15 largest
companies accounting for 42% of the worldwide market in 1998 based on revenue.
The EMS industry has experienced, and is anticipated to continue to experience,
significant consolidation. We believe that the fragmented nature of the
industry will allow us to take advantage of acquisition opportunities to
increase our scale and geographic scope as well as expand our customer
relationships and service offerings.
1
<PAGE>
Since 1995 we and Predecessor SMTC have completed six acquisitions and one
greenfield expansion which have substantially expanded our geographic reach,
added manufacturing capacity, enabled us to diversify into new markets and
broadened our technological capabilities and service offerings. Our corporate
structure is the result of the July 1999 combination of Predecessor SMTC and
HTM Holdings, Inc., or HTM. Combining Toronto, Ontario based Predecessor SMTC
and Denver, Colorado based HTM provided us with increased strategic and
operating scale and greater geographic breadth. After the combination, we
purchased Zenith Electronics' facility in Chihuahua, Mexico, which expanded our
cost-effective manufacturing capabilities in an important geographic region. In
September 1999, we established a manufacturing presence in the Northeastern
United States and expanded our value-added services to include high precision
enclosures capabilities by acquiring Boston, Massachusetts based W.F. Wood. We
intend to continue to capitalize on the attractive acquisition opportunities
that exist in the EMS marketplace. We are actively considering potential
acquisitions in North America and Europe and are presently targeting Asia as an
area for future expansion.
Our Solutions
Our solutions capitalize on our technological capabilities and the service
offerings we deliver to OEMs. Key elements of our solutions include:
. Customer-focused Team Oriented Production System, or T.O.P.S. Our cross-
functional teams work as customer-focused business units without
departmental barriers. As a result, we are able to tailor the
manufacturing process for each customer resulting in reduced cycle times
and quick time-to-market capabilities.
. Comprehensive Supply Chain Management; Web-based System. Our supply
chain management expertise enables us to rapidly scale operations to
meet customer needs, shift capacity in response to product demand
fluctuations, reduce material costs and effectively distribute products
to our customers or their end-customers. In addition, we have available
and are implementing a web-based supply chain management system which
allows us to communicate, collaborate and plan with our suppliers and
customers in real time.
. Fully Integrated Worldwide Factories. Our global reach enables us to
provide OEMs with the flexibility to manufacture products locally in
several regions of the world. All of our assembly locations operate
under the same model and with the same systems, allowing customers to
seamlessly transfer their production from one of our facilities to
another. This gives our customers greater flexibility to transfer
production to the facility that suits their needs, enhances
communication among facilities and allows our employees to work
effectively at any of our sites.
Our Strategy
Our objective is to enhance our position as a leading EMS provider to OEMs
worldwide. We intend to achieve this objective by pursuing the following
strategies:
. Expand our global presence in strategic markets;
. Continue to provide leading edge supply chain management capabilities;
. Strengthen our relationships with leading and emerging global OEMs in
attractive EMS segments;
. Provide advanced technological capabilities and comprehensive service
offerings; and
. Pursue selective acquisition opportunities, including asset divestitures
by OEMs.
SMTC Corporation is a Delaware corporation incorporated in 1998. Our
principal executive office is located at 635 Hood Road, Markham, Ontario,
Canada L3R 4N6 and our telephone number is (905) 479-1810. We maintain a
website on the Internet at www.smtc.com. Our website, and the information
contained therein, is not a part of this prospectus.
2
<PAGE>
The Offering
Common Stock offered by SMTC......... shares
Exchangeable Shares offered by SMTC
Canada.............................. exchangeable shares
Common Stock to be outstanding after
this offering....................... shares of common stock. In
calculating the number of shares, we
included shares issuable upon exchange
of all exchangeable shares that will be
outstanding after this offering pursuant
to the concurrent offering described
under "Concurrent Offering."
Use of proceeds...................... We estimate we will receive
approximately $113.6 million from this
offering of common stock and
exchangeable shares. We intend to use
the proceeds from this offering to repay
a substantial portion of our
indebtedness. See "Use of Proceeds" on
page 16 of this prospectus.
Proposed Nasdaq National Market
Symbol.............................. SMTX
In addition to the shares of common stock that will be outstanding after
this offering, as of the closing of this offering and based on the number of
shares issued and options and warrants granted as of we expect to have
additional shares of common stock available for issuance after this offering
under the following plans and arrangements:
. shares issuable under our stock option plans, consisting of:
. shares underlying options outstanding at a weighted average
exercise price of $ per share, of which are exercisable;
. shares available for future issuance; and
. shares issuable upon the exercise of warrants outstanding at a
weighted average exercise price of $ per share.
Concurrent Offering
Concurrent with the offer and sale of shares of our common stock pursuant to
this prospectus, our subsidiary, SMTC Canada, is offering exchangeable shares
for sale in an underwritten offering in Canada. Each exchangeable share will be
exchangeable at the option of the holder at any time into one share of our
common stock, subject to compliance with applicable securities laws. We and
SMTC Canada will sell a combined total of shares of our common stock and
exchangeable shares of SMTC Canada. We will reduce the number of shares of
common stock we sell by the number of exchangeable shares sold by SMTC Canada
in the concurrent offering. The exchangeable shares issued in the Canadian
offering will not be permitted to be resold in the United States except
pursuant to an effective registration statement under the Securities Act of
1933, as amended, or an exemption from registration under that Act. We will
file a registration statement with respect to the issuance of the shares of our
common stock issuable upon exchange of the exchangeable shares. The offering of
exchangeable shares will enable Canadian investors to acquire shares that are
not foreign property for Canadian federal income tax purposes. The offering of
common stock pursuant to this prospectus and the offering of the exchangeable
shares by SMTC Canada are part of a single underwritten offering that will
close at the same time.
3
<PAGE>
Summary Consolidated Historical and Pro Forma Financial Statements and Other
Data
The summary consolidated financial data set forth below is only a summary
and you should read it together with "Selected Consolidated Financial Data,"
"Unaudited Pro Forma Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes appearing elsewhere
in this prospectus.
. The results of operations, other financial data and supplemental data
for 1997 and 1998 represent the results of operations, financial data
and supplemental data for HTM. For accounting purposes, HTM is
considered to have acquired Predecessor SMTC in the July 1999
combination.
. The historic results of operations included in this prospectus for the
year ended December 31, 1999 include a full year of results for HTM, as
well as the results for Predecessor SMTC from July 30, 1999 through
December 31, 1999 and results for W.F. Wood from September 4, 1999
through December 31, 1999.
. The unaudited pro forma consolidated statement of operations data, other
financial data and supplemental data as adjusted give effect to the
combination of Predecessor SMTC and HTM and the acquisition of W.F. Wood
and reflect the receipt of the net proceeds from the sale of shares
offered by us at the initial public offering price of $ per share
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by us and the application of the net proceeds
of the offering as if these transactions had occurred on January 1,
1999. The unaudited pro forma consolidated balance sheet data as
adjusted gives effect to this offering as if it had occurred on December
31, 1999. See "Use of Proceeds."
Our consolidated financial statements and summary consolidated financial
data have been prepared in accordance with generally accepted accounting
principles, or GAAP, in the United States. These principles conform in all
material respects with Canadian GAAP except as described in Note 23 to our
consolidated financial statements. The differences between the line items under
United States GAAP and those as determined under Canadian GAAP are not
significant except that under Canadian GAAP the 1999 extraordinary loss would
have been reported as a pre-tax expense of $2.1 million as part of other
expenses; accordingly, the 1999 loss before income taxes recovery would be $2.8
million, income taxes recovery would be $0.7 million and net loss would be
unchanged at $2.1 million under Canadian GAAP.
4
<PAGE>
<TABLE>
<CAPTION>
Pro forma
as adjusted
Years Ended December 31, Year Ended
-------------------------- Dec. 31, 1999
1997 1998 1999 (unaudited)
---------------- -------- -------------
(in millions, except per share amounts)
<S> <C> <C> <C> <C>
SMTC Corporation
Consolidated Statement of Operations
Data:
United States GAAP (a)
Revenue.............................. $ 59.0 $ 89.7 $ 258.0 $449.7
Cost of sales........................ 53.6 82.5 236.3 408.7
------- -------- -------- ------
Gross profit....................... 5.4 7.2 21.7 41.0
Selling, general and administrative
expenses.......................... 2.8 3.2 12.6 24.6
Management fees.................... -- 0.1 0.7 0.7
Amortization....................... -- 0.2 2.0 4.2
Leveraged recapitalization expenses
(b)............................... -- 2.2 -- --
Former W.F. Wood shareholders'
compensation (c).................. -- -- -- 0.1
Acquisition-related bonuses paid to
management and employees of W.F.
Wood (d).......................... -- -- -- 2.6
------- -------- -------- ------
Operating income..................... 2.6 1.5 6.4 8.8
Interest........................... 0.7 2.0 7.1 1.5
------- -------- -------- ------
Earnings (loss) before income taxes.. 1.9 (0.5) (0.7) 7.3
Income taxes (recovery)............ 0.7 (0.2) 0.1 4.3
------- -------- -------- ------
Earnings (loss) before extraordinary
loss................................ 1.2 (0.3) (0.8) $ 3.0(i)
======
Extraordinary loss (e)............. -- -- (1.3)
------- -------- --------
Net earnings (loss).................. $ 1.2 $ (0.3) $ (2.1)
======= ======== ========
Earnings (loss) before extraordinary
loss per common share (f)(g):
Basic.............................. $ 0.40 $ (0.44) $ (1.89)
Weighted average number of shares
outstanding (f)(g):
Basic.............................. 3.1 2.1 1.6
Other Financial Data:
Depreciation......................... $ 2.2 $ 2.9 $ 6.5 $ 9.4
Amortization of goodwill............. -- -- 1.5 4.1
Amortization of deferred financing
costs............................... -- 0.2 0.5 0.1
Capital expenditures................. 0.5 0.5 4.1 10.2
Supplemental Data:
EBITDA (h)........................... $ 4.8 $ 4.6 $ 14.9 $ 22.4
Adjusted EBITDA (h).................. 4.9 6.9 15.8 26.0
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
As of Dec. 31,
1999
------------------
Pro forma
as adjusted
Actual (unaudited)
------ -----------
(in millions)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and short-term investments.............................. $ 2.1 $ 2.1
Working capital.............................................. 53.4 56.7
Total assets................................................. 228.1 226.1
Total debt, including current maturities..................... 134.0 20.4
Shareholders' equity......................................... 7.8 119.5
</TABLE>
- --------
(a) Refer to Note 23 to our consolidated financial statements for a description
of differences between United States GAAP and Canadian GAAP.
(b) Leveraged recapitalization expenses of $2.2 million for the year ended
December 31, 1998 include transaction costs and compensation expense
related to our leveraged recapitalization.
(c) These expenses terminated at the time of the W.F. Wood acquisition.
(d) Acquisition-related bonuses for pro forma as adjusted 1999 consist of one-
time bonuses of $2.3 million paid to management and $0.3 million paid to
employees.
(e) The extraordinary loss of $1.3 million in 1999 arises from debt prepayment
penalties of $0.8 million, the write-off of unamortized debt financing fees
of $1.0 million and the write-off of unamortized debt discount of $0.3
million, net of a tax recovery of $0.8 million.
(f) Pro forma earnings per share and pro forma weighted average number of
common shares outstanding include all outstanding common stock equivalents
and have been adjusted to give effect to the reclassification assuming that
this offering closes on and that the initial public offering price is
$ .
(g) Diluted loss per share has not been disclosed as the effect of the
potential conversion of dilutive securities is anti-dilutive.
(h) EBITDA means earnings before interest expense, income taxes, depreciation
and amortization. EBITDA is presented because we believe it is a widely
accepted financial indicator of an entity's ability to incur and service
debt. Adjusted EBITDA is presented because it is used by our lenders as a
basis for evaluating covenant compliance. Adjusted EBITDA means EBITDA
adjusted for management fees, former shareholders' compensation and other
charges described in the following table. However, neither EBITDA nor
adjusted EBITDA should be considered as an alternative to cash flow from
operating activities, as a measure of liquidity or as an alternative to net
income as a measure of operating results in accordance with United States
and Canadian GAAP. Our definition of adjusted EBITDA may differ from
definitions of adjusted EBITDA used by other companies.
6
<PAGE>
The following table sets forth a reconciliation of EBITDA to adjusted
EBITDA for each period included herein:
<TABLE>
<CAPTION>
Pro forma
as adjusted
Year Ended Year Ended
December 31, December 31,
--------------- 1999
1997 1998 1999 (unaudited)
---- ---- ----- ------------
(in millions)
<S> <C> <C> <C> <C>
EBITDA........................................ $4.8 $4.6 $14.9 $22.4
Loss on disposal of capital assets (1)........ 0.1 -- 0.2 0.2
Leveraged recapitalization expenses (2)....... -- 2.2 -- --
Management fees (3)........................... -- 0.1 0.7 0.7
Former W.F. Wood shareholders' compensation
(4).......................................... -- -- -- 0.1
Acquisition-related bonuses paid to W.F. Wood
management and employees (5)................. -- -- -- 2.6
---- ---- ----- -----
Adjusted EBITDA............................... $4.9 $6.9 $15.8 $26.0
==== ==== ===== =====
</TABLE>
(1) Reflects losses on disposal of capital assets included in selling,
general and administrative expenses.
(2) Reflects transaction costs and compensation expense related to our
leveraged recapitalization.
(3) Reflects elimination of management fees paid to Bain Capital Partners
VI, L.P., Celerity Management Co., Inc. and Kilmer Electronics Group
Limited under our Management Agreement, which is expected to be
terminated in connection with this offering.
(4) Reflects compensation paid to the former shareholders of W.F. Wood.
(5) Reflects one-time bonuses paid to management and employees of W.F. Wood
in connection with our acquisition of W.F. Wood on September 3, 1999.
(i) The pro forma as adjusted earnings (loss) before extraordinary loss does
not reflect the after-tax effect of adjusting for the following
acquisition-related, non-recurring adjustments and interest income:
. $0.7 million of pre-tax management fees paid to Bain Capital Partners
VI, L.P., Celerity Management Co., Inc. and Kilmer Electronics Group
Limited under a management agreement which is expected to be terminated
in connection with this offering, although a termination agreement has
not yet been finalized;
. $0.1 million of pre-tax compensation paid to former W.F. Wood
shareholders;
. $2.6 million of pre-tax acquisition-related bonuses paid to W.F. Wood
management ($2.3 million) and W.F. Wood employees ($0.3 million); and
. Proceeds from the offering would have exceeded debt outstanding from
January 1999 through July 1999. The excess cash would have earned $0.6
million of pre-tax interest income using an average treasury bill rate
of 4.3%. As a result, pro forma as adjusted interest expense net of
interest income would have been $0.9 million.
7
<PAGE>
The effect of these adjustments is reflected in the following table:
<TABLE>
<CAPTION>
Pro forma
as adjusted
(unaudited)
-----------
(in millions)
<S> <C> <C> <C> <C>
Earnings (loss) before extraordinary loss....... $ 3.0
Plus:
Management fees............................... 0.7
Former W.F. Wood shareholders' compensation... 0.1
Acquisition-related bonuses paid to management
and employees of W.F. Wood................... 2.6
Interest income............................... 0.6
-----
Less:
Tax effect of above adjustments at 40%........ (1.6)
-----
Adjusted earnings (loss) before extraordinary
loss......................................... $ 5.4
=====
</TABLE>
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RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy our shares. If any of the following risks actually occur, our
business could be harmed. In that event, the trading price of our shares might
decline, and you could lose all or part of your investment. You should also
refer to the other information set forth in this prospectus, including our
financial statements and related notes.
Risks Relating 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 35%
of our total pro forma revenue in 1999. Our next five largest customers
collectively represented an additional 29% 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 15.4% of our total pro forma
revenue in 1999, and riser cards, which represented 19.6% 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. Also, the insolvency of one or more of our largest
customers or the inability of one or more of our largest customers to pay for
its orders could decrease revenue. As many of our costs and operating expenses
are relatively fixed, a reduction in net revenue can decrease our profit
margins and adversely affect our business, financial condition and results of
operations.
Our industry is very competitive and we may not be successful if we fail to
compete effectively.
The 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, EMS 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;
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<PAGE>
. 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. 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.
Our business is not typified by long-term contracts, and cancellations,
reductions or delays in customer orders would affect our profitability.
We do not typically obtain firm long-term purchase orders or commitments
from our customers. Instead, we work closely with our customers to develop
forecasts for future orders, which are not binding. Customers may cancel their
orders, change production quantities from forecast volumes or delay production
for a number of reasons beyond our control. Any material delay, cancellation or
reduction of orders from our largest customers could cause our 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.
Shortages or price fluctuations 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 production 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 route
10
<PAGE>
materials through various world ports. A work stoppage, strike or shutdown of a
major port or airport could result in manufacturing and shipping delays or
expediting charges, which could have a material adverse effect on our business,
financial condition and results of operations.
We have experienced significant growth in a short period of time and may have
trouble integrating acquired businesses and managing our expansion.
Since 1996, we and Predecessor SMTC have together completed six
acquisitions. Acquisitions may involve numerous risks, including difficulty in
integrating operations, technologies, systems, and products and services of
acquired companies, diversion of management's attention and disruption of
operations, increased expenses and working capital requirements, entering
markets in which we have limited or no prior experience and where competitors
in such markets have stronger market positions and the potential loss of key
employees and customers of acquired companies. In addition, acquisitions may
involve financial risks, such as the potential liabilities of the acquired
businesses, the dilutive effect of the issuance of additional equity
securities, the incurrence of additional debt, the financial impact of
transaction expenses and the amortization of goodwill and other intangible
assets involved in any transactions that are accounted for using the purchase
method of accounting, and possible adverse tax and accounting effects.
We have a limited history of owning and operating our acquired businesses on
a consolidated basis. There can be no assurance that we will be able to meet
performance expectations or successfully integrate our acquired businesses on a
timely basis without disrupting the quality and reliability of service to our
customers or diverting management resources. Our rapid growth has placed and
will continue to place a significant strain on management, 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 operations.
Also, if we are not able to successfully complete acquisitions, we may not be
able to compete with larger EMS providers who are able to provide a total
customer solution.
If we do not effectively manage the expansion of our operations, our business
may be harmed.
We have grown rapidly in recent periods, and this growth may be difficult to
sustain. Internal growth and further expansion of services may require us to
expand our existing operations and relationships. We plan to expand our design
and development services and our manufacturing capacity by expanding our
facilities and by adding new equipment. Expansion has caused, and is expected
to continue to cause, strain on our infrastructure, including our managerial,
technical, financial and other resources. Our ability to manage future growth
effectively will require us to attract, train, motivate and manage new
employees successfully, to integrate new employees into our operations and to
continue to improve our operational and information systems. We may experience
inefficiencies as we integrate new operations and manage geographically
dispersed operations. We may incur cost overruns. We may encounter construction
delays, equipment delays or shortages, labor shortages and disputes, and
production start-up problems that could adversely affect our growth and our
ability to meet customers' delivery schedules. We may not be able to obtain
funds for this expansion on acceptable terms or at all. In addition, we expect
to incur new fixed operating expenses associated with our expansion efforts,
including increases in depreciation expense and rental expense. If our revenue
does not increase sufficiently to offset these expenses, our business,
financial condition and results of operations would be adversely affected.
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<PAGE>
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 additional qualified
management in the future.
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 6% 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 accounts
receivable;
. unexpected changes in and the burdens and costs of compliance with a
variety of foreign laws;
12
<PAGE>
. 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
We expect to use substantially all of the net proceeds of this offering to
repay indebtedness and, as a result, we may be unable to meet our future
capital and liquidity requirements.
We expect to use substantially all of the net proceeds of this offering to
repay indebtedness. We expect that our principal sources of funds following
this offering will be cash generated from operating activities and borrowings
under our senior credit facility. After this offering, we expect to have
$ million available to borrow under our senior credit facility. No assurance
can be given that these funds will provide us with sufficient liquidity and
capital resources for us to meet our current and future financial needs. We may
require additional equity or debt financing to meet our working capital
requirements or to finance acquisitions. There can be no assurance that
additional financing will be available when required or, if available, will be
on terms satisfactory to us.
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;
. 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;
13
<PAGE>
. 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 and 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 agreements impose significant restrictions on our
ability to operate.
The terms of our current indebtedness agreements restrict, among other
things, our ability to incur additional indebtedness, pay dividends or make
certain other restricted payments, consummate certain asset sales, enter into
certain transactions with affiliates, merge, consolidate or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of our
assets. We are also required to maintain specified financial ratios and satisfy
certain financial condition tests, which further restrict our ability to
operate as we choose. Substantially all our assets and those of our
subsidiaries are pledged as security under our senior credit facility. See
"Description of Indebtedness."
Investment funds affiliated with Bain Capital, Inc., investment funds
affiliated with Celerity Partners, Kilmer Electronics Group Limited and certain
members of management will continue to have significant influence over our
business after this offering, and could delay, deter or prevent a change of
control or other business combination.
Upon completion of this offering, investment funds affiliated with Bain
Capital, Inc., investment funds affiliated with Celerity Partners, Kilmer
Electronics Group Limited and certain members of management will hold
approximately %, %, % and %, respectively, of our outstanding shares. In
addition, under our Stockholders Agreement, up to three of the ten directors
who will serve on our board following this offering will be representatives of
Bain Capital, Inc., up to three will be representatives of Celerity Partners,
up to two will be representatives of Kilmer Electronics Group Limited and up to
two will be members of management. By virtue of such stock ownership and board
representation, Bain Capital, Inc., Celerity Partners, Kilmer Electronics Group
Limited and certain members of management will continue to have a significant
influence over all matters submitted to our stockholders, including the
election of our directors, and to 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. Please see "Description of Capital Stock."
14
<PAGE>
Risks Related to this Offering
There may not be an active market for our shares, making it difficult to sell
the shares you purchase.
Prior to this offering, there has been no public market for our shares. We
cannot assure you that an active trading market for our shares will develop or
be sustained after this offering. Because the number of shares of common stock
to be sold will be reduced by the number of exchangeable shares sold, in the
event that a relatively larger number of exchangeable shares is sold than the
number of shares of common stock, the resulting smaller number of shares of our
common stock tradeable in the public market could restrict the liquidity and
depress the market price of our common stock. The initial public offering price
for our shares will be determined by negotiations between the underwriters and
us. We cannot assure you that the initial public offering price will correspond
to the price at which our shares will trade in the public market subsequent to
the offering or that the price of our shares available in the public market
will reflect our actual financial performance.
Our share price could be volatile and could drop unexpectedly following this
offering, possibly subjecting us to securities litigation.
Historically, stock prices and trading volumes for newly public companies
fluctuate widely for a number of reasons, including some reasons that may be
unrelated to their businesses or results of operations. This type of market
volatility could depress the price of our shares without regard to our
operating performance. In addition, our operating results may be below the
expectations of public market analysts or investors. If this were to occur, the
market price of our shares could decrease, perhaps significantly.
In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. Many companies have been subject to this
type of litigation. We may also become involved in this type of litigation.
Litigation is often expensive and diverts management's attention and resources.
Such litigation, if it were to occur, could have a material adverse effect upon
our business, financial condition and results of operations.
Future sales of our shares, including those purchased in this offering, may
depress our stock price.
Sales of a substantial number of shares of our common stock in the public
market by our stockholders after this offering could depress the market price
of our common stock and could impair our ability to raise capital through the
sale of additional equity securities. Based on shares outstanding as of ,
upon completion of this offering we will have outstanding shares of common
stock, assuming no exercise of the underwriters' over-allotment option. Of
these shares, the shares of common stock sold in this offering and an
additional shares of common stock will be freely tradeable, without
restriction, in the public market. After the lock-up agreements pertaining to
this offering expire 180 days from the date of this prospectus, an additional
shares will be eligible for sale in the public market.
In addition, of the shares subject to outstanding options and warrants
will be exercisable, and if exercised, available for sale 180 days after the
date of this prospectus. Also, the exchangeable shares sold in this
offering and an additional exchangeable shares will be freely convertible
to our common stock, and any such common stock will be freely tradeable without
restriction in the public market, subject to compliance with applicable
securities laws. The exchange by the holders of exchangeable shares of a
substantial number of exchangeable shares into shares of our common stock
within a relatively short period of time could have the effect of depressing
the market price of our common stock and could impair our ability to raise
capital through the sale of additional equity securities. See "Shares Eligible
for Future Sale" for a description of shares of common stock that are available
for future sale.
The initial public offering price is significantly higher than the book value
of our shares and you will experience immediate and substantial dilution in the
value of your investment.
The initial public offering price per share will significantly exceed the
net tangible book value per share. Accordingly, investors purchasing shares in
this offering will suffer immediate and substantial dilution of their
investment. Additional dilution will occur upon the exercise of outstanding
options. See "Dilution."
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<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the shares offered in this offering,
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by us, will be approximately $113.6 million. If the
underwriters' over-allotment option is exercised in full, our net proceeds will
be approximately $ million. We intend to use the net proceeds to reduce our
indebtedness under our senior credit facility.
Our senior credit facility consists of multi-tranche term loans and a
revolving credit facility with final maturity dates in September 2006 and July
2004, respectively, and an aggregate principal balance of $130.9 million as of
December 31, 1999. This indebtedness was incurred to refinance existing debt
and to finance our acquisition of the Chihuahua facility and W.F. Wood. The
loans under this facility bear interest at varying rates based, at our option,
on either Eurodollar base rate plus 300 to 475 basis points or the bank rate
plus 125 to 175 basis points. The weighted average interest rate for the loans
outstanding under the senior credit facility at December 31, 1999 was 9.8%. See
"Description of Indebtedness."
Pending use of the net proceeds of this offering, we intend to invest the
net proceeds in short-term, interest-bearing, investment-grade marketable
securities.
THE RECLASSIFICATION
SMTC currently has four classes of common stock, designated as Class A
common stock, Class L common stock, Class N common stock and Class S common
stock. The Class L common stock is identical to the Class A common stock,
except that each share of Class L common stock is entitled to a preferential
payment upon any distribution by SMTC to holders of SMTC capital stock, whether
by dividend, liquidating distribution or otherwise, equal to the original cost
of such share, $162.00, plus an amount which accrues on a daily basis at a rate
of 12.0% per annum, compounded quarterly. After payment of this preference
amount, each share of Class A common stock and Class L common stock shares
equally in all distributions to holders of SMTC capital stock. As of December
31, 1999, the preference amount was $170.20 per share of Class L common stock.
The Class N common stock is non-participating and represents voting rights
only. There are no shares of Class S common stock outstanding.
In addition, SMTC Canada currently has outstanding Class L exchangeable
shares that are exchangeable into shares of SMTC Class L common stock on a one-
for-one basis. SMTC Canada also has outstanding Class Y shares that carry
dividend and voting rights on the same basis as the Class L exchangeable
shares. The holder of the Class Y shares has entered into an agreement with
SMTC under which the Class Y shares are exchangeable for shares of Class L
common stock on a one-for-one basis. See "Description of Capital Stock."
Immediately prior to the completion of this offering, we will:
. purchase the outstanding Class Y shares in exchange for shares of SMTC
Class L common stock;
. convert each of the outstanding shares of Class L common stock 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;
. convert each share of Class A common stock into shares of common
stock;
. convert all outstanding shares of Class N common stock into one share of
special voting stock which will be held by a trustee for the benefit of
the holders of exchangeable shares; and
. convert each Class L exchangeable share into exchangeable shares of the
same class as those being offered in this offering in the same ratio as
shares of Class L common stock are converted to shares of common stock.
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The transactions described above are collectively referred to in this
prospectus as the "reclassification."
Assuming an initial public offering price of $ per share (the midpoint
of the filing range), and a closing date of , 2000 for this offering,
shares of common stock will be outstanding immediately after the
reclassification, assuming the exchange of all exchangeable shares. The actual
number of shares of common stock that will be issued as a result of the
reclassification is subject to change based on the actual offering price and
the closing date of this offering. Fractional shares otherwise issuable as a
result of the reclassification will be rounded to the nearest whole number.
DIVIDEND POLICY
SMTC Corporation has never declared or paid a cash dividend on its shares,
and we currently do not anticipate paying any cash dividends in the
foreseeable future. Our existing credit facilities restrict our ability to pay
dividends. We currently intend to retain earnings and cash flow to finance
future operations and expansion and to reduce indebtedness. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
On closing of this offering, SMTC and SMTC Canada will enter into a support
agreement under which, among other things, SMTC will agree with SMTC Canada
that it will not declare and pay dividends on the common stock unless SMTC
Canada is able to declare and pay equivalent dividends on the exchangeable
shares. Although SMTC Canada has paid dividends in the past, it does not
currently anticipate paying any cash dividends in the foreseeable future.
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and our
capitalization as of December 31, 1999 and February 29, 2000:
. on an actual basis; and
. on a pro forma as adjusted basis after giving effect to (1) the
reclassification as if it had occurred on December 31, 1999 or February
29, 2000 as applicable; (2) our sale of common stock and the common
stock issuable upon exchange of the exchangeable shares offered by SMTC
Canada (see "Prospectus Summary--Concurrent Offering"); and (3) the
application of $113.6 million from the sale of shares in this offering
to repay our senior credit facility as described in "Use of Proceeds",
assuming an initial public offering price of $ per share (the
midpoint of the filing range) and after deducting the estimated
underwriting discounts and commissions and our estimated offering
expenses.
You should read this information together with our consolidated financial
statements and the related notes to those statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999 February 29, 2000
------------------- ----------------------
Pro Forma Pro Forma
as adjusted as adjusted
Actual (unaudited) Actual (unaudited)
------ ----------- ------ -----------
(in millions, (in millions,
except share data) except share data)
<S> <C> <C> <C> <C>
Cash and cash equivalents......... $ 2.1 $ 2.1 $ 0.4 $0.4
====== ====== ====== ======
Short-term obligations............ 3.5 1.5 3.4 1.4
Long-term obligations:
Senior credit facility.......... 128.9 17.3 152.5 40.9
Capital lease obligations....... 1.5 1.5 1.5 1.5
------ ------ ------ ------
Total long-term obligations... 130.4 18.8 154.0 42.4
Shareholders' equity:
Common Stock, $0.01 par value,
no shares authorized or issued
on an actual basis; shares
authorized and shares
issued and outstanding on a pro
forma basis.................... -- --
Class A common stock, $0.001 par
value, 12,820,000 shares
authorized; 2,447,782 shares
issued and outstanding on an
actual basis; no shares
authorized, issued and
outstanding on a pro forma
basis (a)...................... -- -- -- --
Class L common stock, $0.001 par
value, 300,000 shares
authorized; 154,168 shares
issued and outstanding on an
actual basis; no shares
authorized, issued and
outstanding on a pro forma
basis (b)...................... -- -- -- --
Class N common stock, $0.001 par
value, 125,000 shares
authorized; 113,408 shares
issued and outstanding on an
actual basis; no shares
authorized, issued and
outstanding on a pro forma
basis.......................... -- -- -- --
Additional paid-in capital........ 11.8 125.4 11.8 125.4
Retained earnings (deficit)....... (4.3) (6.2)(c) (4.3)(d) (6.2)(c)
Other............................. 0.3 0.3 0.3 0.3
------ ------ ------ ------
Total shareholders' equity.... 7.8 119.5 7.8 119.5
------ ------ ------ ------
Total capitalization.......... $141.7 $139.8 $165.2 $163.3
====== ====== ====== ======
</TABLE>
(a) Does not include the 165,000 shares of Class A common stock reserved for
issuance pursuant to our stock option plan as at December 31, 1999 and
February 29, 2000.
18
<PAGE>
(b) Does not include the 4,000 shares of Class L common stock reserved for
issuance pursuant to our stock option plan as at December 31, 1999 and
February 29, 2000, or the 113,408 shares of Class L common stock reserved
for issuance upon exchange of currently outstanding Class L exchangeable
shares and Class Y shares of SMTC Canada.
(c) As at December 31, 1999, adjusted to reflect an after-tax charge estimated
to be $1.9 million, net of a $1.3 million tax recovery, on repayment of
indebtedness with the net proceeds of the offering, comprised of the
following items net of tax: $2.0 million for the write-off of unamortized
deferred financing costs; a $0.2 million premium payable with respect to
the repayment of the senior credit facility; and a $0.3 million gain on
termination of an interest rate swap.
(d) Such amounts for February 29, 2000 reflect the balances as of December 31,
1999, the most recent period for which such information is available.
19
<PAGE>
DILUTION
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers in this offering and the net
tangible book value per share immediately after completion of this offering.
As of December 31, 1999, assuming completion of the reclassification, net
tangible book value was approximately $ million, or $ per share. Net
tangible book value per share represents total tangible assets, less total
liabilities, divided by the number of shares outstanding upon completion of
the reclassification.
After giving effect to the sale of shares in this offering, our pro
forma net tangible book value as of December 31, 1999 would have been
approximately $ million, or $ per share. This represents an immediate
increase in pro forma net tangible book value of $ per share to our existing
stockholders and an immediate dilution in pro forma net tangible book value of
$ per share to new investors in this offering. If the initial public
offering price is higher or lower, the dilution to the new investors will be
greater or less, respectively.
The following table illustrates the dilution in pro forma net tangible book
value per share to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $
Pro forma net tangible book value per share at December 31,
1999..........................................................
Increase per share attributable to this offering...............
---
Pro forma net tangible book value per share after this offering..
---
Dilution of pro forma net tangible book value per share to new
investors....................................................... $
===
</TABLE>
The table below assumes an initial public offering price of $ per share
before deducting underwriting discounts and commissions and estimated offering
expenses payable by us and summarizes, as of December 31, 1999 on a pro forma
basis, the differences between:
. the number of shares purchased from us by our existing stockholders
since our inception and the number of shares purchased by new investors
in this offering;
. the aggregate cash consideration paid by existing stockholders and to be
paid by new investors; and
. the average purchase price per share paid by the existing stockholders
and to be paid by the new investors.
<TABLE>
<CAPTION>
Shares Total Average
Purchased Consideration Price
-------------- -------------- Per
Number Percent Amount Percent Share
------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders..................... $
New investors.............................
----- ---- ----- ---- ---
Total................................... 100% 100%
===== ==== ===== ==== ===
</TABLE>
The above discussion and tables assume no exercise of any stock options or
warrants outstanding as of December 31, 1999. As of December 31, 1999, there
were options and warrants outstanding to purchase a total of shares with a
weighted average exercise price of $ per share. If all of the currently
exercisable options and warrants were exercised, the percent dilution to new
investors would be %, and the average price per share to existing
stockholders would be $ . See "Capitalization" and "Management."
The above discussion and tables also assume that this offering closes on
, 2000.
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated statement of earnings (loss) for the
year ended December 31, 1999 gives pro forma effect to:
. the combination of Predecessor SMTC and HTM;
. the acquisition of W.F. Wood;
. the reclassification as described under "The Reclassification"; and
. the consummation of the offering and the application of the net proceeds
therefrom, as described under "Use of Proceeds".
The unaudited pro forma consolidated balance sheet gives effect to the
reclassification and the offering as if each occurred on December 31, 1999.
The unaudited pro forma consolidated statement of earnings (loss) gives
effect to the combination, the acquisition, the reclassification and the
offering as if each of these occurred on January 1, 1999.
The accounting policies used in preparing the unaudited pro forma
consolidated financial statements are those disclosed in our consolidated
financial statements included in this prospectus.
The unaudited pro forma consolidated financial information has been provided
for informational purposes only and is not necessarily indicative of the
results of operations or financial condition that actually would have been
achieved if the combination, acquisition and other transactions had been
completed on the date indicated, or that may be reported in the future. The
unaudited pro forma financial information does not reflect expenses expected to
be incurred to finalize the integration of the combined or acquired operations,
or potential cost savings or improvements in revenue that we believe can be
realized as a result of the acquisitions.
The unaudited pro forma consolidated financial information is based upon
assumptions that we believe are reasonable and should be read in conjunction
with the separate audited historical consolidated financial statements of SMTC
Corporation (formerly HTM Holdings, Inc.), SMTC Corporation (formerly The
Surface Mount Technology Centre Inc.) and W.F. Wood, Incorporated.
The unaudited pro forma consolidated financial information has been prepared
in accordance with United States GAAP and the notes to the unaudited pro forma
consolidated statement of earnings (loss) include a reconciliation to Canadian
GAAP. There are no differences between United States and Canadian GAAP that
impact the pro forma consolidated balance sheet.
The unaudited pro forma consolidated statement of earnings (loss) does not
reflect the net after-tax extraordinary loss of $1.9 million on the early
extinguishment of debt resulting from the write-off of debt issuance costs,
incurrence of the prepayment penalty and the gain from settlement of the
interest rate swaps in connection with the prepayment of debt upon completion
of the offering. The unaudited pro forma consolidated balance sheet, however,
does reflect the extraordinary loss.
21
<PAGE>
SMTC CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
(dollars in thousands)
December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
SMTC Pro forma
Corporation Offering and as adjusted
December 31, reclassification December 31,
1999 adjustments 1999
------------ ---------------- ------------
(audited) (unaudited)
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and short-term
investments............... $ 2,083 $125,000 (a) $ 2,083
(11,438)(a)
(113,562)(a)
(78)(a)
(400)(b)
478 (d)
Accounts receivable........ 71,597 71,597
Inventories................ 61,680 61,680
Prepaid expenses........... 3,647 3,647
Deferred income taxes...... 1,527 160 (b) 2,782
1,286 (c)
(191)(d)
-------- -------- --------
140,534 1,255 141,789
Capital assets.............. 35,003 35,003
Goodwill.................... 40,800 40,800
Other assets................ 11,145 (3,216)(c) 7,929
Deferred income taxes....... 623 623
-------- -------- --------
$228,105 $ (1,961) $226,144
======== ======== ========
Liabilities and
Shareholders' Equity
Current liabilities:
Accounts payable........... $ 53,119 $ $ 53,119
Accrued liabilities........ 29,307 29,307
Income taxes payable....... 1,127 1,127
Current portion of long-
term debt 2,000 (2,000)(a) --
Current portion of capital
lease obligation.......... 1,541 1,541
-------- -------- --------
87,094 (2,000) 85,094
Capital lease obligations... 1,537 1,537
Long-term debt.............. 128,942 (111,640)(a) 17,302
Deferred income taxes....... 2,733 2,733
Shareholders' equity:
Capital stock.............. 3 (3)(e) --
Warrants................... 367 367
Loans receivable........... (60) (60)
Additional paid-in
capital................... 11,804 113,562 (a) 125,369
3 (e)
Deficit.................... (4,315) (240)(b) (6,198)
(1,930)(c)
287 (d)
-------- -------- --------
7,799 111,679 119,478
-------- -------- --------
$228,105 $ (1,961) $226,144
======== ======== ========
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
22
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(dollars in thousands)
December 31, 1999
(Unaudited)
Pro forma adjustments:
(a) Reflects our sale of shares of common stock and exchangeable shares
generating gross proceeds of $125,000 and the use of the estimated net
proceeds of $113,562, net of underwriting discounts and commissions and
the estimated offering expenses totaling $11,438, and the $78 of proceeds
from termination of the interest rate swap net of the prepayment penalty
(notes (b) and (d)) to repay a portion of the revolving line of credit and
the outstanding balance of the term loans and subordinated debt. The
adjustment assumes the underwriters' over-allotment option is not
exercised. See "Use of Proceeds" and "Description of Indebtedness."
(b) Reflects the prepayment premium of $400, before the $160 of related income
tax recovery (at a 40% effective tax rate), resulting in an extraordinary
loss in connection with the prepayment of the subordinated debt in
connection with the offering. Amounts will differ based on the effective
date of the offering.
(c) Reflects the write-off of $3,216 in capitalized debt issuance costs,
before $1,286 of related income tax recovery (at a 40% effective tax
rate), resulting in an after-tax extraordinary loss of $1,930 in
connection with the paydown of outstanding debt. Amounts will differ based
on the effective date of the offering.
(d) Reflects the recognition of a $478 gain, in connection with the
termination of the swap on debt outstanding under the senior credit
facility before $191 of related income tax expense (at a 40% effective tax
rate), resulting in an extraordinary gain of $287. Amounts will differ
based on the effective date of the offering.
(e) Represents the par value of shares issued in the offering and the
reclassification of the existing common stock.
23
<PAGE>
SMTC CORPORATION
PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(dollars in thousands, except share quantities and per share amounts)
Year ended December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Pre-combination
SMTC Corporation
(formerly The
Surface Mount Pre-combination
Technology W.F. Wood
SMTC Centre Inc.) Incorporated Pro forma
Corporation from January 1, from January 1, Offering as adjusted
year ended 1999 to 1999 to and year ended
December 31, July 29, September 3, Acquisition Pro forma reclassification December 31,
1999 1999 1999 adjustments combined adjustments 1999
------------ ---------------- --------------- ----------- ----------- ---------------- ------------
(audited) (unaudited) (audited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue........... $ 257,962 $168,553 $23,198 $ -- $449,713 $ -- $449,713
Cost of sales..... 236,331 152,330 20,072 -- 408,733 -- 408,733
--------- -------- ------- ------- -------- ------ --------
Gross profit...... 21,631 16,223 3,126 -- 40,980 40,980
Selling, general
and
administrative
expenses......... 12,615 10,268 1,718 -- 24,601 -- 24,601
Management fees... 717 -- -- -- 717 -- 717
Amortization...... 1,990 -- -- 2,615 (a) 4,605 (391)(f) 4,214
Former W.F. Wood
shareholders'
compensation..... -- -- 136 -- 136 -- 136
Acquisition-
related bonuses
paid to
management and
employees of W.F.
Wood............. -- -- 2,571 -- 2,571 -- 2,571
Acquisition-
related
professional
fees............. -- -- 403 (403)(b) -- -- --
--------- -------- ------- ------- -------- ------ --------
Operating income.. 6,309 5,955 (1,702) (2,212) 8,350 391 8,741
Interest.......... 7,066 2,215 58 1,098 (c) 10,437 (8,981)(g) 1,456
--------- -------- ------- ------- -------- ------ --------
Earnings (loss)
before income
taxes............ (757) 3,740 (1,760) (3,310) (2,087) 9,372 7,285
Income taxes
(recovery):
Current.......... 442 2,064 -- (1,296)(d)(e) 1,210 3,592 (h) 4,802
Deferred......... (335) (195) -- (156)(d) (686) 156 (h) (530)
--------- -------- ------- ------- -------- ------ --------
107 1,869 -- (1,452) 524 3,748 4,272
--------- -------- ------- ------- -------- ------ --------
Earnings (loss)
before
extraordinary
loss............. $ (864) $ 1,871 $(1,760) $(1,858) $ (2,611)(i) $5,624 $ 3,013(i)
========= ======== ======= ======= ======== ====== ========
Income (loss) per
common share:
Earnings (loss)
before
extraordinary
loss............ $ (864) $
Less Class L
preferred
entitlement..... (2,185)
--------- --------
Loss before
extraordinary
loss available to
common
shareholders..... $ (3,049) $
========= ========
Loss per common
share
before
extraordinary
loss............. $ (1.89) $
========= ========
Weighted average
number of shares
outstanding:
Basic............ 1,617,356
========= ========
</TABLE>
Diluted loss per share has not been disclosed as the effect of the potential
conversion of dilutive securities is anti-dilutive.
See accompanying notes to pro forma consolidated financial information.
24
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(dollars in thousands)
Year ended December 31, 1999
(Unaudited)
Pro forma adjustments:
(a) Reflects the additional amortization expense related to the allocation of
the purchase price to goodwill for the acquisitions. The amortization is
based on the estimated useful life of 10 years for goodwill, which is our
amortization policy.
(b) Reflects the elimination of the non-recurring acquisition-related
professional fees incurred by W.F. Wood.
(c) Reflects the additional interest expense related to the borrowings
required by us to complete the W.F. Wood acquisition, based on our current
incremental borrowing rate on December 31, 1999 of LIBOR plus 350 basis
points.
(d) Reflects the income tax effect of adjustments (a), (b) and (c) at a 40%
effective tax rate. The amortization of $1,747 of goodwill in connection
with the acquisition of W.F. Wood is tax deductible.
(e) Reflects the income tax effect of treating W.F. Wood as a "C" Corporation.
Prior to its acquisition by SMTC, W.F. Wood held subchapter "S" status for
federal and Massachusetts income tax purposes, thereby consenting to
include the company's income in the shareholders' individual income tax
returns.
(f) Reflects the decrease in amortization of debt issuance costs.
(g) Reflects the decrease in interest expense in connection with the use of net
proceeds from the offering to repay outstanding debt as follows:
<TABLE>
<S> <C>
Pro forma combined interest expense................................. $10,437
Elimination of historical and pro forma interest.................... (8,981)
-------
Pro forma interest expense subsequent to the offering............... $ 1,456
=======
</TABLE>
The elimination of historical and pro forma interest is calculated by
applying the assumed offering proceeds net of the prepayment penalty and
swap termination proceeds for a total of $113,640 to outstanding debt
balances (including the debt related to our acquisition of W.F. Wood) as if
the proceeds were applied at the beginning of the year. The proceeds were
applied against the entire balance outstanding on the subordinated debt,
term loans and a portion of the revolving credit facility. This adjustment
does not reflect the $627 of pre-tax interest income that would have been
earned during the year by investing the excess of proceeds over debt
outstanding from January 1999 to July 1999 using an average treasury bill
rate of 4.3%.
(h) Reflects the income tax effect of adjustments (f) and (g) at a 40%
effective tax rate.
25
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(dollars in thousands)
Year ended December 31, 1999
(Unaudited)
(i) The pro forma combined and pro forma as adjusted earnings (loss) before
extraordinary loss do not reflect the after-tax effect of adjusting for the
following acquisition-related, non-recurring adjustments and interest
income:
. $717 of pre-tax management fees paid to Bain Capital Partners VI, L.P.,
Celerity Management Co., Inc. and Kilmer Electronics Group Limited under
a management agreement which is expected to be terminated in connection
with this offering, although a termination agreement has not yet been
finalized;
. $136 of pre-tax compensation paid to former W.F. Wood shareholders;
. $2,571 of pre-tax acquisition-related bonuses paid to W.F. Wood
management ($2,321) and W.F. Wood employees ($250); and
. Proceeds from the offering would have exceeded debt outstanding from
January 1999 through July 1999. The excess cash would have earned $627
of pre-tax interest income using an average treasury bill rate of 4.3%.
As a result, pro forma as adjusted interest expense net of interest
income would have been $829.
The effect of these adjustments is reflected in the following table:
<TABLE>
<CAPTION>
Pro forma Pro forma
combined as adjusted
--------- -----------
(unaudited)
<S> <C> <C> <C>
Earnings (loss) before extraordinary loss........ $(2,611) $3,013
Plus:
Management fees................................ 717 717
Former W.F. Wood shareholders' compensation.... 136 136
Acquisition-related bonuses paid to management
and employees of W.F. Wood.................... 2,571 2,571
Interest income................................ -- 627
Less:
Tax effect of above adjustments at 40%......... (1,369) (1,620)
------- ------
Adjusted earnings (loss) before extraordinary
loss.......................................... $ (556) $5,444
======= ======
</TABLE>
26
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(dollars in thousands)
Year ended December 31, 1999
(Unaudited)
(j) Differences between United States and Canadian GAAP:
The pro forma consolidated financial information has been prepared in
accordance with generally accepted accounting principles as applied in the
United States. The significant differences between United States GAAP and
Canadian GAAP and their effect on the pro forma consolidated financial
statements are described below:
Extraordinary loss:
Under United States GAAP, the charges incurred as a result of early
payment of the senior notes and subordinated notes are recorded as an
extraordinary loss and not presented for purposes of the pro forma
consolidated statement of earnings (loss). Under Canadian GAAP, the charges
would have been included in earnings (loss) before income taxes and the
related tax benefit recorded in income taxes expense. Accordingly, the
following amounts would have been reported in the pro forma consolidated
statement of earnings (loss) under Canadian GAAP:
<TABLE>
<S> <C>
Operating income.................................................. $8,741
Interest.......................................................... 1,456
Debt extinguishment costs......................................... 5,228
------
Earnings before income taxes...................................... 2,057
Income taxes (recovery):
Current......................................................... 2,736
Deferred........................................................ (530)
------
2,206
------
Net earnings (loss)............................................... $ (149)
======
</TABLE>
27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for the dates
and periods indicated have been derived from our consolidated financial
statements.
. The results of operations, other financial data and supplemental data for
1995, 1996, 1997 and 1998 represent the results of operations, financial
data and supplemental data for HTM. For accounting purposes, HTM is
considered to have acquired Predecessor SMTC in the July 1999
combination.
. The results of operations, other financial data and supplemental data for
1999 include a full year of results for HTM, as well as the results for
Predecessor SMTC from July 30, 1999 through December 31, 1999 and results
for W.F. Wood from September 4, 1999 through December 31, 1999.
. The pro forma results of operations, other financial data and
supplemental data give effect to the combination of Predecessor SMTC and
HTM and the acquisition of W.F. Wood.
You should read the data set forth below in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes thereto appearing
elsewhere in this prospectus.
Our consolidated financial statements and our selected consolidated
financial data have been prepared in accordance with United States GAAP. These
principles conform in all material respects to Canadian GAAP except as
described in Note 23 to our consolidated financial statements. The differences
between the line items under United States GAAP and those as determined under
Canadian GAAP are not significant except that under Canadian GAAP, the 1999
extraordinary loss would have been reported as a pre-tax expense of
$2.1 million as part of other expenses; accordingly the 1999 loss before income
taxes recovery would be $2.8 million, income taxes recovery would be $0.7
million and net loss would be unchanged at $2.1 million under Canadian GAAP.
The consolidated financial statements and the selected consolidated
financial data of Predecessor SMTC have been prepared in accordance with
Canadian GAAP. These principles conform in all material respects with United
States GAAP except as disclosed in Note 17 to Predecessor SMTC's consolidated
financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
combined
Year Ended
Year Ended December 31,(b) December 31,
----------------------------------------- 1999(c)
1995 1996 1997 1998 1999 (unaudited)
------- ------- -------------- ------- ------------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C>
SMTC Corporation
Consolidated Statement
of Operations Data:
United States GAAP (a)
Revenue................. $ 67.5 $ 70.8 $ 59.0 $ 89.7 $ 258.0 $449.7
Cost of sales........... 65.7 68.9 53.6 82.5 236.3 408.7
------- ------- ------ ------- ------- ------
Gross profit.......... 1.8 1.9 5.4 7.2 21.7 41.0
Selling, general and
administrative
expenses............... 2.5 2.8 2.8 3.2 12.6 24.6
Management fees......... -- -- -- 0.1 0.7 0.7
Amortization............ -- -- -- 0.2 2.0 4.6
Relocation expenses
(d).................... -- 0.5 -- -- -- --
Leveraged
recapitalization
expenses (e)........... -- -- -- 2.2 -- --
Former W.F. Wood
shareholders'
compensation (f)....... -- -- -- -- -- 0.1
Acquisition-related
bonuses paid to
management and
employees of W.F. Wood
(g).................... -- -- -- -- -- 2.6
------- ------- ------ ------- ------- ------
Operating income
(loss)................. (0.7) (1.4) 2.6 1.5 6.4 8.4
Interest................ 0.6 0.7 0.7 2.0 7.1 10.5
------- ------- ------ ------- ------- ------
Earnings (loss) before
income taxes........... (1.3) (2.1) 1.9 (0.5) (0.7) (2.1)
Income taxes
(recovery)........... (0.4) (0.8) 0.7 (0.2) 0.1 0.5
------- ------- ------ ------- ------- ------
Earnings (loss) before
extraordinary loss..... (0.9) (1.3) 1.2 (0.3) (0.8) $(2.6)(l)
======
Extraordinary loss
(h).................. -- -- -- -- (1.3)
------- ------- ------ ------- -------
Net earnings (loss)..... $ (0.9) $ (1.3) $ 1.2 $ (0.3) $ (2.1)
======= ======= ====== ======= =======
Earnings (loss) before
extraordinary loss per
common share (i) (j):
Basic................. $ (0.30) $ (0.40) $ 0.40 $ (0.44) $ (1.89)
Weighted average number
of shares outstanding
(i) (j):
Basic................. 3.1 3.1 3.1 2.1 1.6
Other Financial Data:
Depreciation............ $ 1.4 $ 1.9 $ 2.2 $ 2.9 $ 6.5 $ 9.4
Amortization of
goodwill............... -- -- -- -- 1.5 4.1
Amortization of deferred
financing costs........ -- -- -- 0.2 0.5 0.5
Capital expenditures.... 0.8 0.6 0.5 0.5 4.1 10.2
Supplemental Data:
EBITDA (k).............. $ 0.7 $ 0.5 $ 4.8 $ 4.6 $ 14.9 $ 22.4
Adjusted EBITDA (k)..... 0.7 1.0 4.9 6.9 15.8 26.0
<CAPTION>
As of Dec. 31, 1999
-----------------------------------------
1995 1996 1997 1998 1999
------- ------- -------------- -------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and short-term
investments............ $ 0.1 $ 0.1 $ 0.4 $ 0.5 $ 2.1
Working capital......... 2.5 0.7 4.1 8.1 53.4
Total assets............ 46.9 22.9 31.7 44.2 228.1
Total debt, including
current maturities..... 12.3 7.0 8.2 35.5 134.0
Shareholders' equity
(deficit).............. 8.3 7.1 8.4 (10.5) 7.8
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
Ended Aug. 31, Period from
---------------- Sept. 1, 1998
1997 1998 to July 29, 1999
------- -------- ----------------
Statement of Operations Data: (in millions)
<S> <C> <C> <C>
Predecessor SMTC
<CAPTION>
Canadian GAAP (m)
<S> <C> <C> <C>
Revenue....................................... $ 96.8 $ 210.2 $270.6
Cost of sales................................. 81.7 188.4 245.6
------- -------- ------
Gross profit................................ $ 15.1 $ 21.8 $ 25.0
======= ======== ======
<CAPTION>
Fiscal Year Period from
Ended Dec. 31, Jan. 1, 1999
---------------- to Sept. 3,
1997 1998 1999
------- -------- ----------------
W.F. Wood (in millions)
United States GAAP (n)
<S> <C> <C> <C>
Net sales..................................... $ 25.6 $ 30.8 $ 23.2
Cost of sales................................. 20.9 25.2 20.1
------- -------- ------
Gross profit................................ $ 4.7 $ 5.6 $ 3.1
======= ======== ======
</TABLE>
- --------
(a) Refer to Note 23 to our consolidated financial statements for a
description of differences between United States GAAP and Canadian GAAP.
(b) The results of operations, other financial data and supplemental data for
1997 and 1998 represent the results of operations, other financial data
and supplemental data for HTM. HTM is considered to have acquired
Predecessor SMTC for accounting purposes in the July 1999 combination. The
results of operations, other financial data and supplemental data for 1999
include a full year of results for HTM, as well as the results for
Predecessor SMTC from July 30, 1999 through December 31, 1999 and results
for W.F. Wood from September 4, 1999 through December 31, 1999.
(c) The pro forma results of operations, other financial data and supplemental
data give effect to the combination of Predecessor SMTC and HTM and the
acquisition of W.F. Wood as if they had occurred on January 1, 1999. This
data does not give effect to the reclassification or this offering. For a
description of the effects of these events, please see "Unaudited Pro
Forma Consolidated Financial Information."
(d) Relocation expenses include costs incurred to move equipment and employees
from a facility in Longmont, Colorado to Denver, Colorado.
(e) Leveraged recapitalization expenses of $2.2 million for the year ended
December 31, 1998 include transaction costs and compensation expense
related to our leveraged recapitalization.
(f) These expenses terminated at the time of the W.F. Wood acquisition.
(g) Acquisition-related bonuses consist of one-time bonuses of $2.3 million
paid to management and $0.3 million paid to employees.
(h) The extraordinary loss of $1.3 million in 1999 arises from debt prepayment
penalties of $0.8 million, the write-off of unamortized debt financing
fees of $1.0 million and the write-off of the unamortized debt discount of
$0.3 million net of a tax recovery of $0.8 million.
(i) Pro forma earnings per share and pro forma weighted average number of
common shares outstanding include all outstanding common stock equivalents
and have been adjusted to give effect to the reclassification assuming that
this offering closes on and that the initial public offering price is
$ .
(j) Diluted loss per share has not been disclosed as the effect of the
potential conversion of dilutive securities is anti-dilutive.
(k) EBITDA means earnings before interest expense, income taxes, depreciation
and amortization. EBITDA is presented because we believe it is a widely
accepted financial indicator of an entity's ability to incur and service
debt. Adjusted EBITDA is presented because it is used by our lenders as a
basis for evaluating covenant compliance. Adjusted EBITDA means EBITDA
adjusted for management fees, former
30
<PAGE>
shareholders' compensation and other charges described in the following
table. However, neither EBITDA nor adjusted EBITDA should be considered as
an alternative to cash flow from operating activities, as a measure of
liquidity or as an alternative to net income as a measure of operating
results in accordance with United States and Canadian GAAP. Our definition
of adjusted EBITDA may differ from definitions of adjusted EBITDA used by
other companies.
The following table sets forth a reconciliation of EBITDA to adjusted
EBITDA for each period included herein:
<TABLE>
<CAPTION>
Pro forma
combined
Year Ended Year Ended
December 31, December 31,
--------------- 1999
1997 1998 1999 (unaudited)
---- ---- ----- ------------
(in millions)
<S> <C> <C> <C> <C>
EBITDA........................................ $4.8 $4.6 $14.9 $22.4
Loss on disposal of capital assets (a)........ 0.1 -- 0.2 0.2
Leveraged recapitalization expenses (b)....... -- 2.2 -- --
Management fees (c)........................... -- 0.1 0.7 0.7
Former W.F. Wood shareholders' compensation
(d).......................................... -- -- -- 0.1
Acquisition-related bonuses paid to W.F. Wood
management and employees (e)................. -- -- -- 2.6
---- ---- ----- -----
Adjusted EBITDA............................... $4.9 $6.9 $15.8 $26.0
==== ==== ===== =====
</TABLE>
(a) Reflects losses on disposal of capital assets included in selling,
general and administrative expenses.
(b) Reflects transaction costs and compensation expense related to our
leveraged recapitalization.
(c) Reflects elimination of management fees paid to Bain Capital Partners
VI, L.P., Celerity Management Co., Inc. and Kilmer Electronics Group
Limited under our Management Agreement, which is expected to be
terminated in connection with the offering.
(d) Reflects compensation paid to the former shareholders of W.F. Wood.
(e) Reflects one-time bonuses paid to management and employees of W.F.
Wood in connection with our acquisition of W.F. Wood on September 3,
1999.
(l) The pro forma combined earnings (loss) before extraordinary loss does not
reflect the after-tax effect of adjusting for the following acquisition-
related and non-recurring adjustments:
. $0.7 million of pre-tax management fees paid to Bain Capital Partners
VI, L.P., Celerity Management Co., Inc. and Kilmer Electronics Group
Limited under a management agreement which is expected to be terminated
in connection with this offering, although a termination agreement has
not yet been finalized;
. $0.1 million of pre-tax compensation paid to former W.F. Wood
shareholders; and
. $2.6 million of pre-tax acquisition-related bonuses paid to W.F. Wood
management ($2.3 million) and W.F. Wood employees ($0.3 million).
31
<PAGE>
The effect of these adjustments is reflected in the following table:
<TABLE>
<CAPTION>
Pro forma
combined
(unaudited)
-------------
(in millions)
<S> <C>
Earnings (loss) before extraordinary loss.................... $(2.6)
Plus:
Management fees............................................ 0.7
Former W.F. Wood shareholders' compensation................ 0.1
Acquisition-related bonuses paid to management and
employees of W.F. Wood.................................... 2.6
Less:
Tax effect of above adjustments at 40%..................... (1.4)
-----
Adjusted earnings (loss) before extraordinary loss......... $(0.6)
=====
</TABLE>
(m) Refer to Note 17 to Predecessor SMTC's consolidated financial statements
for a description of differences between Canadian and United States GAAP.
These differences do not have a material effect on any statement of
operations line item above operating income.
(n) Refer to Note 12 to W.F. Wood's financial statements for a description of
differences between Canadian and United States GAAP. These differences do
not have a material effect on any statement of operations line item.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the "Selected
Consolidated Financial Data" section of this prospectus and our consolidated
financial statements and notes to those statements included elsewhere in this
prospectus. The forward-looking statements in this discussion regarding the
electronics manufacturing services industry, our expectations regarding our
future performance, liquidity and capital resources and other non-historical
statements in this discussion include numerous risks and uncertainties, as
described in the "Risk Factors" section of this prospectus. Our actual results
may differ materially from those contained in any forward-looking statements.
You should read this discussion completely and with the understanding that our
actual future results may be materially different from what we expect. We may
not update these forward-looking statements after the date of this prospectus,
even though our situation will change in the future. All forward-looking
statements attributable to us are expressly qualified by these cautionary
statements.
Overview
We are a leading provider of advanced electronics manufacturing services, or
EMS, to electronics industry original equipment manufacturers, or OEMs,
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 Predecessor SMTC, 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 takeover
of Predecessor SMTC by HTM. Because HTM acquired Predecessor SMTC for
accounting purposes, its assets and liabilities are included in our
consolidated financial statements at their carrying values and the comparative
figures reflect the results of operations of HTM. The results of operations of
Predecessor SMTC are included in our consolidated financial statements from the
date of the combination. Results of operations of Predecessor SMTC for the
three years prior to the combination are disclosed in separate financial
statements which are also included in this prospectus. Predecessor SMTC 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 $449.7 million in 1999 through both internal growth and strategic
acquisitions. Predecessor SMTC opened a strategically located greenfield site
in San Jose, California in 1995. The July 1999 combination of Predecessor SMTC
and HTM provided us with increased strategic and operating scale and greater
geographic breadth. Collectively, since 1995 we have completed the following
five acquisitions:
. Radian Electronics' operations, which enabled our expansion into Austin,
Texas, in 1996;
. Ogden Atlantic Design's operations in Charlotte, North Carolina, which
provided us with a facility in a major technology center in the
Southeastern United States, in 1997;
. Ogden International Europe's operations in Cork, Ireland, which expanded
our global presence into Europe, in 1998;
. Zenith Electronics' facility in Chihuahua, Mexico, which expanded our
cost-effective manufacturing capabilities, in July 1999; and
. W.F. Wood, based outside Boston, Massachusetts, which provided us with a
manufacturing presence in the Northeastern United States and expanded
our value-added services to include high precision enclosures
capabilities, in September 1999.
33
<PAGE>
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 Predecessor SMTC 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. As of December 31,
1999, we had borrowed approximately $130.9 million under this facility.
We intend to repay the majority of our borrowings under the credit facility
with the proceeds from this offering. We intend to borrow under either our
existing credit facility or a new credit facility to finance working capital
growth and to fund 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, 96.4% of our pro forma revenue was from turnkey
manufacturing services. By contrast, during 1999, 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. We expect that in 2000 we will begin to purchase
materials for Zenith, and that as a result, our relationship with Zenith will
evolve into a turnkey manufacturing relationship.
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. We believe that
Dell's decision will allow us to capitalize on an exciting high growth market
opportunity. Dell has advised us that it plans to discontinue using us to build
their relatively low profit margin riser card, a component used in personal
computers. 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, and we anticipate that by 2001 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.
34
<PAGE>
We service our customers through a total of eight facilities located in the
United States, Canada, Mexico and Europe. In 1999, approximately 83.0% of our
pro forma revenue was generated from operations in the United States,
approximately 11.0% from Canada, approximately 2.0% from Mexico and
approximately 4.0% from Europe. 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 prospectus for the year
ended December 31, 1999 contain the results of Predecessor SMTC, HTM and W.F.
Wood, as if both the combination of Predecessor SMTC and HTM and the
acquisition of W.F. Wood had occurred on January 1, 1999. The historic results
of operations included in this prospectus for the year ended December 31, 1999
include a full year of operating results for HTM, as well as the operating
results for Predecessor SMTC from July 30, 1999 through December 31, 1999 and
operating results for W.F. Wood from September 4, 1999 through December 31,
1999. As such, the pro forma results have been adjusted to reflect seven months
of additional goodwill amortization related to the reverse takeover of
Predecessor SMTC by HTM, eight months of additional goodwill amortization
related to the acquisition of W.F. Wood, and eight months of additional
interest expense and income tax effects related to the borrowings required to
complete the W.F. Wood acquisition.
Our fiscal year end is December 31. Prior to the combination, Predecessor
SMTC and HTM had August 31 and December 31 fiscal year ends, respectively. The
consolidated financial statements of SMTC, including the consolidated financial
statements of HTM for periods prior to the combinations, are prepared in
accordance with United States GAAP, which conforms in all material respects to
Canadian GAAP, except as disclosed in Note 23 to those financial statements.
The consolidated financial statements of Predecessor SMTC are prepared in
accordance with Canadian GAAP, which conforms in all material respects to
United States GAAP, except as disclosed in Note 17 to those financial
statements.
35
<PAGE>
Results of Operations
The following table sets forth certain operating data expressed as a
percentage of revenue for the years indicated:
<TABLE>
<CAPTION>
Pro forma
combined
year ended
Years ended December 31, December 31,
----------------------------- 1999
1997 1998 1999 (unaudited)
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Revenue.......................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.................... 90.8 92.0 91.6 90.9
-------- -------- -------- -----
Gross profit..................... 9.2 8.0 8.4 9.1
Selling, general and
administrative expenses......... 4.7 3.6 4.9 5.5
Management fees.................. -- 0.1 0.3 0.2
Amortization..................... -- 0.2 0.8 1.0
Leveraged recapitalization
expenses........................ -- 2.5 -- --
Former W.F. Wood shareholders'
compensation.................... -- -- -- 0.0
Acquisition-related bonuses paid
to management and employees of
W.F. Wood....................... -- -- -- 0.6
-------- -------- -------- -----
Operating income................. 4.5 1.6 2.4 1.8
Interest......................... 1.2 2.2 2.7 2.3
-------- -------- -------- -----
Earnings (loss) before income
taxes........................... 3.3 (0.6) (0.3) (0.5)
Income taxes (recovery).......... 1.2 (0.2) 0.0 0.1
-------- -------- -------- -----
Earnings (loss) before
extraordinary loss.............. 2.1 (0.4) (0.3) (0.6)%
=====
Extraordinary loss............... -- -- (0.5)
-------- -------- --------
Net earnings (loss).............. 2.1% (0.4)% (0.8)%
======== ======== ========
</TABLE>
Pro forma year ended December 31, 1999
Pro Forma Revenue
Pro forma revenue for 1999 was $449.7 million, which consisted of $303.0
million contributed by Predecessor SMTC, $102.6 million contributed by HTM,
$34.2 million contributed by W.F. Wood and $9.9 million contributed by our
Chihuahua facility since our July 1999 acquisition of that facility. We expect
our proportion of revenue from Mexico to increase in 2000 with a full year of
operations at our Chihuahua facility, the transfer of production from other
facilities to our Chihuahua facility and the addition of new business volume.
We expect our revenue to increase in 2000 as we fully integrate and increase
our utilization of capacity at our acquired facilities and as we include a full
year of revenue for the acquired facilities in our results of operations.
Revenue from Dell Computer of $157.5 million represented approximately 35.0% of
total pro forma revenue in 1999. Our next four largest customers in 1999,
Carrier Access, EFI, EMC and IBM together represented approximately 24.9% of
our total pro forma revenue in 1999.
Pro Forma Gross Profit
Pro forma gross profit for 1999 was $41.0 million at a pro forma gross
margin of 9.1%. Of this total, Predecessor SMTC contributed $27.4 million at a
pro forma gross margin of 9.0%, HTM contributed $7.5 million at a pro forma
gross margin of 7.3%, W.F. Wood contributed $5.0 million at a pro forma gross
margin of 14.6% and our Chihuahua facility contributed $1.1 million at a gross
margin of 11.1%. Since our July 1999 acquisition of our Chihuahua facility,
revenue from that facility was made on a consignment basis, where revenue is
lower and profit margins are higher than the revenue and profit margins in
turnkey manufacturing. W.F. Wood's higher profit margin reflects the fact that
the profit margins in the value-added high
36
<PAGE>
precision enclosure business are higher than profit margins in the electronics
assembly business. We continue to seek to improve our overall profit margins by
offering our customers a wider range of services and by pursuing acquisitions
of businesses that provide value-added services.
Pro Forma Selling, General and Administrative Expenses
Pro forma selling, general and administrative expenses for 1999 were $24.6
million, or 5.5% of pro forma revenue. Of this total, Predecessor SMTC
contributed $17.7 million, or 5.8% of its pro forma revenue, HTM contributed
$2.9 million, or 2.8% of its pro forma revenue, W.F. Wood contributed $2.6
million, or 7.6% of its pro forma revenue and our Chihuahua facility
contributed $1.4 million, or 14.1% of its revenue. Pro forma selling, general
and administrative expenses represent a higher percentage of our pro forma
revenue than the corresponding percentages based on our historical selling,
general and administrative expense and revenue figures described elsewhere in
this discussion because the pro forma figures include full year results for
acquired facilities that have administrative infrastructures capable of
accommodating a higher volume of sales than was experienced in 1999. HTM's
Denver facility has operated near full capacity and has leveraged its fixed
administrative costs to a greater extent than the other facilities we acquired
in 1999. In addition, the relatively higher gross margin, lower volume business
conducted by W.F. Wood causes pro forma selling, general and administrative
expenses to represent a larger percentage of pro forma revenue than the
relatively higher volume, lower profit margin business of HTM. Selling, general
and administrative expenses represent a higher percentage of revenue for the
Chihuahua facility because, as a consignment business in which costs of
materials are paid directly by the customer, the Chihuahua facility produced
relatively lower revenue.
Pro Forma Amortization
Pro forma amortization of intangible assets includes the amortization of
$2.4 million of goodwill related to the combination of Predecessor SMTC and HTM
and $1.7 million of goodwill related to the acquisition of W.F. Wood, in each
case as if the transactions had occurred on January 1, 1999. We are amortizing
goodwill of $24.9 million resulting from the combination of Predecessor SMTC
and HTM, and goodwill of $17.4 million resulting from the acquisition of W.F.
Wood, over a period of ten years. Also included in pro forma amortization of
intangible assets is the amortization of $0.3 million of deferred financing
costs related to the $155.0 million senior credit facility we established in
July 1999 and $0.2 million of deferred financing costs related to HTM's credit
facility prior to refinancing. The costs associated with our $155.0 million
senior credit facility are being amortized over the six and one-half year
average term of the debt.
Pro Forma Management Fees, Former Shareholders' Compensation and Acquisition-
Related and Other Charges
Management fees of $0.7 million, or 0.2% of pro forma revenue, were paid to
certain of our principal stockholders during 1999. We expect these fees to
discontinue after the completion of this offering. During pro forma 1999 we
paid $0.1 million to the former shareholders of W.F. Wood. We also paid $2.6
million, or 0.6% of pro forma revenue, consisting of $2.3 million of bonuses
paid to W.F. Wood management and $0.3 million of bonuses paid to W.F. Wood
employees just prior to the consummation of the W.F. Wood acquisition.
Pro Forma Interest Expense
Pro forma interest expense of $10.5 million includes an adjustment of $1.1
million to reflect the interest on the $19.7 million of debt incurred under our
senior credit facility in connection with the acquisition of W.F. Wood.
Pro Forma Income Tax Expense
No tax recovery is reflected on the pro forma loss before income taxes of
$2.5 million because the goodwill expense of $2.4 million related to the
combination of Predecessor SMTC and HTM is non-deductible and the benefit of
the losses of our Irish subsidiary has not been recorded. The amortization of
$1.7 million of goodwill in connection with our acquisition of W.F. Wood is
deductible.
37
<PAGE>
Adjusted Pro Forma EBITDA
Net adjusted pro forma earnings before an adjustment for non-recurring
expenses (including management fees, former stockholders' compensation and
other charges), pro forma interest expense, pro forma income taxes, pro forma
depreciation and pro forma amortization of intangible assets was $26.0 million,
or 5.8% of pro forma revenue.
SMTC Corporation (formerly HTM Holdings, Inc.)
Year ended December 31, 1999 compared to the year ended December 31, 1998
Revenue
Revenue increased $168.3 million, or 187.6%, from $89.7 million in 1998 to
$258.0 million in 1999. This increase resulted largely from the combination of
Predecessor SMTC and HTM, the acquisition of our Chihuahua facility in July
1999 and our acquisition of W.F. Wood in September 1999. Predecessor SMTC,
W.F. Wood and our Chihuahua facility contributed $134.5 million, $11.0 million
and $9.9 million, respectively, to the increase in revenue. Predecessor SMTC's
largest customer was Dell Computer Corporation. Revenue from Dell for the five
month period from the date of the combination of Predecessor SMTC and HTM to
December 31, 1999 were $76.3 million, or 29.6% of total revenue for 1999.
Revenue generated by our Denver facility, formerly HTM, increased $12.9
million, or 14.4%, from $89.7 million in 1998 to $102.6 million in 1999. In
1999, revenue from Carrier Access of $27.1 million and revenue from IBM of
$25.7 million represented 10.5% and 10.0% of total revenue, respectively. No
other customer represented more than 10.0% of our revenue in 1999.
In 1999, 85.9% of our revenue was generated from operations in the United
States, 7.4% from Canada, 3.8% from Mexico and 2.9% from Europe. Revenue
generated outside the United States increased $27.2 million, from $5.0 million
or 5.6% of revenue in 1998 to $32.2 million or 12.5% of revenue in 1999. The
increase is due to the combination of Predecessor SMTC and HTM and the
acquisition of our Chihuahua facility. We intend to enhance our position as a
leading EMS provider by expanding our global presence in strategic markets with
the addition of facilities in new cost-effective regions and geographic
locations, and through the expansion of our international sales efforts.
Gross Profit
Gross profit increased $14.5 million from $7.2 million in 1998 to $21.7
million in 1999. Our gross margin improved from 8.0% in 1998 to 8.4% in 1999.
The improvements in gross profit and gross margin were due to the acquisitions
completed in 1999 as well as the combination of Predecessor SMTC and HTM. The
combination of Predecessor SMTC and HTM added $11.1 million of gross profit at
a gross margin of 8.3%, our Chihuahua facility contributed $1.1 million of
gross profit at a gross margin of 11.1% and our W.F. Wood business added $1.8
million of gross profit at a gross margin of 16.4%.
Our Chihuahua facility provided us with higher gross margins because it had
a higher percentage of consignment sales, which typically result in lower
revenue and higher gross profit margins but lower gross profit compared to
turnkey services. We expect that in 2000 our Chihuahua facility will become
primarily a turnkey manufacturing operation.
Our W.F. Wood business contributes higher gross margins because the high
precision enclosure products manufactured by that business have higher profit
margins than the products we have historically manufactured. As we expand our
range of value-added services through additional acquisitions, we will seek to
manufacture higher gross margin products and to improve our overall gross
margins.
At our Denver facility, formerly HTM, gross profit increased $0.5 million,
from $7.2 million in 1998 to $7.7 million in 1999, but the gross margin
declined from 8.0% to 7.5% due to a change in our business at that facility
toward manufacturing products with higher volumes and lower profit margins.
38
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $9.4 million from
$3.2 million in 1998 to $12.6 million in 1999. Due to the acquisitions we have
completed as well as the combination of Predecessor SMTC and HTM, we have grown
from one to eight facilities. As a percentage of revenue, selling, general and
administrative expenses increased from 3.6% in 1998 to 4.9% in 1999 because the
facilities added through our acquisitions and the combination of Predecessor
SMTC and HTM were operating at a lower rate of capacity than our Denver
facility. We are focused on reducing selling, general and administrative
expenses as a percentage of revenue. We plan to meet this goal by increasing
utilization of our capacity. We believe that the facilities we have acquired
have established an administrative infrastructure, including sales and
marketing capabilities, that will enable us to develop and support a
significant volume of new business. Selling, general and administrative
expenses were unchanged from 1998 to 1999 at our Denver facility.
Management Fees
In 1999 management fees of $0.7 million were paid to our principal
stockholders. In 1998 $0.1 million of management fees were paid to the
principal stockholders of HTM.
Amortization
Amortization of intangible assets in 1999 includes the amortization of $0.9
million of goodwill related to the combination of Predecessor SMTC and HTM and
$0.6 million of goodwill related to the acquisition of W.F. Wood. We are
amortizing goodwill of $24.9 million resulting from the combination of
Predecessor SMTC and HTM, and goodwill of $17.4 million resulting from the
acquisition of W.F. Wood, over a period of ten years. There were no intangible
items amortized in 1998. Also included in the amortization of intangible assets
is the amortization of $0.3 million of deferred finance costs related to the
establishment of our $155.0 million senior credit facility in July 1999 and
$0.2 million of deferred finance costs related to HTM's credit facility prior
to refinancing. The costs associated with our $155.0 million senior credit
facility are being amortized over the six and one-half year average term of the
debt.
Interest Expense
Interest expense increased $5.1 million from $2.0 million in 1998 to $7.1
million in 1999, primarily as the result of the increase in debt incurred in
connection with the combination of Predecessor SMTC and HTM and the debt
incurred to purchase our Chihuahua facility and W.F. Wood. Debt of
$35.5 million and $134.0 million was outstanding at December 31, 1998 and
December 31, 1999, respectively. The weighted average interest rates with
respect to such debt for 1998 and 1999 were 10.1% and 9.6%, respectively.
Income Tax Expense
Income tax expense in 1999 amounted to $0.1 million on a loss before tax of
$0.7 million, at an effective tax rate of (13.8%), as we were not able to claim
a recovery on losses of $0.5 million incurred by our Irish subsidiary, and we
were not able to deduct $1.0 million of goodwill expense related to the
combination of Predecessor SMTC and HTM. We were able to reduce our tax expense
by $0.4 million by applying $1.0 million of net operating tax losses available
to our subsidiaries in the United States. Income tax expense in 1998 amounted
to a recovery of $0.2 million on a loss before tax of $0.5 million, at an
effective tax rate of 37.0%. As of December 31, 1999, we had total net
operating loss carryforwards of $7.1 million available to apply against future
income of certain subsidiaries.
Extraordinary Loss
The extraordinary loss of $1.3 million in 1999, net of the tax benefit of
$0.8 million, arose from early payment penalties of $0.8 million, the write-off
of $1.0 million of unamortized deferred financing fees and the write-off of the
unamortized debt discount of $0.3 million associated with the repayment of
senior and
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subordinated notes which were refinanced under the $155.0 million senior credit
facility entered into in connection with the July 1999 combination of
Predecessor SMTC and HTM. There were no extraordinary gains or losses in 1998.
The $1.3 million charge would not be presented as an extraordinary loss in
accordance with Canadian GAAP. Rather, the $2.1 million pre-tax expense would
be reported in loss before taxes and the tax benefit of $0.8 million would be
reported as tax recovery.
SMTC Corporation (formerly HTM Holdings, Inc.)
Year ended December 31, 1998 compared to the year ended December 31, 1997
Revenue
Revenue increased $30.7 million, or 52.0%, from $59.0 million in 1997 to
$89.7 million in 1998. IBM, our largest customer in 1998, contributed $19.3
million to such revenue growth, increasing from $19.2 million or approximately
32.5% of revenue in 1997 to $38.5 million or approximately 42.9% of revenue in
1998. The increase in revenue from IBM resulted largely from adding servers to
the products manufactured for IBM in 1998. In 1997, revenue from Supra Products
and from Lucent Technologies represented approximately 11.0% and 10.0% of
sales, respectively.
Gross Profit
Gross profit increased $1.8 million, from $5.4 million in 1997 to $7.2
million in 1998, but the gross margin declined from 9.2% in 1997 to 8.0% in
1998. The decline in gross margin was due to our focus on increasing our higher
volume turnkey manufacturing business and decreasing our consignment
manufacturing business, which is characterized by higher profit margins.
Consignment sales represented 7.3% of total revenue in 1997, as compared to
2.1% of total revenue in 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $0.4 million, from
$2.8 million in 1997 to $3.2 million in 1998. This increase was caused by the
growth of our business. As a percentage of revenue, selling, general and
administrative expenses fell from 4.7% in 1997 to 3.6% in 1998 due to our
ability to leverage fixed administrative costs as revenue expanded.
Other Charges
Other charges expensed in 1998 include transaction costs of $0.1 million
related to our leveraged recapitalization and compensation expense of $2.1
million arising from the settlement of stock options. There were no other
charges in 1997.
Interest Expense
Interest expense increased $1.3 million, from $0.7 million in 1997 to $2.0
million in 1998 because of the leveraged recapitalization we consummated in
June 1998. The recapitalization added approximately $25.0 million in new debt.
Debt of $8.2 million and $35.5 million was outstanding at December 31, 1997 and
December 31, 1998, respectively. The weighted average interest rates in
connection with such debt for 1997 and 1998 were 9.3% and 10.1%, respectively.
Income Tax Expense
Income tax expense in 1998 amounted to a recovery of $0.2 million on a loss
before tax of $0.5 million, at an effective tax rate of 37.0%. This compares to
an expense of $0.7 million on pre-tax income of $2.0 million in 1997, at an
effective tax rate of 37.0%.
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Predecessor SMTC
Eleven Months ended July 29, 1999 compared to the year ended August 31, 1998
Revenue
Revenue increased $60.4 million, or 28.7%, from $210.2 million in 1998 to
$270.6 million for the eleven month period ended July 29, 1999 (just prior to
the combination of Predecessor SMTC and HTM). The increase in revenue was due
to organic growth and the inclusion of a full year of results from our Cork,
Ireland facility, which we acquired in January 1998. Revenue from Dell Computer
increased $57.7 million from $70.1 million in 1998, or 33.3% of our total
revenue, to $127.8 million in 1999, or 47.2% of our total revenue. Sales of
risers and servers to Dell increased from $45.8 million and $24.3,
respectively, in 1998, to $74.1 million and $53.7 million, respectively, in
1999. Revenue from EFI increased from $36.1 million in 1998, or 17.2% of our
total revenue, to $37.2 million in 1999, or 13.7% of our total revenue.
Gross Profit
Gross profit increased $3.2 million from $21.8 million in 1998 to $25.0
million in 1999. Gross margin declined from 10.4% in 1998 to 9.2% in 1999 due
to general industry competitive price pressures and due to specific price
pressure from Dell Computer to produce risers at a low cost. Also, consignment
sales fell to 1.7% of revenue in 1999 from 2.5% in 1998.
Year ended August 31, 1998 compared to the year ended August 31, 1997
Revenue
Revenue increased $113.4 million, or 117.1%, from $96.8 million in 1997 to
$210.2 million in 1998. Revenue increased due to our acquisition of Ogden
Atlantic Design's operations in Charlotte, North Carolina in September 1997 and
Ogden International Europe's operations in Cork, Ireland in January 1998. These
acquisitions contributed $27.9 million of revenue from new customers and
allowed us to expand our relationship with Dell Computer beyond our Austin
facility. Revenue from Dell Computer was $70.1 million in 1998 or 33.3% of
total revenue for the year. Revenue from EFI was $36.1 million or 17.2% of
total 1998 revenue. No other customer represented more than 10.0% of revenue
1998. In 1997, revenue from EFI, Aironet, IVI and Dell Computer of
$24.4 million, $19.7 million, $18.4 million and $12.2 million, respectively,
represented 25.2%, 20.4%, 19.0% and 12.6%, respectively, of total revenue.
Gross Profit
Gross profit increased $6.7 million from $15.1 million in 1997 to $21.8
million in 1998. Gross margin declined from 15.6% in 1997 to 10.4% in 1998 as
consignment sales represented 7.0% of total revenue in 1997 as compared to 2.5%
of revenue in 1998. Also, we experienced profit margin pressure in 1998 as the
result of the additional costs to ramp up for a significant volume of new
business with Dell Computer and the start-up costs associated with our Cork
facility.
Quarterly Pro Forma Results of Operations
The following table sets forth our unaudited pro forma quarterly results for
the four quarters ended December 31, 1999. This information has been prepared
on the same basis as our annual consolidated financial statements and it
includes all adjustments necessary for a fair presentation of the financial
results of such periods. This information should be read in conjunction with
our consolidated pro forma statements for the year ended December 31, 1999. The
operating results for any previous quarter are not necessarily indicative of
results for any future period.
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<TABLE>
<CAPTION>
Quarter ended (a)
------------------------------------------
March 31, June 30, October 3, December 31,
1999 1999 1999 1999
--------- -------- ---------- ------------
(unaudited)
(in millions)
<S> <C> <C> <C> <C>
Revenue............................ $104.5 $101.2 $120.4 $123.6
Gross profit....................... 9.6 9.1 10.5 11.8
Earnings (loss) before extraordi-
nary loss......................... -- (0.3) (2.4) (0.2)
Adjusted EBITDA.................... 5.8 5.9 7.1 7.2
</TABLE>
- --------
(a) Prior to the combination of Predecessor SMTC and HTM and the acquisition
of W.F. Wood, the companies had different quarter ending dates. For
Predecessor SMTC, the first and second quarters ended March 28, 1999 and
June 27, 1999, respectively, while HTM and W.F. Wood were on calendar
quarter ends. Following the combination and acquisition, all three
companies adopted a 13 week quarter reporting cycle and a December 31 year
end.
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, meet debt service requirements and finance capital
expenditures. We anticipate that these uses, including potential future
acquisition opportunities, will continue to be our principal uses of cash in
the future.
Net cash used in operating activities for the years ended December 31, 1997,
1998 and 1999 was $0.4 million, $3.8 million, and $6.6 million, respectively.
Fluctuations in net cash used by operating activities are primarily
attributable to increases and decreases in working capital requirements related
to revenue growth.
Net cash provided by financing activities for the years ended December 31,
1997, 1998 and 1999 was $1.2 million, $4.3 million, and $49.6 million,
respectively. Our principal financing activities in 1997 included increased
borrowings and payment of capital leases. Our principal financing activities in
1998 included increased borrowings, issuances of common stock and repurchases
of common stock. Our principal financing activities in 1999 included repayment
of existing debt facilities and borrowings on our senior credit facility in
connection with the combination of Predecessor SMTC and HTM. As a result of our
early repayment of this debt, we incurred charges of $2.1 million, or $1.3
million net of taxes, related to early payment penalties, write-offs of
unamortized deferred financing fees and write-offs of the unamortized debt
discount.
Net cash used in investing activities for the years ended December 31, 1997,
1998 and 1999 was $0.4 million, $0.5 million and $41.4 million, respectively.
Investing activities in 1999 included $31.6 million for acquisitions and $5.7
million held in escrow in connection with the acquisition of our Chihuahua
facility. Capital expenditures were $0.5 million in both 1997 and 1998. Capital
expenditures in 1999 of $4.1 million were incurred principally to upgrade our
Chihuahua facility and to purchase and install our web-based collaborative
planning system. We anticipate capital expenditures for 2000 will be consistent
with 1999 levels.
As of December 31, 1999, we had borrowings of approximately $130.9 million
under our senior credit facility. The minimum principal payment obligation
under our senior credit facility is $2.0 million for 2000. We intend to use the
proceeds of this offering to repay the majority of our debt. We expect to incur
an after-tax charge estimated to be $1.9 million, net of a $1.3 million tax
recovery, on repayment of the debt comprised of the following items net of tax:
$2.0 million for the write-off of unamortized financing fees and a $0.2 million
premium payable net of a $0.3 million gain on the termination of the interest
rate swap.
The senior credit facility is described below under "Description of
Indebtedness."
Based upon our current level of operations, we believe that cash generated
from operations, available cash and amounts available under our senior credit
facility will be adequate to meet our debt service requirements,
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capital expenditures and working capital needs for at least the next twelve
months, 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. We will require additional financing if we decide to
consummate acquisitions.
Quantitative and Qualitative Disclosure Relating to 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 will pay on the approximately $65.0 million of our
debt is 9.66%. The remainder of our debt of $65.9 million bears interest based
on the Eurodollar base rate. As of December 31, 1999, the Eurodollar base rate
was 6.5%. If the Eurodollar base rate increased by 10% to 7.2%, our interest
expense would increase by approximately $0.9 million in 2000.
The revolving credit facility portion of our senior credit facility bears
interest at (1) 1.25% per annum plus the greater of the United States prime
rate or the Federal Reserve reported overnight funds rate plus 0.5% or (2)
1.25% per annum plus the greater of a Canadian chartered bank's reference rate
for U.S. dollar commercial loans made in Canada or the Federal Reserve reported
overnight funds rate plus 0.5%. We do not anticipate having a material
outstanding balance on this facility during the year ending December 31, 2000.
Therefore, a 10% change in interest rates as of December 31, 1999 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.
Impact of Inflation
We believe that our results of operations will not be significantly affected
by moderate changes in the inflation rate.
Recent Accounting Developments
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 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.
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BUSINESS
Overview
We are a leading provider of advanced electronics manufacturing services, or
EMS, to electronics industry original equipment manufacturers, or OEMs,
worldwide. We service our customers through eight manufacturing and technology
centers strategically located in key technology corridors in the United States,
Canada, Europe and a cost-effective region of Mexico. Our full range of value-
added services include product design, procurement, prototyping, assembly,
test, final system build, comprehensive supply chain management, packaging,
global distribution and after-sales support. Our business is focused on the
fast-growing fixed and wireless communications, networking and computing
sectors. Based upon our comparison of our 1999 pro forma revenue of
approximately $450 million, with 1999 EMS industry revenue data provided by
TFI, we are among the 15 largest EMS companies worldwide. We believe we are
well-positioned to capitalize on the significant and growing market opportunity
to provide advanced EMS solutions to OEMs on a global basis.
We have customer relationships with over 50 OEMs, many of which date back
more than five years. Our customers include industry leading OEMs such as ATI,
Dell Computer, EMC, IBM and Lucent Technologies. We developed these
relationships by capitalizing on the continuing trend of OEMs to outsource
manufacturing services to consolidate their supply base and to form long-term
strategic partnerships with selected high quality EMS providers. We also have
relationships with a number of emerging companies in the high-growth
communications and networking sectors, including Carrier Access, Cobalt
Networks, Netopia and Sycamore Networks. In 1999, approximately 57% of our pro
forma revenue was generated from the communications and networking sectors. We
expect to continue to grow our business through the addition of new, high
quality customers and the expansion of our relationships with existing
customers.
We believe that our key competitive advantages include our global
manufacturing capabilities, customer focused team-based approach, global supply
chain management capabilities and leading edge equipment and processes that are
consistent from site to site. In addition, we have introduced an advanced web-
based collaborative planning tool that will electronically link us with our
customers and suppliers in real time, enhancing our supply chain management
capabilities.
Industry Background
The EMS industry provides manufacturing services to OEMs in the electronics
marketplace. The EMS market is large and continues to grow rapidly. According
to TFI, global EMS industry revenue is forecasted to grow at a compounded
annual growth rate of approximately 20%, from $60.0 billion in 1998 to $149.4
billion in 2003. TFI forecasts that larger EMS companies with revenue of
approximately $500 million or greater are expected to grow at 30% or more
annually during the same period. We believe that the growth for larger EMS
companies is projected to be greater than the industry average because OEMs are
increasingly outsourcing production to larger manufacturers that have the
ability to provide a total service solution. Industry growth is being fueled by
the overall growth of the electronics industry, the increased outsourcing of
manufacturing by OEMs, and the divestiture of OEM manufacturing assets to EMS
businesses. We believe that OEMs decide to outsource in order to take advantage
of the technology and manufacturing expertise of EMS companies, eliminate
manufacturing overhead, reduce time-to-market of products, and improve supply
chain efficiency. TFI estimates that the percentage of total cost of goods sold
in the electronics industry which is outsourced for manufacture by OEMs will
increase from 9.5% in 1998 to 17.1% by 2003, as depicted in the following
chart.
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[GRAPH APPEARS HERE]
In addition, according to TFI, the EMS industry is highly fragmented with
over 3,000 independent EMS companies in existence and the 15 largest companies
accounting for approximately 42% of the worldwide market in 1998. The EMS
industry has experienced, and is anticipated to continue to experience,
significant consolidation. We believe that the fragmented nature of the
industry will allow us to take advantage of acquisition opportunities to
increase our scale and geographic scope as well as to expand our customer
relationships and service offerings.
Revenues generated by the EMS industry are relatively concentrated among the
computing and fixed and wireless communications sectors. The following charts
illustrate the continued importance of these industry sectors to the global EMS
industry.
[PIE CHARTS APPEARS HERE]
Historically, OEMs were vertically integrated manufacturers that invested
significantly in manufacturing assets and facilities around the world to
manufacture, service and distribute their products. EMS originated as primarily
labor intensive functions outsourced by OEMs to obtain additional capacity
during periods of high demand. Early EMS providers were essentially
subcontractors, providing production capacity on a transactional basis.
However, with significant advances in manufacturing process technology, EMS
providers developed additional capabilities and were able to improve quality
and dramatically reduce OEMs' costs. Furthermore, as the capabilities of EMS
companies expanded, an increasing number of OEMs adopted and became dependent
upon EMS outsourcing strategies. Over time, OEMs came to rely on EMS providers
to perform a broader array of manufacturing services, including design and
development activities. In recent years, EMS providers have further expanded
their range of services to include advanced manufacturing, packaging and
distribution and overall supply chain management. In addition, many OEMs are
reducing the number of vendors from which outsourced services are purchased,
and are partnering with EMS suppliers that can provide a total service solution
on a national or global basis, in order to further lower costs and increase
supplier accountability.
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By using EMS providers, OEMs are able to focus on their core competencies,
including product development, sales and marketing, while leveraging the
manufacturing efficiency and capital investment of EMS providers. OEMs use EMS
providers to enhance their competitive position by:
. Reducing Time-to-Market. Electronics products are experiencing
increasingly shorter product life cycles, requiring OEMs to continually
reduce the time required to bring new products to market. OEMs can
significantly improve product development cycles and enhance time-to-
market by benefitting from the expertise and infrastructure of EMS
providers. This expertise includes capabilities relating to design,
quick-turn prototype development and rapid ramp-up of new products to
high volume production, with the critical support of worldwide supply
chain management.
. Improving Supply Chain Management. OEMs who manufacture internally are
faced with greater complexities in planning, procurement and inventory
management due to frequent design changes, short product life cycles and
product demand fluctuations. OEMs can address these complexities by
outsourcing to EMS providers which (1) possess sophisticated supply
chain management capabilities and (2) can leverage significant component
procurement advantages to lower product costs.
. Accessing Advanced Manufacturing Capabilities and Process
Technologies. Electronics products and electronics manufacturing
technology have become increasingly sophisticated and complex, making it
difficult for many OEMs to maintain the necessary technological
expertise and focus required to efficiently manufacture products
internally. By working closely with EMS providers, OEMs gain access to
high quality manufacturing expertise and capabilities in the areas of
advanced process, interconnect and test technologies.
. Improving Access to Global Markets. OEMs are generally increasing their
international activities in an effort to expand sales through access to
foreign markets. EMS companies with worldwide capabilities are able to
offer such OEMs global manufacturing solutions enabling them to meet
local content requirements to distribute products efficiently around the
world at lower costs.
The SMTC Customer Solution
We believe that the key competitive advantages of our solution include our
customer-focused team based approach, comprehensive supply chain management
capabilities and fully integrated worldwide facilities. Our customers benefit
from the following components of the SMTC solution:
Customer-focused Team Oriented Production System, or T.O.P.S. Our cross-
functional teams work as customer-focused business units, without departmental
barriers which allow for faster and more direct communication between our
customers and the team responsible for their product. The removal of
departmental barriers eliminates time wasted by internal communication between
departments. Our teams provide the customer with the entire range of services
from prototype to production to distribution. In addition, our cross-functional
team structure enables us to tailor each team to specific custom requirements.
In some cases we have employees on-site at customer locations. The result is a
manufacturing process tailored to each customer which we believe accelerates
time-to-market for our customers.
Comprehensive Supply Chain Management; Web-based System. The systems and
processes we employ in supply chain management enable us to rapidly scale
operations to meet customer needs, shift capacity in response to product demand
fluctuations, reduce material costs and effectively distribute products to our
customers or their end-customers. We have available and are implementing a web-
based system through which we can communicate, collaborate and plan with our
customers in real time. This web-based system enables us to manage information
rather than inventory. As a result, inventory risk and exposure are reduced. In
addition, our customers can commit to delivering products to their customers
knowing that the materials and capacity are available because they can monitor
the status of our materials and capacity in real time through use of our web-
based collaborative planning system.
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Fully Integrated Worldwide Factories. Our global reach enables us to provide
OEMs with the flexibility to manufacture products locally in several regions of
the world. All of our locations operate under the same model and with the same
systems allowing customers to seamlessly transfer their production from one of
our facilities to another. This gives our customers greater flexibility and the
opportunity to reduce their costs by transferring production to the facility
that suits their needs. The fact that each facility operates similarly also
enhances communications among facilities, allows our employees to work
effectively at any of our sites, improves quality control, allows us to acquire
equipment at volume discounts and promotes adoption of best practices at each
of our facilities. These factors reduce inefficiencies, improve product quality
and ultimately reduce costs.
The SMTC Strategy
Our objective is to enhance our position as a leading EMS provider to OEMs
worldwide. We intend to achieve this objective by pursuing the following
business strategies:
Expand our Global Presence in Strategic Markets. In order to enhance our
existing high standards of service to our global customers, we intend to
continue to expand our global presence. We expect to tailor each facility
acquired to the same high standards of excellence and to a similar plant layout
as our current facilities. This will allow us to continue to enjoy the benefits
of fully integrated factories. Since 1995, we have expanded from our first
facility located in Toronto, Ontario to eight facilities located in the United
States, Canada, Europe and Mexico. We intend to continue to expand our global
infrastructure and are currently targeting Asia as an area for future
expansion.
Continue to Provide Leading Edge Supply Chain Management Capabilities. We
remain fully committed to maintaining our leadership position in supply chain
management through the use of innovative management strategies. We believe the
introduction of our web-based collaborative planning system will enable us to
rapidly scale operations to meet customer needs, shift capacity in response to
product demand fluctuations, reduce material costs and effectively distribute
products to our customers or their end-customers.
Strengthen our Relationships with Leading and Emerging Global OEMs in
Attractive EMS Segments. We plan to continue to focus on providing advanced
electronic manufacturing services to industry leaders, particularly in the high
growth, high value-added communications and networking sectors. Communications
and networking companies, in particular, are dramatically increasing the amount
of manufacturing they are outsourcing, and we believe our technological
capabilities and global manufacturing platform are well suited to capitalize on
this opportunity. In addition to our industry leading customers such as ATI,
Dell Computer, EMC, IBM and Lucent Technologies, we have relationships with a
number of emerging companies in the communications and networking sectors
including Carrier Access, Cobalt Networks, Netopia and Sycamore Networks.
Provide Advanced Technological Capabilities and Comprehensive Service
Offerings. We remain committed to enhancing our capabilities and value-added
services to meet the ongoing needs of our customers. Through our continuing
investment in leading-edge assembly and logistics technologies, as well as our
investment in design, engineering and test capabilities, we are able to offer
our customers a variety of advanced design and manufacturing solutions. These
capabilities include micro ball grid arrays, complex circuitry layouts,
manufacturing and testing of wireless products and manufacturing of ethernet
cards, among others. Additionally, building on our integrated engineering and
manufacturing capabilities, we provide our customers with services ranging from
initial product design and prototype production to final product assembly, test
and distribution directly to customers. We believe that this provides greater
control over quality, delivery and costs and enables us to offer our customers
a complete cost effective solution.
Pursue Selective Acquisition Opportunities, including Asset Divestitures by
OEMs. We intend to continue to target strategic acquisitions that will enable
us to expand our geographic reach, add manufacturing capacity, secure key new
customers, diversify into complementary product markets or broaden our
technological capabilities and value-added service offerings. We have
successfully completed six acquisitions and one
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greenfield expansion since 1995. As a result, we have developed and deployed a
comprehensive integration strategy which includes establishing our team-
oriented production system at all locations with broad-based workforce
participation, utilization of similar manufacturing equipment and processes,
deploying common information technology platforms, transferring best practices
among operations company wide and leveraging wide-scale procurement.
Our Services
Our full range of advanced value-added electronics manufacturing services
include:
New Product Development and Introduction. The key to our new product
development approach is the cross-functionality of our teams. We integrate our
design group, materials group and manufacturing group into a new product
development team which works with our customers and suppliers throughout the
development process to ensure that new designs are efficiently transitioned
into production. We use advanced design tools to enable new product ideas to
progress from design, to simulation and physical layout, to design for
manufacturability. We work with our customers' product developers in the early
stages of new product development. Our new product development team also
coordinates the prototyping of new product designs, a critical stage in the
development of new products. Our prototyping and new product introduction
centers are strategically located, and we use electronic communications with
our customers and suppliers in order to provide a quick response to customer
demands and to facilitate greater collaboration between our new product
development team, our customers and our suppliers.
Supply Chain Management. We use our integrated resource planning and supply
chain management system to optimize efficient materials management from
supplier to end-customer. We provide our customers with a complete supply chain
management solution, using advanced electronic schedule sharing methods with
our customers and suppliers to plan, purchase, expedite and warehouse
components and materials. We believe our inventory management and volume
procurement capabilities reduce costs and shorten total cycle time. Effective
management of the supply chain is critical to the success of OEMs because it
reduces the time required to deliver products to market and the capital
requirements associated with carrying inventory. The introduction of our web-
based collaborative planning system will further link our suppliers and
customers in a real time environment.
Assembly and Integration. We use state-of-the-art technology in the assembly
process, and continually focus, together with our customers and suppliers, on
developing assembly techniques, improving quality, improving time-to-market of
our customers' products and reducing costs. We are able to apply a broad range
of assembly techniques, from pin-through-hole and surface mount to micro ball
grid array assemblies. Our extensive test capabilities allow us to identify the
cause of defects and determine the most appropriate corrective action. Our
engineers work proactively with our customers and suppliers to implement
solutions to defects before products are shipped. We also design and test
packaging of products for bulk shipment or single end-customer use. We provide
fully-integrated system build services to our customers. These services
capitalize on our sophisticated logistical capabilities to rapidly acquire and
assemble source components, perform complex testing and deliver products to our
customers around the world. Our complete system integration capabilities,
coupled with our strength in supply chain management, position us to meet our
customers' growing demand for build-to-order system solutions.
Global Distribution and After-sales Support. We have a sophisticated
integrated system for managing complex international distribution, allowing us
to efficiently ship worldwide and, in many cases, directly to the OEMs' end-
customers. We also offer a wide range of after-sales support services including
field failure analyses, product upgrades and repair services. We also assist
our customers in improving design for manufacture.
49
<PAGE>
Our Customers
We target industry leading OEMs primarily in the networking, fixed and
wireless communications, and computing sectors. Pro forma 1999 revenue from
customers in the networking, communications (including wireless), computing and
industrial, consumer and other sectors represented 40.6%, 16.8%, 25.8% and
16.8% of pro forma revenue, respectively. We are targeting the high growth
networking and communications sectors for our future revenue growth. We have
customer relationships with over 50 OEMs, many of which date back more than
five years. Our customers include industry leading OEMs such as ATI, Dell
Computer, EMC, IBM and Lucent Technologies. We also have relationships with a
number of emerging companies in the high-growth communications and networking
sectors, including Carrier Access, Cobalt Networks, Netopia and Sycamore
Networks. The electronic products we assemble and manufacture can be found in a
wide array of end-products including:
. PBX switches . Routers
. Personal computers
. Wireless base . Hubs
stations . Multimedia
. Switches peripherals
. Wireless loop
systems . Mass storage . Video broadcasting
devices
. Modems . Ethernet PCMCIA
. Servers cards
. Fax machines
. Workstations . Semiconductor test
. Components for T1 equipment
and T3 broadband
equipment
Marketing and Sales
We market our services through a focused strategy that emphasizes our team
based approach to servicing our customers. In addition to developing
relationships with established industry leading OEMs, we also target selected
emerging companies in high growth market segments. We target prospective
customers in the networking, fixed and wireless communications, computing and
peripheral and other industries which are leaders in their markets. We are
focused on building relationships with customers that require a volume of
production that complements our customer-focused team-based approach. In all
cases, our goal is to allocate our program management, engineering and
manufacturing resources, business systems and assets on a customer-by-customer
basis, enabling each of our customers to have a dedicated environment that
operates as a virtual extension of its business.
We have a direct sales force with a global presence that focuses on new and
existing customers to take advantage of our worldwide capabilities. We also
have a mix of established direct sales representatives and manufacturer
representative companies throughout Canada, the United States and Europe. When
a customer opportunity is identified by our direct or outside sales force, we
dedicate a team to the potential customer, and that team becomes part of our
marketing effort and will continue to service the customer throughout our
relationship.
Supply Chain Management
We believe that the basis of true collaboration is seamless integration
across the enterprise-wide system, encompassing the customers' worldwide
facilities, our global manufacturing sites, and our suppliers. We provide our
customers with a complete supply chain management solution, using advanced
electronic schedule sharing methods with our customers and suppliers to plan,
purchase, expedite and warehouse components and materials. The systems and
processes we currently employ in supply chain management enable us to rapidly
scale operations to meet customer needs, shift capacity in response to product
demand fluctuations, reduce material costs and effectively distribute products
to our customers or their end-customers.
50
<PAGE>
In April 1999, we launched a major new initiative with the development of
our web-based collaborative planning system. This system will initially be used
to enhance our manufacturing execution capabilities through the use of web-
based master scheduling, real time materials requirement planning and factory
scheduling software. In conjunction with our enhanced manufacturing execution
processes, we plan to introduce our web-based tools for customer demand
management and supplier management in the first half of 2000.
We believe that in order to continue to offer our customers leading
services, we and our customers and suppliers must create virtual enterprises,
sharing information and making joint decisions to ensure a fast and cost-
effective response to the market. Our web-based collaborative planning tool
features a "capable to promise" ability that we expect will improve flexibility
and reduce cycle times in the supply chain for our customers. Through a web-
based user interface, our customers and suppliers will have direct access to
our supply chain management database. Customers will be able to monitor the
availability and supply of component parts in real time. Simulation features
will allow customers to explore "what-if" scenarios, enhancing our customers'
forecasting and planning efficiency. Communication will be streamlined
throughout the supply chain, allowing our customers to receive timely feedback
from us and allowing us to receive real time input from our suppliers.
Our goal is to gauge and optimize performance in real time. Our web-based
tools will enable all activities in the supply chain to be synchronized, and
will enable us and our trading partners to rapidly analyze, revise and fine-
tune plans based on the latest customer information. WebPLAN and Lotus Notes
are the foundation for our e-business solution.
Our web-based collaborative planning system is currently operating at our
Toronto, Ontario, San Jose, California, Austin, Texas, Charlotte, North
Carolina and Cork, Ireland facilities. We expect that our remaining sites will
implement the system in the first half of 2000. Concurrently, we plan to roll-
out the system to our customers and suppliers. Because our customers and
suppliers will need only standard, low-cost web access capabilities to access
our collaborative planning tool, and because the system represents a major
advance over traditional electronic data interchange systems, we believe our
customers and suppliers will readily adopt our leading-edge e-business solution
to supply chain management.
Technology, Processes and Development
We use advanced technology in the assembly and testing of the products we
manufacture. We believe that our processes and skills are among the most
sophisticated in the industry.
Surface mount technology is the principal technology for the assembly of
printed circuit boards. Our customer-focused factories include predominantly
surface mount technology lines, which are highly flexible and are continually
reconfigured to meet customer-specific product requirements. In addition to
expertise in conventional surface mount technology, we have extensive
capabilities across a broad range of specialized assembly process technologies,
including chip scale packaging, flip chip attach, tape automated bonding,
multi-chip module, ball grid array, micro ball grid array, tape ball grid array
and column grid array. We also work with a wide range of substrate types from
thin flexible printed circuit boards to highly complex, dense multilayer
boards.
Our assembly capabilities are complemented by advanced test capabilities.
Technologies include high speed functional testing, burn-in, vibration, radio
frequency, in-circuit and in-situ dynamic thermal cycling stress testing. We
believe that our inspection technology, which includes x-ray laminography,
three-dimensional laser paste volumetric inspection and scanning electron
microscopy, is among the most sophisticated in the EMS industry.
Our ongoing research and development activities include the development of
processes and test technologies as well as some focused product development. We
are proactive in developing manufacturing techniques which take advantage of
the latest component and product designs and packaging.
51
<PAGE>
Our Suppliers
We order raw materials and components based on purchase orders received and
accepted, and maintain minimal levels of inventory that are not identified for
use in filling specific orders. We currently use electronic data interchange
with our key suppliers, and ensure speed of supply through the use of automated
receiving and full-service distribution capabilities. With the implementation
of our web-based collaborative planning systems, our customers' needs will be
integrated with our suppliers in a more efficient and cost effective manner
than is achievable through traditional electronic data interchange. In pro
forma 1999 we purchased in excess of $300 million in materials. We believe this
volume of procurement enhances our ability to obtain better pricing, influence
component packaging and design and obtain supply of components in constrained
markets.
We employ a strategy of risk minimization relative to our inventory and
generally order materials and components only to the extent necessary to
satisfy existing customer orders. We have implemented specific inventory
management strategies with certain suppliers such as "line-side stocking"
(pulling inventory at the production line on an as needed basis) and "real-time
component pricing" (the ability to obtain the advantage of the most recent
price change in component pricing) designed to minimize the risk to us of cost
fluctuations. These strategies help protect us from the risk of fluctuations in
inventory costs. In addition, these costs can generally be passed through to
customers.
During pro forma 1999, we did not rely significantly on any one supplier,
with no supplier representing more than 10.0% of total purchases.
Competition
The EMS industry is highly fragmented and comprised of a large number of
domestic and foreign companies. The intense competition we face is provided by
many independent sources as well as in-house manufacturing capabilities of
current and potential customers who evaluate our capabilities against the merit
of manufacturing products internally. We compete with different companies
depending on the type of service or geographic area. Our competitors include
Celestica Inc., Flextronics International Ltd., Jabil Circuit, Inc., SCI
Systems, Inc. and Solectron Corporation. Certain of our competitors may have
greater manufacturing, financial, research and development and marketing
resources than we do. We believe that we are a leading EMS provider and that we
are well positioned to compete against these larger competitors due to our
product quality, flexibility and timeliness in responding to design and
schedule changes, reliability in meeting product delivery schedules, pricing,
technological sophistication, the provision of value-added services and
geographic location.
Governmental Regulation
Our operations are subject to certain federal, state, provincial and local
regulatory requirements relating to environmental compliance and site cleanups,
waste management and health and safety matters. In particular, we are subject
to regulations promulgated by regulatory agencies pertaining to health and
safety in the workplace and the use, storage, discharge and disposal of
hazardous chemicals used in the manufacturing processes.
To date, the costs of compliance and environmental remediation have not been
material to us. Nevertheless, additional or modified requirements may be
imposed in the future. If such additional or modified requirements are imposed
on us, or if conditions requiring remediation were found to exist, we may be
required to incur substantial additional expenditures.
Employees
As of December 31, 1999, we employed over 2,500 permanent and temporary
(contract) employees worldwide. Given the variable nature of our project flow
and the quick response time required by our customers, it is critical that we
be able to quickly ramp-up and ramp-down our production to maximize efficiency.
To achieve this, our strategy has been to employ a skilled temporary labor
force, as required. We believe we are team-
52
<PAGE>
oriented, dynamic and results-oriented with an emphasis on customer service and
quality at all levels. We believe this environment is a critical factor for us
to be able to fully utilize the intellectual capital of our employees.
With the exception of approximately 400 of our employees in Mexico and 100
of our employees in Ireland, none of our employees is unionized. We have never
experienced a work stoppage or strike and believe that our employee relations
are good.
Facilities
We conduct our operations within approximately 850,000 square feet of
building space. We believe our facilities are currently adequate for our
operating needs. Our principal service at all locations is assembly of
electronic components, with the exception of the larger Boston facility where
we manufacture precision enclosures. Our facilities are as follows:
<TABLE>
<CAPTION>
Approx.
Location Square Feet Leased/Owned
-------- ----------- ------------
<S> <C> <C>
Toronto, Ontario.................................... 100,000 Leased
San Jose, California................................ 75,000 Leased
Austin, Texas....................................... 75,000 Leased
Charlotte, North Carolina........................... 120,000 Leased
Cork, Ireland....................................... 50,000 Leased
Denver, Colorado.................................... 100,000 Leased
Chihuahua, Mexico................................... 250,000 Owned
Boston, Massachusetts............................... 50,000 Leased
Boston, Massachusetts............................... 30,000 Leased
</TABLE>
All of our principal facilities are ISO certified to ISO 9001 or ISO 9002
standards. The principal executive office of SMTC and SMTC Canada is located at
635 Hood Road, Markham, Ontario, Canada L3R 4N6.
Our Structure and Our History
The following chart shows our current corporate structure including our
material subsidiaries and their jurisdictions of incorporation or organization.
Unless otherwise indicated, all such subsidiaries are wholly-owned, directly or
indirectly by SMTC.
[CHART APPEARS HERE]
53
<PAGE>
SMTC Corporation
Our company's present corporate structure resulted from the July 1999
combination of Predecessor SMTC and HTM in a transaction accounted for under
the purchase method of accounting as the acquisition of Predecessor SMTC by
HTM. The transaction provided us with increased strategic and operating scale,
as well as greater geographic breadth. Subsequent to the combination, all of
Predecessor SMTC's operating subsidiaries other than SMTC Canada have become
subsidiaries of HTM.
Since the combination, we acquired Zenith's facility in Chihuahua, Mexico, a
transaction which expanded our cost-effective manufacturing capabilities in an
important geographic region. In September 1999, we acquired the Boston,
Massachusetts based systems integration and precision enclosures business of
W.F. Wood, which expanded our operations into the Northeastern United States.
We plan to continue to capitalize on attractive acquisitions and internal
growth opportunities in the EMS marketplace and are presently targeting Asia as
an area for future expansion.
SMTC Canada
SMTC Canada was incorporated in Canada in 1985 as The Surface Mount
Technology Centre Inc., or SMTCI, and continued to Ontario in 1994. Prior to
the July 1999 combination, SMTCI and its wholly-owned U.S. subsidiary,
Predecessor SMTC, completed a reorganization such that Predecessor SMTC then
became the parent of a group of companies which included SMTCI. In connection
with the July 1999 reorganization, SMTC Nova Scotia Company, a wholly-owned
subsidiary of SMTC, acquired all of the outstanding voting shares of SMTCI. On
October 29, 1999, SMTCI changed its name to SMTC Manufacturing Corporation of
Canada.
HTM Holdings, Inc.
In June 1998, Hi-Tech Manufacturing Inc., or Hi-Tech Manufacturing, was
recapitalized by investors led by Bain Capital and Celerity Partners, and HTM,
a Delaware corporation, was organized such that Hi-Tech Manufacturing became a
wholly owned subsidiary of HTM. Organized in 1990, Thornton, Colorado based Hi-
Tech Manufacturing was a turnkey contract manufacturer which focused on the
assembly of completed printed circuit boards. Hi-Tech Manufacturing has changed
its name to SMTC Manufacturing Corporation of Colorado.
Legal Proceedings
We are a party to various legal actions arising in the ordinary course of
our business. We believe that the resolution of these legal actions will not
have a material adverse effect on our financial position or results of
operations.
Backlog
Although we obtain firm purchase orders from our customers, our customers
typically do not make firm orders for delivery of products more than 30 to 90
days in advance. We do not believe that the backlog of expected product sales
covered by firm purchase orders is a meaningful measure of future sales since
orders may be rescheduled or canceled.
54
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
The following table sets forth our directors and executive officers, their
ages as of December 31, 1999, the positions currently held by each person and
their place of residence. All of the directors and executives have been with us
since Predecessor SMTC combined with HTM in July 1999, except Tom Harrington.
<TABLE>
<CAPTION>
Name and Municipality of
Residence Age Office
- ------------------------ --- ------
<S> <C> <C>
Paul Walker............. 42 President, Chief Executive Officer and Director(1)
Unionville, Ontario
Edward Johnson.......... 41 Executive Vice President, Business Development and Director
Longmont, Colorado
Philip Woodard.......... 45 Senior Vice President, Enterprise Development and Integration
Newmarket, Ontario
Gary Walker............. 40 Vice President and General Manager, San Jose and Director
Monte Sereno, California
Derek D'Andrade......... 46 Vice President, Quality
Richmond Hill, Ontario
Gary Itenson............ 40 Vice President, Sales
Los Altos, California
Richard Smith........... 40 Vice President, Finance & Administration
Toronto, Ontario
John Somerville......... 40 Vice President, Engineering
Austin, Texas
Tom Harrington.......... 50 Vice President and General Manager, Enclosure Services
Westford, Massachusetts
Mark Gordon............. 40 Vice President, Supply Chain Optimization
Newmarket, Ontario
Robert Koss............. 52 Vice President, Strategic Accounts
Boulder, Colorado
James Laurion........... 43 Vice President, Program Management and Internal Audit
Boulder, Colorado
Brad Tesch.............. 39 Vice President, Access Centers
Berthoud, Colorado
David Dominik........... 43 Director
Belvedere, California
Prescott Ashe........... 32 Director(1)
San Francisco,
California
Stephen Adamson......... 43 Director
Los Angeles, California
Mark Benham............. 49 Director
Woodside, California
Michael Griffiths....... 48 Director(1)
Toronto, Ontario
Anthony Sigel........... 36 Director
Toronto, Ontario
</TABLE>
- --------
(1) Also a member of the board of directors of SMTC Canada.
We anticipate that two additional directors not otherwise affiliated with us
or any of our stockholders will be elected to our board of directors prior to
the closing of this offering.
55
<PAGE>
Paul Walker founded Predecessor SMTC in 1985. Previously he was employed at
Brock Electronics, a manufacturer and distributor of production equipment for
the electronics industry, as Director of Business Management from 1982 to 1985
and at Motorola Canada, an integrated communications and embedded electronics
solutions provider, as Program Manager from 1979 to 1982. Paul Walker is Gary
Walker's brother.
Edward Johnson has served as Executive Vice President, Business Development
and Director of SMTC Corporation since the combination of Predecessor SMTC and
HTM in 1999. He was President and Chief Executive Officer of Hi-Tech
Manufacturing, (the former operating subsidiary of HTM Holdings, Inc.) a
turnkey contract manufacturer, from its inception in January 1990. He served as
President of Digital Storage Systems, a provider of mass storage, back-up and
archiving solutions from 1984 to 1990. Prior to joining Digital Storage, Mr.
Johnson served as Controller of Aspen Peripherals, a tape drive systems
manufacturer, and Cost Accountant at MiniScribe, a disk drive manufacturer.
Philip Woodard joined Predecessor SMTC in 1992 as Vice President, Materials.
Previously he was employed at Motorola Canada, an integrated communications and
embedded electronics solutions provider from 1977 to 1992 where he progressed
through various positions to Director of Materials.
Gary Walker founded Predecessor SMTC in 1985. Previously he was employed at
Brock Electronics, a manufacturer and distributor of production equipment for
the electronics industry, as a Manufacturers Representative from 1982 to 1985
and at Motorola Canada, an integrated communications and embedded electronics
solutions provider, from 1980 to 1982. Gary Walker is Paul Walker's brother.
Derek D'Andrade founded Predecessor SMTC in 1985. Formerly Vice President
Engineering, he was previously employed at Motorola Canada, as Manufacturing
Engineering Manager from 1979 to 1985 and at Sunbeam Canada, a manufacturer of
home appliances, as Manufacturing Manager from 1975 to 1979.
Gary Itenson joined Predecessor SMTC in August 1998. Previously, he was
employed at Future Electronics, an electronics components distributor, from
1981 to 1996 where his career progressed from field sales, to sales management,
to strategic account/multi-region sales management to division general
management.
Richard Smith joined Predecessor SMTC in August 1998. Previously, he was
employed as Chief Financial Officer of Wolf Group Integrated Communications, an
advertising and public relations company, from 1997 to 1998; Vice President
Finance of Green Forest Lumber Corporation, a Toronto Stock Exchange listed
forest products manufacturer from 1988 to 1997; Account Manager at a Canadian
chartered bank, from 1985 to 1988; and auditor, Price Waterhouse, a public
accounting firm, from 1982 to 1985.
John Somerville joined Predecessor SMTC in January 1999 as Director of
Engineering, North American Operations and Acting Site Operations Manager for
Austin, Texas. Previously, he was employed as Manufacturing Manager at Motorola
from 1995 to 1998 and IBM Canada Toronto Manufacturing (now Celestica), an EMS
provider, from 1984 to 1995. At IBM, he progressed through various positions to
Engineering Manager.
Tom Harrington has been with us since the acquisition of W.F. Wood in
September 1999. He was President of W.F. Wood, a high precision enclosures
manufacturer, from 1992 to 1999. Mr. Harrington worked for W. F. Wood for over
twenty years.
Mark Gordon joined Predecessor SMTC in 1997 as Director of Logistics. He was
promoted to Vice President, Supply Chain Optimization in April 1999. Prior to
1997 he was the Director of Logistics for Today's Business Products, an office
supply products distributor, from 1996 to 1997 and for Lily Cups, a food
service industry container manufacturer, from 1994 to 1996. From 1989 to 1994,
Mr. Gordon worked in supply chain management with Motorola Canada in the
communications division.
56
<PAGE>
James Laurion joined Hi-Tech Manufacturing, the former operating subsidiary
of HTM Holdings, Inc., in July 1994 from Morton, Nehls & Tierney, SC, a
Wisconsin and Florida public accounting firm where he was a principal and
stockholder.
Robert Koss joined Hi-Tech Manufacturing, the former operating subsidiary of
HTM Holdings, Inc., in November 1992. Prior to joining HTM, Mr. Koss was Vice
President of Sales and Marketing at Precision Power Systems, a power supply
manufacturer.
Brad Tesch joined Hi-Tech Manufacturing , the former operating subsidiary of
HTM Holdings, Inc., in August 1990. He previously served as a member of the
process planning and technical staffs at AT&T Manufacturing and Bell Telephone
Laboratories, both telecommunications equipment manufacturers.
David Dominik has served as a Director since July 1999. Mr. Dominik is a co-
founder and managing director of Convergence Capital Group. He is also a
special limited partner of Bain Capital, Inc., a private equity investment
firm. He was a managing director of Bain Capital, Inc. from 1990 to March 2000.
Previously, Mr. Dominik was a general partner of Zero Stage Capital, a venture
capital firm focused on early-stage companies, and assistant to the chairman of
Genzyme Corporation, a biotechnology firm. From 1982 to 1984, he worked as a
management consultant at Bain & Company, a consulting firm. Mr. Dominik also
serves as a director of ChipPAC, Inc., Integrated Circuit Systems, Inc., DDi
Corp. and OneSource.
Prescott Ashe has served as a Director since July 1999. Mr. Ashe has been a
principal at Bain Capital, Inc., a private equity investment firm since June
1998 and was an associate at Bain Capital, Inc. from December 1992 to June
1998. Prior to that, he was an analyst at Bain Capital, Inc. and a consultant
at Bain & Company, a consulting firm. Mr. Ashe also serves as a director of
ChipPAC, Inc., Integrated Circuit Systems, Inc. and DDi Corp.
Stephen Adamson has served as a Director since July 1999. Mr. Adamson is a
Partner of Celerity Partners. Prior to joining Celerity Partners, he was a
Managing Director of W. E. Myers & Co., a merchant banking firm. Prior to W. E.
Myers & Co., Mr. Adamson was Managing Director with KD Equities, a private
partnership specializing in middle market leveraged buyouts. Mr. Adamson is a
Director of Financial Pacific Insurance Group, Inc., Rapid Design Service,
Inc., and Starcom Holdings, Inc.
Mark Benham has served as a Director since July 1999. Mr. Benham was a co-
founder of Celerity Partners, a private equity investment firm, and has been a
Partner since 1992. Previously he was a Senior Investment Officer of Citicorp
Venture Capital, Ltd., and prior to that he was an advisor to Yamaichi UniVen
Co., Ltd., the venture capital subsidiary of Yamaichi Securities International.
Mr. Benham is a Director of DDi Corporation, Rapid Design Service, Inc., and
Starcom Holdings, Inc.
Michael Griffiths has served as a Director since July 1999. Mr. Griffiths
has been Executive Vice President of Kilmer Van Nostrand Co. Limited, or KVN, a
private investment holding company, since 1988 and has served there in various
other capacities since 1979. Previously, Mr. Griffiths was a manager with
Clarkson Gordon Chartered Accountants (now Ernst & Young), a public accounting
firm with responsibility for the audit, tax and related management matters of a
variety of public clients.
Anthony Sigel has been Vice President, Corporate Development of KVN, a
private investment holding company, since 1994. Mr. Sigel joined KVN in 1991 as
Vice President of KVN's Palestra Group Limited. Prior to joining KVN, Mr. Sigel
was an Associate within Bankers Trust Company's Merchant Bank, Toronto, Canada.
Board Composition
Each of our directors is elected and serves until a successor is duly
elected and qualified or until the earlier of his death, resignation or
removal. All members of our board of directors set forth herein were elected by
57
<PAGE>
class vote pursuant to our certificate of incorporation. Our executive officers
are elected by and serve at the discretion of the board of directors.
Prior to the completion of this offering, our board will be divided into
three classes, as nearly equal in number as possible, with each director
serving a three-year term and one class being elected at each year's annual
meeting of stockholders. Messrs. and and the two additional directors
we anticipate electing prior to the completion of this offering will be in the
class of directors whose term expires at the 2001 annual meeting of our
stockholders. Messrs. , , and will be in the class of directors
whose term expires at the 2002 annual meeting of our stockholders. Messrs. ,
, and will be in the class of directors whose term expires at the
2003 annual meeting of our stockholders. At each annual meeting of our
stockholders, successors to the class of directors whose term expires at such
meeting will be elected to serve for three-year terms or until their respective
successors are elected and qualified.
Board Committees
Prior to this offering, our board of directors had two committees, the audit
committee and the compensation committee. The board may also establish other
committees to assist in the discharge of its responsibilities.
The audit committee makes recommendations to the board of directors
regarding the independent auditors to be nominated for election by the
stockholders and reviews the independence of such auditors, approves the scope
of the annual audit activities of the independent auditors, approves the audit
fee payable to the independent auditors and reviews such audit results with the
independent auditors. The audit committee is currently comprised of and
, and following this offering will be comprised of directors not otherwise
affiliated with us or any of our principal stockholders. KPMG LLP presently
serves as our independent auditors.
The compensation committee provides a general review of our compensation and
benefit plans to ensure that they meet corporate objectives. In addition, the
compensation committee reviews the chief executive officer's recommendations on
compensation of all our officers and adopting and changing major compensation
policies and practices, and reports its recommendations to the whole board of
directors for approval and authorization. The compensation committee
administers our stock plans and is comprised of Messrs. , and .
Compensation of Directors
We currently pay no compensation to our independent directors, and pay no
additional remuneration to our employees or to our executives for serving as
directors.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between our board of directors or our
compensation committee and the board of directors or compensation committee of
any other company, nor has any interlocking relationship existed in the past.
Executive Compensation
The following table sets forth information concerning the compensation for
the years ended December 31, 1999, 1998 and 1997 on a pro forma basis for our
chief executive officer and four other most highly compensated executive
officers at the end of our last fiscal year. For ease of reference, we
collectively refer to these executive officers throughout this section as our
"named executive officers."
58
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long Term
Compensation(1)(2) Compensation
------------------- ---------------------
Restricted Securities
Stock Underlying All Other
Name and Principal Salary Bonus Awards Options Compensation
Position Year ($) ($) ($) (#) ($)
- ------------------ ---- --------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Paul Walker............. 1999 168,612 -- -- -- --
President and Chief 1998 167,853 16,458 -- -- --
Executive Officer 1997 130,173 -- -- -- --
Edward Johnson(3)....... 1999 164,408 53,437 -- 10,310.1(4) 9,235(9)
Executive Vice
President, 1,199.6(5)
Business Development 5,060.0(6)
1998 123,950 49,185 -- 38,168.0(7) 164,909(10)
1997 92,702 -- -- -- --
Philip Woodard.......... 1999 134,889 -- -- 7,500.0(8) --
Senior Vice President, 1998 134,282 2,596 -- -- --
Enterprise Development
and 1997 109,068 -- -- -- --
Integration
Gary Walker ............ 1999 200,000 -- -- -- --
Vice President and
General 1998 200,000 153,873 -- -- --
Manager, San Jose 1997 166,238 233,605 -- -- --
Derek D'Andrade ........ 1999 134,889 -- -- -- --
Vice President, Quality 1998 134,282 16,458 -- -- --
1997 117,716 -- -- -- --
</TABLE>
- --------
(1) Compensation information for Messrs. Walker, Woodard, Walker and D'Andrade
includes compensation paid by Predecessor SMTC during periods prior to the
July 30, 1999 combination of Predecessor SMTC and HTM, and by SMTC during
periods after the combination. Compensation information for Mr. Johnson
includes compensation paid by HTM during periods prior to the combination,
and by SMTC during periods after the combination.
(2) Excludes perquisites and other personal benefits because such compensation
did not exceed either $50,000 or 10% of the total annual salary and bonus
for any of the named executive officers.
(3) During the years ended December 31, 1998 and 1997, and from January 1, 1999
until the July 30, 1999 combination of Predecessor SMTC and HTM, Mr.
Johnson served as President and Chief Executive Officer of HTM.
(4) The options represent options to purchase shares of our Class A common
stock at an exercise price equal to $1.82 per share issued in connection
with the combination of Predecessor SMTC and HTM to replace options to
purchase shares of HTM common stock.
(5) The options represent options to purchase shares of our Class L common
stock at an exercise price equal to $147.57 per share issued in connection
with the combination of Predecessor SMTC and HTM to replace options to
purchase shares of HTM common stock.
(6) The options represent options to purchase shares of common stock of HTM at
an exercise price of $5.13 per share, which options were replaced by
options to purchase shares of our Class A common stock and Class L common
stock in connection with the combination of Predecessor SMTC and HTM.
(7) The options represent options to purchase shares of common stock of HTM at
an exercise price of $5.13 per share issued in connection with the
recapitalization of HTM in June 1998 to replace options to purchase shares
of HTM common stock. These options were replaced by options to purchase
shares of our Class A common stock and Class L common stock in connection
with the combination of Predecessor SMTC and HTM.
59
<PAGE>
(8) The options represent options to purchase shares of our Class A common
stock at an exercise price of $19.68 per share.
(9) Represents amounts paid to Mr. Johnson in respect of the cancellation of
vested stock options exercisable for HTM common stock in connection with
the June 1998 recapitalization of HTM.
(10) Represents amounts paid to Mr. Johnson in respect of the cancellation of
vested stock options exercisable for HTM common stock in connection with
the June 1998 recapitalization of HTM, which amounts were held in escrow
for one year following the date of the recapitalization and were
subsequently paid to Mr. Johnson.
Option Grants in Last Fiscal Year
The following table sets forth information concerning grants of options to
purchase shares of our common stock made to the named executive officers during
the fiscal year ended December 31, 1999.
OPTION GRANTS IN FISCAL 1999
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term (8)
--------------------------------------------- --------------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Per
Granted Fiscal 1999 Share Expiration
Name (#) (%)(7) ($) Date 5% ($) 10% ($)
- ---- ---------- ------------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Paul Walker............. -- -- -- -- -- --
Edward Johnson (1)...... 8,943.3(2) 6.0 1.82 6/9/2008 8,799.40 21,586.75
1,366.8(3) 0.9 1.82 4/30/2009 1,514.89 3,811.37
1,040.5(4) 27.0 147.57 6/9/2008 83,008.81 203,637.77
159.0(5) 4.1 147.57 4/30/2009 14,288.93 35,950.12
Philip Woodard.......... 7,500.0(6) 5.0 19.68 9/30/2009 92,824.85 235,236.39
Gary Walker............. -- -- -- -- -- --
Derek D'Andrade......... -- -- -- -- -- --
</TABLE>
- --------
(1) In connection with the combination of Predecessor SMTC and HTM, options to
purchase shares of common stock of HTM at an exercise price of $5.13 per
share held by Mr. Johnson were rolled over and converted into options to
purchase 10,310.1 shares of our Class A common stock at an exercise price
of $1.82 per share, and options to purchase 1,199.6 shares of our Class L
common stock at an exercise price of $147.57 per share.
(2) Represents options to purchase shares of our Class A common stock. All of
such options were vested and had been exercised as of December 31, 1999.
The shares issued on exercise of these options are subject to certain
restrictions, which restrictions will lapse with respect to 341.1 of these
shares on each of May 1, 2000 and May 1, 2001, and 683.4 of these shares on
July 30, 2001.
(3) Represents options to purchase shares of our Class A common stock. All of
such options were vested and had been exercised as of December 31, 1999.
6,707.5 of the shares issued on exercise of these options are subject to
certain restrictions, which restrictions will lapse with respect to 2,235.8
of these shares on each of June 10, 2000, June 10, 2001 and July 30, 2001.
(4) Represents options to purchase shares of our Class L common stock. Of this
total, 260 was vested at December 31, 1999. Of the remaining 781 options,
260 vest on each of June 10, 2000, June 10, 2001 and July 30, 2001.
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<PAGE>
(5) Represents options to purchase shares of our Class L common stock. None of
the options was vested at December 31, 1999. Of this total, 40 will vest on
each of May 1, 2000 and May 1, 2001. The remaining 79 options will vest on
July 30, 2001.
(6) Represents options to purchase shares of our Class A common stock. None of
the options were vested as of December 31, 1999. The options will vest in
four equal annual installments beginning September 30, 2000.
(7) Percentages are based upon the total number of options to purchase shares
of Class A common stock or Class L common stock, as the case may be,
granted to our employees in 1999.
(8) At the time of the grant, there was no market for our Class A common stock
or our Class L common stock. For purposes of the calculations in this
table, the fair market value of the Class A common stock ($1.82 per share)
issuable upon exercise of the options held by Mr. Johnson and the Class L
common stock ($147.57 per share) issuable upon exercise of the options held
by Mr. Johnson was determined by our board of directors based upon arms'
length sales of shares of Class A common stock and shares of Class L common
stock, and the fair market value of the Class A common stock issuable upon
exercise of the options held by Mr. Woodard was determined by our board of
directors based upon its good faith estimate. There have been no arms'
length sales of the Class A common stock or of the Class L common stock
since July 30, 1999. In accordance with the rules of the Securities and
Exchange Commission, the amounts shown on this table represent hypothetical
gains that could be achieved for the respective options if exercised at the
end of the option term. These gains are based on assumed rates of stock
appreciation of 5% and 10% compounded annually from the date the respective
options were granted to their expiration date. The gains shown are net of
the option exercise price, but do not include deductions for taxes or other
expenses associated with the exercise. Actual gains, if any, on stock
option exercises will depend on the future performance of our common stock,
the optionholder's continued employment through the option period and the
date on which the options are exercised.
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth information for the named executive officers
concerning stock option exercises during our last fiscal year and options
outstanding at the end of the last fiscal year.
AGGREGATED OPTION EXERCISES IN FISCAL 1999
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options At
Shares Acquired Value Options At Fiscal Year-End Fiscal Year-End
On Exercise Realized (Exercisable/Unexercisable) (Exercisable/Unexercisable)
Name (#) ($)(3) (#) ($)(3)
- ---- --------------- ---------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Paul Walker............. -- -- -- --
Edward Johnson.......... 8,943.3(1) 159,727.33 -- --
1,366.8(2) 24,411.04
-- -- 260.1/780.4(4) 8,872.01/26,619.44
0/159.0(5) 0/5,423.49
Philip Woodard.......... -- -- 0/7,500.0(6) 0/0
Gary Walker............. -- -- -- --
Derek D'Andrade......... -- -- -- --
</TABLE>
- --------
(1) Represents shares of Class A common stock purchased at an exercise price of
$1.82 per share. 6,707.5 of these shares are subject to certain
restrictions, which restrictions will lapse with respect to 2,235.8 of
these shares on each of June 10, 2000, June 10, 2001 and July 30, 2001.
(2) Represents shares of Class A common stock purchased at an exercise price of
$1.82 per share. The shares are subject to certain restrictions, which
restrictions will lapse with respect to 341.1 of these shares on each of
May 1, 2000 and May 1, 2001, and 683.4 of these shares on July 30, 2001.
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<PAGE>
(3) Value is based on the difference between the option exercise price and the
fair market value at December 31, 1999. The fair market value of the Class
A common stock, $19.68 per share, and the Class L common stock, issuable
upon the exercise of outstanding options, $181.68 per share, at December
31, 1999 was determined by the board of directors based upon its good faith
estimate.
(4) Represents options to purchase Class L common stock at an exercise price of
$147.57 per share. The options to purchase such shares of Class L common
stock replaced options to purchase shares of common stock of HTM that were
rolled over in connection with the combination of Predecessor SMTC and HTM
and converted into options to purchase shares of Class A common stock and
Class L common stock. Of this total, 260.1 were vested at December 31,
1999. Of the remaining 780.4 options, 260.1 vest on May 1, 2000 and 520.3
vest on July 30, 2001.
(5) Represents options to purchase Class L common stock at an exercise price of
$147.57 per share. The options to purchase such shares of Class L common
stock replaced options to purchase shares of common stock of HTM that were
rolled over in connection with the combination of Predecessor SMTC and HTM
and converted into options to purchase shares of Class A common stock and
Class L common stock. None of these options was vested at December 31,
1999. Of this total, 39.8 options vest on each of May 1, 2000 and May 1,
2001, and 79.5 vest on July 30, 2001.
(6) Represents shares of our Class A common stock. None of the options were
vested as of December 31, 1999. The options will vest in four equal annual
installments beginning September 30, 2000.
Employment Contracts, Termination of Employment and Change of Control
Arrangements
Paul Walker is currently employed as our President and Chief Executive
Officer pursuant to an employment agreement dated July 30, 1999 which is
effective until December 31, 2001 and will automatically renew for successive
one-year terms unless it is terminated by the parties in accordance with its
terms. Under the employment agreement, Mr. Walker receives an annual salary of
$250,000 per year and is eligible for an annual bonus based upon our
achievement of certain EBITDA targets. Mr. Walker's employment agreement
contains customary confidentiality provisions and a non-compete clause which is
effective during the term of the agreement, for one year following termination
of his employment if he is terminated for cause, and, under certain other
circumstances, for two years following the termination of his employment. In
the event Mr. Walker's employment is terminated by us without cause, or by Mr.
Walker for good reason, the employment agreement provides that we will pay Mr.
Walker's base salary for two years following such termination.
Mr. Johnson is currently employed as our Executive Vice President, Business
Development pursuant to an employment agreement dated July 30, 1999 which is
effective until December 31, 2001 and will automatically renew for successive
one-year terms unless it is terminated by the parties in accordance with its
terms. Under the employment agreement, Mr. Johnson receives an annual salary of
$225,000 per year and is eligible for an annual bonus based upon our
achievement of certain EBITDA targets. Mr. Johnson is also entitled to receive
an additional bonus, payable on or before April 15, 2000, in order to cover his
tax liability, if any, resulting from certain aspects of the July 1999
combination of Predecessor SMTC and HTM. Mr. Johnson's employment agreement
contains customary confidentiality provisions and a non-compete clause which is
effective during the term of the agreement, for one year following termination
of his employment if he is terminated for cause, and, under certain other
circumstances, for two years following the termination of his employment. In
the event Mr. Johnson's employment is terminated by us without cause, or by Mr.
Johnson for good reason, the employment agreement provides that we will pay Mr.
Johnson's base salary for two years following such termination.
Mr. Woodard is currently employed as our Senior Vice President, Enterprise
Development and Integration pursuant to an employment agreement dated July 30,
1999 which is effective until December 31, 2001 and will automatically renew
for successive one-year terms unless it is terminated by the parties in
accordance with its terms. Under the employment agreement, Mr. Woodard receives
an annual salary of $200,000 per year and is eligible for an annual bonus based
upon our achievement of certain EBITDA targets. Mr. Woodard's employment
agreement contains customary confidentiality provisions and a non-compete
clause which is
62
<PAGE>
effective during the term of the agreement, for one year following termination
of his employment if he is terminated for cause, and, under certain other
circumstances, for two years following the termination of his employment. In
the event Mr. Woodard's employment is terminated by us without cause, or by Mr.
Woodard for good reason, the employment agreement provides that we will pay Mr.
Woodard's base salary for two years following such termination.
Gary Walker is currently employed as our Vice President and General Manager,
San Jose pursuant to an employment agreement dated July 30, 1999 which is
effective until December 31, 2001 and will automatically renew for successive
one-year terms unless it is terminated by the parties in accordance with its
terms. Under the employment agreement, Mr. Walker receives an annual salary of
$200,000 per year and is eligible for an annual bonus based upon our
achievement of certain EBITDA targets. Mr. Walker's employment agreement
contains customary confidentiality provisions and a non-compete clause which is
effective during the term of the agreement, for one year following termination
of his employment if he is terminated for cause, and, under certain other
circumstances, for two years following the termination of his employment. In
the event Mr. Walker's employment is terminated by us without cause, or by Mr.
Walker for good reason, the employment agreement provides that we will pay Mr.
Walker's base salary for two years following such termination.
Mr. D'Andrade is currently employed as our Vice President Quality pursuant
to an employment agreement dated July 30, 1999 which is effective until
December 31, 2001 and will automatically renew for successive one-year terms
unless it is terminated by the parties in accordance with its terms. Under the
employment agreement, Mr. D'Andrade receives an annual salary of $200,000 per
year and is eligible for an annual bonus based upon our achievement of certain
EBITDA targets. Mr. D'Andrade's employment agreement contains customary
confidentiality provisions and a non-compete clause which is effective during
the term of the agreement, for one year following termination of his employment
if he is terminated for cause and, under certain other circumstances, for two
years following the termination of his employment. In the event Mr. D'Andrade's
employment is terminated by us without cause, or by Mr. D'Andrade for good
reason, the employment agreement provides that we will pay Mr. D'Andrade's base
salary for two years following such termination.
Stock Plans
Amended and Restated 1998 Equity Incentive Plan
On September 30, 1999, the board of directors adopted, and our stockholders
approved, our Amended and Restated 1998 Equity Incentive Plan, or the 1998
Plan, which amended and restated in its entirety our 1998 Equity Incentive
Plan. The 1998 Plan authorizes the granting of stock options to our executives
or other key employees. Under the 1998 Plan, our board of directors is
authorized to grant stock purchase options exercisable for up to 165,000 shares
of our Class A common stock and up to 4,000 shares of our Class L common stock,
subject to adjustment upon the occurrence of certain events to prevent any
dilution or expansion of the rights of participants that might otherwise result
from the occurrence of such events, which grants may be made to such executives
or key employees, in such quantities, at such exercise price and on such other
terms and conditions as may be established by the board of directors. Currently
there are options exercisable for 14,200 shares of Class A common stock and 144
shares of Class L common stock, respectively, available for issue under the
1998 Plan. A total of 33,140 options exercisable for Class A common stock and
3,856 options exercisable for our Class L common stock under the 1998 Plan were
granted in connection with the July 1999 combination of Predecessor SMTC and
HTM in substitution of stock options previously granted by HTM to certain of
its executives and key employees. Those options expire in April 2009 or June
2008, subject to earlier expiration in connection with the termination of the
optionholder's employment. The substituted options exercisable for Class A
common stock were immediately exercisable upon grant, but the shares of Class A
common stock acquired upon exercise are subject to certain transfer
restrictions which lapse over the four year period beginning on the date of
grant. The outstanding options exercisable for Class L common stock vest over
the four year period beginning on the date of grant. An additional 116,860
options exercisable for our Class A common stock under the 1998 Plan were
granted by the board of directors on September 30, 1999. Those
63
<PAGE>
options expire in September 2009, subject to earlier termination in connection
with the termination of the optionholder's employment. Those options become
exercisable in four equal annual installments beginning on September 30, 2000.
The vesting of an optionholder's unvested options is dependent upon continued
employment with us. Upon termination of employment, all unexercised and
unvested options expire and are forfeited. All unvested options will vest
automatically in connection with the acquisition of a majority or more of our
voting securities by any person or "group" as defined under Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended, other than our stockholders as
of the date of the 1998 Plan and their affiliates.
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<PAGE>
RELATED PARTY TRANSACTIONS
The following summary of the Reorganization and Merger Agreement, the
Stockholders Agreement and the Management Agreement is a description of the
material provisions of such agreements and is subject to, and qualified in its
entirety by reference to, such agreements, each of which is filed as an exhibit
hereto with the Securities and Exchange Commission.
Reorganization and Merger Agreement
The Reorganization and Merger Agreement relating to the July 1999
combination of Predecessor SMTC and HTM contains indemnification provisions
binding on us. Specifically, we have agreed to indemnify (a) each of the former
stockholders of Predecessor SMTC and their agents and affiliates against any
and all liabilities resulting from (i) any breach or default in performance by
HTM, prior to the combination of Predecessor SMTC and HTM, of any covenant or
agreement of HTM contained in the Reorganization and Merger Agreement, and (ii)
any breach of any representation or warranty made by HTM or any of its
subsidiaries in the Reorganization and Merger Agreement, and (b) each of the
former stockholders of HTM and their agents and affiliates against any and all
liabilities resulting from (i) any breach or default in performance by
Predecessor SMTC, prior to the combination of Predecessor SMTC and HTM, of any
covenant or agreement of Predecessor SMTC contained in the Reorganization and
Merger Agreement, and (ii) any breach of any representation or warranty made by
Predecessor SMTC or any of its subsidiaries in the Reorganization and Merger
Agreement.
Immediately prior to the consummation of the combination of Predecessor SMTC
and HTM, certain of our principal stockholders, directors and executive
officers, including the Bain Capital Funds, Celerity EMSIcon L.L.C., and
Messrs. Johnson, Laurion, Tesch, Koss, Dominik, Ashe, Benham and Adamson, were
beneficial holders of HTM stock. In addition, immediately prior to the
consummation of the combination of Predecessor SMTC and HTM, certain of our
principal stockholders, directors and executive officers, including Kilmer
Electronics Group Limited, or Kilmer, Paul Walker, Gary Walker, and Messrs.
D'Andrade and Woodard, were beneficial holders of Predecessor SMTC stock.
Stockholders Agreement
All of our current stockholders and optionholders are parties to a
stockholders agreement that, among other things, provides for rights of first
refusal, tag-along rights, drag-along rights, preemptive rights, registration
rights and restrictions on the transfer of shares. The stockholders agreement
contains voting agreements that we intend to terminate immediately prior to
this offering.
Management Agreements
Under a management agreement entered into on July 30, 1999 among us, Bain
Capital Partners VI, L.P., or Bain, Celerity Management Co., Inc., or Celerity,
and Kilmer, since the July 1999 combination of Predecessor SMTC and HTM, Bain
has been paid management fees of $104,166, Celerity has been paid management
fees of $104,166 and Kilmer has been paid management fees of $52,083. In
addition, we have reimbursed each of Bain, Celerity and Kilmer for their
respective out-of-pocket expenses incurred in connection with the services
provided under the management agreement. The management agreement contains
customary indemnification provisions in favor of each of Bain, Celerity and
Kilmer. Investment funds affiliated with Bain and Celerity are our largest
stockholders. Our directors Messrs. Dominik and Ashe are affiliated with Bain,
our directors Messrs. Benham and Adamson are affiliated with Celerity, and our
directors Messrs. Griffiths and Sigel are affiliated with Kilmer. The
management agreement will be terminated in connection with the offering.
Under a management agreement entered into on June 8, 1998 among HTM, Bain
and Celerity prior to the July 1999 combination of Predecessor SMTC and HTM,
Bain was paid management fees of approximately $83,333 and Celerity was paid
management fees of approximately $83,333. In addition, Bain was paid a
transaction fee of approximately $775,000 and Celerity was paid a transaction
fee of approximately $775,000 in
65
<PAGE>
connection with the combination of Predecessor SMTC and HTM. Also, each of Bain
and Celerity was reimbursed for their respective out-of-pocket expenses
incurred in connection with the services provided under the management
agreement. The management agreement contained customary indemnification
provisions in favor of each of Bain and Celerity. Investment funds affiliated
with Bain and Celerity are our largest stockholders. Our directors Messrs.
Dominik and Ashe are affiliated with Bain, and our directors Messrs. Benham and
Adamson are affiliated with Celerity. The management agreement was terminated
in connection with the combination of Predecessor SMTC and HTM in July of 1999.
Directors' Relationships with Major Stockholders
All of our current directors are affiliated with our major stockholders.
Paul Walker, Edward Johnson and Gary Walker are executive officers,
stockholders and directors. David Dominik and Prescott Ashe are affiliated with
the Bain Capital Funds. Stephen Adamson and Mark Benham are affiliated with
Celerity Partners. Michael Griffiths and Anthony Sigel are affiliated with
Kilmer Electronics Group Limited.
Other Related Party Payments
The Bain Capital Funds and Celerity Partners, two of our principal
stockholders, were stockholders of HTM prior to the combination of Predecessor
SMTC and HTM. In connection with the combination of Predecessor SMTC and HTM,
the Bain Capital Funds and Celerity Partners received shares of our capital
stock in exchange for their shares of HTM and an additional cash payment of
approximately $16.2 million. In addition, certain affiliates of the Bain
Capital Funds held subordinated debt of HTM in the amount of approximately
$13.5 million that was repaid in connection with the combination.
The Predecessor SMTC stockholders received a combination of cash and stock
in exchange for their shares of Predecessor SMTC. They reinvested a portion of
their cash proceeds in our capital stock.
Purchases from an Affiliate of a Major Stockholder
Investment funds affiliated with Bain and Celerity are also stockholders of
DDi Corp., one of our suppliers. Our transactions with DDi, which totalled less
than $2.5 million in 1999, are on equivalent terms as those with our other
suppliers.
Certain Loans and Payments Made to Named Executive Officers
Gary Walker holds all the Class Y shares of SMTC Canada. In connection with
the reclassification, we have agreed to purchase all of his Class Y shares in
exchange for an equivalent number of shares of Class L common stock. This
purchase is subject to the conditions that we fund any tax liability incurred
by Mr. Walker as a result of the exchange by making an interest-free loan to
him and that we compensate him for any tax payable by him on any imputed
interest on such loan. We expect that we will be required to lend approximately
$1.6 million to Mr. Walker pursuant to this arrangement. The loan will be
secured by a first priority security interest over all of Mr. Walker's shares
of capital stock of SMTC and will be repayable at such time and to the extent
that Mr. Walker receives cash proceeds in respect of such shares.
In connection with the exercise of certain options and the purchase of Class
A common stock in 1999, we accepted as payment from Edward Johnson and other
employees, secured promissory notes bearing interest at 5.70%. The aggregate
principal amount outstanding as at July 30, 1999 under these promissory notes
was approximately $60,000. We have agreed to permit these employees to repay
their respective loan obligations with proceeds received from the sale of
stock. As security for their obligations to us under their respective notes,
these employees have pledged, pursuant to pledge agreements, certain of our
shares that they own.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of each class of our common stock as of December 31, 1999 and as
adjusted to reflect the sale of the shares offered by us in this offering for:
. each person who is known by us to own beneficially more than 5% of our
outstanding shares of common stock;
. each director and named executive officer; and
. all directors and officers as a group.
As of December 31, 1999, our outstanding equity securities consisted of
2,447,782 shares of Class A common stock and 154,168 shares of Class L common
stock, and 90,315 Class L exchangeable shares and 23,092 Class Y shares issued
by SMTC Canada that are exchangeable into shares of Class L common stock. In
addition, SMTC Canada had outstanding 9,477,847 common shares and 6,331,517
Class C preferred shares owned by SMTC Nova Scotia Company, a wholly owned
subsidiary. The Class L common stock is identical to the Class A common stock
except that the Class L common stock is entitled to a preference over the Class
A common stock with respect to any distribution by us to holders of our capital
stock equal to the original cost of such shares, $162.00, plus an amount which
accrues on a daily basis at a rate of 12% per annum, compounded quarterly. The
Class L common stock is convertible into Class A common stock upon a vote of a
majority of the holders of the outstanding Class L common stock at the time of
an initial public offering or under other specified circumstances.
Unless otherwise indicated below, to our knowledge, all persons listed below
have sole voting and investment power with respect to their shares of common
stock, except to the extent authority is shared by spouses under applicable
law. Unless otherwise indicated below, each entity or person listed below
maintains a mailing address of c/o SMTC Corporation, 635 Hood Road, Markham,
Ontario, Canada, L3R 4N6.
The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission and assumes
the underwriters do not exercise their over-allotment option. The information
is not necessarily indicative of beneficial ownership for any other purpose.
Under these rules, beneficial ownership includes any shares as to which the
individual or entity has sole or shared voting or investment power and any
shares as to which the individual or entity has the right to acquire beneficial
ownership within 60 days after December 31, 1999 through the exercise of any
stock option, warrant or other right. The inclusion in the following table of
those shares, however, does not constitute an admission that the named
stockholder is a direct or indirect beneficial owner.
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<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Owned (**)
------------------------------------------------------------------------ Percentage
Class A Common Stock Class L Common Stock(1) of Shares
-------------------------------------- --------------------------------- Beneficially
Warrants Warrants Owned
and and After
Name and Address Shares Options Total % Shares Options Total % Offering
---------------- ----------- --------- ----------- ---- --------- -------- --------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Stockholders:
Bain Capital
Funds(2)(3)(4)......... 680,042.4 103,894.9 783,937.3 30.8 75,575.2 12,088.2 87,663.4 31.4
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts
02116
Celerity EMSIcon
L.L.C.(2)(4)........... 625,250.6 -- 625,250.6 25.6 69,502.7 -- 69,502.7 26.0
c/o Celerity Partners
11111 Santa Monica
Boulevard
Suite 1111
Los Angeles, California
90025
Kilmer Electronics
Group, Limited......... 357,234.9 -- 357,234.9 14.7 39,692.8 -- 39,692.8 14.8
50 Ashwarren Road
Downsview, Ontario M3J
1Z5
Directors and Executive
Officers:
Paul Walker(5).......... 207,832.2 -- 207,832.2 8.5 23,092.5 -- 23,092.5 8.6
Gary Walker............. 207,832.2 -- 207,832.2 8.5 23,092.5 -- 23,092.5 8.6
Derek D'Andrade(6)...... 207,832.2 -- 207,832.2 8.5 23,092.5 -- 23,092.5 8.6
Philip Woodard.......... 39,939.3 -- 39,939.3 1.6 4,437.7 -- 4,437.7 1.7
Edward Johnson(2)(4).... 23,131.2 -- 23,131.2 1.0 730.8 299.9 990.9 *
David Dominik(2)(4)(7).. 157,683.4 1,090.8 158,774.2 6.5 17,510.3 126.9 17,637.2 6.6
Prescott Ashe(2)(4)(8).. 23,384.5 -- 23,384.5 1.0 2,596.6 -- 2,577.2 1.0
Mark Benham(9).......... 625,250.6 -- 625,250.6 25.6 69,502.7 -- 69,502.7 26.0
Stephen Adamson(9)...... 625,250.6 -- 625,250.6 25.6 69,502.7 -- 69,502.7 26.0
Michael Griffiths....... -- -- -- -- -- -- -- --
Anthony Sigel........... -- -- -- -- -- -- -- --
All Directors and
executive officers as a
group (19 persons)..... 1,506,772.7 1,090.8 1,507,863.5 61.8 164,055.6 830.7 164,886.3 61.4
</TABLE>
- --------
* Indicates beneficial ownership of less than 1% of the issued and
outstanding Class A common stock or Class L common stock.
** The number of shares of Class A common stock, Class L and Class N common
stock deemed outstanding on December 31, 1999 with respect to a person or
group includes (a) 2,414,641.7 shares of Class A common stock and an
aggregate of 267,575.6 shares of Class L and Class N common stock
outstanding on such date and (b) all options and warrants that are
currently exercisable or will be exercisable within 60 days of December 31,
1999 by the person or group in question.
(1) Includes shares of Class N common stock. Class N common stock is non-
participating voting stock. Each holder of Class L exchangeable shares and
Class Y shares issued by our subsidiary, SMTC Canada, holds a number of
Class N common stock so that their Class N votes are equal to the number of
votes they would have if they held an equivalent number of shares of Class
L common stock. The Class L exchangeable shares and Class Y shares of SMTC
Canada may be exchanged for shares of Class L common stock on a one-for-one
basis. See "Description of Capital Stock--Exchangeable Shares."
(2) The shares of Class A common stock and Class L common stock included in the
table include shares held through investment in EMSIcon Investments, LLC.
Each member of EMSIcon Investments, LLC has sole voting and investment
power as to shares held on such member's behalf by EMSIcon Investments,
LLC.
(3) Includes shares of Class A common stock and Class L common stock held by
Bain Capital Fund VI, L.P., ("Fund VI"); BCIP Associates II ("BCIP II");
BCIP Associates II-B ("BCIP II-B"); BCIP Associates II-C ("BCIP II-C");
Sankaty High Yield Asset Partners, L.P. ("Sankaty"); Bain Capital V
Mezzanine Fund, L.P. ("Mezzanine"); BCM Capital Partners, L.P. ("BCM"); and
BCIP Trust Associates II ("BCIP Trust II" and collectively with Fund VI,
BCIP II, BCIP II-B, BCIP II-C, Sankaty, Mezzanine and BCM, the "Bain
Capital Funds"). Does not include shares owned by other stockholders that
are subject to the Stockholders Agreement.
(4) The shares of Class A common stock included in the table include shares
held through J&L Investments, LLC.
(5) Consists of shares owned by P.N. Walker Consulting Inc. Paul Walker is the
sole stockholder of P.N. Walker Consulting Inc. and may be deemed to
beneficially own shares owned by P.N. Walker Consulting Inc.
(6) Consists of shares owned by Nichal, Inc. Derek D'Andrade is the sole
stockholder of Nichal, Inc. and may be deemed to beneficially own shares
owned by Nichal, Inc.
(7) The shares of Class A common stock and Class L common stock included in the
table represent shares held by BCIP II, BCIP II-C and BCIP Trust II. Mr.
Dominik is a former Managing Director of Bain Capital, Inc. and is a former
general partner of BCIP II, BCIP II-C and BCIP Trust II and, accordingly,
may be deemed to beneficially own shares owned by such funds. Mr. Dominik
disclaims beneficial ownership of any such shares in which he does not have
a pecuniary interest. The address of Mr. Dominik is c/o Bain Capital, Inc.,
Two Copley Place, Boston, Massachusetts 02116.
(8) The shares of Class A common stock and Class L common stock included in the
table represent shares held by BCIP II-B. Mr. Ashe is a principal of Bain
Capital, Inc. and is a partner of BCIP II-B, and, accordingly, may be
deemed to beneficially own shares owned by such funds. Mr. Ashe disclaims
beneficial ownership of any such shares in which he does not have a
pecuniary interest. The address of Mr. Ashe is c/o Bain Capital, Inc., Two
Copley Plaza, Boston, Massachusetts 01116.
(9) Mr. Benham and Mr. Adamson are both Managing Members of Celerity EMSIcon,
LLC, and accordingly, may be deemed to beneficially own shares owned by
Celerity EMSIcon, LLC. Mr. Benham and Mr. Adamson disclaim beneficial
ownership of any such shares in which they do not have a pecuniary
interest. The address for Mr. Benham is c/o Celerity Partners, 11111 Santa
Monica Boulevard, Suite 1127, Los Angeles, California 90025.
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DESCRIPTION OF INDEBTEDNESS
After giving effect to this offering, we and our subsidiaries will have
outstanding debt under our senior credit facility.
Senior Credit Facility
We, together with our subsidiaries HTM Holdings Inc. and SMTC Manufacturing
Corporation of Canada, have entered into an agreement with various banks and
financial institutions, including Lehman Commercial Paper Inc. as a lender and
as general administrative agent for the other lenders, providing for the senior
credit facilities, which currently consist of:
. a US Tranche A facility of up to $20,000,000 in term loans;
. a US Tranche B facility of up to $50,000,000 in term loans;
. a US Tranche C facility of up to $10,000,000 in term loans;
. a US revolving credit facility of up to $52,500,000 in revolving credit
loans, swing line loans and letters of credit;
. a Canadian facility of up to US $15,000,000 in term loans; and
. a Canadian revolving credit facility of up to US $7,500,000 in revolving
credit loans, swing line loans, letters of credit, depository notes and
bills of exchange.
We intend to use the net proceeds of this offering to reduce the
indebtedness under this facility, which was approximately $130.9 million as of
December 31, 1999.
The senior credit facility is jointly and severally guaranteed by and
secured by the assets of our subsidiaries other than certain foreign
subsidiaries, and our future subsidiaries, other than certain foreign
subsidiaries, will guarantee the senior credit facility and secure that
guarantee with their assets. The senior credit facility requires us to meet
financial ratios and benchmarks and requires us and our subsidiaries to comply
with other restrictive covenants. The senior credit facility contains customary
restrictions on our ability to incur additional indebtedness or guarantee the
indebtedness of others, create liens on our assets, enter into business
combinations, liquidate or dissolve, dispose of assets other than in the
ordinary course of business, declare or pay cash dividends, make capital
expenditures in excess of established limits, make investments in third
parties, modify or prepay debt instruments, engage in transactions with our
affiliates, enter into sale and leaseback arrangements with respect to real
property, change our fiscal year, enter into agreements that restrict our
ability to create liens to secure the senior credit facility, restrict the
ability of our subsidiaries to make distributions to us, engage in unrelated
lines of business, conduct operating activities at SMTC or enter into hedging
agreements other than in the ordinary course of business.
The US Tranche A facility matures in quarterly installments from September
2000 until June 2004. The US Tranche B facility matures in quarterly
installments from September 2000 until December 2005. The US Tranche C facility
matures in one installment payable on September 30, 2006. In the event we
prepay the US Tranche C facility, we will be required to pay a prepayment
premium of up to four percent of the principal amount of the prepayment,
depending on when we make the prepayment. There is no prepayment penalty in
connection with prepayment of any other tranche of the senior credit facility.
The revolving credit facility terminates in July 2004. The Canadian term loan
matures in quarterly installments from September 2000 until June 2004. The
Canadian revolving credit facility terminates in July 2004.
Our borrowings under the US senior credit facility bear interest at varying
rates based, at our option, on either the Eurodollar base rate plus 300 basis
points or the US base rate plus 125 basis points (in the case of US Tranche A
and the US revolving credit facility), the Eurodollar base rate plus 350 basis
points or the US
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base rate plus 175 basis points (in the case of US Tranche B) and the
Eurodollar base rate plus 475 basis points or the US base rate plus 300 basis
points (in the case of US Tranche C).
Our borrowings under the Canadian senior credit facility bear interest at
varying rates based, at our option, on either the Eurodollar base rate plus 300
basis points or the Canadian base rate plus 125 basis points (in the case of
the Canadian term loan) and the Eurodollar base rate plus 300 basis points, the
Canadian base rate plus 125 basis points or the Canadian prime rate plus 125
basis points (in the case of the Canadian revolving credit facility).
The overall effective interest rate at December 31, 1999 was 9.8%. We are
required to pay to the lenders under the senior credit facility a commitment
fee on the average unused portion of our US and Canadian revolving credit
facility and a letter of credit fee on any letters of credit outstanding. We
are required to pay to the lenders under the Canadian portion of the senior
credit facility a stamping fee on depository notes and bills of exchange
outstanding. We must apply proceeds of sales of debt, equity or material assets
to prepayment of the senior credit facility, subject to some exceptions, and
must also, in some circumstances, pay excess cash flow to the lenders under the
senior credit facility.
This summary of the material provisions of the senior credit facility is
qualified in its entirety by reference to all of the provisions of the senior
credit facility, which has been filed as an exhibit to the registration
statement of which this prospectus forms a part. See "Additional Information."
DESCRIPTION OF CAPITAL STOCK
General Matters
Upon completion of this offering, the total amount of our authorized capital
stock will consist of shares of common stock and shares of one or more
series of preferred stock.
After giving effect to the offerings, assuming an offering price of $ per
share (the mid-point of the range set forth on the cover page of this
prospectus) and a closing date of , 2000, we will have shares of common
stock outstanding (consisting of our common stock and exchangeable shares
issued by SMTC Canada that may be exchangeable into our common stock). We will
have no shares of any series of preferred stock outstanding. As of December 31,
1999, we had 23 stockholders of record. The following summary of provisions of
our capital stock describes all material provisions of, but does not purport to
be complete and is subject to, and qualified in its entirety by, our
certificate of incorporation and our by-laws, and by the provisions of
applicable law.
The certificate and by-laws contain provisions that are intended to enhance
the likelihood of continuity and stability in the composition of the board of
directors and which may have the effect of delaying, deferring or preventing a
future takeover or change in control of our company unless such takeover or
change in control is approved by our board of directors.
Common Stock
The issued and outstanding shares of common stock are, and the shares of
common stock to be issued by us in connection with the offering will be,
validly issued, fully paid and nonassessable. Subject to the prior rights of
the holders of any series of preferred stock, the holders of outstanding shares
of common stock are entitled to receive dividends out of assets legally
available therefor at such time and in such amounts as the board of directors
may from time to time determine. Please see "Dividend Policy." The shares of
common stock are not convertible and the holders thereof have no preemptive or
subscription rights to purchase any of our securities. Upon liquidation,
dissolution or winding up of our company, the holders of common stock are
entitled to receive pro rata our assets which are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of any holders of any series of preferred stock then
outstanding.
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Each outstanding share of common stock is entitled to one vote on all matters
submitted to a vote of stockholders. There is no cumulative voting. Except as
otherwise required by law or the restated certificate, the holders of common
stock vote together as a single class on all matters submitted to a vote of
stockholders.
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "SMTX."
Preferred Stock
Our board of directors may, without further action by our stockholders, from
time to time, direct the issuance of shares of preferred stock in a series and
may, at the time of issuance, determine the rights, preferences and limitations
of each series. Satisfaction of any dividend preferences of outstanding shares
of preferred stock would reduce the amount of funds available for the payment
of dividends on shares of common stock. Holders of shares of preferred stock
may be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of our company before any payment is
made to the holders of shares of common stock. The issuance of shares of
preferred stock may render more difficult or tend to discourage a merger,
tender offer or proxy contest, the assumption of control by a holder of a large
block of our securities or the removal of incumbent management. Upon the
affirmative vote of a majority of the total number of directors then in office,
the board of directors, without stockholder approval, may issue shares of
preferred stock with voting and conversion rights which could adversely affect
the holders of shares of common stock.
There are no shares of preferred stock outstanding, and we have no current
intention to issue any of our unissued, authorized shares of preferred stock.
However, the issuance of any shares of preferred stock in the future could
adversely affect the rights of the holders of common stock.
SMTC Canada Share Capital
Each of the newly issued exchangeable shares will be exchangeable, at the
option of the holder, at any time for one share of our common stock. Holders of
the exchangeable shares will be entitled to dividend and liquidation rights
that are, as nearly as practicable, economically equivalent to those of holders
of shares of our common stock. However, the exchangeable shares generally do
not have any voting rights in respect of SMTC Canada. Holders of exchangeable
shares will have certain rights to receive common stock in the event of any
liquidation, dissolution or winding-up of SMTC Canada or SMTC or any other
distribution of the assets of SMTC Canada or SMTC for the purpose of winding-up
its respective affairs.
On closing of this offering, we will enter into a voting and exchange trust
agreement and issue one share of SMTC special voting stock to a trustee to be
held for the benefit of the holders of exchangeable shares, other than
companies with which we are affiliated. By furnishing instructions to the
trustee, holders of exchangeable shares will be able to exercise essentially
the same voting rights with respect to SMTC as they would have if they had
exchanged their exchangeable shares for shares of our common stock.
Holders of exchangeable shares will be entitled to receive from SMTC Canada
dividends payable in U.S. dollars or Canadian dollars that are economically
equivalent to any cash dividends paid on our common stock. We will agree for
the benefit of the holders of exchangeable shares that we will not declare and
pay dividends on our common stock unless SMTC Canada is able to declare and pay
equivalent dividends on the exchangeable shares. We have also agreed to take
any other necessary steps to maintain the economic equivalency of the
exchangeable shares and our common stock.
The exchangeable shares are subject to adjustment or modification in the
event of a stock split or other change to our capital structure so as to
maintain the initial one-to-one relationship between the exchangeable shares
and our common stock. On or after , 2015, subject to acceleration in certain
circumstances, the board of directors of SMTC Canada may redeem all of the
outstanding exchangeable shares by delivering to the holders one share of our
common stock for each exchangeable share held.
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The exchangeable shares of SMTC Canada that will be outstanding on closing
of the concurrent offering cannot be transferred except pursuant to an
effective registration statement under the Securities Act or an exemption from
registration under the Act. We will file a registration statement with respect
to the issuance of the shares of our common stock issuable upon the exercise of
the exchange rights granted to the holders of the exchangeable shares of SMTC
Canada.
SMTC Nova Scotia Company owns all of the 9,477,847 common shares and
6,331,517 Class C preferred shares that have been issued by SMTC Canada. The
terms of the SMTC Canada common shares are substantially the same as the terms
of our common stock. The Class C preferred shares are redeemable at any time at
the option of SMTC Canada and entitle the holder to receive fixed preferential
non-cumulative cash dividends of C$0.06 per share per year in priority to the
holders of Class L exchangeable shares, Class Y shares and common shares.
Holders of Class C preferred shares are also entitled to a preference payment
of C$1.00 per share in the event of any liquidation, dissolution or winding-up
of SMTC Canada, before any payment is made to the holders of SMTC Canada Class
L exchangeable shares, Class Y shares and common shares. The common shares and
the Class C preferred shares will not be changed in the reclassification and
will remain outstanding after completion of this offering.
We have applied to list the exchangeable shares for trading on The Toronto
Stock Exchange, subject to SMTC Canada meeting that exchange's listing
requirements.
Registration Rights
Under the stockholders agreement dated July 30, 1999 between us and our
current stockholders, some of our stockholders will be entitled to rights with
respect to the registration under the Securities Act of some or all of their
shares as described below.
Majority Stockholders Demand Registration Rights. At any time after 180 days
following the effective date of any registration statement filed with this
offering, the holders of a majority of the aggregate number of shares of common
stock held by our stockholders who are parties to the stockholders agreement
can request that we register all or a portion of their shares. We will only be
required to file up to three registration statements on forms other than Form
S-3 in response to such demand registration rights.
Other Demand Registration Rights. At any time after July 30, 2003,
stockholders holding a majority of the shares of common stock held by the Bain
Capital Funds and their affiliates, by Celerity EMSIcon, LLC and its
affiliates, and by P. N. Walker Consulting, Inc., Paul Walker, Nichal Inc.,
Derek D'Andrade, Gary Walker, Philip Woodard and Kilmer Electronics Group
Limited, taken as a group, in each case holding at least 15% of our common
stock then outstanding on a fully diluted basis, can request that we register
all or a portion of their shares. We will only be required to file up to three
registration statements on forms other than Form S-3 in response to such demand
registration rights. We will not be required to file a registration statement
in response to their demand registration rights within 180 days following the
effective date of any registration statement filed by us with respect to an
underwritten public offering of our securities for our own account.
Piggyback Registration Rights. If we register any securities for public sale
after this initial public offering, the holders of shares of our common stock
who are parties to the stockholders agreement will have the right to include
their shares in the registration statement. This right does not apply to a
registration statement relating to any of our employee benefit plans, a
corporate reorganization or qualified public offerings unless such public
offering has been initiated pursuant to the majority demand registration rights
or other demand registration rights described above. The managing underwriter
of any underwritten offering will have the right to limit the number of shares
registered by these holders for marketing reasons.
We will pay all expenses incurred in connection with the registrations
described above, except for underwriters' and brokers' discounts and
commissions, which will be paid by the selling stockholders.
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Holders of these registration rights have waived the exercise of these
registration rights for 180 days following the date of this prospectus.
Other Provisions of the Certificate of Incorporation and By-laws
Our certificate of incorporation provides for the board to be divided into
three classes, as nearly equal in number as possible, serving staggered terms.
Approximately one-third of the board will be elected each year. Please see
"Management." Under the Delaware General Corporation Law, directors serving on
a classified board can only be removed for cause. The provision for a
classified board could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of the board until the
second annual stockholders meeting following the date the acquiror obtains the
controlling stock interest. The classified board provision could have the
effect of discouraging a potential acquiror from making a tender offer or
otherwise attempting to obtain control of SMTC and could increase the
likelihood that incumbent directors will retain their positions.
Our certificate of incorporation provides that stockholder action can be
taken only at an annual or special meeting of stockholders and cannot be taken
by written consent in lieu of a meeting. The certificate of incorporation and
the by-laws provide that, except as otherwise required by law, special meetings
of the stockholders can only be called pursuant to a resolution adopted by a
majority of the board of directors or by our chief executive officer.
Stockholders will not be permitted to call a special meeting or to require the
board to call a special meeting.
The by-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of our stockholders, including proposed
nominations of persons for election to the board. Stockholders at an annual
meeting may only consider proposals or nominations specified in the notice of
meeting or brought before the meeting by or at the direction of the board or by
a stockholder who was a stockholder of record on the record date for the
meeting, who is entitled to vote at the meeting and who has given to our
secretary timely written notice, in proper form, of such stockholder's
intention to bring that business before the meeting. Although the by-laws do
not give the board the power to approve or disapprove stockholder nominations
of candidates or proposals regarding other business to be conducted at a
special or annual meeting, the by-laws may have the effect of precluding the
conduct of business at a meeting if the proper procedures are not followed or
may discourage or defer a potential acquiror from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to obtain
control of SMTC.
The certificate of incorporation and by-laws provide that the affirmative
vote of holders of at least 66 2/3% of the total votes eligible to be cast in
the election of directors is required to amend, alter, change or repeal some of
their provisions, unless such amendment or change has been approved by a
majority of the directors not affiliated or associated with any person or
entity holding 20% or more of the voting power of our outstanding capital
stock, other than the Bain Capital Funds. This requirement of a super-majority
vote to approve amendments to the certificate of incorporation and by-laws
could enable a minority of our stockholders to exercise veto power over any
such amendments.
Provisions of Delaware Law Governing Business Combinations
Following the consummation of this offering, we will be subject to the
"business combination" provisions of the Delaware General Corporation Law. In
general, such provisions prohibit a publicly held Delaware corporation from
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an "interested stockholder," unless:
. the transaction is approved by the board of directors prior to the date
the "interested stockholder" obtained such status;
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. upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining
the number of shares outstanding those shares owned by (a) persons who
are directors and also officers and (b) employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to such date the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested
stockholder."
A "business combination" is defined to include mergers, asset sales and
other transactions resulting in financial benefit to a stockholder. In general,
an "interested stockholder" is a person who, together with affiliates and
associates, owns 15% or more of a corporation's voting stock or within three
years did own 15% or more of a corporation's voting stock. The statute could
prohibit or delay mergers or other takeover or change in control attempts with
respect to SMTC and, accordingly, may discourage attempts to acquire SMTC.
Limitations on Liability and Indemnification of Officers and Directors
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by the Delaware General Corporation Law. In addition,
our certificate of incorporation provides that we will indemnify our directors
and officers to the fullest extent permitted by such law. We expect to enter
into indemnification agreements with our current directors and executive
officers prior to the completion of the offering and expect to enter into a
similar agreement with any new directors or executive officers.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C. The transfer agent and registrar for the
exchangeable shares is CIBC Mellon Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial amount of our shares in the public market after
this offering could adversely affect the prevailing market price of our shares.
Furthermore, the sale of a substantial amount of shares in the public market
after the contractual and legal restrictions on resale described below lapse
could adversely affect the prevailing market price of our shares and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
shares, assuming no exercise of the underwriters' over-allotment option and
no exercise of outstanding options. Of these shares, all of the shares sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, unless the shares are purchased by
"affiliates" as that term is defined in Rule 144 under the Securities Act. Any
shares purchased by an affiliate may not be resold except pursuant to an
effective registration statement or an applicable exemption from registration,
including an exemption under Rule 144 of the Securities Act. The remaining
shares of common stock held by existing stockholders are "restricted
securities" as that term is defined in Rule 144 under the Securities Act. These
restricted securities may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rule 144
or Rule 701 under the Securities Act. These rules are summarized below.
Upon the expiration of the lock-up agreements described below and subject to
the provisions of Rule 144 and Rule 701, restricted shares totaling will be
available for sale in the public market 180 days after the date of this
prospectus. The sale of these restricted securities is subject to the volume
restrictions contained in those rules.
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Lock-up Agreements
We, our directors and executive officers and all of our stockholders, who
own in the aggregate shares of our common stock, have entered into lock-up
agreements with the underwriters. Under those agreements, neither we nor any of
our directors or executive officers nor any of those stockholders may dispose
of or hedge any shares of common stock or securities convertible into or
exchangeable for shares of common stock. These restrictions will be in effect
for a period of 180 days after the date of this prospectus. At any time and
without notice, Lehman Brothers may, in its sole discretion, release all or
some of the securities from these lock-up agreements. Transfers or dispositions
can be made sooner, provided the transferee becomes bound by the terms of the
lockup:
. with the prior written consent of Lehman Brothers;
. in the case of some transfers to affiliates;
. as a bona fide gift; or
. to any trust.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year from the later of the date those shares of
common stock were acquired from us or from an affiliate of ours would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
. one percent of the number of shares of common stock then outstanding,
which will equal approximately shares immediately after this
offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale of any shares of common
stock.
The sales of any shares of common stock under Rule 144 are also subject to
manner of sale provisions and notice requirements and to the availability of
current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years from the later of the date
such shares of common stock were acquired from us or from an affiliate of ours,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted pursuant to the lock-up agreements or otherwise,
those shares may be sold immediately upon the completion of this offering.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchased shares from us in
connection with a compensatory stock plan or other written agreement is
eligible to resell those shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with some of the
restrictions, including the holding period, contained in Rule 144.
No precise prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price of our common stock prevailing from time to time. We are unable to
estimate the number of our shares that may be sold in the public market
pursuant to Rule 144 or Rule 701
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because this will depend on the market price of our common stock, the personal
circumstances of the sellers and other factors. Nevertheless, sales of
significant amounts of our common stock in the public market could adversely
affect the market price of our common stock.
Stock Plans
We intend to file a registration statement under the Securities Act covering
shares of common stock reserved for issuance under our 1998 Plan. This
registration statement is expected to be filed as soon as practicable after the
effective date of this offering.
Currently, there are options to purchase 116,860 shares of our Class A
common stock and 3,856 shares of our Class L common stock outstanding under our
1998 Plan. All of these shares will be eligible for sale in the public market
from time to time, subject to vesting provisions, Rule 144 volume limitations
applicable to our affiliates and, in the case of some of the options, the
expiration of lock-up agreements.
Registration Rights under Stockholders Agreement
Following this offering, some of our stockholders will, under some
circumstances, have the right to require us to register their shares for future
sale. See "Description of Capital Stock--Registration Rights."
Sales in Canada--Exchangeable Shares
On closing of this offering, excluding any exchangeable shares purchased in
this offering and after giving effect to the share capital reclassification
described under "The Reclassification", Canadian residents will hold
exchangeable shares. All of the outstanding exchangeable shares will be freely
tradeable in Canada without restriction except for shares that may be held by
controlling persons of SMTC Canada (generally, persons or companies, who alone
or in combination with others hold a sufficient number of securities to affect
materially the control of SMTC Canada or SMTC). All of the exchangeable shares
are freely exchangeable into common stock on a one-for-one basis and freely
tradeable in the United States as such common stock subject to compliance with
applicable securities laws.
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UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, the underwriters of the offering of shares of common
stock and exchangeable shares, for whom Lehman Brothers Inc., RBC Dominion
Securities Corporation, FleetBoston Robertson Stephens Inc. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated are acting as representatives, have each
agreed to purchase from us the respective number of shares of common stock and
exchangeable shares shown opposite its name below:
<TABLE>
<CAPTION>
Number of Shares
U.S. Underwriters of Common Stock of Common Stock
- --------------------------------- ----------------
<S> <C>
Lehman Brothers Inc............................................
RBC Dominion Securities Corporation............................
FleetBoston Robertson Stephens Inc.............................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................
---
Subtotal.....................................................
<CAPTION>
Number of
Exchangeable
Canadian Underwriters of Exchangeable Shares Shares
- -------------------------------------------- ----------------
<S> <C>
Lehman Brothers Canada Inc.....................................
RBC Dominion Securities Inc....................................
Merrill Lynch Canada Inc.......................................
---
Subtotal.....................................................
---
Total........................................................
===
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase shares included in this offering depend on the
satisfaction of the conditions contained in the underwriting agreement, and
that if any of the shares are purchased by the underwriters under the
underwriting agreement, then all of the shares which the underwriters have
agreed to purchase under the underwriting agreement must be purchased. The
conditions contained in the underwriting agreement include the requirement that
the representations and warranties made by us to the underwriters are true,
that there is no material change in the financial markets and that we deliver
to the underwriters customary closing documents.
The representatives have advised us that the underwriters propose to offer
the shares directly to the public at the public offering price set forth on the
cover page of this prospectus, and to dealers, who may include the
underwriters, at a public offering price less a selling concession not in
excess of $ per share of common stock or C$ per exchangeable share. The
underwriters may allow, and the dealers may reallow, a concession not in excess
of $ per share of common stock or C$ per exchangeable share to brokers and
dealers. After the offering, the underwriters may change the offering price and
other selling terms.
We have granted to the underwriters an option to purchase up to an aggregate
of additional shares of common stock and exchangeable shares, exercisable
to cover over-allotments, if any, at the public offering price less the
underwriting discounts and commissions shown on the cover page of this
prospectus. The underwriters may exercise this option at any time until 30 days
after the date of the underwriting agreement. If this option is exercised, each
underwriter will be committed, so long as the conditions of the underwriting
agreement are satisfied, to purchase a number of additional shares
proportionate to the initial commitment of each underwriter as indicated in the
preceding tables and we will be obligated, under the over-allotment option, to
sell the shares to the underwriters.
We have agreed that, without the prior consent of Lehman Brothers, we will
not directly or indirectly, offer, sell or otherwise dispose of any shares of
common stock or any securities which may be converted into or exchanged for any
such shares of common stock (including exchangeable shares) for a period of 180
days from the date of this prospectus. All of our executive officers,
directors, key employees and our current stockholders
77
<PAGE>
have agreed under lock-up agreements that, without the prior written consent of
Lehman Brothers, they will not, directly or indirectly, offer, sell or
otherwise dispose of any shares of common stock or any securities which may be
converted into or exchanged for any of these shares of common stock (including
exchangeable shares) for the period ending 180 days after the date of this
prospectus.
Prior to the offering, there has been no public market for the shares of
common stock or the exchangeable shares. The initial public offering price of
the shares will be negotiated between the representatives and us. In
determining the initial public offering price the representatives will consider
various factors, including:
. prevailing market conditions;
. our historical performance and capital structure;
. estimates of our business potential and earning prospects;
. an overall assessment of our management; and
. the consideration of the above factors in relation to market valuation
of companies in related businesses.
We have made an application for quotation of our shares of common stock on
the Nasdaq National Market under the symbol "SMTX." We have also applied to
list the exchangeable shares for trading on The Toronto Stock Exchange, subject
to SMTC Canada meeting that exchange's listing requirements.
We have agreed in the underwriting agreement to indemnify the underwriters
against certain liabilities under the Securities Act and the securities
legislation of each Canadian province and to contribute to payments that the
underwriters may be required to make for these liabilities.
Until the distribution of the shares of common stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the
underwriters and selling group members to bid for and purchase shares of common
stock. As an exception to these rules, the representatives are permitted to
engage in transactions that stabilize the price of the shares of common stock.
These transactions may consist of bids or purchases for the purposes of
pegging, fixing or maintaining the price of the shares of common stock.
The underwriters may create a short position in the shares of common stock
in connection with the offering, which means that they may sell more shares of
common stock than are set forth on the cover page of this prospectus. If the
underwriters create a short position, then the representatives may reduce that
short position by purchasing shares of common stock in the open market. The
representatives also may elect to reduce any short position by exercising all
or part of the over-allotment option. The underwriters have informed us that
they do not intend to confirm sales to discretionary accounts that exceed 5% of
the total number of shares of common stock offered by them.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares
of common stock in the open market to reduce the underwriters' short position
or to stabilize the price of the shares of common stock, they may reclaim the
amount of the selling concession from the underwriters and selling group
members who sold those shares of common stock as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of these purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
In accordance with a policy statement of the Ontario Securities Commission,
the underwriters may not, throughout the period of distribution, bid for or
purchase exchangeable shares. Exceptions, however, exist where the bid or
purchase is not made to create the appearance of active trading in, or raising
prices of the exchangeable shares. These exceptions include a bid or purchase
permitted under the by-laws and rules of The Toronto Stock Exchange relating to
market stabilization and passive market making activities and a bid or
78
<PAGE>
purchase made for and on behalf of a customer where the order was not solicited
during the period of distribution. We have been advised that in connection with
this offering and pursuant to the first exception mentioned above, the
underwriters may over-allot or effect transactions which stabilize or maintain
the market price of the exchangeable shares at levels other than those which
might otherwise prevail on the open market.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the shares of common stock or the
exchangeable shares. In addition, neither we nor any of the underwriters makes
any representation that the representatives will engage in these transactions
or that such transactions, once commenced, will not be discontinued without
notice.
No action will be taken by us or by the underwriters in any other
jurisdiction where action is required to permit a public offering offered in
this prospectus. People who obtain this prospectus are required by us and the
underwriters to inform themselves about and to observe any restrictions on the
offering of the shares and the distribution of this prospectus.
Purchasers of the shares offered in this prospectus may be required to pay
stamp taxes and other charges under the laws and practices of the country of
purchase, in addition to the offering price listed on the over page of this
prospectus.
At our request, the underwriters have reserved up to shares offered by
this prospectus for sale to our officers, directors, employees and their family
members and to our business associates at the initial offering price set forth
on the cover page of this prospectus. These persons must commit to purchase no
later than the close of business on the day following the date of this
prospectus. The number of shares available for sale to the general public will
be reduced to the extent these persons purchase the reserved shares.
An affiliate of Lehman Brothers is a lender under our senior credit
facility, a portion of which will be repaid using the proceeds from this
offering. Approximately $46 million was owed to the Lehman Brothers affililate
under this facility as at December 31, 1999. Because more than ten percent of
the net proceeds of the offering may be paid to members or affiliates of
members of the National Association of Securities Dealers, Inc., or NASD,
participating in the offering, the offering will be conducted in accordance
with Rule 2710(c)(8) of the Conduct of Rules of the NASD, which requires that
the public offering price of an equity security be no higher than the price
recommended by a "qualified independent underwriter" which has participated in
the preparation of the registration statement and performed its usual standard
of due diligence with respect thereto. has agreed to act as qualified
independent underwriter with respect to the offering, and the price of the
common stock will be no higher than that recommended by .
LEGAL MATTERS
The validity of the shares to be issued in the offerings will be passed upon
for us by Ropes & Gray, Boston, Massachusetts and McMillan Binch, Toronto,
Ontario. Some partners of Ropes & Gray are members in RGIP LLC, which
beneficially owns 5,072 shares of Class A common stock and 574 shares of Class
L common stock. RGIP LLC is also an investor in certain of the Bain Capital
Funds. Legal matters in connection with this offering will be passed upon for
the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York and Blake, Cassels & Graydon LLP, Toronto, Ontario. Blake, Cassels &
Graydon LLP, Toronto, Ontario has, from time to time, represented and may
continue to represent Bain Capital Funds in connection with certain legal
matters. Ropes & Gray, Boston, Massachusetts has, from time to time,
represented and may continue to represent some of the underwriters in
connection with various legal matters and the Bain Capital Funds and some of
their affiliates, including us, in connection with certain legal matters.
McMillan Binch, Toronto, Ontario has, from time to time, represented and may
continue to represent some of the underwriters in connection with various legal
matters and Kilmer Electronics Group Limited and Bain Capital Funds and some of
their affiliates, including us, in connection with certain legal matters.
79
<PAGE>
EXPERTS
Our consolidated financial statements as of December 31, 1999 and for the
year then ended and the consolidated financial statements of SMTC Corporation,
or Predecessor SMTC, as of July 29, 1999 and August 31, 1998 and for the period
from September 1, 1998 to July 29, 1999 and each of the two years in the period
ended August 31, 1998 included in this prospectus and elsewhere in the
registration statement have been so included in reliance on the reports of KPMG
LLP, independent accountants, appearing elsewhere herein, and upon the
authority of such firm as experts in auditing and accounting.
The audited consolidated financial statements of SMTC Corporation (formerly
HTM Holdings, Inc.) as of and for the year then ended December 31, 1998
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
The financial statements of SMTC Corporation (formerly Hi-Tech
Manufacturing, Inc., subsequently HTM Holdings, Inc.) as of and for the year
ended December 31, 1997 included in this prospectus and elsewhere in this
registration statement have been audited by PricewaterhouseCoopers LLP,
independent public accountants, as indicated in their report thereto, and are
so included and given on the authority of said firm as experts in auditing and
accounting.
The financial statements of W.F. Wood, Incorporated as of September 3, 1999
and December 31, 1998 and 1997, and for the period from January 1, 1999 to
September 3, 1999 and each of the three years in the period ended December 31,
1998 included in this prospectus have been so included in reliance on the
report of Canby, Maloney & Co., Inc., independent accountants, appearing
elsewhere herein, and upon the authority of such firm as experts in auditing
and accounting.
On or about December 23, 1998, Hi-Tech Manufacturing, Inc. notified Arthur
Andersen LLP that it would be engaged as its independent auditors, replacing
PricewaterhouseCoopers LLP, who were dismissed as Hi-Tech Manufacturing, Inc.'s
independent auditors during the last week of December 1998. The decision to
change independent auditors was approved by Hi-Tech Manufacturing, Inc.'s board
of directors. During their engagement, PricewaterhouseCoopers LLP issued no
audit report which was qualified or modified as to uncertainity, audit scope or
accounting principles, no adverse opinions or disclaimers of opinion on any of
Hi-Tech Manufacturing, Inc.'s financial statements, and there were no
disagreements with PricewaterhouseCoopers LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures. A letter from PricewaterhouseCoopers LLP to that effect is
incorporated by reference as Exhibit 16.1 hereto.
On September 20, 1999, we notified KPMG LLP that it would be engaged as our
independent auditors, replacing Arthur Andersen LLP, who were dismissed as our
independent auditors on September 20, 1999. KPMG LLP was the independent
auditor for Predecessor SMTC prior to the July 1999 combination of Predecessor
SMTC and HTM. The decision to change independent auditors was approved by our
board of directors on September 17, 1999. During their engagement, Arthur
Andersen LLP issued no audit report which was qualified or modified as to
uncertainty, audit scope or accounting principles, no adverse opinions or
disclaimers of opinion on any of our financial statements,and there were no
disagreements with Arthur Andersen LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures.
A letter from Arthur Andersen LLP to that effect is incorporated by reference
as Exhibit 16.2 hereto.
80
<PAGE>
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits and schedules, under the Securities
Act with respect to the common stock to be sold in this offering. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement or the
exhibits and schedules which are part of the registration statement. For
further information about us and our common stock, you should refer to the
registration statement. Any statements made in this prospectus as to the
contents of any contract, agreement or other document are necessarily
incomplete. With respect to each such contract, agreement or other document
filed as an exhibit to the registration statement we refer you to the exhibit
for a more complete description of the matter involved, and each statement in
this prospectus shall be deemed qualified in its entirety by this reference.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information in the files at the public
reference facilities of the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C., 20549 and at the regional offices of the SEC
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request
copies of these documents upon payment of a duplicating fee by writing to the
SEC. You may call the SEC at 1-800-SEC-0330 for further information on the
operation of its public reference rooms. Our filings, including the
registration statement, will also be available to you on the Internet site
maintained by the SEC at http://www.sec.gov.
We will also file annual, quarterly and current reports, proxy statements
and other information with the SEC. You can request copies of these documents,
for a copying fee, by writing to the SEC. We intend to furnish our stockholders
with annual reports containing financial statements audited by our independent
auditors.
81
<PAGE>
SMTC CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SMTC Corporation:
Unaudited Pro Forma Consolidated Financial Information for the year ended
December 31, 1999........................................................ F-2
Notes to Pro Forma Consolidated Financial Information (unaudited)......... F-3
Pro Forma Consolidated Balance Sheet (unaudited).......................... F-5
Notes to Pro Forma Consolidated Balance Sheet (unaudited)................. F-6
Pro Forma Consolidated Statement of Earnings (Loss) (unaudited)........... F-7
Notes to Pro Forma Consolidated Statement of Earnings (Loss) (unaudited).. F-8
SMTC Corporation (formerly HTM Holdings, Inc.):
Independent Auditors' Report for the year ended December 31, 1999......... F-11
Report of Independent Public Accountants for the year ended December 31,
1998..................................................................... F-12
Report of Independent Accountants for the year ended December 31, 1997.... F-13
Consolidated Balance Sheets as of December 31, 1998 and 1999.............. F-14
Consolidated Statements of Earnings (Loss) for the years ended December
31, 1997, 1998 and 1999.................................................. F-15
Consolidated Statements of Changes in Shareholders' Equity (Deficiency)
for the years ended December 31, 1997, 1998 and 1999..................... F-16
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999...................................................... F-17
Notes to Consolidated Financial Statements................................ F-18
SMTC Corporation (formerly The Surface Mount Technology Centre Inc.):
Auditors' Report.......................................................... F-41
Consolidated Balance Sheets as of August 31, 1998 and July 29, 1999....... F-42
Consolidated Statements of Earnings and Retained Earnings (Deficit) for
the the years ended August 31, 1997 and 1998 and the period from
September 1, 1998 to July 29, 1999....................................... F-43
Consolidated Statements of Cash Flows for the years ended August 31, 1997
and 1998 and the period from September 1, 1998 to July 29, 1999 ......... F-44
Notes to Consolidated Financial Statements................................ F-45
W.F. Wood, Incorporated:
Independent Auditors' Report.............................................. F-57
Balance Sheets as of December 31, 1997 and 1998 and September 3, 1999..... F-58
Statements of Income for the years ending December 31, 1996, 1997 and 1998
and the period from January 1, 1999 to September 3, 1999 ................ F-59
Statements of Stockholders' Equity for the years ending December 31, 1996,
1997 and 1998 and the period from January 1, 1999 to September 3, 1999... F-60
Statements of Cash Flows for the years ending December 31, 1996, 1997 and
1998 and the period from January 1, 1999 to September 3, 1999............ F-61
Notes to Financial Statements............................................. F-63
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION OF SMTC CORPORATION
The unaudited pro forma consolidated statement of earnings (loss) for the
year ended December 31, 1999 gives pro forma effect to (1) the acquisitions of
SMTC Corporation (formerly The Surface Mount Technology Centre Inc.) and W.F.
Wood, Incorporated by SMTC Corporation (pre-combination HTM Holdings, Inc.),
(2) the reclassification as described under "The Reclassification" and (3) the
consummation of the offering and the application of the net proceeds therefrom,
as described under "Use of Proceeds". The unaudited pro forma consolidated
statement of earnings (loss) gives effect to the acquisitions, the
reclassification and the offering as if each of these occurred on January 1,
1999. The unaudited pro forma consolidated balance sheet as at December 31,
1999 gives effect to the reclassification and offering as if each had occurred
on December 31, 1999. The accounting policies used in preparing the unaudited
pro forma consolidated financial information are those disclosed in the SMTC
Corporation consolidated financial statements included in this prospectus.
The unaudited pro forma consolidated financial information has been provided
for information purposes only and is not necessarily indicative of the results
of operations or financial condition that actually would have been achieved if
the acquisitions and other transactions had been completed on the date
indicated or that may be reported in the future. The unaudited pro forma
financial information does not reflect expenses expected to be incurred to
finalize the integration of SMTC Corporation and the acquired operations or
potential cost savings or improvements in revenue that SMTC Corporation
believes can be realized as a result of the acquisitions. The pro forma
financial information should be read in conjunction with the consolidated
financial statements of SMTC Corporation and the acquired operations, including
the respective notes, included elsewhere in this prospectus.
The unaudited pro forma consolidated financial information has been prepared
in accordance with United States GAAP and the notes to the unaudited pro forma
consolidated income statement include a reconciliation to Canadian GAAP. There
are no differences between United States and Canadian GAAP that impact the
unaudited pro forma consolidated balance sheet.
The unaudited pro forma consolidated statement of earnings (loss) does not
reflect the net after-tax extraordinary loss of $1.9 million on the early
extinguishment of debt resulting from the write-off of debt issuance costs,
incurrence of the prepayment penalty and the gain from settlement of the
interests rate swaps in connection with the prepayment of debt upon completion
of the offering. The unaudited pro forma consolidated balance sheet, however,
does reflect this extraordinary loss.
F-2
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(In thousands of U.S. dollars)
Year ended December 31, 1999
(Unaudited)
1. Basis of presentation:
The unaudited pro forma consolidated financial information has been
prepared in accordance with U.S. generally accepted accounting principles.
The pro forma consolidated balance sheet gives effect to the following
transactions:
(i) The reclassification of the capital stock of the Company where all
Class L common stock will be converted to Class A common stock
which in turn will be converted to new common stock of the
Company. Existing exchangeable shares of the Company's subsidiary,
SMTC Manufacturing Corporation of Canada, will be converted into
exchangeable shares of the same class as those being offered in
this offering or exchanged for shares of Class L common stock that
will be converted in the reclassification. See "The
Reclassification" and note 22(b) of the SMTC Corporation
consolidated financial statements for the year ended December 31,
1999.
(ii) The initial public offering of common stock of the Company and
exchangeable shares of its subsidiary with the net proceeds used
to repay indebtedness. See "Use of Proceeds" and "Description of
Indebtedness".
The pro forma consolidated statement of earnings (loss) gives effect to
the reclassification and the initial public offering described above, as
well as the following transactions:
(i) SMTC Corporation's acquisition of all of the issued and
outstanding shares of HTM Holdings, Inc. on July 31, 1999 as part
of a series of transactions including the issuance of SMTC
Corporation shares to the shareholders of HTM Holdings, Inc. The
acquisition is treated as a reverse takeover of SMTC Corporation
by HTM Holdings, Inc. and is accounted for under the purchase
method. The consolidated financial statements of the combined
entity are issued under the name of the legal parent, SMTC
Corporation, but are considered a continuation of the financial
statements of the legal subsidiary, HTM Holdings, Inc.
(ii) SMTC Corporation's acquisition of all the issued and outstanding
shares of W.F. Wood, Incorporated on September 3, 1999 for a
total cash consideration of $19,672.
The unaudited pro forma consolidated financial information for the year
ended December 31, 1999 has been prepared by management of SMTC Corporation
based on the audited consolidated financial statements of SMTC Corporation
(formerly HTM Holdings, Inc.) for the year ended December 31, 1999, the
unaudited financial statements of SMTC Corporation (formerly The Surface
Mount Technology Centre Inc.) for the period from January 1, 1999 to July
29, 1999 and the audited financial statements of W.F. Wood, Incorporated
for the period from January 1, 1999 to September 3, 1999.
The acquisitions have been accounted for by the purchase method. The
total purchase considerations were allocated to the identifiable assets
acquired and liabilities assumed based on their respective fair values as
at the date of acquisition, with the excess amounts allocated to goodwill,
which is being amortized over ten years.
Accounting policies used in the preparation of the unaudited pro forma
consolidated information are those disclosed in the SMTC Corporation
consolidated financial statements as at and for the year ended
F-3
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(In thousands of U.S. dollars)
Year ended December 31, 1999
(Unaudited)
December 31, 1999 presented elsewhere in this prospectus. The unaudited pro
forma consolidated information should be read in conjunction with the
separate historical audited consolidated financial statements of SMTC
Corporation (formerly HTM Holdings, Inc.), SMTC Corporation (formerly The
Surface Mount Technology Centre Inc.) and W.F. Wood, Incorporated.
The pro forma consolidated financial information is not necessarily
indicative of the actual results that would have occurred had the
acquisitions occurred on the date indicated and is not necessarily
indicative of the results of operations or financial condition that
actually would have been achieved if the acquisitions had been completed on
the date indicated, or that may be reported in the future. In preparing pro
forma information, no adjustments have been made to reflect expenses
expected to be incurred to finalize the integration of SMTC Corporation and
the acquired operations or the full impact of the operating synergies
expected to result from combining the operations of SMTC Corporation and
the acquired operations.
2. Significant assumptions and adjustments:
The unaudited pro forma consolidated balance sheet gives effect to the
reclassification and offering as if they had taken place December 31, 1999.
The unaudited pro forma consolidated statement of earnings (loss) for
the year ended December 31, 1999 gives effect to the acquisitions, the
reclassification and offering as if these transactions had taken place at
the beginning of the year.
F-4
<PAGE>
SMTC CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
(In thousands of U.S. dollars)
December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
SMTC Pro forma
Corporation Offering and as adjusted
December 31, reclassification December 31,
1999 adjustments 1999
------------ ---------------- ------------
<S> <C> <C> <C>
(audited) (unaudited)
--------- -----------
Assets
Current assets:
Cash and short-term investments.... $ 2,083 $125,000 (a) $ 2,083
(11,438)(a)
(113,562)(a)
(78)(a)
(400)(b)
478 (d)
Accounts receivable................ 71,597 71,597
Inventories........................ 61,680 61,680
Prepaid expenses................... 3,647 3,647
Deferred income taxes.............. 1,527 160 (b) 2,782
1,286 (c)
(191)(d)
--------- -------- -----------
140,534 1,255 141,789
Capital assets...................... 35,003 35,003
Goodwill............................ 40,800 40,800
Other assets........................ 11,145 (3,216)(c) 7,929
Deferred income taxes............... 623 623
--------- -------- -----------
$ 228,105 $ (1,961) $ 226,144
========= ======== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable................... $ 53,119 $ $ 53,119
Accrued liabilities................ 29,307 29,307
Income taxes payable............... 1,127 1,127
Current portion of long-term debt 2,000 (2,000)(a) --
Current portion of capital lease
obligation........................ 1,541 1,541
--------- -------- -----------
87,094 (2,000) 85,094
Capital lease obligations........... 1,537 1,537
Long-term debt...................... 128,942 (111,640)(a) 17,302
Deferred income taxes............... 2,733 2,733
Shareholders' equity:
Capital stock...................... 3 (3)(e) --
Warrants........................... 367 367
Loans receivable................... (60) (60)
Additional paid-in capital......... 11,804 113,562 (a) 125,369
3 (e)
Deficit............................ (4,315) (240)(b) (6,198)
(1,930)(c)
287 (d)
--------- -------- -----------
7,799 111,679 119,478
--------- -------- -----------
$ 228,105 $ (1,961) $ 226,144
========= ======== ===========
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
F-5
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(In thousands of U.S. dollars)
Year ended December 31, 1999
(Unaudited)
Pro forma adjustments:
(a) Reflects the sale of shares of common stock and exchangeable shares
generating gross proceeds of $125,000 and the use of the estimated net
proceeds of $113,562, net of underwriting discounts and commissions and
the estimated offering expenses totaling $11,438, and the $78 of proceeds
from termination of the interest rate swap net of the prepayment penalty
(notes (b) and (d)) to repay a portion of the revolving line of credit and
the outstanding balance of the term loans and subordinated debt. The
adjustment assumes the underwriters' over-allotment option is not
exercised. See "Use of Proceeds" and "Description of Indebtedness."
(b) Reflects the prepayment premium of $400, before the $160 of related income
tax recovery (at a 40% effective tax rate), resulting in an extraordinary
loss in connection with the prepayment of the subordinated debt in
connection with the offering. Amounts will differ based on the effective
date of the offering.
(c) Reflects the write-off of $3,216 in capitalized debt issuance costs,
before $1,286 of related income tax recovery (at a 40% effective tax
rate), resulting in an after-tax extraordinary loss of $1,930 in
connection with the paydown of outstanding debt. Amounts will differ based
on the effective date of the offering.
(d) Reflects the recognition of a $478 gain in connection with the termination
of the interest rate swap on debt outstanding under the senior credit
facility before $191 of related income tax expense (at a 40% effective tax
rate), resulting in an extraordinary gain of $287. Amounts will differ
based on the effective date of the offering.
(e) Represents the par value of shares issued in the offering and the
reclassification of the existing common stock.
F-6
<PAGE>
SMTC CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS (LOSS)
(In thousands of U.S. dollars, except share quantities and per share amounts)
Year ended December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Pre-combination
SMTC
Corporation
(formerly The
Surface Mount Pre-combination
Technology W.F. Wood,
SMTC Centre Inc.) Incorporated Pro forma
Corporation from January 1, from January 1, Offering as adjusted
year ended 1999 to 1999 to and year ended
December 31, July 29, September 3, Acquisition Pro forma reclassification December 31,
1999 1999 1999 adjustments combined adjustments 1999
------------ --------------- --------------- ----------- ----------- ---------------- ------------
(audited) (unaudited) (audited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue............ $ 257,962 $168,553 $23,198 $ -- $449,713 $ -- $449,713
Cost of sales...... 236,331 152,330 20,072 -- 408,733 -- 408,733
--------- -------- ------- ------- -------- ------ --------
Gross profit....... 21,631 16,223 3,126 -- 40,980 40,980
Selling, general
and administrative
expenses.......... 12,615 10,268 1,718 -- 24,601 -- 24,601
Management fees.... 717 -- -- -- 717 -- 717
Amortization....... 1,990 -- -- 2,615 (a) 4,605 (391)(f) 4,214
Former W.F. Wood
shareholders'
compensation...... -- -- 136 -- 136 -- 136
Acquisition-related
bonuses paid to
management and
employees of
W.F. Wood......... -- -- 2,571 -- 2,571 -- 2,571
Acquisition-related
professional
fees.............. -- -- 403 (403)(b) -- -- --
--------- -------- ------- ------- -------- ------ --------
Operating income... 6,309 5,955 (1,702) (2,212) 8,350 391 8,741
Interest........... 7,066 2,215 58 1,098 (c) 10,437 (8,981)(g) 1,456
--------- -------- ------- ------- -------- ------ --------
Earnings (loss)
before income
taxes............. (757) 3,740 (1,760) (3,310) (2,087) 9,372 7,285
Income taxes
(recovery):
Current........... 442 2,064 -- (1,296)(d)(e) 1,210 3,592 (h) 4,802
Deferred.......... (335) (195) -- (156)(d) (686) 156 (h) (530)
--------- -------- ------- ------- -------- ------ --------
107 1,869 -- (1,452) 524 3,748 4,272
--------- -------- ------- ------- -------- ------ --------
Earnings (loss)
before
extraordinary
loss.............. $ (864) $ 1,871 $(1,760) $(1,858) $ (2,611)(i) $5,624 $ 3,013(i)
========= ======== ======= ======= ======== ====== ========
Income (loss) per
common share:
Earnings (loss)
before
extraordinary
loss............. $ (864) $
Less Class L
preferred
entitlement...... (2,185)
--------- --------
Loss before
extraordinary loss
available to
common
shareholders...... $ (3,049) $
========= ========
Loss per common
share before
extraordinary
loss............. $ (1.89) $
========= ========
Weighted average
number of shares
outstanding:
Basic............. 1,617,356
========= ========
</TABLE>
Diluted loss per share has not been disclosed as the effect of the potential
conversion of dilutive securities is anti-dilutive.
See accompanying notes to pro forma consolidated financial information.
F-7
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(In thousands of U.S. dollars)
Year ended December 31, 1999
(Unaudited)
Pro forma adjustments:
The pro forma consolidated statement of earnings (loss) gives effect to the
acquisitions as if they had taken place at the beginning of the year. The
following reflects the allocation of the purchase consideration for the two
acquisitions in accordance with the purchase method of accounting as described
in notes 1 and 3 to the SMTC Corporation consolidated financial statements for
the year ended December 31, 1999:
<TABLE>
<CAPTION>
SMTC Corporation
(formerly The
Surface Mount W.F. Wood,
Technology Centre Inc.) Incorporated
----------------------- ------------
<S> <C> <C>
Current assets......................... $ 84,423 $ 6,354
Capital assets......................... 21,093 1,695
Other long-term assets................. -- 20
Goodwill............................... 24,863 17,468
Liabilities assumed.................... (105,676) (5,865)
-------- -------
Net assets acquired.................... $ 24,703 $19,672
======== =======
</TABLE>
(a) Reflects the additional amortization expense related to the allocation of
the purchase price to goodwill for the acquisitions. The amortization is
based on the estimated useful life of 10 years for goodwill, which is SMTC
Corporation's amortization policy.
(b) Reflects the elimination of acquisition-related professional fees incurred
by W.F. Wood.
(c) Reflects the additional interest expense related to the borrowings
required by SMTC Corporation to complete the W.F. Wood, Incorporated
acquisition as described in note 1(ii), based on the Company's current
incremental borrowing rate on December 31, 1999 of LIBOR plus 350 basis
points.
(d) Reflects the income tax effect of adjustments (a), (b) and (c) at a 40%
effective tax rate. The amortization of $1,747 of goodwill in connection
with the acquisition of W.F. Wood is tax deductible.
(e) Reflects the income tax effect of treating W.F. Wood, Incorporated as a
"C" Corporation. Prior to its acquisition by SMTC Corporation, W.F. Wood,
Incorporated held subchapter "S" status for federal and Massachusetts
income tax purposes, thereby consenting to include the Company's income in
the shareholders' individual income tax returns.
(f) Reflects the decrease in amortization of debt issuance costs.
(g) Reflects the decrease in interest expense in connection with the use of
net proceeds from the offering to repay outstanding debt as follows:
<TABLE>
<S> <C>
Pro forma combined interest expense................................. $10,437
Elimination of historical and pro forma interest.................... (8,981)
-------
Pro forma interest expense subsequent to the offering............... $ 1,456
=======
</TABLE>
The elimination of historical and pro forma interest is calculated by
applying the assumed offering proceeds net of the prepayment penalty and
interest rate swap termination proceeds for a total of $113,640
F-8
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(In thousands of U.S. dollars)
Year ended December 31, 1999
(Unaudited)
to outstanding debt balances (including the debt related to the W.F. Wood
acquisition) as if the proceeds were applied at the beginning of the year.
The proceeds were applied against the entire balance outstanding on the
subordinated debt, term loans and a portion of the revolving credit
facility. This adjustment does not reflect the $627 of pre-tax interest
income that would have been earned by the Company during the year by
investing the excess of proceeds over debt outstanding from January 1999 to
July 1999 using an average treasury bill rate of 4.3%.
(h) Reflects the income tax effect of adjustments (f) and (g) at a 40%
effective tax rate.
(i) The pro forma combined and pro forma as adjusted earnings (loss) before
extraordinary loss do not reflect the after-tax effect of adjusting for the
following acquisition-related, non-recurring adjustments and interest
income:
. $717 of pre-tax management fees paid to Bain Capital Partners VI, L.P.,
Celerity Management Co., Inc. and Kilmer Electronics Group Limited under
a management agreement which is expected to be terminated in connection
with this offering, although a termination agreement has not yet been
finalized;
. $136 of pre-tax compensation paid to former W.F. Wood shareholders;
. $2,571 of pre-tax acquisition-related bonuses paid to W.F. Wood
management ($2,321) and W.F. Wood employees ($250); and
. Proceeds from the offering would have exceeded debt outstanding from
January 1999 through July 1999. The excess cash would have earned $627
of pre-tax interest income using an average treasury bill rate of 4.3%.
As a result, pro forma as adjusted interest expense net of interest
income would have been $829.
The effect of these adjustments is reflected in the following table:
<TABLE>
<CAPTION>
Pro forma Pro forma
combined as adjusted
--------- -----------
(unaudited)
<S> <C> <C>
Earnings (loss) before extraordinary loss............ $(2,611) $3,013
Plus:
Management fees.................................... 717 717
Former W.F. Wood shareholders' compensation........ 136 136
Acquisition-related bonuses paid to management and
employees of W.F. Wood............................ 2,571 2,571
Interest income.................................... -- 627
Less:
Tax effect of above adjustments at 40%............. (1,369) (1,620)
------- ------
Adjusted earnings (loss) before extraordinary
loss.............................................. $ (556) $5,444
======= ======
</TABLE>
F-9
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(In thousands of U.S. dollars)
Year ended December 31, 1999
(Unaudited)
(j) Differences between United States and Canadian GAAP:
The pro forma consolidated financial information has been prepared in
accordance with generally accepted accounting principles as applied in the
United States. The significant differences between United States GAAP and
Canadian GAAP and their effect on the pro forma consolidated financial
statements are described below:
Extraordinary loss:
Under United States GAAP, the charges incurred as a result of early
payment of the senior notes and subordinated notes are recorded as an
extraordinary loss and not presented for purposes of the pro forma
consolidated statement of earnings (loss). Under Canadian GAAP, the charges
would have been included in earnings (loss) before income taxes and the
related tax benefit recorded in income taxes expense. Accordingly, the
following amounts would have been reported in the pro forma consolidated
statement of earnings (loss) under Canadian GAAP:
<TABLE>
<S> <C>
Operating income.................................................. $8,741
Interest.......................................................... 1,456
Debt extinguishment costs......................................... 5,228
------
Earnings before income taxes...................................... 2,057
Income taxes (recovery):
Current......................................................... 2,736
Deferred........................................................ (530)
------
2,206
------
Net earnings (loss)............................................... $ (149)
======
</TABLE>
F-10
<PAGE>
When the transactions referred to in note 22 of the Notes to Consolidated
Financial Statements have been consummated, we will be in a position to render
the following report.
Toronto, Canada /s/ KPMG LLP
March 22, 2000 Chartered Accountants
INDEPENDENT AUDITORS' REPORT
To the Directors of SMTC Corporation
We have audited the consolidated balance sheet of SMTC Corporation (formerly
HTM Holdings, Inc.) as at December 31, 1999 and the consolidated statements of
earnings (loss) and changes in shareholders' equity (deficiency) and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1999 and the results of its operations and its cash flows for the year then
ended in accordance with United States generally accepted accounting
principles.
United States generally accepted accounting principles vary in certain
significant respects from accounting principles generally accepted in Canada.
Application of accounting principles generally accepted in Canada would have
affected results of operations for the year ended December 31, 1999 and
shareholders' equity (deficiency) as at December 31, 1999 to the extent
summarized in note 23 to the consolidated financial statements.
Chartered Accountants
Toronto, Canada
February 18, 2000, except
as to note 22 which is as of
, 2000
F-11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of SMTC Corporation (formerly HTM Holdings, Inc.):
We have audited the accompanying consolidated balance sheet of SMTC
Corporation (a Delaware corporation, formerly HTM Holdings, Inc.) and its
subsidiary as of December 31, 1998, and the related consolidated statements of
earnings (loss), changes in shareholders' equity (deficiency) and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of SMTC Corporation (formerly HTM Holdings, Inc.) and its subsidiary as of
December 31, 1998, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
March 22, 2000
F-12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
SMTC Corporation (formerly Hi-Tech Manufacturing, Inc., subsequently HTM
Holdings, Inc.):
In our opinion, the consolidated statements of earnings (loss), changes in
shareholders' equity (deficiency) and cash flows for the year ended December
31, 1997 (appearing on pages F-14 through F-40 of the SMTC Corporation
(formerly Hi-Tech Manufacturing, Inc., subsequently HTM Holdings, Inc. and the
"Company") registration statement on Form S-1) present fairly, in all material
respects, the results of operations and cash flows of SMTC Corporation and its
subsidiaries for the year ended December 31, 1997, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of SMTC Corporation for any period subsequent
to December 31, 1997.
Broomfield, Colorado /s/ PricewaterhouseCoopers LLP
March 22, 2000
F-13
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of U.S. dollars)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and short-term investments......................... $ 486 $ 2,083
Accounts receivable (note 4)............................ 21,780 71,597
Inventories (note 5).................................... 12,485 61,680
Prepaid expenses........................................ 79 3,647
Deferred income taxes................................... 855 1,527
-------- --------
35,685 140,534
Capital assets (note 6)................................... 7,071 35,003
Goodwill (note 7)......................................... -- 40,800
Other assets (note 8)..................................... 1,489 11,145
Deferred income taxes..................................... -- 623
-------- --------
$ 44,245 $228,105
======== ========
Liabilities and Shareholders' Equity (Deficiency)
Current liabilities:
Bank indebtedness (note 9).............................. $ 6,559 $ --
Accounts payable........................................ 10,399 53,119
Accrued liabilities..................................... 8,208 29,307
Income taxes payable.................................... -- 1,127
Current portion of long-term debt (note 9).............. 725 2,000
Current portion of capital lease obligations (note 9)... 1,740 1,541
-------- --------
27,631 87,094
Capital lease obligations (note 9)........................ 2,419 1,537
Long-term debt (note 9)................................... 24,063 128,942
Deferred income taxes..................................... 600 2,733
Shareholders' equity (deficiency):
Capital stock (note 10)................................. 6 3
Treasury stock.......................................... (21,938) --
Warrants (note 10)...................................... 367 367
Loans receivable (note 10).............................. -- (60)
Additional paid-in-capital.............................. 13,269 11,804
Deficit................................................. (2,172) (4,315)
-------- --------
(10,468) 7,799
Commitments and contingencies (notes 15 and 16)...........
Subsequent events (note 22)...............................
United States and Canadian accounting policy differences
(note 23)................................................
-------- --------
$ 44,245 $228,105
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<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)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenue....................................... $ 59,031 $ 89,687 $ 257,962
Cost of sales................................. 53,603 82,528 236,331
--------- --------- ---------
Gross profit.................................. 5,428 7,159 21,631
Selling, general and administrative expenses.. 2,769 3,144 12,615
Management fees (note 13)..................... -- 136 717
Amortization.................................. -- 151 1,990
Leveraged recapitalization expenses (note
2(a))........................................ -- 2,219 --
--------- --------- ---------
Operating income.............................. 2,659 1,509 6,309
Interest (note 9)............................. 673 2,030 7,066
--------- --------- ---------
Earnings (loss) before income taxes........... 1,986 (521) (757)
Income taxes:
Current..................................... 34 15 442
Deferred (recovery)......................... 708 (208) (335)
--------- --------- ---------
742 (193) 107
--------- --------- ---------
Earnings (loss) before extraordinary loss..... 1,244 (328) (864)
Extraordinary loss (note 17).................. -- -- (1,279)
--------- --------- ---------
Net earnings (loss)........................... $ 1,244 $ (328) $ (2,143)
========= ========= =========
Earnings (loss) per common share (note 20):
Earnings (loss) before extraordinary loss... $ 0.40 $ (0.44) $ (1.89)
Extraordinary loss.......................... -- -- (0.79)
--------- --------- ---------
$ 0.40 $ (0.44) $ (2.68)
========= ========= =========
Diluted earnings (loss) per common share...... $ N/A $ N/A $ N/A
========= ========= =========
Weighted average number of shares outstanding:
Basic....................................... 3,122,921 2,147,130 1,617,356
========= ========= =========
</TABLE>
N/A - Diluted loss per share has not been disclosed as the effect of the
potential conversion of dilutive securities is anti-dilutive.
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
(Expressed in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Additional Retained Shareholders'
Treasury paid-in Loans earnings equity
Capital stock Warrants stock capital receivable (deficit) (deficiency)
------------- -------- -------- ---------- ---------- -------- -------------
(note 10)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... $ 4 $ -- $ -- $ 5,971 $ -- $(3,088) $ 2,887
Net earnings............ -- -- -- -- -- 1,244 1,244
--- ---- ------- ------- ---- ------- -------
Balance, December 31,
1997................... 4 -- -- 5,971 -- (1,844) 4,131
Shares issued........... 2 -- -- 7,907 -- -- 7,909
Warrants issued......... -- 367 -- -- -- -- 367
Preferred share
dividends.............. -- -- -- (609) -- -- (609)
Shares repurchased...... -- -- (21,938) -- -- -- (21,938)
Loss for the year....... -- -- -- -- -- (328) (328)
--- ---- ------- ------- ---- ------- -------
Balance, December 31,
1998................... 6 367 (21,938) 13,269 -- (2,172) (10,468)
Acquisition of SMTC
Corporation............ (3) -- 21,938 (1,525) -- -- 20,410
Options exercised....... -- -- -- 60 (60) -- --
Loss for the year....... -- -- -- -- -- (2,143) (2,143)
--- ---- ------- ------- ---- ------- -------
Balance, December 31,
1999................... $ 3 $367 $ -- $11,804 $(60) $(4,315) $ 7,799
=== ==== ======= ======= ==== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Cash provided by (used in):
Operations:
Earnings (loss) before extraordinary loss....... $ 1,244 $ (328) $ (864)
Items not involving cash:
Amortization.................................. -- 151 1,990
Depreciation.................................. 2,194 2,869 6,452
Deferred income tax provision (benefit)....... 708 (208) (335)
Loss (gain) on disposition of capital assets.. 118 (6) 160
Change in non-cash operating working capital:
Accounts receivable........................... (4,534) (9,895) 4,441
Inventory..................................... (5,822) (1,170) (15,217)
Prepaid expenses and other.................... 158 105 (1,705)
Accounts payable and accrued liabilities...... 5,493 4,709 (1,487)
------- -------- --------
(441) (3,773) (6,565)
Financing:
Net change in bank indebtedness................. 2,261 1,212 --
Repayment of bank indebtedness.................. -- -- (6,559)
Change in restricted cash....................... 400 (250) --
Increase in long-term debt...................... -- -- 130,942
Repayment of long-term debt..................... -- -- (69,261)
Principal payments on notes payable............. (265) (175) --
Principal payments on capital leases............ (1,235) (1,319) (1,571)
Proceeds from notes payable..................... -- 25,000 --
Proceeds from issuance of common stock.......... -- 9,252 --
Dividends paid on preferred stock............... -- (609) --
Stock issuance costs............................ -- (1,342) --
Repurchase of stock............................. -- (26,160) --
Debt issuance costs............................. -- (1,296) (3,975)
------- -------- --------
1,161 4,313 49,576
Investments:
Acquisition of SMTC Corporation, net of $698
cash acquired.................................. -- -- (3,595)
Acquisition of W.F. Wood and Chihuahua, Mexico
facility....................................... -- -- (28,024)
Purchases of capital assets..................... (469) (505) (4,130)
Proceeds from sale of capital assets............ 55 30 8
Cash in escrow.................................. -- -- (5,735)
Other........................................... 49 -- 62
------- -------- --------
(365) (475) (41,414)
------- -------- --------
Increase in cash and cash equivalents............. 355 65 1,597
Cash and cash equivalents, beginning of year...... 66 421 486
------- -------- --------
Cash and cash equivalents, end of year............ $ 421 $ 486 $ 2,083
======= ======== ========
</TABLE>
Supplemental cash flow disclosures (note 14)
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
1. Nature of business:
The Company is a worldwide provider of advanced electronics
manufacturing services to original equipment manufacturers. The Company
services its customers through eight manufacturing and technology centers
located in the United States, Canada, Europe and Mexico.
The Company's accounting principles are in accordance with accounting
principles generally accepted in the United States, and, except as outlined
in note 23, are, in all material respects, in accordance with accounting
principles generally accepted in Canada.
2. Significant accounting policies:
(a) Basis of presentation:
(i) Business combination between HTM Holdings, Inc. and SMTC
Corporation:
Effective July 30, 1999, SMTC Corporation acquired 100% of the
outstanding common shares of HTM Holdings Inc. SMTC Corporation
issued 1,393,971 Class A shares and 154,168 Class L shares to the
shareholders of HTM Holdings, Inc. for $16,739 cash consideration
and 100% of the outstanding shares of HTM Holdings, Inc.
Simultaneously, the former shareholders of SMTC Corporation
subscribed for an additional 26,701 Class N shares for nominal
consideration. Upon completion of these transactions, the former HTM
Holdings, Inc. shareholders held 58% of the outstanding shares of
SMTC Corporation. Accordingly, the acquisition is recorded as a
reverse takeover of SMTC Corporation by HTM Holdings, Inc. and
accounted for using the purchase method. Application of reverse
takeover accounting results in the following:
(a) The consolidated financial statements of the combined entity are
issued under the name of the legal parent (SMTC Corporation) but
are considered a continuation of the financial statements of the
legal subsidiary (HTM Holdings, Inc.).
(b) As HTM Holdings, Inc. is deemed to be the acquiror for
accounting purposes, its assets and liabilities are included in
the consolidated financial statements of the continuing entity
at their carrying values and the comparative figures reflect the
results of operations of HTM Holdings, Inc.
(c) Control of the net assets and operations of SMTC Corporation is
deemed to be acquired by HTM Holdings, Inc. effective July 30,
1999. For purposes of this transaction, the deemed consideration
is $24,703, being the $20,410 fair value of the outstanding
common shares of SMTC Corporation immediately prior to the
business combination plus transaction costs of $4,293.
Details of net assets acquired at fair value are as follows:
<TABLE>
<S> <C>
Current assets............................................... $ 84,423
Capital assets............................................... 21,093
Goodwill..................................................... 24,863
Liabilities assumed.......................................... (105,676)
--------
Net assets acquired.......................................... $ 24,703
========
</TABLE>
F-18
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
(ii) Recapitalization transaction:
On June 8, 1998, HTM Holdings, Inc. completed a leveraged
recapitalization and reorganization in which it sold 1,800,424 new
shares to an investment company, reacquired 92% of its then
outstanding common shares, retired its preferred stock and settled
all options outstanding under its 1993 stock option plan.
In connection with the recapitalization, the Company contributed
substantially all of its assets and liabilities to a newly formed
subsidiary in exchange for 100% of the subsidiary's stock, and
changed its name from Hi-Tech Manufacturing, Inc. to HTM Holdings,
Inc. The subsidiary adopted the Hi-Tech Manufacturing, Inc. name.
The subsidiary borrowed $13,000 in senior debt and $12,000 in
subordinated debt and entered into a $15,000 revolving line of
credit agreement. The stock of the subsidiary was pledged as
collateral for the senior debt and line of credit. The subsidiary
loaned approximately $21,000 to the Company.
The net sources and uses of proceeds were as follows:
<TABLE>
<S> <C>
Borrowings...................................................... $23,700
Stock proceeds.................................................. 7,900
Repurchase of stock............................................. (26,800)
-------
$ 4,800
=======
</TABLE>
Subsequent to the leveraged recapitalization, an investment
company held 92% of the outstanding common stock of the parent.
Transaction costs related to the leveraged recapitalization and
compensation expense arising from the settlement of stock options
resulted in a $2,219 charge to operating income in fiscal 1998.
(b) Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated on consolidation.
(c) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting year. Actual results may differ from those estimates.
(d) Revenue recognition:
Revenue from the sale of products is recognized when goods are shipped
to customers. Revenue from the provision of services is recognized when
services are provided.
(e) Cash and short-term investments:
Cash and short-term investments include cash on hand and deposits with
banks with original maturities of less than three months.
F-19
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
(f) Inventories:
Inventories are valued on a first-in, first-out basis at the lower of
cost and replacement cost for raw materials and at the lower of cost and
net realizable value for work in progress. Inventories include an
application of relevant overhead.
(g) Capital assets:
Capital assets are recorded at cost and depreciated on a straight-line
basis over their estimated useful lives as follows:
<TABLE>
----------------------------------------------------------------------------
<S> <C>
Buildings.................................................... 20 years
Machinery and equipment...................................... 7 years
Office furniture and equipment............................... 7 years
Computer hardware and software............................... 3 years
Leasehold improvements....................................... Term of lease
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
(h) Goodwill:
Goodwill represents the excess of cost over the fair value of net
tangible assets acquired in facility acquisitions and other business
combinations. Goodwill is amortized on a straight-line basis over 10 years.
The recoverability of goodwill is reviewed whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. An
impairment of value is recorded if undiscounted projected future net cash
flows of the acquired operation are determined to be insufficient to
recover goodwill. The amount of goodwill impairment, if any, is measured
based on projected discounted future net cash flows using a discount rate
reflecting the Company's average cost of funds.
(i) Other assets:
Costs incurred relating to the issuance of debt are deferred and
amortized over the term of the related debt. Amortization of debt issuance
costs is included in amortization expense in the statement of earnings
(loss). Deferred lease costs are amortized over the term of the lease.
(j) Income taxes:
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year end, based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable earnings. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
more likely than not to be realized. The effect of changes in tax rates is
recognized in the period in which the rate change occurs.
(k) Stock-based compensation:
The Company accounts for stock options issued to employees using the
intrinsic value method of Accounting Principles Board Opinion No. 25.
Compensation expense is recorded on the date stock options are granted only
if the current fair value of the underlying stock exceeds the exercise
price. The Company has provided the pro forma disclosures required by
Statement of Financial Accounting Standards No. 123.
F-20
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
(l) Foreign currency translation:
The functional currency of all foreign subsidiaries is the U.S. dollar.
Monetary assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at the year-end rate of exchange. Non-monetary
assets and liabilities denominated in foreign currencies are translated at
historic rates and revenues and expenses are translated at average exchange
rates prevailing during the month of the transaction. Exchange gains or
losses are reflected in the consolidated statements of earnings (loss).
(m) Financial instruments and hedging:
The Company enters into interest rate swap contracts to hedge its
exposure to changes in interest rates on its long-term debt. The contracts
have the effect of converting the floating rate of interest on $65,000 of
the senior credit facility to a fixed rate. Net receipts, payments and
accruals under the swap contracts are recorded as adjustments to interest
expense.
If a swap is terminated prior to its maturity, the gain or loss is
recognized over the remaining original life of the swap if the item hedged
remains outstanding or immediately, if the item hedged does not remain
outstanding. If the swap is not terminated prior to maturity, but the
underlying hedged item is no longer outstanding, the interest rate swap is
marked to market and any unrealized gain or loss is recognized immediately.
(n) Impairment of long-lived assets:
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets to be Disposed Of". This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairments whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of
the assets.
(o) Recently issued accounting pronouncements:
(i) Effective January 1, 1998, the Company adopted the provisions of
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 establishes standards for reporting comprehensive
income and its components in financial statements. Comprehensive
income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. During the years ended
December 31, 1999, 1998 and 1997, comprehensive income was equal to
net earnings as shown in the consolidated statements of earnings
(loss).
(ii) In fiscal 1999, the Company adopted the American Institute of
Certified Public Accountants ("AICPA") Statement of Position
("SOP") 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 provides
guidance on accounting for the costs of computer software
developed or obtained for internal use and for determining when
specific costs should be capitalized and when they should be
expensed. The impact of adopting SOP 98-1 was not significant to
the Company's financial position, results of operations or cash
flows.
(iii) In fiscal 1999, the Company adopted AICPA SOP 98-5 "Reporting on
the Costs of Start-Up Activities". SOP 98-5 requires that all
start-up costs related to new operations be expensed as
F-21
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
incurred. The impact of adopting SOP 98-5 was not significant to the
Company's financial position, results of operations or cash flows.
(iv) In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 establishes methods of accounting for derivative
financial instruments and hedging activities related to those
instruments as well as other hedging activities. SFAS No. 133
requires all derivatives to be recognized either as assets or
liabilities and measured at fair value. As per SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities
Deferral of the Effective Date of SFAS 133", the Company will be
required to implement SFAS No. 133 for its fiscal year ended
December 31, 2001. The Company has not yet determined the impact,
if any, of SFAS No. 133 on its financial position, results of
operations or cash flows.
3. Acquisitions:
In addition to the business combination between HTM Holdings, Inc. and
SMTC Corporation (note 2(a)(i)), the Company completed two acquisitions
during 1999 which were accounted for as purchases. The results of
operations of the facilities acquired are included in these financial
statements from their respective dates of acquisition.
Acquisitions completed in 1999 were:
(a) In July 1999, the Company acquired a manufacturing facility
operated by Zenith Electronics Corporation in Chihuahua, Mexico. Zenith
used the facility to manufacture components included in Zenith
products. The transaction was effected through the acquisition of the
outstanding shares of Cableproducts de Chihuahua, S.A. de C.V.
("Cableproducts") and Radio Components de Mexico, S.A. de C.V.
("Radio"). The total purchase price of $8,352 was financed with cash.
Under the provisions of the purchase agreement, Zenith may claim
additional consideration in the form of cash if certain production
volumes are achieved through 2000. The contingent consideration will be
allocated to equipment, building and intangible assets if and when
paid. $5,735 of the purchase price is being held in escrow and will be
released pending the resolution of certain liabilities, including the
settlement of a portion of the contingent consideration.
(b) In September 1999, the Company acquired 100% of the issued and
outstanding shares of W.F. Wood, Incorporated. W.F. Wood, Incorporated
operates a manufacturing facility in Boston, Massachusetts. The total
purchase price of $19,672 was financed with cash.
Details of the net assets acquired in these acquisitions, at fair value,
are as follows:
<TABLE>
<CAPTION>
Chihuahua
Manufacturing W.F. Wood,
Facility Incorporated
------------- ------------
<S> <C> <C>
Current assets................................... $ -- $ 6,354
Capital assets................................... 9,094 1,695
Other long-term assets........................... -- 20
Goodwill......................................... -- 17,468
Liabilities assumed.............................. -- (5,865)
Deferred income taxes............................ (742) --
------ -------
Net assets acquired.............................. $8,352 $19,672
====== =======
</TABLE>
F-22
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
The following unaudited pro forma consolidated financial information
reflects the impact of the business combination with SMTC Corporation and
the acquisition of W.F. Wood, Incorporated, assuming the acquisitions had
occurred at the beginning of the periods presented. This unaudited pro
forma consolidated financial information has been provided for information
purposes only and is not necessarily indicative of the results of
operations or financial condition that actually would have been achieved if
the acquisitions had been on the date indicated, or that may be reported in
the future:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(Unaudited)
<S> <C> <C>
Revenue.................................................. $372,880 $449,713
Loss before extraordinary loss........................... (413) (2,853)
Basic loss per share before extraordinary loss........... (0.26) (3.43)
</TABLE>
4. Accounts receivable:
Accounts receivable at December 31, 1999 are net of an allowance for
doubtful accounts of $514 (1998--$195).
5. Inventories:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Raw materials................................................ $ 6,036 $35,371
Work in process.............................................. 5,900 17,124
Finished goods............................................... 298 8,578
Other........................................................ 251 607
------- -------
$12,485 $61,680
======= =======
</TABLE>
6. Capital assets:
<TABLE>
<CAPTION>
Net
Accumulated book
December 31, 1998 Cost depreciation value
----------------- ------- ------------ -------
<S> <C> <C> <C>
Machinery and equipment........................ $13,899 $ 8,066 $ 5,833
Office furniture and equipment................. 404 276 128
Computer hardware and software................. 988 709 279
Leasehold improvements......................... 1,259 428 831
------- ------- -------
$16,550 $ 9,479 $ 7,071
======= ======= =======
<CAPTION>
Net
Accumulated book
December 31, 1999 Cost depreciation value
----------------- ------- ------------ -------
<S> <C> <C> <C>
Land........................................... $ 2,060 $ -- $ 2,060
Buildings...................................... 5,099 59 5,040
Machinery and equipment........................ 31,150 12,789 18,361
Office furniture and equipment................. 2,540 479 2,061
Computer hardware and software................. 3,838 1,371 2,467
Leasehold improvements......................... 6,065 1,051 5,014
------- ------- -------
$50,752 $15,749 $35,003
======= ======= =======
</TABLE>
F-23
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Property and equipment recorded under capital leases included above at
December 31, 1999 was $8,981 (1998--$ 8,583) and accumulated amortization
of equipment under capital leases at December 31, 1999 was $8,123 (1998--
$6,765).
Included in the total depreciation expense for the year ended December
31, 1999 of $6,452 (1998--$2,869; 1997--$2,194) is $1,358 (1998--$1,305;
1997--$1,123) relating to the depreciation of equipment under capital
lease.
7. Goodwill:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------
Net
Accumulated book
Cost amortization value
<S> <C> <C> <C>
----------------------------
Goodwill........................................... $42,331 $1,531 $40,800
======= ====== =======
</TABLE>
8. Other assets:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------ --------
<S> <C> <C>
Deferred financing costs net of accumulated amortization of
$277 (1998--$151)............................................ $1,145 $ 3,698
Restricted cash and cash held in escrow....................... 250 5,985
Deferred lease costs, net of accumulated amortization of $30.. -- 1,430
Other......................................................... 94 32
------ --------
$1,489 $ 11,145
====== ========
</TABLE>
9. Long-term debt, bank indebtedness and capital leases:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- ---------
<S> <C> <C>
Term loans (a)............................................... $ -- $ 85,000
Revolving credit facilities (a).............................. -- 35,942
Subordinated debt (a)........................................ -- 10,000
Senior notes payable (b)..................................... 12,825 --
Subordinated notes (c)....................................... 11,963 --
------- ---------
24,788 130,942
Less current portion......................................... 725 2,000
------- ---------
$24,063 $ 128,942
======= =========
</TABLE>
(a) Concurrent with the business combination between HTM Holdings, Inc.
and SMTC Corporation, the Company and certain of its subsidiaries entered
into a senior credit facility that provides for $85,000 in term loans,
$10,000 in subordinated debt and $60,000 in revolving credit loans, swing
line loans and letters of credit. The senior credit facility is secured by
a security agreement over all assets and requires the Company to meet
certain financial ratios and benchmarks and to comply with certain
restrictive covenants. The revolving credit facilities terminate in July
2004. The term loans mature in quarterly instalments from September 2000 to
June 2004 for $35,000 of the term loans and from September 2000 to December
2005 for $50,000 of the term loans. The $10,000 subordinated debt is
payable in one instalment on September 30, 2006.
F-24
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
The credit loans and term loans bear interest at varying rates based on
either the Eurodollar base rate plus 3.00% to 3.50%, the U.S. base rate
plus 1.25% to 1.75% or the Canadian prime rate plus 1.25% to 1.75%.
The subordinated debt bears interest at the Eurodollar plus 4.75% or the
U.S. base rate plus 3.00%.
The Company has entered into interest rate swaps to exchange the 90-day
floating LIBOR rates on $65,000 of borrowings for a two-year fixed interest
rate of 6.16% (before credit spread) per annum (note 12).
The weighted average interest rate on the borrowings in 1999 was 9.5%.
The Company is required to pay the lenders a commitment fee of 0.5% of
the average unused portion of the revolving credit facility. $37 of
commitment fees were incurred in 1999.
As at December 31, 1999, principal repayments due within each of the
next five years and thereafter are as follows:
<TABLE>
<S> <C>
2000............................................................... $ 2,000
2001............................................................... 5,750
2002............................................................... 9,250
2003............................................................... 12,750
2004............................................................... 59,192
Thereafter......................................................... 42,000
---------
$ 130,942
=========
</TABLE>
(b) The senior notes payable outstanding in 1998 and through July 30,
1999 bore interest based on the prime rate or LIBOR. The weighted average
interest rate was 7.64% in 1999 and 8.3% in 1998.
(c) The subordinated notes were issued in 1998 in connection with the
leveraged recapitalization and were held by affiliates of certain
shareholders of HTM Holdings, Inc. The weighted average interest rate was
11.5% in 1999 and 1998.
(d) Lines of credit:
For the period up to July 30, 1999, the Company had a line of credit for
borrowings up to a maximum of $15,000. The weighted average interest rate
on the line of credit was 7.35% in 1999 (1998--8.75%).
F-25
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
(e) Capital lease obligations:
Minimum lease payments for capital leases consist of the following at
December 31, 1999:
<TABLE>
<S> <C>
2000................................................................. $1,725
2001................................................................. 749
2002................................................................. 494
2003................................................................. 426
2004................................................................. 27
------
Total minimum lease payments......................................... 3,421
Less amount representing interest (8% to 11%)........................ 343
------
3,078
Less current portion................................................. 1,541
------
Long-term capital lease obligations.................................. $1,537
======
</TABLE>
The Company is required to maintain $250 in a certificate of deposit in
connection with certain capital lease obligations.
(f) Interest expense:
<TABLE>
<CAPTION>
1997 1998 1999
---- ------ ------
<S> <C> <C> <C>
Short-term obligations................................. $359 $ 584 $ 702
Long-term:
Bank debt and subordinated notes..................... -- 1,105 6,061
Obligations under capital leases..................... 314 341 303
---- ------ ------
$673 $2,030 $7,066
==== ====== ======
</TABLE>
10.Capital stock:
(a) Authorized:
To July 30, 1999:
The authorized share capital of HTM Holdings, Inc. consists of:
(i) 10,000,000 common shares, $0.01 par value per share;
(ii) 100,000 Series A preferred shares, convertible, $0.001 par value
per share, mandatorily redeemable for $11.48 per share;
(iii) 100,000 Series B preferred shares--$0.001 par value per share;
mandatorily redeemable for $11.48 per share; and
(iv) 250,000 Series C preferred shares, convertible, $0.001 par value
per share, mandatorily redeemable for $11.25 per share.
F-26
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
As a result of the business combination, described in note 2(a), HTM
Holdings, Inc. became a wholly owned subsidiary of SMTC Corporation on July
30, 1999. The authorized share capital of SMTC Corporation at December 31,
1999 consists of:
(i) 11,720,000 Class A-1 voting common shares, par value $0.001 per
share:
Holders are entitled to one vote per share and to share in dividends
pro rata subject to any preferential rights of the Class L shares.
(ii) 1,100,000 Class A-2 voting common shares, par value $0.001 per
share:
Holders are entitled to one vote per share and to share in dividends
pro rata subject to any preferential rights of the Class L shares.
(iii) 300,000 Class L voting common shares, par value $0.001 per share:
The number of votes per share is determined by a prescribed formula
and the holders are entitled to receive all dividends declared on
common stock until there has been paid a specified amount based on
an internal rate of return of 12% compounded quarterly and a
recovery of the initial amount of $162 per Class L share, after
which point, they are entitled to receive dividends pro rata.
(iv) 125,000 Class N voting common shares, par value $0.001 per share:
The number of votes per share is determined by a prescribed formula
and the holders are not entitled to receive dividends. The holders
of the Class N shares hold the exchangeable shares described in note
10(c).
(v) 5,000 Class S voting common shares, par value $0.001 per share:
Holders are entitled to one vote per share and entitled to share in
dividends pro rata subject to any preferential rights of the Class L
shares. The Company has not issued any Class S shares at December
31, 1999.
Each share of Class L and Class A-2 stock shall convert
automatically, under certain conditions, into Class A-1 shares based
on a prescribed formula for Class L shares and on a one-for-one
basis for Class A-2 shares.
(b) Issued and outstanding:
HTM Holdings, Inc. to July 30, 1999:
<TABLE>
<CAPTION>
Common Preferred
Number of shares shares shares
---------------- ---------- ---------
<S> <C> <C>
Balance, December 31, 1997......................... 4,361,621 450,000
Shares issued (i).................................. 1,800,424 --
Shares repurchased (i)............................. (4,215,641) (450,000)
---------- --------
Balance, December 31, 1998, being balance July 30,
1999.............................................. 1,946,404 --
========== ========
</TABLE>
F-27
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
The 4,215,641 common shares repurchased are held in treasury stock.
<TABLE>
<CAPTION>
Common Preferred
Amount shares shares
------ ------ ---------
<S> <C> <C>
Balance, December 31,
1997................... $ 4 $ 1
Shares issued (i)....... 2 --
Shares repurchased (i).. -- (1)
--- ---
Balance, December 31,
1998, being balance
July 30, 1999.......... $ 6 $--
=== ===
</TABLE>
Capital transactions to July 30, 1999:
(i) On June 8, 1998, HTM Holdings, Inc. completed a leveraged
recapitalization and reorganization in which it sold 1,800,424 new
shares to an investment company, reacquired 92% of its then
outstanding common shares, declared and paid dividends of $609 on
its preferred stock, retired its preferred stock at the original
issued price of $4,500, and settled all options outstanding under
its 1993 stock option plan. The mandatorily redeemable preferred
stock was recorded outside of permanent shareholders' equity in the
consolidated balance sheet.
In connection with the recapitalization, the Company contributed
substantially all of its assets and liabilities to a newly formed
subsidiary in exchange for 100% of the subsidiary's stock, and
changed its name from Hi-Tech Manufacturing, Inc. to HTM Holdings,
Inc. The subsidiary adopted the Hi-Tech Manufacturing, Inc. name.
The subsidiary borrowed $13,000 in senior debt and $12,000 in
subordinated debt and entered into a $15,000 revolving line of
credit agreement. The stock of the subsidiary was pledged as
collateral for the senior debt and line of credit. The subsidiary
loaned approximately $21,000 to the Company.
SMTC Corporation from July 30, 1999 to December 31, 1999:
As a result of the application of reverse takeover accounting to the
business combination with HTM Holdings, Inc., the number of outstanding
shares of the continuing consolidated entity consists of the number of
outstanding shares of SMTC Corporation outstanding at July 30, 1999.
<TABLE>
<CAPTION>
Class A Class L Class N Exchangeable
Number of shares shares shares shares shares
---------------- --------- ------- ------- ------------
<S> <C> <C> <C> <C>
Balance, July 29, 1999............ 1,020,671 -- 86,707 --
Issued to existing shareholders
(i).............................. -- -- 26,701 113,408
Share transactions related to the
reverse takeover (ii)............ 1,393,971 154,168 -- --
Options exercised (iii)........... 33,140 -- -- --
--------- ------- ------- -------
Balance, December 31, 1999........ 2,447,782 154,168 113,408 113,408
========= ======= ======= =======
<CAPTION>
Class A Class L Class N Exchangeable
Amount shares shares shares shares
------ --------- ------- ------- ------------
<S> <C> <C> <C> <C>
Ascribed value at the date of the
reverse takeover (ii)............ $ 3 $ -- $ -- $ --
Options exercised (iii)........... -- -- -- --
--------- ------- ------- -------
Balance, December 31, 1999........ $ 3 $ -- $ -- $ --
========= ======= ======= =======
</TABLE>
The difference between the par value of the capital stock and the
accounting value ascribed at the date of the reverse takeover has been
credited to additional paid-in capital.
F-28
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Capital transactions from July 30, 1999 to December 31, 1999:
(i) In connection with the business combination on July 30, 1999, SMTC
Corporation issued 26,701 Class N shares to its existing
shareholders for nominal cash consideration. The existing
shareholders also received the exchangeable shares described in (c)
below.
(ii) On July 30, 1999, SMTC Corporation issued 1,393,971 Class A shares
and 154,168 Class L shares to the shareholders of HTM Holdings,
Inc. in exchange for $16,739 cash consideration and 100% of the
outstanding shares of HTM Holdings, Inc. The ascribed value of the
shares issued is equal to the $20,410 fair value of SMTC
Corporation at the time of the transaction.
(iii) On July 30, 1999, 33,140 Class A restricted shares were granted
upon the exercise of options for consideration of $60 in
promissory notes receivable. The notes are secured by the shares
granted and bear interest at 5.7%. The notes have been recorded
as a reduction of shareholders' equity. The restrictions vest
over the original vesting period of the underlying 1998 HTM Plan
options. At December 31, 1999, 24,855 of the issued Class A
shares are subject to restrictions.
(c) Exchangeable shares:
On July 30, 1999, SMTC Manufacturing Corporation of Canada, a 100% owned
subsidiary of the Company, issued two classes of non-voting shares which
can be exchanged into 113,408 Class L common shares of the Company on a
one-for-one basis. The holders of the exchangeable shares are entitled to
receive dividends equivalent to the dividends declared on Class L shares.
(d) Warrants:
1998 transactions:
In connection with the subordinated note, 384,619 detachable warrants
were issued to the lenders who are also affiliates of shareholders of HTM
Holdings, Inc. The warrants have a term of 10 years and an exercise price
of $5.14 per share. The warrants are exercisable from the date of grant.
The estimated fair value of the warrants at December 31, 1998 was $0.95 per
warrant.
1999 transactions:
In connection with the business combination between SMTC Corporation and
HTM Holdings, Inc., each existing warrant holder of HTM Holdings, Inc. was
granted equivalent warrants in SMTC Corporation and the previous HTM
Holdings, Inc. warrants were cancelled.
At December 31, 1999, the following warrants are outstanding:
<TABLE>
<CAPTION>
Number Exercise price
------- --------------
<S> <C> <C>
Class A warrants.................................... 103,895 $ 1.82
Class L warrants.................................... 12,088 147.57
</TABLE>
The warrants have a term of 10 years and are exercisable from the date
of grant. Each warrant is convertible into one Class A common share or one
Class L common share, respectively.
F-29
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
(e) Stock options:
1993 HTM Holdings Equity Plan:
In connection with the leveraged recapitalization in 1998, the stock
option plan adopted by HTM Holdings, Inc. in 1993 (the "1993 Plan") was
cancelled. HTM Holdings, Inc. permitted its employees to exercise all
outstanding options prior to the cancellation of the 1993 Plan by executing
notes payable for the exercise price. The shares issued to the exercising
employees were reacquired in connection with the leveraged recapitalization
and both the shares issued and the notes payable were retired, resulting in
a $2,108 non-recurring charge.
The weighted average grant date fair value of options granted during
1997 was $0.54 per share.
1998 HTM Plan:
In June 1998, HTM Holdings, Inc. adopted a new stock option plan (the
"1998 Plan") pursuant to which incentive stock options and non-qualified
stock options to purchase shares of common stock may be issued. The Board
of Directors authorized 122,685 shares to be issued under the 1998 Plan.
Incentive stock options are granted at an exercise price not less than the
fair market value of the common stock on the date of grant, as determined
by the Board of Directors. Options generally vest over four years and
expire 10 years from their respective dates of grant.
The weighted average grant date fair value of options granted during
1998 was $3.46 per share.
1998 SMTC Plan:
In July 1999, the Company replaced the 1998 Plan with an equivalent
stock option plan. Each HTM option holder was granted equivalent options in
SMTC Corporation's stock. The Board of Directors authorized 165,000 Class A
and 4,000 Class L options to be issued under the plan. The Class A options
vest immediately and are exercisable for Class A restricted shares. The
restrictions expire on the same basis as the Class L vesting periods. The
Class L options vest over a four year period and expire after 10 years from
the original grant date of the 1998 Plan options.
Stock option transactions were as follows:
<TABLE>
<CAPTION>
HTM Plans
---------------------------------------
1993 Plan 1998 Plan 1998 SMTC Plan
-------------------- ------------------ ----------------------------------
Weighted Weighted Weighted Weighted
average average average average
exercise exercise Class A exercise Class L exercise
Shares price Shares price Shares price Shares price
---------- -------- -------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding,
January 1, 1997........ 506,042 $4.59 -- $ -- -- $ -- -- $ --
Granted................. 925,347 3.14 -- -- -- -- -- --
Forfeited............... (180,897) 4.89 -- -- -- -- -- --
---------- ----- -------- ----- ------- ------ ----- -------
Balance, December 31,
1997................... 1,250,492 3.48 -- -- -- -- -- --
Granted................. 33,212 3.10 115,603 5.14 -- -- -- --
Forfeited............... (26,000) 3.67 -- -- -- -- -- --
Exercised............... (1,257,704) 3.46 -- -- -- -- -- --
---------- ----- -------- ----- ------- ------ ----- -------
Balance, December 31,
1998................... -- -- 115,603 5.14 -- -- -- --
Exchanged and issued at
combination date....... -- -- (115,603) (5.14) 33,140 1.82 3,856 147.57
Issued.................. -- -- -- -- 116,860 19.68 -- --
Exercised............... -- -- -- -- (33,140) (1.82) -- --
---------- ----- -------- ----- ------- ------ ----- -------
Balance, December 31,
1999................... -- $ -- -- $ -- 116,860 $19.68 3,856 $147.57
========== ===== ======== ===== ======= ====== ===== =======
</TABLE>
F-30
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
The following options were outstanding as at December 31, 1999:
<TABLE>
<CAPTION>
Weighted Weighted
average average Remaining
Outstanding exercise Exercisable exercise contractual
Option plan options price options price life
----------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
1998 SMTC plan:
Class L shares...... 3,856 $147.57 964 $147.57 3
Class A shares...... 116,860 19.68 -- -- 4
</TABLE>
The Company accounts for its employee stock plans using the intrinsic
value method under APB No. 25. Compensation expense related to these plans
has been recognized in the Company's financial statements as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Compensation expense................................. $ -- $2,108 $ --
The table below sets out the pro forma amounts of earnings (loss) before
extraordinary loss and earnings (loss) per share before extraordinary loss
that would have resulted if the Company had accounted for its employee
stock plans under the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation".
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Earnings (loss) before extraordinary loss:
As reported........................................ $1,244 $ (328) $ (864)
Pro forma.......................................... 1,088 975 (1,122)
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Earnings (loss) per share before extraordinary loss:
Basic as reported.................................. $ 0.40 $(0.44) $(1.89)
Pro forma.......................................... 0.35 0.16 (2.04)
</TABLE>
For purposes of computing pro forma net earnings, the fair value of each
option grant is estimated on the date of grant using the minimum value
method under which no volatility is assumed. Assumptions used to calculate
the fair value were:
<TABLE>
<CAPTION>
1997 1998 1999
----- ---- ----
<S> <C> <C> <C>
Risk-free interest rate............................. 6.0% to 6.2% 5.5% 6.0%
Dividend yield...................................... -- -- --
Expected life (years)............................... 3 4 3-4
</TABLE>
F-31
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
11. Income taxes:
The components of income taxes are:
<TABLE>
<CAPTION>
1997 1998 1999
------ ----- -------
<S> <C> <C> <C>
Current:
Federal......................................... $ 34 $ 15 $ --
Foreign......................................... -- -- 442
------ ----- -------
34 15 442
Deferred:
Federal......................................... 642 (198) (267)
State........................................... 66 (10) (47)
Foreign......................................... -- -- (21)
------ ----- -------
708 (208) (335)
------ ----- -------
$ 742 $(193) $ 107
====== ===== =======
The overall effective income tax rate (expressed as a percentage of
financial statement earnings (loss) before income taxes) varied from the
U.S. statutory income tax rate as follows:
<CAPTION>
1997 1998 1999
------ ----- -------
<S> <C> <C> <C>
Federal tax rate.................................. 34.0% 34.0% 34.0%
State income tax, net of federal tax benefit...... 3.0 3.0 6.0
Income of international subsidiaries taxed at
different rates.................................. -- -- 4.9
Change in valuation allowance..................... -- -- (6.3)
Non-deductible goodwill amortization.............. -- -- (50.1)
Other............................................. -- -- (2.3)
------ ----- -------
Effective income tax rate......................... 37.0% 37.0% (13.8)%
====== ===== =======
A tax benefit of $811 has been allocated to the extraordinary loss.
Worldwide earnings (loss) before income taxes consisted of the
following:
<CAPTION>
1997 1998 1999
------ ----- -------
<S> <C> <C> <C>
U.S............................................... $1,986 $(521) $(1,269)
Non-U.S........................................... -- -- 512
------ ----- -------
$1,986 $(521) $ (757)
====== ===== =======
</TABLE>
F-32
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
The Company's deferred tax liabilities and assets are comprised of the
following at December 31:
<TABLE>
<CAPTION>
1998 1999
---- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $467 $1,275
Reserves, allowances and accruals........................... 388 321
---- ------
855 1,596
Valuation allowance......................................... -- 554
---- ------
855 2,150
---- ------
Deferred tax liabilities:
Capital and other assets.................................... (600) (2,733)
---- ------
Net deferred tax assets (liabilities)......................... $255 $ (583)
==== ======
</TABLE>
At December 31, 1999, the Company had total net operating loss
carryforwards of approximately $7,100, which begin to expire in 2013. $1.4
million of losses in one of our subsidiaries may only be used against
taxable income generated by that subsidiary. In assessing the realization
of deferred tax assets, management considers whether it is more likely than
not that some portion or all of its deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income by the appropriate subsidiaries
during those periods when the temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
change of control limitations, projected future taxable income and tax
planning strategies in making this assessment. Based upon consideration of
these factors, management believes the recorded valuation allowance related
to the loss carryforwards of a specific subsidiary is appropriate.
The valuation allowance in 1999 is higher than 1998 by $554 due to the
acquisition of certain loss carryforwards in the business combination
between HTM Holdings, Inc. and SMTC Corporation.
12.Financial instruments:
(a) Interest rate swaps:
On September 30, 1999, the Company entered into two interest rate swap
transactions with a Canadian chartered bank for hedging purposes. The swaps
expire on September 22, 2001 and involve the exchange by the Company of 90-
day floating LIBOR rates for a two-year fixed interest rate of 6.16%
(before credit spread) per annum on a notional amount of $65,000.
(b) Fair values:
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument:
(i) The carrying amounts of cash and short-term investments, restricted
cash, accounts receivable, accounts payable and accrued liabilities
approximate fair values due to the short-term nature of these
instruments.
F-33
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
(ii) The fair value of long-term debt, including the current portion,
is based on rates currently available to the Company for debt with
similar terms and maturities.
(iii) The fair value of interest rate swap contracts is estimated by
obtaining quotes from a financial institution.
The carrying amounts and fair values of the Company's financial
instruments, where there are differences at December 31, 1999 and
1998, are as follows:
<TABLE>
<CAPTION>
1998 1999
------------------ --------------------
Carrying Fair Carrying Fair
Asset (liability) amount value amount value
----------------- -------- -------- --------- ---------
<S> <C> <C> <C> <C>
Long-term debt................. $(24,788) $(24,346) $(130,942) $(130,942)
Interest rate swaps............ -- -- -- 478
</TABLE>
13.Related party transactions:
The Company entered into related party transactions with certain
shareholders as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ------
<S> <C> <C> <C>
Management fees expensed under formal management
agreements.............................................. $-- $136 $ 717
Share issue costs incurred............................... -- 650 --
Financing and acquisition related fees paid.............. -- -- 1,741
Lease costs expensed for the Colorado facility........... 456 535 535
</TABLE>
14.Cash flows:
Cash paid for interest and income taxes:
<TABLE>
<CAPTION>
1997 1998 1999
---- ------ ------
<S> <C> <C> <C>
Interest.................................................. $300 $1,627 $6,767
Income taxes.............................................. 34 15 1,460
</TABLE>
Non-cash financing and investing activities:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------ -------
<S> <C> <C> <C>
Acquisition of equipment under capital leases....... $ 401 $2,673 $ --
Acquisition of SMTC Corporation for capital stock... -- -- 20,410
Deferred lease costs arising from trade in of
equipment.......................................... -- -- 1,460
Issuance of capital stock for notes receivable under
option plan........................................ -- -- 60
</TABLE>
15.Commitments:
The Company leases manufacturing equipment and office space under
various non-cancellable operating leases. Minimum future payments under
non-cancellable operating lease agreements are as follows at December 31,
1999:
<TABLE>
<S> <C>
2000................................................................. $10,332
2001................................................................. 7,789
2002................................................................. 6,486
2003................................................................. 2,931
2004................................................................. 661
Subsequent to 2004................................................... 75
-------
$28,274
=======
</TABLE>
F-34
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Operating lease expenses were approximately $4,585, $1,414 and $1,225
for the years ended December 31, 1999, 1998 and 1997, respectively.
16. Contingencies:
(a) General:
In the normal course of business, the Company may be subject to
litigation and claims from customers, suppliers and former employees.
Management believes that adequate provisions have been recorded in the
accounts where required. Although it is not possible to estimate the extent
of potential costs, if any, management believes that ultimate resolution of
such contingencies would not have a material adverse effect on the
financial position, results of operations and cash flows of the Company.
(b) Acquisitions:
A claim has been filed against one of the Company's subsidiaries
alleging commissions are owing as a result of the acquisition of certain
assets in Chihuahua, Mexico. The claim is for $800 plus interest and costs.
The Company is vigorously defending this matter and management believes it
has a strong defense against the claim. Future settlement, if any, of this
claim will be accounted for as a cost of the asset acquisition.
17. Extraordinary loss:
As a result of the early payment of the senior notes payable and
subordinated notes that occurred concurrent with the business combination
between SMTC Corporation and HTM Holdings, Inc., the Company incurred
charges of $2,090 ($1,279 after tax) related to early payment penalties,
write-off of unamortized deferred financing fees and write-off of the
unamortized debt discount.
F-35
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
18. Segmented information:
The Company derives its revenue from one dominant industry segment, the
electronics manufacturing services industry. The Company is operated and
managed geographically and has 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 of intangibles). Intersegment adjustments reflect
intersegment sales that are generally recorded at prices that approximate
arm's-length transactions. Information about the operating segments for the
fiscal year ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Net
Total Intersegment external
revenue revenue revenue
--------- ------------ --------
<S> <C> <C> <C>
United States.............................. $ 223,006 $(1,419) $221,587
Canada..................................... 21,675 (2,676) 18,999
Europe..................................... 9,507 (1,995) 7,512
Mexico..................................... 9,864 -- 9,864
--------- ------- --------
$ 264,052 $(6,090) $257,962
========= ======= ========
EBITA:
United States............................ $ 6,917
Canada................................... 2,107
Europe................................... (222)
Mexico................................... (503)
--------
8,299
Interest................................... 7,066
Amortization............................... 1,990
--------
Loss before income taxes................... $ (757)
========
Capital expenditures:
United States............................ $ 2,713
Canada................................... 840
Europe................................... 30
Mexico................................... 547
--------
$ 4,130
========
</TABLE>
Prior to 1999, the Company operated in one geographic segment--the
United States.
This segmented information incorporates the operations of SMTC
Corporation and W.F. Wood, Incorporated from July 30, 1999 and September 4,
1999, as discussed in note 2(a) and note 3, respectively. SMTC Corporation
has operated facilities in Canada, the United States and Europe for 14
years, 4 years and 2 years, respectively.
F-36
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
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>
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Geographic revenue:
United States..................................... $58,799 $84,668 $225,772
Canada............................................ -- -- 8,983
Europe............................................ 232 5,019 19,965
Asia.............................................. -- -- 3,242
------- ------- --------
$59,031 $89,687 $257,962
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
1999
-------
<S> <C>
Long-lived assets:
United States...................................................... $40,304
Canada............................................................. 25,585
Europe............................................................. 735
Mexico............................................................. 9,179
-------
$75,803
=======
</TABLE>
In 1998 and 1997, all of the Company's long-lived assets were located in
the United States.
19. Significant customers and concentration of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Sales of the Company's products are concentrated among specific customers
in the same industry. The Company generally does not require collateral.
The Company considers concentrations of credit risk in establishing the
reserves for bad debts and believes the recorded reserves are adequate.
During 1999, three customers individually comprised 29%, 10% and 10% of
total revenue across all geographic segments. At December 31, 1999, these
customers represented 33%, 6% and 3%, respectively of the Company's
accounts receivable.
During 1998, one customer individually comprised 43% of total revenue
generated in the United States. At December 31, 1998, this customer
represented 48% of the Company's accounts receivable.
During 1997, three customers individually comprised 33%, 11% and 10% of
total revenue generated in the United States. At December 31, 1997, these
customers represented 33%, 9% and 4%, respectively of the Company's
accounts receivable.
F-37
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
20. Earnings per share:
The following table sets forth the computation of basic earnings (loss)
per share before extraordinary loss:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Earnings (loss) before extraordinary
loss................................... $ 1,244 $ (328) $ (864)
Less preferred share dividends.......... -- (609) --
Less Class L preferred entitlement...... -- -- (2,185)
---------- ---------- ----------
Earnings (loss) before extraordinary
loss available to Class A
shareholders........................... $ 1,244 $ (937) $ (3,049)
========== ========== ==========
Weighted average shares--basic.......... 3,122,921 2,147,180 1,617,356
========== ========== ==========
Net earnings (loss) per share--basic.... $ 0.40 $ (0.44) $ (1.89)
========== ========== ==========
</TABLE>
For purposes of calculating the basic number of weighted average shares
outstanding, the number of shares for which loans receivable are
outstanding has been excluded. Under reverse takeover accounting, the
number of shares outstanding prior to July 30, 1999 is deemed to be the
number of shares of SMTC Corporation issued to the shareholders of HTM
Holdings, Inc., appropriately adjusted to take into account the effect of
any change in the number of HTM Holdings, Inc. shares outstanding in that
period.
During fiscal 1999 and fiscal 1998, the exercise prices of the options
and warrants were less than the average fair value price and were not
included in the calculation of diluted loss per share as the effect would
have been anti-dilutive. In addition, in fiscal 1999, the calculation did
not include the Class A shares issuable upon conversion of the Class L
shares and exchangeable shares as the effect would have been anti-dilutive.
During fiscal 1997, the exercise prices of the options and warrants were
higher than the average fair value price and were not included in the
calculation of diluted earnings per share as the effect would have been
anti-dilutive.
21. Comparative figures:
Certain of the 1998 and 1997 figures presented for comparative purposes
have been reclassified to conform with the current year's presentation.
22. Subsequent events:
(a) Initial public offering:
In March 2000, the Company filed a registration statement on Form S-1
with the U.S. Securities and Exchange Commission and a preliminary
prospectus with the securities commission or similar regulatory authority
in each of the Canadian provinces in connection with an initial public
offering of common stock of the Company and exchangeable shares of its
subsidiary, SMTC Manufacturing Corporation of Canada. The completion of
this offering is subject to certain conditions. If successful, the
estimated net proceeds of
F-38
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
this offering of approximately $ will be used by the Company to reduce
$ of indebtedness under the senior credit facility. The Company will
record a pretax charge on repayment of the indebtedness amounting to
approximately $ for the write-off of unamortized deferred financing costs
and early payment fee for the subordinated debt, net of the gain on
termination of the interest rate swap. The charge will be recorded as an
extraordinary loss.
(b) Share reclassification:
Concurrent with the effectiveness of the offering, SMTC Corporation will
complete a share capital reorganization that will be effected as follows:
. each outstanding Class Y share of the Company's subsidiary, SMTC
Manufacturing Corporation of Canada, will be purchased in exchange
for shares of Class L common stock;
. each outstanding share of Class L common stock will be 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;
. each outstanding share of Class A common stock will be converted
into shares of common stock;
. all outstanding Class N common stock will be converted into one
share of special voting stock which will be held by a trustee for
the benefit of the holders of the exchangeable shares; and
. each Class L exchangeable share will be converted into exchangeable
shares of the same class as those being offered in the offering in
the same ratio as shares of Class L common stock are converted to
shares of common stock.
Subsequent to the reclassification, the share capital of the Company
will be as follows on a pro forma basis (unaudited):
<TABLE>
<CAPTION>
Additional Class Class
Paid-in A L Exchangeable Common
Capital Shares Shares Shares Stock
---------- ------ ------ ------------ ------
<S> <C> <C> <C> <C> <C>
Number of shares
outstanding................. -- -- --
Amount....................... $ $ -- $ -- $ -- $
</TABLE>
The calculation of pro forma basic loss per share was determined by
dividing net loss by the pro forma weighted average common shares
outstanding after giving retroactive effect to the conversion of Class L
common stock and exchangeable shares into shares of common stock upon
the anticipated effectiveness of the Registration Statement on Form S-1.
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Pro forma net loss per share........................... $ $ $
Pro forma weighted average shares outstanding..........
</TABLE>
F-39
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
23. United States and Canadian accounting policy differences:
The consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles ("GAAP") as
applied in the United States ("U.S."). The significant differences between
U.S. GAAP and Canadian GAAP and their effect on the consolidated financial
statements of the Company are described below:
(a) Extraordinary loss:
Under U.S. GAAP the charges incurred as a result of the early payment of
the senior notes payable and subordinated notes described in note 17 are
recorded as an extraordinary loss. Under Canadian GAAP, the charges would
have been included in earnings (loss) before income taxes and the related
tax benefit recorded in income taxes expense. Accordingly the following
amounts would have been reported in fiscal 1999 under Canadian GAAP:
<TABLE>
<S> <C>
Operating income.................................................. $ 6,309
Interest.......................................................... 7,066
Debt extinguishment costs......................................... 2,090
--------
Earnings (loss) before income taxes............................... (2,847)
Income taxes (recovery):
Current......................................................... (289)
Deferred........................................................ (415)
--------
(704)
--------
Net earnings (loss)............................................... $ (2,143)
========
</TABLE>
(b) Income taxes:
The Company has adopted, on a retroactive basis, the new accounting
standards approved by The Canadian Institute of Chartered Accountants
dealing with accounting for income taxes. These new standards are
substantially identical to U.S. GAAP as contained in FASB Statement No.
109.
(c) Diluted earnings per share:
Under Canadian GAAP, fully diluted earnings per share is calculated by
assuming that all the outstanding options at the end of the year have been
exercised at the beginning of the year or at the date granted, if later,
and proceeds from the exercise of options have been used to generate
investment income. Under U.S. GAAP, the calculations assume that the
proceeds were used to acquire common shares of the Company at the average
market price. Diluted earnings per share under Canadian GAAP is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----- ---- ----
<S> <C> <C> <C>
Fully diluted earnings per share in accordance with
Canadian GAAP............................................ $0.36 N/A N/A
</TABLE>
N/A--Fully diluted loss per share has not been disclosed as the effect
of the potential conversion of dilutive securities is anti-dilutive under
Canadian GAAP.
F-40
<PAGE>
AUDITORS' REPORT
To the Directors of SMTC Corporation (formerly The Surface Mount Technology
Centre Inc.)
We have audited the consolidated balance sheets of SMTC Corporation
(formerly The Surface Mount Technology Centre Inc.) as at July 29, 1999 and
August 31, 1998 and the consolidated statements of earnings and retained
earnings (deficit) and cash flows for the period from September 1, 1998 to July
29, 1999 and for each of the years ended August 31, 1998 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at July 29,
1999 and August 31, 1998 and the results of its operations and its cash flows
for the period from September 1, 1998 to July 29, 1999 and for each of the
years ended August 31, 1998 and 1997 in accordance with Canadian generally
accepted accounting principles.
Canadian generally accepted accounting principles vary in certain
significant respects from accounting principles generally accepted in the
United States. Application of accounting principles generally accepted in the
United States would have affected results of operations for the period from
September 1, 1998 to July 29, 1999 and each of the years ended August 31, 1998
and 1997 and shareholders' equity (deficiency) as at July 29, 1999 and August
31, 1998, to the extent summarized in note 17 to the consolidated financial
statements.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
December 3, 1999
F-41
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.)
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of U.S. dollars)
<TABLE>
<CAPTION>
August 31, July 29,
1998 1999
---------- --------
<S> <C> <C>
Assets
Current assets:
Cash and short-term investments......................... $ 4,704 $ 698
Accounts receivable..................................... 39,379 51,639
Inventories............................................. 31,067 30,388
Prepaid expenses........................................ 864 1,698
------- --------
76,014 84,423
Capital assets (note 4)................................... 18,501 21,093
------- --------
$94,515 $105,516
======= ========
Liabilities and Shareholders' Equity (Deficiency)
Current liabilities:
Bank indebtedness (note 5).............................. $27,099 $ --
Accounts payable and accrued liabilities................ 34,839 36,183
Income taxes payable.................................... 1,860 2,247
Note payable............................................ 3,335 --
Preferred and non-voting shares of subsidiary (note 8).. -- 42,035
Current portion of long-term debt (note 6).............. 2,378 --
Current portion of obligations under capital leases
(note 7)............................................... 191 95
------- --------
69,702 80,560
Long-term debt (note 6)................................... 4,098 43,376
Obligations under capital leases (note 7)................. 88 --
Deferred income taxes..................................... 787 512
Shareholders' equity (deficiency):
Share capital (note 8).................................. 3,604 1
Additional paid-in capital.............................. -- 4
Retained earnings (deficit)............................. 15,856 (19,317)
Currency translation account (note 2(c))................ 380 380
------- --------
19,840 (18,932)
Commitments (note 13).....................................
Contingencies (note 14)...................................
Subsequent events (note 16)...............................
------- --------
$94,515 $105,516
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.)
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (DEFICIT)
(Expressed in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year ended Year ended September 1, 1998
August 31, August 31, to July 29,
1997 1998 1999
---------- ---------- -----------------
<S> <C> <C> <C>
Revenue............................... $96,761 $210,213 $270,578
Cost of sales......................... 81,662 188,397 245,575
------- -------- --------
Gross profit.......................... 15,099 21,816 25,003
Selling, general and administrative... 5,132 11,774 14,978
------- -------- --------
Operating income...................... 9,967 10,042 10,025
Interest (note 9)..................... 955 2,468 3,111
------- -------- --------
Earnings before income taxes.......... 9,012 7,574 6,914
Income taxes:
Current............................. 3,335 4,195 3,251
Deferred (recovery)................. 176 (71) (195)
------- -------- --------
3,511 4,124 3,056
------- -------- --------
Net earnings.......................... 5,501 3,450 3,858
Retained earnings, beginning of
period............................... 7,517 12,856 15,856
Dividends (note 8).................... (162) (450) (387)
Increase in stated capital (note 8)... -- -- (17,582)
Premium on redemption of shares of
subsidiary (note 8).................. -- -- (20,850)
Reorganization costs, net of tax of
$79 (note 2(a))...................... -- -- (212)
------- -------- --------
Retained earnings (deficit), end of
period............................... $12,856 $ 15,856 $(19,317)
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of U.S. dollars)
<TABLE>
<CAPTION>
September 1,
Year ended Year ended 1998
August 31, August 31, to July 29,
1997 1998 1999
---------- ---------- ------------
<S> <C> <C> <C>
Cash provided by (used in):
Operating activities:
Net earnings............................. $ 5,501 $ 3,450 $ 3,858
Items not involving cash:
Depreciation of capital assets......... 2,558 3,899 4,005
Loss (gain) on disposal of capital
assets................................ 37 (23) --
Unrealized foreign exchange loss
(gain)................................ (96) (422) 8
Deferred income taxes.................. 176 (71) (195)
Change in non-cash operating working
capital................................. (8,557) (19,777) (10,684)
------- -------- --------
(381) (12,944) (3,008)
Financing activities:
Increase (decrease) in bank
indebtedness............................ 878 22,589 (27,099)
Increase in long-term debt............... 3,610 1,793 39,348
Repayment of long-term debt.............. (3,008) (2,260) (2,450)
Repayment of note payable................ -- -- (3,335)
Issuance of shares....................... -- -- 5
Redemption of shares..................... -- -- (1)
Decrease in obligations under capital
leases.................................. (214) (458) (184)
Dividends paid........................... (162) (450) (387)
------- -------- --------
1,104 21,214 5,897
Investing activities:
Purchase of capital assets............... (3,657) (1,555) (6,596)
Reorganization costs..................... -- -- (291)
Acquisitions............................. -- (1,744) --
Proceeds on disposal of capital assets... 176 72 --
------- -------- --------
(3,481) (3,227) (6,887)
Foreign exchange gain (loss) on cash held
in foreign currency....................... 69 55 (8)
------- -------- --------
Increase (decrease) in cash................ (2,689) 5,098 (4,006)
Cash and short-term investments (bank
indebtedness), beginning of period........ 2,295 (394) 4,704
------- -------- --------
Cash and short-term investments (bank
indebtedness), end of period.............. $ (394) $ 4,704 $ 698
======= ======== ========
</TABLE>
Cash is defined as cash and short-term investments.
Supplemental cash flow disclosures (note 11).
See accompanying notes to consolidated financial statements.
F-44
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of U.S. dollars, except for share quantities and per
share amounts)
1. Nature of business:
SMTC Corporation (formerly The Surface Mount Technology Centre Inc.)
(the "Company") is a worldwide provider of electronics manufacturing
services to original equipment manufacturers. The Company services its
customers through five manufacturing and technology centres located in the
United States, Canada and Europe.
The Company's accounting principles are in accordance with accounting
principles generally accepted in Canada, and, except as outlined in note
17, are in all material respects, in accordance with accounting principles
generally accepted in the United States.
2. Significant accounting policies:
(a) Basis of presentation:
On July 28, 1999, The Surface Mount Technology Centre Inc. and its 100%
owned U.S. subsidiary, SMTC Corporation, completed a reorganization such
that SMTC Corporation then became the parent company of the group of
companies which includes The Surface Mount Technology Centre Inc. The
reorganization provides a more effective corporate structure for tax,
investing and financing purposes. As the reorganization involved the
transfer of entities under common control, the reorganization has been
accounted for as a continuity of interests in a manner similar to a pooling
of interests. The expenses incurred in connection with the reorganization
have been charged directly to retained earnings.
(b) Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated on consolidation.
(c) Change in functional currency:
As a result of changes in underlying circumstances resulting in the U.S.
dollar becoming the measurement currency in which most of the Company's and
its subsidiaries' business was transacted, effective September 1, 1997 the
Company adopted the U.S. dollar as its measurement currency for preparation
of its consolidated financial statements resulting in a change from the
previous use of the Canadian dollar as its measurement currency.
(d) Revenue recognition:
Revenue from sales of products is recognized when goods are shipped.
Revenue from services is recognized when the services are provided.
(e) Income taxes:
The Company follows the deferral method of tax allocation in accounting
for income taxes whereby the provision for income taxes is based on
accounting income. Income taxes related to timing differences between
accounting and taxable income are recorded as deferred income taxes.
(f) Cash and short-term investments:
Cash and short-term investments include cash on hand and deposits with
banks with original maturities of less than three months.
F-45
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
(g) Inventories:
Inventories are valued at the lower of cost, on a first-in, first-out
basis, and net realizable value. Inventories include an application of the
relevant overhead.
(h) Capital assets:
Capital assets are stated at cost. Depreciation is provided using the
following methods and annual rates:
------------------------------------------------------------------------
<TABLE>
<CAPTION>
Asset Basis Rate
---------------------------------------------------------------------------
<S> <C> <C>
Manufacturing machinery and equipment..... Straight line 5-10 years
Furniture and equipment................... Declining balance 20%
Computer software and hardware............ Straight line 3 years
Leasehold improvements.................... Straight line Term of lease
---------------------------------------------------------------------------
---------------------------------------------------------------------------
</TABLE>
(i) Foreign currency translation:
Transactions in foreign currencies are translated at the exchange rate
in effect on the transaction date. Monetary items expressed in foreign
currencies are translated at the exchange rate in effect at the balance
sheet date. The resulting exchange gains and losses are included in the
determination of net earnings for the period.
The Company's foreign subsidiaries are classified as integrated foreign
operations. As such, their monetary assets and monetary liabilities are
translated using period-end exchange rates, and other assets and
liabilities are translated at applicable historical rates of exchange.
Revenue and expenses are translated at monthly average exchange rates,
except for depreciation, which is translated at historical rates. Exchange
gains and losses are included in earnings in the period they are incurred.
(j) Accounting estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the period. Actual results could differ from those estimates.
(k) Statement of cash flows:
Effective September 1, 1998, the Company adopted retroactively, the new
recommendations of The Canadian Institute of Chartered Accountants ("CICA")
with respect to the preparation of the statement of cash flows. As a
result, this change has revised the definition of cash and cash equivalents
to include only cash and highly liquid investments with a maturity of 90
days or less and does not include the Company's bank indebtedness under its
credit facilities as was the case in prior years. In addition, non-cash
transactions previously presented in the statement of changes in financial
position are no longer presented in the statement of cash flows.
F-46
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
(l) Recently issued accounting pronouncements:
The CICA has issued Section 3465, "Income Taxes", that establishes new
standards for accounting for income taxes. The recommendations require the
use of the liability method whereby deferred income taxes are recognized
for the tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at
each year end. The Company will adopt the new recommendations effective
July 30, 1999 and has estimated that the impact would be to decrease the
recorded deferred income tax liability by $247.
3. Acquisitions:
(a) On January 1, 1998, the Company acquired 100% of the issued and
outstanding shares of Ogden Atlantic Design (Europe) Ltd. for $353. The
purchase price consisted of $219 paid at closing and $134 of acquisition-
related expenses. This acquisition was accounted for by the purchase method
with the purchase price being allocated to capital assets.
(b) Effective September 1, 1997, the Company acquired certain assets of
Ogden Atlantic Design Company, Inc. located in Charlotte, North Carolina
for $4,726. Under the terms of the purchase, the Company also assumed the
property lease and certain operating leased equipment. The purchase price
consisted of $1,155 paid at closing, $236 of acquisition related expenses
and a $3,335 one year note, subordinated to the bank and bearing interest
at 9% per annum. $1,391 of the purchase price was allocated to capital
assets and $3,335 was allocated to inventory.
4. Capital assets:
<TABLE>
<CAPTION>
Accumulated Net book
August 31, 1998 Cost depreciation value
--------------- ------- ------------ --------
<S> <C> <C> <C>
Manufacturing machinery and equipment.......... $21,904 $ 7,623 $14,281
Furniture and equipment........................ 1,331 489 842
Computer software and hardware................. 2,210 1,080 1,130
Leasehold improvements......................... 3,513 1,265 2,248
------- ------- -------
$28,958 $10,457 $18,501
======= ======= =======
<CAPTION>
Accumulated Net book
July 29, 1999 Cost depreciation value
------------- ------- ------------ --------
<S> <C> <C> <C>
Manufacturing machinery and equipment.......... $23,791 $ 9,571 $14,220
Furniture and equipment........................ 2,114 866 1,248
Computer software and hardware................. 3,296 1,691 1,605
Leasehold improvements......................... 6,005 1,985 4,020
------- ------- -------
$35,206 $14,113 $21,093
======= ======= =======
</TABLE>
Included in machinery and equipment at December 31, 1999 is equipment
under capital lease with a cost of $443 (1998--$1,133) and accumulated
depreciation of $203 (1998--$757).
Included in the total depreciation expense for the year ended December
31, 1999 of $4,005 (1998--$3,899; 1997--$2,558) is $128 (1998--$402; 1997--
$363) relating to the depreciation of equipment under capital lease.
F-47
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
5. Bank indebtedness:
Up to July 29, 1999, the operating lines of credit were due on demand,
bore interest at LIBOR plus 0.45% and rates ranging from the Company's bank
prime rate (prime) plus 0.25% to prime plus 1% and were secured by a
general security agreement covering all assets of the Company. All bank
indebtedness outstanding on July 29, 1999 was refinanced under a new senior
credit facility on July 30, 1999. The indebtedness has been classified as
long-term, consistent with the terms of that facility (note 6).
6. Long-term debt:
Up to July 29, 1999, the term loans bore interest at rates ranging from
the Company's bank prime or base rate plus 0.50% to prime or base rate plus
1.5%. The loans could be repaid at any time or times without payment of
bonus interest.
On July 30, 1999, concurrent with the business combination with HTM
Holdings, Inc. ("HTM") (note 16) the Company and HTM entered into a new
senior credit facility that provides for $95,000 in term loans and $60,000
in revolving credit loans, swing line loans and letters of credit. The
senior credit facility is secured by a security agreement over all assets
and requires the Company to meet certain financial ratios and benchmarks
and to comply with certain restrictive covenants. The revolving credit
facilities terminate in July 2004. The term loans mature in quarterly
instalments from September 2000 to June 2004 for $35,000 of the term loans
and from September 2000 to December 2005 for $50,000 of the term loans.
$10,000 of the term loans is payable in one instalment on September 30,
2006. The borrowings will bear interest at varying rates based on either
the Eurodollar base rate plus 3%, the U.S. bank rate plus 1.25% or the
Canadian prime rate plus 1.25%.
The future minimum repayments under the new senior credit facility are:
<TABLE>
<S> <C>
2000................................................................. $ --
2001................................................................. 2,668
2002................................................................. 5,335
2003................................................................. 8,003
2004 and thereafter.................................................. 27,370
-------
$43,376
=======
</TABLE>
7. Obligations under capital leases:
Obligations under capital leases consist of several leases for equipment
bearing interest from 7% to 8% per annum.
8. Share capital:
(a) Authorized:
At July 29, 1999 (SMTC Corporation):
(i) 1,720,000 Class A-1 voting common shares, par value $0.001 per
share, holders are entitled to one vote per share, entitled to
share in dividends pro rata subject to any preferential rights to
the Class L shares;
F-48
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
(ii) 1,100,000 Class A-2 voting common shares, par value $0.001 per
share, holders are entitled to one vote per share, entitled to
share in dividends pro rata subject to any preferential rights of
the Class L shares;
(iii) 300,000 Class L voting common shares, par value $0.001 per share,
the number of votes per share is determined by a prescribed
formula, entitled to receive all dividends declared on common
stock until there has been paid a specified amount based on an
internal annual rate of return of 12%;
(iv) 125,000 Class N voting common shares, par value $0.001 per share,
the number of votes per share are determined by a prescribed
formula, not entitled to receive dividends; and
(v) 5,000 Class S voting common shares, par value $0.001 per share,
holders are entitled to one vote per share, entitled to share in
dividends pro rata subject to any preferential rights of the Class L
shares.
Each share of Class L and Class A-2 stock shall convert automatically
under certain conditions into Class A-1 shares based on a prescribed
formula for Class L shares and on a one-for-one basis for Class A-2
shares.
Prior to July 28, 1999 (The Surface Mount Technology Centre Inc.):
The Company completed a capital reorganization on July 28, 1999 such that
The Surface Mount Technology Centre Inc. became a wholly owned subsidiary
of SMTC Corporation. Prior to the reorganization, the authorized capital
stock of The Surface Mount Technology Centre Inc. was:
(i) An unlimited number of Class B common shares, voting, convertible
into 0.78 common or Class D shares and 0.22 Class C or Class E
shares each;
(ii) An unlimited number of Class C non-cumulative shares, voting,
redeemable at $3.03 each, convertible into one common share each,
and subject to a maximum dividend of $0.33 per share per year;
(iii) An unlimited number of Class D non-cumulative shares, voting,
convertible into one common share each;
(iv) An unlimited number of Class E non-cumulative shares, voting,
redeemable at $3.03 each, convertible into one common share each,
and subject to a maximum dividend of $0.33 per share per year; and
(v) An unlimited number of common shares.
In order to facilitate the share capital reorganization, the Company
amended its authorized share capital on July 28, 1999 to include new
classes of shares including:
(i) Unlimited number of Class A, Class B and Class C preferred shares,
redeemable by the Company at $0.66 per share with an annual 6% non-
cumulative dividend;
(ii) Unlimited number of subordinate non-voting Class D and Class E
shares; the Class D shares are convertible into Class E shares; and
(iii) Class V voting shares.
F-49
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
(b) Issued and outstanding:
The Surface Mount Technology Centre Inc.
<TABLE>
<CAPTION>
1998
-----------------------------------
Common Class C Class D Class E
Number of shares shares shares shares shares
---------------- --------- -------- ------- -------
<S> <C> <C> <C> <C>
Balance, August 31, 1997.............. 1,272,224 169,444 390,278 84,722
Share conversion (i).................. 254,166 (169,444) -- (84,722)
--------- -------- ------- -------
Balance, August 31, 1998.............. 1,526,390 -- 390,278 --
========= ======== ======= =======
<CAPTION>
Common Class C Class D Class E
Amount shares shares shares shares
------ --------- -------- ------- -------
<S> <C> <C> <C> <C>
Balance, August 31, 1997.............. $ 2,392 $ 319 $ 734 $ 159
Share conversion (i).................. 478 (319) -- (159)
--------- -------- ------- -------
Balance, August 31, 1998.............. $ 2,870 $ -- $ 734 $ --
========= ======== ======= =======
</TABLE>
1998 capital transactions:
(i) On September 5, 1997, the issued Class C and Class E shares were
converted into an equal number of common shares.
(ii) During fiscal 1998, the Company paid dividends on its common and
Class C shares in the amount of $397 and $53, respectively.
<TABLE>
<CAPTION>
1999
------------------------------------------------------
Class D Class E
Class D shares shares
Common shares (non- (non- Preferred
Number of shares shares (voting) voting) voting) shares
---------------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, August 31,
1998................... 1,526,390 390,278 -- -- --
Share capital
reorganization (i)..... (1,521,390) (390,278) 12,301,570 26,399,229 32,731,788
---------- -------- ---------- ---------- ----------
Balance, July 29, 1999.. 5,000 -- 12,301,570 26,399,229 32,731,788
========== ======== ========== ========== ==========
<CAPTION>
Class D Class E
Class D shares shares
Common shares (non- (non- Preferred
Amount shares (voting) voting) voting) shares
------ ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, August 31,
1998................... $ 2,870 $ 734 $ -- $ -- $ --
Share capital
reorganization (i)..... (2,865) (734) -- -- 21,185
---------- -------- ---------- ---------- ----------
Balance, July 29, 1999.. $ 5 $ -- $ -- $ -- $ 21,185
========== ======== ========== ========== ==========
</TABLE>
As a result of the capital reorganization, The Surface Mount
Technology Centre Inc. acquired 100% of the outstanding voting shares
of SMTC Corporation. The number of issued and outstanding shares of
SMTC Corporation become the number of issued and outstanding shares of
the continuing consolidated entity. The recorded value of the issued
and outstanding shares of the continuing
F-50
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
consolidated entity is the recorded value of the capital stock of The
Surface Mount Technology Centre Inc. The issued and outstanding shares
of the continuing consolidated entity are as follows:
<TABLE>
<CAPTION>
Number Amount
------ ------
<S> <C> <C>
Class A-2 shares:
Recorded value of The Surface Mount Technology Centre Inc.
shares................................................... 2,500 $ 1
----- ---
Balance, July 29, 1999...................................... 2,500 $ 1
===== ===
</TABLE>
The $4 excess of The Surface Mount Technology Centre Inc. shares
recorded value over the $1 par value of the Class A-2 shares has been
recorded as additional paid-in capital.
1999 capital transactions:
(i) On July 27, 1999 and July 28, 1999, The Surface Mount Technology
Centre Inc. and SMTC Corporation completed a series of
transactions to complete the reorganization described in note
2(a). As a result of the reorganization, the Company increased the
stated capital of certain classes of common shares with a
corresponding charge to retained earnings of $17,582 and reduced
the stated capital of other classes of shares; converted common
shares into Class A, B or C common shares which in turn were
exchanged into Class E non-voting shares, preferred shares and
Class V voting shares; exchanged Class D shares into Class D non-
voting shares and Class V voting shares; issued 5,000 common
shares for $5 cash consideration; and redeemed the outstanding
Class V voting shares for $1 cash consideration.
(ii) In connection with the reorganization agreement and the business
combination with HTM Holdings, Inc. that was consummated on July
30, 1999 (note 16), the Company committed to redeem the
outstanding preferred shares and a portion of the outstanding
Class D non-voting and Class E non-voting shares of The Surface
Mount Technology Centre Inc. for $42,035. The redemption amount
of these shares has been presented as a current liability in the
consolidated financial statements at July 29, 1999. The $20,850
excess of the redemption amount over the $21,185 stated capital
for the Class D, Class E and preferred shares has been recorded
as a charge to retained earnings.
(iii) During fiscal 1999, The Surface Mount Technology Centre Inc.
paid dividends on its common shares in the amount of $387. The
dividends were paid prior to the reorganization.
Due to the corporate reorganization that took place effective July 29,
1999, the capital stock amount for accounting purposes differs from the
legal stated capital amount.
F-51
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
9. Interest expense:
<TABLE>
<CAPTION>
Year ended Year ended September 1, 1998
August 31, 1997 August 31, 1998 to July 29, 1999
--------------- --------------- -----------------
<S> <C> <C> <C>
Short-term:
Bank indebtedness...... $533 $1,665 $2,615
Interest on acquisition
note payable.......... -- 288 --
---- ------ ------
533 1,953 2,615
Long-term:
Interest on bank debt.. 349 469 478
Interest on obligations
under capital leases.. 73 46 18
---- ------ ------
422 515 496
---- ------ ------
$955 $2,468 $3,111
==== ====== ======
</TABLE>
10. Income taxes:
Certain of the Company's subsidiaries have approximately $7,322 of
losses available to reduce income taxes in future years. The losses begin
to expire in 2017. The benefit of approximately $991 of these losses has
been recognized in the financial statements as a reduction in the deferred
tax liability. In fiscal 1998, tax expense was reduced by the benefit of
losses of $1,100 which had not been previously recognized.
11. Cash flows:
Change in non-cash operating working capital:
<TABLE>
<CAPTION>
Year ended Year ended September 1, 1998
August 31, August 31, to July 29,
1997 1998 1999
---------- ---------- -----------------
<S> <C> <C> <C>
Accounts receivable................ $(3,188) $(24,289) $(12,260)
Inventories........................ (7,355) (18,787) 679
Prepaid expenses................... (147) (553) (835)
Accounts payable and accrued lia-
bilities.......................... 1,727 23,704 1,345
Income taxes payable............... 406 148 387
------- -------- --------
$(8,557) $(19,777) $(10,684)
======= ======== ========
</TABLE>
Cash paid for interest and income taxes:
<TABLE>
<CAPTION>
Year ended Year ended September 1, 1998
August 31, August 31, to July 29,
1997 1998 1999
---------- ---------- -----------------
<S> <C> <C> <C>
Interest............................. $1,023 $2,258 $3,193
Income taxes......................... 2,998 4,062 3,054
</TABLE>
F-52
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Non-cash financing and investing activities:
1999:
Certain transactions arising from the share capital reorganization
(notes 2(a) and 8) were non-cash transactions including the increase in
stated capital and the exchange of common shares for preferred and non-
voting shares.
1998:
On September 1, 1997, the Company acquired certain assets of Ogden
Atlantic Design Company, Inc. located in Charlotte, North Carolina. A
portion of the acquisition was financed by the issuance of a $3,335 one
year note payable.
12. Economic dependence and concentration of credit risk:
84% of sales for the period ended July 29, 1999 (year ended August 31,
1998--74%; year ended August 31, 1997--84%) and 81% of accounts receivable
at July 29, 1999 (August 31, 1998--61%) arise from transactions with the
Company's five largest customers.
13. Commitments:
The Company is committed to future payments on operating leases for
premises and equipment at July 29, 1999 as follows:
<TABLE>
<S> <C>
2000.................................................................. $7,294
2001.................................................................. 6,635
2002.................................................................. 5,650
2003.................................................................. 2,659
2004.................................................................. 635
Subsequent years...................................................... 169
</TABLE>
14. Contingencies:
(a) General:
In the normal course of business, the Company may be subjected to
litigation and claims from customers, suppliers and former employees.
Management believes that adequate provisions have been recorded in the
accounts where required. Although it is not possible to estimate the extent
of potential costs, if any, management believes the ultimate resolution of
such contingencies would not have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
(b) Uncertainty due to the Year 2000 Issue:
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to a significant systems failure which could affect an
entity's ability to conduct normal business operations. It is not possible
to be certain that
F-53
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
all aspects of the Year 2000 Issue affecting the Company, including those
related to the efforts of customers, suppliers, or other third parties,
will be fully resolved.
15. Comparative figures:
Certain prior years' figures presented have been reclassified to conform
with the current year's presentation.
16. Subsequent events:
(a) Capital transactions:
On July 30, 1999, the Company issued 1,018,171 Class A shares and 86,707
Class N shares to its existing shareholders for $2,036 cash consideration.
(b) Business combination between HTM Holdings, Inc. and SMTC Corporation:
Effective July 30, 1999, the Company acquired 100% of the outstanding
common shares of HTM Holdings, Inc., a contract manufacturer in Denver,
Colorado. The Company issued 1,393,971 Class A shares and 154,168 Class L
shares to the shareholders of HTM Holdings, Inc. for $16,739 cash
consideration and 100% of the outstanding shares of HTM Holdings, Inc.
Simultaneously, the former shareholders of the Company subscribed for an
additional 26,701 Class N shares for nominal consideration.
Upon completion of these transactions, the former shareholders of HTM
Holdings, Inc. held 58% of the outstanding shares of the Company and HTM
Holdings, Inc. became a wholly owned subsidiary of the Company. As a
result, the acquisition will be recorded as a reverse takeover of the
Company by HTM Holdings, Inc. and accounted for using the purchase method.
The purchase price is $24,703, including transaction costs of $4,293. The
purchase price will be allocated to the fair value of the Company's net
assets as follows:
<TABLE>
<S> <C>
Current assets.................................................. $ 84,423
Capital assets.................................................. 21,093
Goodwill........................................................ 24,863
Liabilities and other........................................... (105,676)
---------
Net assets acquired............................................. $ 24,703
=========
</TABLE>
(c) Stock options and warrants:
On July 30, 1999, in connection with the business combination described
in note 16(b), each existing warrant holder and stock option holder of HTM
Holdings, Inc. was granted equivalent warrants and stock options for Class
A and Class L shares of SMTC Corporation.
On September 30, 1999, the Company issued an additional 116,860 Class A
stock options to certain employees.
F-54
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
(d) Hedging activities:
On September 20, 1999, the Company entered into, for hedging purposes,
two interest rate swap transactions with a Canadian chartered bank. The
swaps expire on September 22, 2001 and involve the exchange of 90-day
floating LIBOR rates for a two-year fixed interest rate of 6.16% (before
credit spread) per annum on a notional amount of $65,000.
17. Canadian and United States accounting policy differences:
The consolidated financial statements of the Company have been prepared
in accordance with the generally accepted accounting principles ("GAAP") in
Canada. Material measurement differences between Canadian and U.S. GAAP and
their effect on the Company's consolidated financial statements are
summarized below:
Consolidated statements of earnings:
<TABLE>
<CAPTION>
Year ended Year ended September 1, 1998
August 31, August 31, to July 29,
1997 1998 1999
---------- ---------- -----------------
<S> <C> <C> <C>
Net earnings for the year in
accordance with Canadian GAAP.... $5,501 $3,450 $3,858
Adjustment to foreign
exchange(i)...................... -- (87) (58)
Adjustment to deferred income
taxes(ii)........................ (143) 48 152
Adjustment to reorganization
costs(iii)....................... -- -- (212)
------ ------ ------
Net earnings for the year in
accordance with U.S. GAAP........ 5,358 3,411 3,740
Currency translation adjustment... 380 -- --
------ ------ ------
Comprehensive income--U.S. GAAP... $5,738 $3,411 $3,740
====== ====== ======
</TABLE>
As a result of the adjustments to foreign exchange and deferred taxes,
deferred income taxes would be $600 and $969 at July 29, 1999 and August
31, 1998, respectively and shareholders' equity (deficiency) would be
$(19,020) and $19,658 at July 29, 1999 and August 31, 1998, respectively.
(i) Under Canadian GAAP, deferred taxes of operations using the
temporal method are translated at historical exchange rates, while
under U.S. GAAP, deferred income taxes are translated at current
exchange rates.
(ii) Under Canadian GAAP, deferred income taxes are computed based on
accounting income using the deferral method. Under U.S. GAAP,
deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year
end, based on enacted tax rates applicable in periods in which
the differences are expected to reverse.
(iii) Under Canadian GAAP, the costs associated with the
reorganization are charged directly to retained earnings. Under
U.S. GAAP, because the transaction is between entities under
common control and is accounted for in a manner similar to a
pooling of interests, these costs are recorded as a charge to
earnings.
(iv) U.S. GAAP requires the reporting of comprehensive income in
addition to net earnings. Comprehensive income includes net
earnings plus other comprehensive income; specifically, all
F-55
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
changes in equity of a company during the period arising from
transactions and other events from non-owner sources.
(v) Under Canadian GAAP, changes in bank overdraft balances are
considered cash reductions and are not presented as financing
activities. Under U.S. GAAP, any changes in bank overdrafts are
considered to be financing activities. Accordingly, the cash
provided by financing activities would have been $1,498 and
$20,820 for the years ended August 31, 1998 and 1997,
respectively, in accordance with U.S. GAAP. In addition, at the
end of 1997 and beginning of 1998 cash would have been nil.
F-56
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of SMTC Corporation (formerly HTM Holdings, Inc):
We have audited the accompanying balance sheets of W.F. Wood, Incorporated
(a Massachusetts corporation and a wholly owned subsidiary of HTM Holdings,
Inc.) as of September 3, 1999, December 31, 1998, and 1997, and the related
statements of income, stockholders' equity, and cash flows for the period ended
September 3, 1999 and the years ended December 31, 1998, 1997 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of W.F. Wood, Incorporated as
of September 3, 1999, December 31, 1998, and 1997, and the results of its
operations and its cash flows for the period ended September 3, 1999 and the
years ended December 31, 1998, 1997, and 1996 in conformity with United States
generally accepted accounting principles.
Boston, Massachusetts /s/ Canby, Maloney & Co., Inc.
February 9, 2000.
F-57
<PAGE>
W.F. WOOD, INCORPORATED
BALANCE SHEETS
AS OF THE DATES INDICATED
<TABLE>
<CAPTION>
December 31, December 31, September 3,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Assets
Current Assets:
Cash.................................. $ 70,282 $ 22,991 $ 3
Accounts receivable, net of allowance
for doubtful accounts of $20,000..... 1,953,774 2,599,745 2,619,517
Inventories........................... 3,011,002 2,971,547 3,590,236
Prepaid state income taxes............ -- -- 59,820
Other current assets.................. 33,041 91,347 84,751
---------- ---------- ----------
Total current assets................ 5,068,099 5,685,630 6,354,327
---------- ---------- ----------
Equipment and Improvements, Net......... 1,412,241 1,414,924 1,695,208
---------- ---------- ----------
Other Assets:
Due from related party................ 624,609 484,609 --
Deposits.............................. 8,732 8,732 20,160
---------- ---------- ----------
633,341 493,341 20,160
---------- ---------- ----------
$7,113,681 $7,593,895 $8,069,695
========== ========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Demand note payable to a bank......... $1,670,764 $ -- $ --
Current maturities of capital lease
obligations.......................... 63,088 33,726 6,626
Current maturities of long-term debt.. 350,744 275,930 183,835
Accounts payable...................... 1,879,225 2,710,425 3,855,502
Accrued expenses...................... 211,369 279,862 570,166
Accrued state income taxes............ 26,703 26,000 --
---------- ---------- ----------
Total current liabilities........... 4,201,893 3,325,943 4,616,129
---------- ---------- ----------
Capital Lease Obligations, less current
maturities............................. 43,303 -- --
---------- ---------- ----------
Long-Term Debt, less current
liabilities............................ 473,529 465,013 394,833
---------- ---------- ----------
Total Liabilities................... 4,718,725 3,790,956 5,010,962
========== ========== ==========
Stockholders' Equity:
Common stock, no par value
Authorized--200,000 shares
Issued and outstanding--80,000
shares................................ 985,000 985,000 3,806,393
Retained earnings (accumulated
deficit)............................... 1,409,956 2,817,939 (747,660)
---------- ---------- ----------
2,394,956 3,802,939 3,058,733
---------- ---------- ----------
$7,113,681 $7,593,895 $8,069,695
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
W.F. WOOD, INCORPORATED
STATEMENTS OF INCOME
FOR THE PERIODS INDICATED
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
For the Period Ended
1996 1997 1998 September 3, 1999
----------- ----------- ----------- --------------------
<S> <C> <C> <C> <C>
Net Sales............... $16,822,612 $25,618,654 $30,783,620 $23,198,095
Cost of Sales........... 12,700,384 20,883,967 25,196,045 20,071,521
----------- ----------- ----------- -----------
Gross profit.......... 4,122,228 4,734,687 5,587,575 3,126,574
----------- ----------- ----------- -----------
Selling, General, and
Administrative
Expenses:
Stockholders'
compensation......... 166,057 248,805 214,619 135,525
Professional fees
related to sale
transaction.......... -- -- -- 402,610
Bonuses paid to
management and
employees related to
sale transaction..... -- -- -- 2,571,176
Other selling,
general, and
administrative
expenses............. 2,204,506 2,370,845 2,965,395 1,717,789
----------- ----------- ----------- -----------
Total selling,
general, and
administrative
expenses........... 2,370,563 2,619,650 3,180,014 4,827,100
----------- ----------- ----------- -----------
Income (loss) from
operations......... 1,751,665 2,115,037 2,407,561 (1,700,526)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest expense,
net.................. (179,160) (220,593) (132,578) (58,078)
Income (loss) before
provision for state
income taxes....... 1,572,505 1,894,444 2,274,983 (1,758,604)
Provision for State
Income Taxes........... 45,000 79,000 103,000 --
----------- ----------- ----------- -----------
Net income (loss)..... $ 1,527,505 $ 1,815,444 $ 2,171,983 $(1,758,604)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
W.F. WOOD, INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIODS INDICATED
<TABLE>
<CAPTION>
Common Stock
--------------------
Number of Retained
Shares Earnings
Issued Amount (Deficit)
--------- ---------- -----------
<S> <C> <C> <C>
BALANCE, December 31, 1995................... 80,000 $ 985,000 $ 220,385
Net income................................. -- -- 1,527,505
Distributions to stockholders.............. -- -- (1,069,810)
------ ---------- -----------
BALANCE, December 31, 1996................... 80,000 985,000 678,080
Net income................................. -- -- 1,815,444
Distributions to stockholders.............. -- -- (1,083,568)
------ ---------- -----------
BALANCE, December 31, 1997................... 80,000 985,000 1,409,956
Net income................................. -- -- 2,171,983
Distributions to stockholders.............. -- -- (764,000)
------ ---------- -----------
BALANCE, December 31, 1998................... 80,000 985,000 2,817,939
Additional paid-in capital................. -- 2,821,393 --
Net loss................................... -- -- (1,758,604)
Distributions to stockholders.............. -- -- (1,806,995)
------ ---------- -----------
BALANCE, September 3, 1999................... 80,000 $3,806,393 $ (747,660)
====== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
W.F. WOOD, INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE PERIODS INDICATED
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
For the
Period Ended
September 3,
1996 1997 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating Activities:
Collections from
customers............ $ 15,693,172 $ 26,008,142 $ 30,137,649 $ 23,178,323
Interest income
collected............ 3,750 4,143 555 36
Payment of state
income taxes......... (22,033) (103,730) (111,470) (82,564)
Payment of operating
expenses............. (14,290,962) (24,485,261) (27,127,288) (23,798,966)
Payment of interest... (193,518) (215,707) (161,872) (66,169)
------------ ------------ ------------ ------------
Net cash provided by
(used for)
operating
activities......... 1,190,409 1,207,587 2,737,574 (769,340)
------------ ------------ ------------ ------------
Investing Activities:
Proceeds from sale of
equipment............ 18,500 10,301 45,757 5,704
Purchase of equipment
and improvements..... (638,596) (281,560) (181,863) (222,911)
Payment of deposits... (19,402) (3,576) -- (11,428)
------------ ------------ ------------ ------------
Net cash used for
investing
activities......... (639,498) (274,835) (136,106) (228,635)
------------ ------------ ------------ ------------
Financing Activities:
Net proceeds from
(payment of) demand
note payable to a
bank................. 232,734 259,581 (1,670,764) --
Proceeds from long-
term debt............ 389,920 71,469 -- --
Payment of long-term
debt................. (181,605) (205,387) (281,330) (227,776)
Payment of capital
lease obligations.... (8,219) (62,674) (72,665) (27,100)
Proceeds from
(payments to) related
party................ (11,622) 27,101 140,000 83,496
Additional paid-in
capital.............. -- -- -- 2,552,249
Distributions to
stockholders......... (1,069,810) (1,083,568) (764,000) (1,405,882)
------------ ------------ ------------ ------------
Net cash provided by
(used for)
financing
activities......... (648,602) (993,478) (2,648,759) 974,987
------------ ------------ ------------ ------------
Net decrease in cash.... (97,691) (60,726) (47,291) (22,988)
Cash balance, beginning
of period.............. 228,699 131,008 70,282 22,991
------------ ------------ ------------ ------------
Cash balance, end of
period................. $ 131,008 $ 70,282 $ 22,991 $ 3
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
W.F. WOOD, INCORPORATED
STATEMENTS OF CASH FLOWS--(Continued)
FOR THE PERIODS INDICATED
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
For the
Period
Ended
September
1996 1997 1998 3, 1999
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Reconciliation of Net Income
(Loss) to Net Cash Provided
by (Used for) Operating
Activities
Net income (loss)........... $ 1,527,705 $1,815,444 $2,171,983 $(1,758,604)
Adjustments to reconciled
net income (loss) to net
cash provided by (used for)
operating activities:
Depreciation and
amortization............. 242,315 321,615 365,624 264,160
(Gain) loss on disposal of
equipment................ 19,339 (8,307) (34,301) 7,408
(Increase) decrease in:
Accounts receivable..... (1,129,440) 389,488 (645,971) (19,772)
Inventories............. (1,166,871) (591,976) 39,455 (618,689)
Prepaid state income
taxes.................. -- -- -- (59,820)
Other current assets.... (1,957) 18,588 (58,306) 6,596
Increase (decrease) in:
Accounts payable........ 1,576,965 (656,910) 831,200 1,145,077
Accrued expenses........ 99,386 (65,737) 68,493 290,304
Accrued state income
taxes.................. 22,967 (14,618) (703) (26,000)
----------- ---------- ---------- -----------
Net cash provided by
(used for) operating
activities............. $ 1,190,409 $1,207,587 $2,737,574 $ (769,340)
=========== ========== ========== ===========
Non-Cash Investing and
Financing Activities
Payment of long-term debt
with stockholders'
additional paid-in
capital.................... $ -- $ -- $ -- $ 269,144
=========== ========== ========== ===========
Distribution of due from
related party to
stockholders............... $ -- $ -- $ -- $ 401,113
=========== ========== ========== ===========
Purchase of equipment in
exchange for long-term
debt....................... $ 32,778 $ -- $ 198,000 $ 334,645
=========== ========== ========== ===========
Purchase of equipment in
exchange for capital lease
obligations................ $ 105,689 $ 71,595 $ -- $ --
=========== ========== ========== ===========
Deposit applied to equipment
purchase................... $ -- $ 17,746 $ -- $ --
=========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
W.F. WOOD, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
W.F. Wood, Incorporated (the "Company"), is engaged in the design,
manufacture, finishing, and sale of sheet metal fabrication and metal products.
The accompanying financial statements reflect the application of certain
accounting policies as described in this note. Other policies and practices are
covered in the remaining notes.
(a) Inventories
Inventories, which include material, labor, and manufacturing overhead, are
stated at the lower of cost (first-in, first-out) or market.
(b) Equipment and Improvements
Purchased property and equipment is recorded at cost. Capital lease property
and equipment is recorded at the lesser of cost or the present value of minimum
lease payments required. The Company provides for depreciation and amortization
by charges to income in amounts estimated to recover the cost of its equipment
and improvements over their estimated useful lives or term of lease, using the
straight-line method, as follows:
<TABLE>
<S> <C>
Machinery and equipment........................................ 5-10 Years
Building improvements.......................................... Term of Lease
Office equipment............................................... 3-10 Years
Vehicles....................................................... 5 Years
Office equipment under capital lease........................... Term of Lease
</TABLE>
(c) Income Taxes
As discussed in Note 10, the outstanding common stock of the Company was
sold effective September 3, 1999 to HTM Holdings, Inc. This transaction
terminated the Company's subchapter "S" status. Prior to this transaction, the
former stockholders of the Company had elected subchapter "S" status for
federal and Massachusetts income tax purposes, thereby consenting to include
the Company's income in their individual income tax returns. Massachusetts "S"
corporations with sales over $9 million are subject to a state corporate income
tax of 4.5%. The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes". This
Statement requires the use of the asset and liability approach for financial
accounting and reporting for income taxes.
(d) Reclassification
Certain accounts in the financial statements for the years ended December
31, 1998 and 1997 have been reclassified to conform to the financial statement
presentation for the period ended September 3, 1999.
(e) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results may differ from those estimates.
(2) Related Party Transactions
(a) Due from Related Party
Due from related party represents an amount due from Airedale Realty Trust
(the "Trust"), which is an entity that the former majority stockholders of the
Company are beneficiaries of. On September 3, 1999, the
F-63
<PAGE>
W.F. WOOD, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
amount due from the Trust was distributed to the former majority stockholders.
The due from related party was unsecured with no interest.
(b) Facility Lease
In connection with the sale of stock described in Note 10, the Company
entered into a lease agreement with the Trust to lease a manufacturing facility
for a term of one year with a four-year extension at the option of the Company.
The annual base rent is $300,000, plus operating costs, as defined. The annual
rent will range from approximately $319,000 in the first extension year to
approximately $362,000 in the fourth extension year.
Prior to the lease agreement described above, the Company leased the
facility from the Trust on a tenant-at-will basis. Total rent expense was
$202,500 for the period ended September 3, 1999 and $300,000 for each of the
years ended December 31, 1998, 1997, and 1996.
(3) Equipment and Improvements
Equipment and improvements consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31, September 3,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Machinery and equipment............. $1,823,555 $2,003,146 $2,484,866
Building improvements............... 251,093 325,593 377,248
Office equipment.................... 525,855 584,989 609,169
Vehicles............................ 49,023 32,778 --
---------- ---------- ----------
2,649,526 2,946,506 3,471,283
Less--Accumulated depreciation and
amortization....................... 1,237,285 1,531,582 1,776,075
---------- ---------- ----------
$1,412,241 $1,414,924 $1,695,208
========== ========== ==========
</TABLE>
Depreciation and amortization expense related to equipment and improvements,
including the equipment under capital lease, was $264,160 for the period ended
September 3, 1999 and $365,624, $321,615, and $242,315 for the years ended
December 31, 1998, 1997, and 1996, respectively.
(4) Demand Note Payable to a Bank
In connection with the sale of common stock described in Note 10, the demand
note payable to a bank and the security interest provided to the bank was
terminated.
In 1998 and 1997, the demand note payable to a bank represents borrowings
under a line-of-credit agreement, renewable annually, in which the Company may
borrow against qualified accounts receivable and inventories, less letters of
credit, as defined in the loan agreement, subject to a maximum limit of
$2,500,000. Borrowings under the agreement bear interest at the bank's prime
rate (7.75% at December 31, 1998) plus 0.5%, are collateralized by
substantially all assets of the Company and the Trust and are fully guaranteed
by the Trust.
The provisions of this agreement require, among other things, the Company to
(a) maintain a minimum cash flow coverage ratio as defined, (b) maintain a
minimum tangible capital base (stockholders' equity less intangibles plus
subordinated debt) as defined, (c) not allow senior debt to be four times
greater than the tangible capital base and (d) places certain limits on
distributions to the Company's stockholders.
F-64
<PAGE>
W.F. WOOD, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(5) Capital Lease Obligations
The Company leases various office equipment under capital lease agreements
with monthly principal and interest installments ranging from $3,300 to $6,672,
expiring at various dates through October 2000, with effective interest rates
of approximately 8% to 10%. The related equipment collateralizes each lease.
At September 3, 1999, and December 31, 1998 and 1997, the capitalized cost
of leased office equipment was approximately $177,000 as of each date and the
related accumulated amortization was approximately $167,000, $126,000, and
$67,000, respectively.
(6) Long-Term Debt
Long-term debt at September 3, 1999, and December 31, 1998 and 1997,
consists of the following:
<TABLE>
<CAPTION>
December 31, December 31, September 3,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
(a) Installment note payable to a
bank, due in monthly principal
payments of $8,929 through January
1999, with a final payment of
$61,343 due February 1999. The
note bears interest at the bank's
prime rate (7.75% at December 31,
1998) plus 0.5% and is
collateralized by substantially
all assets of the Company and the
Trust. This note payable was
refinanced in 1998 to extend its
maturity date from November 1998
to February 1999.................. $177,415 $ 70,272 $ --
(b) Installment note payable to a
bank, due in monthly principal
payments of $7,690 plus interest
at the bank's prime rate (7.75% at
December 31, 1998) plus 0.5%
through August 2002. Borrowings
are collateralized by
substantially all assets of the
Company and the Trust ............ 430,631 338,353 --
(c) 9.9% Installment note payable to a
finance company, due in monthly
principal and interest payments of
$833 through March 2000. The note
is collateralized by a motor
vehicle .......................... 19,934 11,534 --
(f) 10.2% Installment note payable to
a finance company, due in monthly
principal and interest payments of
$6,672 through October 2000. The
note is collateralized by the
related equipment................. 196,293 133,669 93,584
-------- -------- --------
824,273 740,943 578,668
Less--Current maturities............... 350,744 275,930 183,835
-------- -------- --------
$473,529 $465,013 $394,833
======== ======== ========
</TABLE>
(d) 8.0% Installment note payable to a
finance company, due in monthly
principal and interest payments of
$4,015 through August 2003. The
note is collateralized by the
related equipment ................ -- 187,115 164,456
(e) 7.25% Installment note payable to
a finance company, due in monthly
principal and interest payments of
$6,666 through May 2004. The note
is collateralized by the related
equipment......................... -- -- 320,628
F-65
<PAGE>
W.F. WOOD, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
The installment notes payable to a bank in (a) and (b) were fully repaid in
connection with the sale of common stock described in Note 10, and the security
interest provided to the bank was terminated.
Principal payments on the long-term debt at September 3, 1999 are due as
follows:
<TABLE>
<CAPTION>
Year Ending September 3, Amount
------------------------ --------
<S> <C>
2000......................................................... $183,835
2001......................................................... 116,058
2002......................................................... 111,110
2003......................................................... 115,771
2004......................................................... 51,894
--------
$578,668
========
</TABLE>
(7) Commitments
(a) Facility Lease
The Company leases a second manufacturing facility under a five-year lease
agreement expiring January 2004. The lease requires the Company to pay annual
base rent, plus a share of real estate taxes, operating costs and management
fees as defined in the agreement. The agreement provides for one five-year
option to extend the lease term.
Future minimum lease payments (without regard to real estate taxes,
operating costs and management fees) on the operating lease are as follows:
<TABLE>
<CAPTION>
Year Ending September 3, Amount
------------------------ --------
<S> <C>
2000......................................................... $189,092
2001......................................................... 189,092
2002......................................................... 198,791
2003......................................................... 203,637
2004......................................................... 67,877
--------
$848,489
========
</TABLE>
(b) Employment Agreements
The Company has entered into employment agreements with two officers of the
Company. The Company is obligated to pay the officers one year's salary as
severance if their employment is terminated by the Company without cause or
terminated by the officers with good reason, as defined. The terms of the
agreements expire in December 2001 and are automatically renewed each year
until terminated by either party.
(c) Employee Bonus Plan
In connection with the sale of stock described in Note 10, the Company
adopted an employee bonus plan in which the Company provided a $250,000 bonus
to its employees in recognition of their past service and will pay a $250,000
retention bonus as an incentive for employees to remain with the Company for at
least six months subsequent to the sale of stock. As of September 3, 1999, the
past service bonus of $250,000 has been reflected in the accompanying financial
statements. The retention bonus will be recognized upon the completion of the
required term of employment.
F-66
<PAGE>
W.F. WOOD, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(8) Profit Sharing Plan
The Company has a defined contribution profit sharing plan covering both
salaried and hourly employees under Section 401(k) of the Internal Revenue
Code. Under the plan, employees may reduce up to 15% of their compensation per
year as a contribution to the plan, subject to the limitations imposed under
Section 401(k). The matching contribution to the plan, if any, is determined
annually at the discretion of the Company's directors. During the period ended
September 3, 1999 and the years ended December 31, 1998, 1997, and 1996, there
were no matching contributions by the Company.
(9) Concentrations
(a) Concentration of Credit Risk
The Company extends credit to customers primarily located in Massachusetts
who are manufacturers of various equipment, such as computers, computer-related
equipment, and production equipment.
The Company generally does not require its customers to secure the accounts
receivable. Total accounts receivable outstanding at September 3, 1999, and
December 31, 1998 and 1997, from Massachusetts customers in computer-related
industries is approximately $1,794,000, $2,083,000, and $1,317,000,
respectively.
(b) Concentration of Credit Risk Arising from Cash Deposits in Excess of
Insured Limits
The Company maintains its cash balances in one financial institution. The
balances are insured up to $100,000. At September 3, 1999, the Company's
uninsured cash balances totaled $1,021,812. The Company has not experienced any
losses in such cash accounts and believes it is not exposed to any significant
credit risk on cash.
(c) Significant Customer
One customer accounted for approximately 80%, 87%, and 77% of net sales for
the period ended September 3, 1999 and the years ended December 31, 1998 and
1997, respectively. Two customers accounted for approximately 67% of net sales
for the year ended December 31, 1996. Total receivables from this significant
customer was approximately $1,850,000, $1,989,000, and $1,033,000 at September
3, 1999 and December 31, 1998 and 1997, respectively.
(10) Sale of Common Stock and Change in Tax Status
Effective on September 3, 1999, the stockholders sold their common stock of
the Company to HTM Holdings, Inc. This transaction terminated the Company's
subchapter "S" status and will become a taxable corporation. SFAS No. 109
requires recognizing a deferred tax asset and liability for temporary
differences that exist at the date the Company's tax status changes from
nontaxable to taxable. The deferred tax liability due to this change was
immaterial and has not been reflected in the accompanying financial statements.
As part of the stock purchase agreement relating to the sale of stock, HTM
Holdings, Inc. may make an election under Section 338(h)(10) of the Internal
Revenue Code, thereby treating the common stock sale of the Company as a sale
of assets for tax reporting purposes. This would result in a gain on sale of
assets for Massachusetts income tax reporting purposes. The potential state tax
liability as a result of this election would be approximately $680,000. The
accompanying financial statements do not reflect any adjustments for this as
the election has not been made as of the date of this report.
F-67
<PAGE>
W.F. WOOD, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(11) Sale Related Professional Fees and Bonuses Paid to Management and
Employees
Professional fees reflected in the accompanying statements of income for the
period ended September 3, 1999 are non-recurring professional fees related to
the Sale of the Company. Acquisition-related bonuses paid to management and
employees reflect non-recurring bonuses paid by the Company upon sale of the
Company to HTM Holdings, Inc.
(12) Material Differences Between Generally Accepted Accounting Principles
(GAAP) in United States and Canada
The financial statements have been prepared in accordance with generally
accepted accounting principles as applied in the United States. The financial
statements also conform, in all material respects, with Canadian generally
accepted accounting principles.
F-68
<PAGE>
Shares
SMTC Corporation
Common Stock
-------------
PROSPECTUS
, 2000
-------------
Joint Lead Managers and Joint Book-Running Managers
Lehman Brothers RBC Dominion Securities
-------------
Merrill Lynch & Co.
Robertson Stephens
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates, except
the Securities and Exchange Commission registration fee and the National
Association of Securities Dealers, Inc. filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration fee................. $33,000
National Association of Securities Dealers, Inc. filing fee......... 13,000
Nasdaq National Market listing fee.................................. 1,000
Printing and engraving expenses..................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Blue sky fees and expenses.......................................... *
Transfer agent and Registrar fees................................... *
Miscellaneous....................................................... *
-------
Total............................................................. $ *
=======
</TABLE>
--------
* To be included by amendment.
Item 14. Indemnification of Directors and Officers.
The Registrant's Certificate of Incorporation provides that the Registrant's
directors shall not be liable to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent that the exculpation from liabilities is not permitted under the
Delaware General Corporation Law as in effect at the time such liability is
determined. The By-Laws provide that the Registrant shall indemnify its
directors to the full extent permitted by the laws of the State of Delaware.
Prior to the consummation of this offering, the Company will enter into
indemnification agreements with each of its directors and executive officers
that provide for indemnification and expense advancement to the fullest extent
permitted under the Delaware General Corporation Law.
Item 15. Recent Sales of Unregistered Securities.
Since its incorporation in 1998, SMTC has issued the following securities
without registration under the Securities Act of 1933, as amended (the
"Securities Act"):
(1) The combination of Predecessor SMTC and HTM was completed on July
30, 1999. In connection with the combination, SMTC issued an aggregate of
2,414,647.7 shares of its Class A common stock, 154,167.8 shares of its
Class L common stock, 113,407.9 shares of its Class N common stock and
warrants exercisable for an aggregate of 103,894.9 shares of its Class A
common stock and 12,088.2 shares of its Class L common stock to pre-
combination stockholders of Predecessor SMTC, including certain members of
management of Predecessor SMTC and other investors and pre-combination
stockholders of HTM, including affiliates of Bain Capital, Inc., affiliates
of Celerity Partners, L.L.C., certain members of management of HTM and
other investors, in exchange for pre-combination securities of Predecessor
SMTC, pre-combination securities of HTM and an aggregate of approximately
$16.7 million.
(2) On July 30, 1999, pursuant to an employee stock option plan, SMTC
issued an aggregate of 33,140.2 options to purchase its Class A common
stock and 3,855.9 options to purchase its Class L common stock. The options
to purchase Class A common stock were fully vested when granted, and were
II-1
<PAGE>
immediately exercised for an aggregate of 33,140.2 shares of Class A common
stock at an aggregate exercise price of $60,374. These shares are subject
to certain restrictions on transferability and certain repurchase rights.
(3) On September 30, 1999, pursuant to an employee stock option plan,
SMTC issued an aggregate of 116,860 shares of its Class A common stock.
All such shares were exempt from registration under the Securities Act of 1933,
as amended, pursuant to (S)4(2) thereof or Rule 701 thereunder.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
2.1*+ Reorganization and Merger Agreement dated as of July 26, 1999.
2.2+ Stock Purchase Agreement dated as of September 3, 1999.
3.1* Form of Certificate of Incorporation, as amended.
3.2* Form of By-laws.
4.1* Stockholders Agreement dated as of July 30, 1999.
4.2* Form of certificate representing shares of common stock.
4.3 Form of warrant to purchase shares of Class L common stock.
4.4 Form of warrant to purchase shares of Class A-1 common stock.
5.1* Opinion of Ropes & Gray.
10.1.1* Credit and Guarantee Agreement dated as of July 28, 1999.
10.1.2* First Amendment dated as of November 4, 1999 to the Credit and
Guarantee Agreement dated as of July 28, 1999.
10.1.3* Second Amendment dated as of December 14, 1999 to the Credit and
Guarantee Agreement dated as of July 28, 1999.
Amended and Restated SMTC (HTM) 1998 Equity Incentive Plan dated as
10.2 of September 30, 1999.
10.3 Management Agreement dated July 30, 1999.
10.4.1* Real Property Lease dated September 1, 1993 between Ogden Atlantic
Design Company Inc. and Garrett and Garrett.
10.4.2* Assignment of Lease dated September 16, 1997 between Ogden Atlantic
Design Company Inc. and The SMT Centre S.E. Inc.
10.5* Real Property Lease dated December 22, 1998 between Third Franklin
Trust and W.F. Wood, Incorporated.
10.6* Real Property Lease dated May 9, 1995 between Logitech Ireland
Limited and Ogden Atlantic Design (Europe) Limited.
10.7* Real Property Sublease Agreement dated March 29, 1996 between Radian
International, LLC and The SMT Centre of Texas Inc.
10.8* Real Property Lease dated August 11, 1997 between Edwin A. Helwig and
Barbara G. Helwig and The SMT Centre, Inc., Lease Addendum and Work
Letter Agreement.
10.9* Real Property Lease dated as of September 15, 1998 between Warden-
McPherson Developments Ltd. and The Surface Mount Technology Centre
Inc.
10.10* Real Property Lease dated September 3, 1999 between Airedale Realty
Trust and W. F. Wood, Incorporated.
10.11.1* Real Property Revised Lease Agreement dated January 14, 1994 between
HTM Building Investors, LLC and Hi-Tech Manufacturing, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.11.2* First Amendment to Lease.
10.11.3* Second Amendment to Lease.
10.12 Derek D'Andrade Employment Agreement dated July 30, 1999.
10.13 Edward Johnson Employment Agreement dated July 30, 1999.
10.14 Gary Walker Employment Agreement dated July 30, 1999.
10.15 Paul Walker Employment Agreement dated July 30, 1999.
10.16 Philip Woodard Employment Agreement dated July 30, 1999.
16.1 Letter from PricewaterhouseCoopers LLP regarding change in certifying accountants.
16.2 Letter from Arthur Andersen LLP regarding change in certifying accountants.
21.1 Subsidiaries of the registrant.
23.1 Consent of KPMG LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Canby, Maloney & Co., Inc.
23.5* Consent of Ropes & Gray (included in the opinion filed as Exhibit 5.1).
24.1 Power of attorney pursuant to which amendments to this registration statement may be filed (included
on the signature page in Part II hereof).
27.1 SMTC Corporation Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
+ The registrant agrees to furnish supplementally to the SEC a copy of any
omitted schedule or exhibit to such agreement upon request by the SEC.
(b) Financial Statement Schedules.
The schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions, are inapplicable or not material, or the information
called for thereby is otherwise included in the financial statements and
therefore has been omitted.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such manner as requested by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under "Item 14--Indemnification
of Directors and Officers" above, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, SMTC
Corporation has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Markham, Province of Ontario, on this 24th day of March, 2000.
SMTC Corporation
/s/ Paul Walker
By: _________________________________
Name: Paul Walker
Title: President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Paul
Walker and Richard Smith, and each of them singly, his or her true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all (1) amendments (including post-effective
amendments) to this Registration Statement on Form S-1 and (2) Registration
Statements, and any and all amendments thereto (including post-effective
amendments), relating to the offering contemplated pursuant to Rule 462(b)
under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes,
may lawfully do or cause to be done by virtue hereof.
* * * *
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Paul Walker President, Chief Executive March 24, 2000
______________________________________ Officer (Principal
Paul Walker Executive Officer) and
Director
/s/ Richard Smith Vice President, Finance & March 24, 2000
______________________________________ Administration (Principal
Richard Smith Financial and Accounting
Officer)
/s/ Edward Johnson Executive Vice President, March 24, 2000
______________________________________ Business Development and
Edward Johnson Director
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Gary Walker Vice President and General March 24, 2000
______________________________________ Manager, San Jose and
Gary Walker Director
/s/ David Dominik Director March 24, 2000
______________________________________
David Dominik
/s/ Prescott Ashe Director March 24, 2000
______________________________________
Prescott Ashe
/s/ Stephen Adamson Director March 24, 2000
______________________________________
Stephen Adamson
/s/ Mark Benham Director March 24, 2000
______________________________________
Mark Benham
/s/ Michael Griffiths Director March 24, 2000
______________________________________
Michael Griffiths
/s/ Anthony Sigel Director March 24, 2000
______________________________________
Anthony Sigel
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
2.1*+ Reorganization and Merger Agreement dated as of July 26, 1999.
2.2+ Stock Purchase Agreement dated as of September 3, 1999.
3.1* Form of Certificate of Incorporation, as amended.
3.2* Form of By-laws.
4.1* Stockholders Agreement dated as of July 30, 1999.
4.2* Form of certificate representing shares of common stock.
4.3 Form of warrant to purchase shares of Class L common stock.
4.4 Form of warrant to purchase shares of Class A-1 common stock.
5.1* Opinion of Ropes & Gray.
10.1.1* Credit and Guarantee Agreement dated as of July 28, 1999.
10.1.2* First Amendment dated as of November 4, 1999 to the Credit and
Guarantee Agreement dated as of July 28, 1999.
10.1.3* Second Amendment dated as of December 14, 1999 to the Credit and
Guarantee Agreement dated as of July 28, 1999.
Amended and Restated SMTC (HTM) 1998 Equity Incentive Plan dated as
10.2 of September 30, 1999.
10.3 Management Agreement dated July 30, 1999.
10.4.1* Real Property Lease dated September 1, 1993 between Ogden Atlantic
Design Company Inc. and Garrett and Garrett.
10.4.2* Assignment of Lease dated September 16, 1997 between Ogden Atlantic
Design Company Inc. and The SMT Centre S.E. Inc.
10.5* Real Property Lease dated December 22, 1998 between Third Franklin
Trust and W.F. Wood, Incorporated.
10.6* Real Property Lease dated May 9, 1995 between Logitech Ireland
Limited and Ogden Atlantic Design (Europe) Limited.
10.7* Real Property Sublease Agreement dated March 29, 1996 between Radian
International, LLC and The SMT Centre of Texas Inc.
10.8* Real Property Lease dated August 11, 1997 between Edwin A. Helwig and
Barbara G. Helwig and The SMT Centre, Inc., Lease Addendum and Work
Letter Agreement.
10.9* Real Property Lease dated as of September 15, 1998 between Warden-
McPherson Developments Ltd. and The Surface Mount Technology Centre
Inc.
10.10* Real Property Lease dated September 3, 1999 between Airedale Realty
Trust and W. F. Wood, Incorporated.
10.11.1* Real Property Revised Lease Agreement dated January 14, 1994 between
HTM Building Investors, LLC and Hi-Tech Manufacturing, Inc.
10.11.2* First Amendment to Lease.
10.11.3* Second Amendment to Lease.
10.12 Derek D'Andrade Employment Agreement dated July 30, 1999.
10.13 Edward Johnson Employment Agreement dated July 30, 1999.
10.14 Gary Walker Employment Agreement dated July 30, 1999.
10.15 Paul Walker Employment Agreement dated July 30, 1999.
10.16 Philip Woodard Employment Agreement dated July 30, 1999.
Letter from PricewaterhouseCoopers LLP regarding change in certifying
16.1 accountants.
Letter from Arthur Andersen LLP regarding change in certifying
16.2 accountants.
21.1 Subsidiaries of the registrant.
23.1 Consent of KPMG LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Canby, Maloney & Co., Inc.
Consent of Ropes & Gray (included in the opinion filed as Exhibit
23.5* 5.1).
24.1 Power of attorney pursuant to which amendments to this registration
statement may be filed (included on the signature page in Part II
hereof).
27.1 SMTC Corporation Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
+ The registrant agrees to furnish supplementally to the SEC a copy of any
omitted schedule or exhibit to such agreement upon request by the SEC.
<PAGE>
EXHIBIT 2.2
EXECUTION COPY
STOCK PURCHASE AGREEMENT BY AND AMONG
W.F. WOOD, INCORPORATED
SHAREHOLDERS OF W.F. WOOD, INCORPORATED
AND
HTM HOLDINGS, INC.
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (together with all Schedules and Exhibits,
this "Agreement"), dated as of September 3, 1999 is entered into by and among
all of those persons whose signatures are affixed to this Agreement under the
designation "Sellers" (collectively, "Sellers" and individually a "Seller"), W.
F. Wood, Incorporated, a Massachusetts corporation (the "Company"), and HTM
Holdings, Inc., a Delaware corporation ("Buyer").
RECITALS:
1. The Company operates an electronic manufacturing services business
providing customized product and manufacturing design, metal fabrication, wet
paint powder coat finishing and systems integration services to original
equipment manufacturers serving, inter alia, the electronics industry (the
----------
"Business").
2. Sellers are the owners, beneficially and of record, of all of the
outstanding capital stock of the Company (the "Shares").
3. Sellers desire to sell, and Buyer desires to buy, the Shares, on the
terms and conditions set forth in this Agreement.
NOW, THEREFORE, the parties agree as follows:
ARTICLE 1
PURCHASE AND SALE OF SHARES
---------------------------
1.1 Purchase and Sale. Sellers agree to sell to Buyer, and Buyer agrees
-----------------
to buy from Sellers, at the Closing (as defined below) all, and not less than
all, of the Shares, free and clear of all liabilities, obligations, liens,
security interests and other encumbrances.
1.2 Purchase Price.
--------------
(a) General. The aggregate purchase price to be paid for the Shares
-------
(the "Purchase Price") shall be $19,250,000, subject to adjustment as provided
in Sections 1.2(f), 5.4, 6.3 and 6.4 and Article 10 below. Because the Purchase
Price is subject to adjustment both before and after the Closing Date, the
aggregate amount paid by Buyer on the Closing Date as determined pursuant to
Sections 1.2(f)(i), 6.3 and 6.4 is sometimes referred to in this Agreement as
the "Initial Purchase Price," and the Purchase Price as finally determined
pursuant to Section 1.2(f)(ii) is sometimes referred to as the "Final Purchase
Price." The Initial Purchase Price shall be payable on the Closing Date by
delivery of the following:
(i) a wire transfer of immediately available funds in the
amount of $1,000,000 to Brown Brothers Harriman & Co. (the "Escrow
Agent"), which shall
1
<PAGE>
hold such amount (together with interest accrued thereon pursuant to
the terms of the Escrow Agreement, the "Price Adjustment Holdback
Amount") in escrow pending final determination of the Closing Balance
Sheet and the Adjustments Statement (each as defined below), all in
accordance with the escrow agreement attached to this Agreement as
Exhibit 1.2(a)(i) (the "Escrow Agreement"), which will be executed and
delivered at the Closing;
(ii) wire transfers of immediately available funds, in the
amounts set forth in Schedule 7.11, in respect of Company debt repaid
at Closing; and
(iii) wire transfers of immediately available funds in an Amount
equal to the remainder of the Initial Purchase Price, which amount
shall be allocated among the Sellers in proportion to their respective
holdings of the Shares, with each Seller to receive the percentage set
forth opposite his or her name on Exhibit 1.2(a)(iii), and each
Seller's proportionate payment to be wired to a single account
designated by such Seller; and
(b) [Reserved.]
--------
(c) Closing Balance Sheet. Within 24 hours of the Effective Time,
---------------------
Seller and its independent auditors shall conduct a physical count and
inspection of the inventory of the Company located on the premises set forth in
Schedule 3.13 for use in preparation of the Closing Balance Sheet described in
- -------------
this paragraph. The inventory shall be valued on the Closing Balance Sheet as
described in Section 1.2(d) below. As soon as practicable following the Closing
Date, Seller shall cause to be prepared a balance sheet of the Company as of the
Effective Time (as finally determined in accordance with this Section 1.2, the
"Closing Balance Sheet"), and shall have the Closing Balance Sheet audited by
Canby, Maloney & Co., Inc. Buyer and its independent auditors shall be permitted
to observe the physical inventory count and to review the preparation of the
Pre-Closing Balance Sheet (as hereinafter defined), the Closing Balance Sheet
and all work papers, books and records associated with such preparation. Buyer
and Seller shall cooperate with each other and their respective auditors to the
extent reasonable and practical in the course of preparing the Closing Balance
Sheet. Seller shall use its commercially reasonable best efforts to cause the
Closing Balance Sheet, together with the auditor's report thereon, to be
delivered to Buyer within 60 days following the Closing Date, and agrees that it
shall be delivered to Buyer in any event no later than 90 days following the
Closing Date. The Closing Balance Sheet shall be prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a basis consistent
with those applied in preparation of the March 31 Balance Sheet of the Company
(as defined in Section 3.8 below); provided, however, the Closing Balance Sheet
-------- -------
shall be determined after giving effect to the following transactions: (i) the
distribution of intercompany receivable due from Airedale Realty Trust (the
"Trust") to the Company, which as of June 30, 1999 was in the amount of
$431,609, to the Sellers, (ii) the payment of the employee bonuses set forth on
Exhibits 6.4(a) and 6.4(b), (iii) the payment by the Company prior to or at the
Closing of expenses to be borne by the Sellers in accordance with Section 6.3
and (iv) all debt to be repaid by the Company at the Closing pursuant to Section
7.11. In addition, the Closing Balance Sheet and the calculation of Working
Capital shall not include any accrual for the employee bonuses to be paid post
Closing pursuant to Exhibit 6.4(a) and any expenses to be borne by the
--------------
Sellers pursuant to Section 6.3.
2
<PAGE>
The Closing Balance Sheet shall reflect, among other things, the
following items as of the Effective Time: (i) the amount of "Working Capital,"
which is defined for purposes of this Agreement to include (A) non-cash current
assets, (B) negative cash, (C) current liabilities and (D) the asset of $66,950
and liability of $7,130 associated with corporate income taxes for the periods
prior to Closing, excluding matters described by Section 5.4(b) (subject to
audit confirmation); and (ii) capitalized equipment lease and loan obligations
(determined in accordance with GAAP) of the Company. The following items shall
be specifically excluded from the definition of Working Capital: (A) receivable
due from Airedale Realty Trust, (B) payment and/or accrual for employee bonuses
described in Section 6.4, (C) all long term debt, including current portion, (D)
capitalized equipment lease and loan obligations, (E) any liabilities due to the
338(h)(10) election, (F) all bank debt, (G) any expenses to be borne by the
Sellers pursuant to Section 6.3, and (G) any other liabilities arising from this
transaction. Furthermore, the Closing Balance Sheet shall reflect any necessary
audit adjustments from the Pre-Closing Balance Sheet.
The Closing Balance Sheet shall form the basis for certain adjustments
to the Purchase Price, as described in Section 1.2(f) below. Seller shall
deliver to Buyer at the same time as the Closing Balance Sheet a statement (the
"Adjustments Statement") showing any adjustment to the Initial Purchase Price
required as a result of the amounts reflected on Closing Balance Sheet.
(d) Inventory. It is agreed and understood that in valuing the
---------
inventory for purposes of the Closing Balance Sheet and Pre-Closing Balance
Sheet: (i) the value attributed to each inventory item shall not exceed the
lower of cost and net realizable value as at the Effective Time; (ii) Obsolete
(as defined below), defective and/or Excess (as defined below) inventory items
shall not be included as inventory on the Closing Balance Sheet; provided,
however, that up to $150,000 of Excess inventory that is not associated with
pending customer orders for which the Company has been delivered a purchase
order consistent with past practice or MRPs as at the Effective Time may be
included as inventory on the Closing Balance Sheet; (iii) an unlimited amount of
sheet stock of the Company as of the Closing shall be included as inventory on
the Closing Balance Sheet, but only to the extent such sheet stock is returnable
by the Company without penalty; and (iv) an unlimited amount of inventory
subject to full customer reimbursement (via a cancellation charge) or cash
reimbursement shall be included as inventory of the Company on the Closing
Balance Sheet. For purposes hereof, inventory shall be deemed "Obsolete" to the
extent it is not useable, not returnable without penalty or not saleable within
twelve months from the date of this Agreement in the ordinary course of business
and "Excess" inventory shall mean all inventory that is not associated with a
pending customer order entered into in the ordinary course of business or an
MRP. Sellers shall have provided written procedures to determine the quantum of
inventory obsolescence and Buyer and Sellers shall use GAAP to determine the
quantum of inventory obsolescence and the inventory value. An open order report
summarizing all existing customer purchase orders and MRPs shall be provided by
the Sellers and the Company on the Closing Date. The set of such written
procedures and open order report documents is annexed as Schedule 1.2(d).
---------------
3
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(e) Dispute Resolution. If Buyer does not deliver to Seller, within
------------------
21 business days following its receipt of the Closing Balance Sheet and the
Adjustments Statement, any objection thereto (an "Objection"), then Buyer shall
be deemed to agree with the Closing Balance Sheet and the Adjustments Statement,
and such documents shall be final and binding between the parties. If Buyer does
deliver an Objection within the 21 business day period described above, the
parties agree to negotiate in good faith to resolve their differences as to any
disputed amounts. If they are unable to resolve their differences within 15
business days after Buyer's Objection, the parties shall resolve their
differences pursuant to Section 12.14 hereof.
(f) Purchase Price Adjustments. The Initial Purchase Price shall be
--------------------------
adjusted as provided in this Section 1.2(f).
(i) Closing. For purposes of determining the Initial Purchase
-------
Price, the Company shall deliver to Buyer at least two business days
prior to the Closing Date an unaudited balance sheet of the Company as
of July 31, 1999 (the "Pre-Closing Balance Sheet"). The Pre-Closing
Balance Sheet shall be prepared in accordance with the methodology
described in Sections 1.2(c) and 1.2(d) for preparing the Closing
Balance Sheet, including without limitation the definition of Working
Capital and the method for determining inventory set forth therein.
The Initial Purchase Price shall be equal to $19,250,000, increased or
decreased dollar for dollar to the extent that the Working Capital
shown on the Pre-Closing Balance Sheet is more or less than
$2,201,510, and shall be further decreased dollar for dollar to the
extent that the capitalized equipment lease and loan obligations shown
on the Pre-Closing Balance Sheet exceed $500,000.
(ii) Post-Closing. Following final determination of the Closing
------------
Balance Sheet in accordance with this Section 1.2, the Initial
Purchase Price shall be increased or decreased dollar for dollar to
the extent that the Working Capital shown on the Closing Balance Sheet
is more or less than the Working Capital shown on the Pre-Closing
Balance Sheet, and shall be further decreased dollar for dollar to the
extent that the capitalized equipment lease and loan obligations shown
on the Closing Balance Sheet exceed those shown on the Pre-Closing
Balance Sheet. The Initial Purchase Price, as so adjusted, is known as
the "Final Purchase Price." Additionally, the parties shall make such
payments as are calculated pursuant to Section 5.4 hereto, to be paid
in accordance with the terms of Section 5.4.
(g) Instructions to Escrow Agent; Other Payments. As soon as the
--------------------------------------------
Closing Balance Sheet and Adjustments Statement have become final, whether by
mutual agreement of the parties or the determination of the Arbitrator, Buyer
and Sellers' Agent agree to execute joint instructions to the Escrow Agent
regarding the disposition of the Price Adjustment Holdback Amount and to take
other actions, as described below. If either Buyer or Sellers' Agent fails to
execute such instructions to the Escrow Agent within three business days
following the final decision of the Arbitrator, then the parties agree that the
Arbitrator is authorized to execute such instructions and deliver them to the
Escrow Agent.
4
<PAGE>
(i) If the Final Purchase Price equals the Initial Purchase
Price, the Escrow Agent shall be instructed to distribute the entire
Price Adjustment Holdback Amount to Sellers in accordance with their
proportionate interests.
(ii) If the Final Purchase Price is greater than the Initial
Purchase Price, the Escrow Agent shall be instructed to distribute the
entire Price Adjustment Holdback Amount to Sellers in accordance with
their proportionate interests, and within three business days Buyer
shall pay by wire transfer to Sellers, in accordance with their
proportionate interests, the excess of the Final Purchase Price over
the Initial Purchase Price. Buyer shall additionally pay Sellers, in
accordance with their proportionate interest set forth on Exhibit
1.2(a)(iii), interest on the amount required to be paid in excess of
the Price Adjustment Holdback Amount at an annual rate of 8.5% for the
period beginning on the Closing Date and ending on the date on which
such required payment is made.
(iii) If the Final Purchase Price is less than the Initial
Purchase Price, the Escrow Agent shall be instructed to distribute to
Buyer so much of the Price Adjustment Holdback Amount as shall be
equal to such shortfall, and to distribute to Sellers in accordance
with their proportionate interests the remainder of the Price
Adjustment Holdback Amount, if any. If the Price Adjustment Holdback
Amount is less than the amount of the shortfall between the Final
Purchase Price and the Initial Purchase Price, then Sellers, jointly
and severally, agree to pay within three business days by wire
transfer to Buyer any additional amounts due to cover such shortfall.
Sellers shall additionally be jointly and severally responsible to pay
Buyer interest on the amount required to be paid in excess of the
Price Adjustment Holdback Amount at an annual rate of 8.5% for the
period beginning on the Closing Date and ending on the date on which
such required payment is made.
1.3 Noncompetition.
--------------
(a) In consideration of Buyer's completion of the transactions
contemplated by this Agreement, and in order to ensure to Buyer the full
benefits of ownership of the Company, each Seller covenants and agrees that he
or she will not, at any time during the three year period following the Closing
Date, either individually or in partnership or in conjunction with any person or
persons, firm, association, syndicate, company or corporation, as principal,
agent, director, officer, employee, investor, or in any other manner whatsoever
(other than as provided in Section 1.3(b)), directly or indirectly, run, own,
manage, operate, control, provide consulting services to, broker business to or
otherwise transact business of any kind with, be an officer or director of,
carry on, be engaged in, be interested in, or be concerned with, or permit his
or her name or any part thereof to be used or employed by any person or persons,
firm, association, syndicate, company or corporation, that competes with the
Business in Canada, the United States or Mexico (the "Territory").
(b) Without limiting the generality of the foregoing, each Seller
further covenants and agrees (i) not to request any present or future customer
or supplier of the
5
<PAGE>
Company without regard to such person's location to curtail or cancel its
business with the Company or Buyer, not to solicit any such person for the
purpose of selling any product or service in competition with the Company, and
not to sell any such product or service to any such person; and (ii) not to
induce or attempt to influence any employee of the Company to terminate his or
her employment. Nothing in this Section 1.3 shall prevent any Seller from owning
or purchasing as a passive investor up to 5% of the outstanding publicly traded
shares or other securities of any class of any issuer, whether privately owned
or listed on a recognized stock exchange. The obligations arising pursuant to
this Section 1.3 are hereby expressly excluded from the dispute resolution
provisions of Section 12.14 of this Agreement. Each Seller acknowledges that the
covenants in this Section are reasonably necessary for the protection of the
Buyer and its conduct of the Business following the Closing Date, and that such
covenants are reasonably limited with respect to the activities prohibited, the
duration thereof, the geographic area thereof, the scope thereof and the effect
thereof on Seller and the general public. Each Seller agrees to waive all
defenses to the strict enforcement of the restrictions set out in this Section.
Each Seller acknowledges that violation of the covenants in this Section would
immeasurably and irreparably damage the Buyer and agree that the Buyer, in
addition to claiming for damages for breach of the covenants described in this
Section shall be entitled as a matter of right to seek specific performance of
the covenants contained herein and such right to such specific performance shall
be cumulative in addition to other remedies which may be available to the Buyer,
including without limitation the right to require one or more Sellers to account
for and to pay over to the Buyer all compensation, profits, monies, accruals,
increments or other benefits derived or received by such Sellers as the result
of any transaction constituting a breach of the covenants in this Section 1.3.
In the event that it shall be necessary for the Buyer to commence legal
proceedings as a result of the breach of the covenants contained in this
Section, against whom such proceedings are commenced, then the prevailing party
shall be entitled to collect from the other party its reasonable attorney fees
in respect thereof.
(c) The covenants in this Section 1.3 are severable and separate. The
unenforceability of any specific covenant in this Section 1.3 is not intended by
any party to, and shall not, affect the provisions of any other covenant in this
Section 1.3, all of which shall be given full effect, without regard to any
portions which may be deemed invalid. If any court of competent jurisdiction
determines that the scope, time or territorial restrictions set forth in
Sections 1.3(a) and 1.3(b) are unreasonable as applied to any Seller, the
parties, including the Seller in question, acknowledge their mutual intention
and agreement that those restrictions be enforced to the fullest extent the
court deems reasonable, and thereby shall be reformed to that extent as applied
to that Seller and any other Seller similarly situated.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES CONCERNING SELLERS
-------------------------------------------------
Each Seller represents and warrants to Buyer, with respect to himself or
herself, as follows:
2.1 Authority. Each Seller has, and collectively the Sellers have, full
---------
power and authority to execute, deliver and perform this Agreement and the
agreements referred to in this Agreement to which he or she is party (the
"Ancillary Agreements") and to consummate the
6
<PAGE>
transactions contemplated by this Agreement and by the Ancillary Agreements.
This Agreement has been duly executed and delivered by each Seller, and the
Ancillary Agreements, when executed and delivered, will be duly executed and
delivered by each such Seller, and each such agreement is, or upon execution and
delivery will be, a valid and binding obligation of each Seller, enforceable
against him or her in accordance with its terms. If a Seller is acting otherwise
than in his, her or its individual capacity (whether as an executor or a
guardian or in any other fiduciary or representative capacity), all actions on
the part of such Seller and all other persons (including any court) necessary
for the authorization, execution, delivery and performance by such Seller of
this Agreement and the Ancillary Agreements have been duly taken.
2.2 No Conflict or Breach. The execution, delivery and performance of
---------------------
this Agreement and the Ancillary Agreements do not and will not (a) conflict
with or constitute a violation of any law, statute, judgment or regulation of
any legislative body, court, administrative agency, governmental authority or
arbitrator applicable to any Seller, or (b) constitute or cause a breach or
violation of any covenant, agreement or obligation binding upon any Seller or
affecting any of his or her properties.
2.3 Share Ownership. Each Seller is the owner, beneficially and of
---------------
record, of all right, title and interest in and to the number of issued and
outstanding Shares set forth opposite his or her name on Schedule 2.3.
------------
Collectively, the Sellers own all the Shares issued and outstanding in the
Company, and there are no other ownership interests of any kind in the Company.
Each Seller has, and will have at the Closing, good and marketable title to all
such shares and the absolute right to sell, assign and transfer the same to
Buyer, free and clear of all liens, pledges, encumbrances, security interests,
options or other restrictions. Except as set forth on Schedule 2.3(a) or
------------
Schedule 3.5, no Seller is party to any option, warrant, right, contract, call,
- ------------
put or other agreement or commitment providing for the disposition or
acquisition of any of the Shares (other than this Agreement). Except as set
forth in Schedule 2.3(b), no Seller is party to any voting trust, proxy or other
---------------
agreement or understanding with respect to any of the Shares.
2.4 Brokers. No finder, broker, agent or other intermediary has acted for
-------
or on behalf of any Seller in connection with the negotiation or consummation of
this Agreement, and there are no claims for any brokerage commission, finder's
fee or similar payment due from any Seller save and except for Stonebridge
Associates, LLC.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES CONCERNING COMPANY
-------------------------------------------------
Paul A. Keany and Edward J. Stewart III (together, the "Warranting
Shareholders") jointly and severally represent and warrant to Buyer as follows:
3.1 Organization and Good Standing; Governing Documents. The Company is a
---------------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Massachusetts. The Company has all requisite power and authority
to own, operate and lease its properties and to carry on its business as now
being conducted. The Company is duly qualified to do business as a foreign
corporation and is in good standing in all other jurisdictions in which the
character of the property owned, leased or operated by it or the nature of the
business
7
<PAGE>
conducted by it makes such qualification necessary, and such jurisdictions are
listed on Schedule 3.1. True and complete copies of the Articles of Organization
------------
and Bylaws of the Company, as in effect as of the date of this Agreement, have
been delivered to the Buyer.
3.2 Authority. The Company has all requisite power and authority to
---------
execute, deliver and perform this Agreement and to consummate the transactions
contemplated by this Agreement. The execution, delivery and performance of this
Agreement, and the consummation of the transactions contemplated by this
Agreement, have been duly and validly authorized by all necessary corporate and
shareholder action on the part of the Company. This Agreement has been duly
executed and delivered by the Company and constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms.
3.3 No Conflict or Breach. Except as described in Schedule 3.3, the
--------------------- ------------
execution, delivery and performance of this Agreement do not and will not:
(a) conflict with or constitute a violation of the Articles of
Organization or Bylaws of the Company;
(b) assuming compliance with the requirements of the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended, and the rules and
regulations thereunder (the "HSR Act"), conflict with or constitute a violation
of any law, statute, judgment, order, decree or regulation of any legislative
body, court, administrative agency, governmental authority or arbitrator
applicable to or relating to the Company or its assets;
(c) conflict with, constitute a default under, result in a breach or
acceleration of or require notice to or the consent of any third party under any
contract, agreement, lease, commitment, mortgage, note, license or other
instrument or obligation to which the Company is party or by which it is bound
or by which its assets are affected; or
(d) result in the creation or imposition of any lien, charge or
encumbrance of any nature whatsoever on any of the assets of the Company or on
the Shares.
3.4 Consents and Approvals. Except as described in Schedule 3.4, each of
---------------------- ------------
the following which is required in connection with the valid execution and
delivery by Sellers and the Company of this Agreement or the consummation by
Sellers and the Company of the transactions contemplated by this Agreement shall
have been obtained on or before the date hereof: (a) each consent, approval,
authorization, registration or filing with any federal, state or local judicial
or governmental authority or administrative agency, and (b) each consent,
approval, authorization of or notice to any other third party. The items
described in clauses (a) and (b) are referred to collectively as the "Required
Consents."
3.5 Capitalization. The authorized capital stock of the Company consists
--------------
of 200,000 shares of common stock, no par value, of which 80,000 shares are
issued and outstanding. Such outstanding shares, all of which are Shares
transferred pursuant to this Agreement, represent all of the outstanding
ownership interests of the Company. All of the Shares are validly issued, fully
paid and nonassessable, are free from, and were not issued in violation of any,
preemptive
8
<PAGE>
rights, and are owned of record and beneficially by Sellers in the numbers set
forth opposite their respective names on Schedule 2.3. Except as described in
------------
Schedule 3.5, (i) there are no outstanding or authorized options, warrants,
- ------------
rights, contracts, calls, puts, right to subscribe, conversion rights or other
agreements or commitments to which the Company is a party or which are binding
upon the Company providing for the issuance, disposition or acquisition of any
of its capital stock (other than this Agreement); (ii) there are no outstanding
or authorized stock appreciation, phantom stock or similar rights with respect
to the Company; (iii) there are no voting trusts, proxies or any other
agreements or understandings with respect to the voting of the capital stock of
the Company; and (iv) the Company is not subject to any obligation (contingent
or otherwise) to repurchase or otherwise acquire or retire any of its capital
stock.
3.6 Subsidiaries; Investments. Except as described in Schedule 3.6, the
------------------------- ------------
Company does not own or hold any shares of stock or any other security or
interest in any other entity, or any rights to acquire any such security or
interest. The Company has never had any subsidiary corporation of which the
securities having a majority of the voting power in electing the board of
directors were, at the time as of which any determination was made, owned by the
Company either directly or indirectly.
3.7 Minute and Stock Transfer Books. The minute books of the Company, all
-------------------------------
of which have been made available to Buyer, are true, correct, complete and
current in all material respects and contain accurate and complete records of
all material actions taken by its shareholders, its Board of Directors and each
committee of its Board of Directors, and all signatures contained in such minute
books are the true signatures of the persons whose signatures they purport to
be. The stock transfer books of each Company are true, correct, complete and
current in all respects. At the Closing, all books and records will be delivered
to Buyer. Schedule 3.7 to this Agreement sets forth a true, correct and complete
------------
list of the names and titles of all officers and directors of the Company.
3.8 Financial Statements.
--------------------
(a) Sellers and the Company have previously delivered to Buyer true
and complete copies of (i) the audited balance sheets of the Company combined
with the Trust as of December 31, 1996, 1997 and 1998, and the related
statements of operations, shareholders' equity and cash flows for the fiscal
years then ended, including the footnotes to such statements, additional or
supplemental information supplied therewith and the report prepared in
connection therewith by the independent certified public accountants reviewing
such financial statements; and (ii) interim unaudited financial reports prepared
by the Company's management for each month since December 31, 1998 (the "Interim
Financial Statements"), including, without limitation, a balance sheet as of
March 31, 1999 (the "March 31 Balance Sheet") and a balance sheet as of June 30,
1999 (the "June 30 Balance Sheet"). The documents described in clauses (i) and
(ii) (collectively, the "Financial Statements") (A) are consistent with the
books and records of the Company; (B) present fairly the assets, liabilities and
financial condition of the Company (as so combined with the Trust) as of the
respective dates of the Financial Statements, and the results of operations for
the periods then ending; and (C) have been prepared in accordance with GAAP
applied on a consistent basis throughout the periods involved, subject in the
case of the Interim Financial Statements to normal recurring year end
adjustments, the absence of notes and
9
<PAGE>
any adjustments or the lack thereof on account of the Trust. The Interim
Financial Statements form part of Schedule 3.8.
-------- ---
(b) Except as set forth on Schedule 3.8, the Company has no material
------------
liability or obligation, whether accrued, absolute or contingent, that is not
reflected or reserved against in the December 31, 1998 balance sheet or the June
30 Balance Sheet, except for current liabilities incurred in the ordinary course
of business since the respective dates thereof. Except as described in Section
3.8(a), any items of income or expense which are of a nonrecurring nature are
separately disclosed in the Financial Statements. Except as set forth on
Schedule 3.8 and Schedule 7.11, the Company has no indebtedness for borrowed
- ------------ -------------
money (including capitalized lease and loan obligations).
3.9 Books and Records. The books and records of the Company are true,
-----------------
accurate and complete and, where appropriate, have been maintained in accordance
with GAAP applied on a consistent basis. At Closing, all such books and records,
including, without limitation, all Tax Returns (as defined in Section 3.21) will
be in the possession of the Company.
3.10 Title to Assets. The Company has good and marketable title to all of
---------------
the properties and assets (real or personal, tangible or intangible) owned by it
(including, without limitation, those properties and assets shown on the June 30
Balance Sheet), and a valid leasehold or other possessory interest in all other
properties and assets used, operated or occupied by it, located on its premises
or otherwise shown on the June 30 Balance Sheet, except for tangible personal
property sold or disposed of in the ordinary course of business of the Company
and consistent with past practice since June 30, 1999. All of the Company's
properties and assets (whether real or personal, tangible or intangible, owned,
leased or otherwise acquired) are free and clear of any liens, claims, charges,
security interests, mortgages, pledges or other encumbrances or restrictions of
any nature whatsoever (collectively, "Liens"), other than:
(a) Liens for taxes not yet due and payable; and
(b) Liens described on Schedule 3.10. There are no existing breaches
-------------
or defaults of the Company, or to the best knowledge of the Warranting
Shareholders and the Company any existing breaches or defaults by any other
party, under, and no events or circumstances have occurred with respect to the
Company, or to the best knowledge of the Warranting Shareholders and the Company
with respect to any other party, which, with or without notice or lapse of time
or both, would constitute a breach of or a default under, any instrument,
agreement or other document that creates, evidences or constitutes any such Lien
or that evidences, secures or governs the terms of any indebtedness or
obligation secured by any such Lien (any such instrument, agreement or other
document is referred to herein as a "Lien Instrument"). Except as described in
paragraphs 4 and 5 of Schedule 3.10 , the sale of the Shares by Sellers to Buyer
will not, with respect to any Lien Instrument, (i) constitute a breach thereof
or a default thereunder; (ii) permit (with or without notice, lapse of time or
both), cause or result in (A) the acceleration of any indebtedness or other
obligation evidenced, secured or governed thereby or (B) the foreclosure or
other enforcement of any such Lien; (iii) permit or cause the terms thereof to
be renegotiated; or (iv) require the consent of the holder of any such
indebtedness or obligation or any third party.
10
<PAGE>
3.11 Real Property.
-------------
(a) Owned. The Company presently owns no real property, and has
-----
never owned any real property.
(b) Leased. Schedule 3.11(b) contains a true and correct description
------ ----------------
of all real property leased by the Company (the "Leased Real Property"), of all
leases relating to the Leased Real Property (collectively, the "Real Property
Leases"), and of all Liens upon or affecting the Buyer's rights to or interest
in any of the Leased Real Property or any Real Property Lease. Except as set
forth in Schedule 3.11(b), (i) the Company has not sublet, or granted to any
----------------
other person any right of use, operation or occupancy of, any of the Leased Real
Property, (ii) the Company has not sold, transferred or assigned, or granted any
Lien on or otherwise encumbered, all or any portion of its interest under any
Real Property Lease, (iii) no person or entity has any sub-leasehold interest
in, and no person or entity (other than the Company) has any right to use,
operate or occupy, any Leased Real Property and (iv) all monies due by the
Company to the Trust or to any other person with respect to the Leased Real
Property as of the date of this Agreement, or which to the knowledge of the
Warranting Shareholders or the Company will be claimed by such persons, have
been paid in full. Sellers have delivered to Buyer true, correct and complete
copies of (A) all of the Real Property Leases, (B) all title insurance policies
insuring any leasehold or other interest of the Company in, and all surveys in
the Company's possession of, the Leased Real Property, (C) all instruments,
agreements and other documents creating, evidencing or constituting any Liens
upon any of the Leased Real Property or any Real Property Lease, and (D) all
instruments, agreements and other documents evidencing or otherwise relating to
any transaction or other arrangement described or referred to in the immediately
preceding sentence. Each of the Real Property Leases is valid, binding and
enforceable in accordance with its terms and is in full force and effect, and
there are no offsets or defenses by either landlord or tenant thereunder
(provided, however, that the foregoing statement is made to the best knowledge
of the Warranting Shareholders and the Company with respect to the Leased Real
Property in Franklin, Massachusetts). There are no existing breaches of or
defaults by the Company or the Trust, or to the best knowledge of the Warranting
Shareholders and the Company any existing breaches of or defaults by any other
party, under, and no events or circumstances have occurred which, with or
without notice or lapse of time or both, would constitute a breach of or a
default under, any of the Real Property Leases. The sale of the Shares by
Sellers to Buyer will not, with respect to any such Real Property Lease, (1)
constitute a breach thereof or a default thereunder; (2) permit (with or without
notice, lapse of time or both), cause or result in (x) the termination thereof
or (y) the acceleration of any of the rentals due thereunder; (3) permit or
cause the terms thereof to be renegotiated; or (4) require the consent of the
landlord or any third party.
(c) Improvements; Use. The Leased Real Property is zoned for the
-----------------
various purposes for which the buildings and other improvements located thereon
(the "Improvements") are presently being used (provided, however, that the
foregoing statement is made only as to the actual knowledge of the Warranting
Shareholders and the Company with respect to the Leased Real Property in
Franklin, Massachusetts). Except as described in Schedule 3.11(c), all
----------------
Improvements and all uses thereof are in compliance with all material applicable
zoning and land
11
<PAGE>
use laws, ordinances and regulations. All Improvements are in good repair and in
good operating condition, ordinary wear and tear excepted. To the best knowledge
of Sellers and the Company, no part of any Improvement encroaches on any real
property not included in the Leased Real Property.
3.12 Tangible Personal Property. Except as described in Schedule 3.12,
-------------------------- -------------
the Company owns or leases all buildings, machinery, equipment and other
tangible assets used for the conduct of its business (the "Tangible Property").
Each item of Tangible Property used in the conduct of the Business is in good
operating order, condition and repair (ordinary wear and tear excepted) and is
suitable for immediate use in the ordinary course of business of the Company. No
item of Tangible Property is in need of repair or replacement, except for
routine maintenance in the ordinary course of business.
3.13 Inventories. All items classified as inventories on the Financial
-----------
Statements of the Company (i) are in materially good condition, not Obsolete and
nondefective; (ii) are materially useable or saleable within twelve months from
the date of this Agreement in the ordinary course of business of the Business;
(iii) are located on the premises described on Schedule 3.13; (iv) have been
--------------
acquired by the Company only in bona fide transactions entered into in the
ordinary course of business; and (v) as at March 31, 1999, were reasonable in
relation to the then existing circumstances of the Company and classified as
current assets in accordance with GAAP and fairly reflected the average
inventory levels maintained during the 12-month period ended on that date. The
inventory, taken as a whole, as reflected in the March 31 Balance Sheet and
books and records of the Company is reflected on the basis of a partial physical
count and is valued at the lower of cost and net realizable value. Since March
31, 1999, no inventory has been sold or disposed of except in anticipation of
and through sales in the ordinary course of business.
3.14 Contracts. Schedule 3.14 lists all contracts, commitments,
--------- -------------
guarantees, agreements (including agreements for the borrowing of money or the
extension of credit), leases (other than Real Property Leases), licenses,
understandings and obligations, whether written or oral, to which the Company is
party or by which the Company is bound, (i) that involve the expenditure by any
party to such contract, commitment, agreement, lease, license, understanding or
obligation of more than $10,000; (ii) that are not terminable by either party
without penalty on 30 days' notice; (iii) under which the Company has incurred
or may incur any severance pay or special compensation obligation which would
become payable by reason of this Agreement or the consummation of the
transactions contemplated hereby; (iv) under which the Company is or will after
Closing be restricted from carrying on any business or other activities or which
relates to confidentiality obligations; (v) under which the Company is obligated
to sell or otherwise dispose of any assets except in the ordinary course of
business; (vi) under which the Company has or will after the Closing have any
liability or obligation to or for the benefit of any Seller or any affiliate of
any Seller; (vii) under which the Company has any liability or obligation for
debt of another person or constituting or giving rise to a guarantee of any
liability or obligation of any person; or (viii) under which the Company is or
may become obligated to pay any amount in respect of indemnification
obligations, purchase price adjustment or otherwise (other than as contemplated
by the Articles of Organization or Bylaws of the Company or by this Agreement)
in connection with any acquisition or disposition of assets or securities or any
merger, consolidation or other business combination (each of which is referred
to herein as a "Contract").
12
<PAGE>
The Company has delivered to Buyer true and complete copies of all written
Contracts and true and complete memoranda of all oral Contracts, including any
and all amendments and other modifications to such Contracts. Each of the
Contracts is valid, binding and enforceable in accordance with its terms and is
in full force and effect. With respect to the Company, there are no existing
breaches or defaults, and no events or circumstances have occurred which, with
or without notice or lapse of time or both, would constitute breaches or
defaults, under any of the Contracts. The sale of the Shares by Sellers to Buyer
will not, with respect to any Contract, (i) constitute a default thereunder;
(ii) require the consent of any person or party, except for the Required
Consents; or (iii) affect the continuation, validity and effectiveness of any
Contract or the terms of any Contract.
3.15 Receivables. All accounts receivable and trade accounts reflected on
-----------
the March 31 Balance Sheet (less any such receivables collected since March 31,
1999) and all accounts receivable and trade accounts presently owing and to be
owing to the Company on the Closing Date (collectively, the "Receivables"), in
each case net of the reserves established and reflected on the March 31 Balance
Sheet or the Closing Balance Sheet (as the case may be), are, and on the Closing
Date will be, legal, valid and binding obligations. Except as set forth on
Schedule 3.15, all such Receivables were and will be created in the ordinary
- -------------
course of business of the Business and are reflected properly on its books and
records in accordance with GAAP. Except as set forth on Schedule 3.15, the
-------------
reserves established for doubtful or uncollected accounts as shown on the March
31 Balance Sheet, and to be shown on the Closing Balance Sheet, are consistent
in amount to those historically established with respect to the accounts
receivable of the Business. Prior to Closing, the ADD's receivable shall have
been written off in its entirety.
3.16 Intellectual Property. Schedule 3.16 sets forth a list of all
--------------------- -------------
trademarks, trade names and logos owned or used by the Company (the "Marks").
Each of the Marks has been in continuous use prior to the date the Company was
formed, and each of the Marks is now in use in interstate or intrastate
commerce, in each case as stated on Schedule 3.16, on or in connection with all
-------------
of the goods or services set forth on such Schedule. The Company owns all right,
title and interest in and to the Marks, free and clear of any Liens or licenses.
The Company has not licensed any of the Marks to any third party, and no third
party has any right to use any of the Marks. There are no claims or suits
pending or, to the best knowledge of the Warranting Shareholders or the Company,
threatened against the Company challenging the Company's ownership of or
unencumbered right to use any of the Marks or alleging that any of the Marks
infringes any rights of any third parties, nor does there exist any basis
therefor.
3.17 Suppliers and Customers. Schedule 3.17 sets forth the Company's top
----------------------- -------------
ten suppliers, together with the dollar amount of goods or services purchased
from each such supplier during the fiscal year ended December 31, 1998 and the
six-month period ended June 30, 1999, as well as the Company's top ten
customers, together with the dollar amount of goods or services sold to each
such customer during the twelve-month period ended June 30, 1999. Except as
otherwise set forth in Schedule 3.17, since December 31, 1998, there has been
-------------
no material adverse change in the business relationship of the Company with any
supplier or customer named in Schedule 3.17. No customer or supplier named in
-------------
Schedule 3.17 (i) has terminated or materially altered, or notified the Company
- -------------
that it is considering terminating or materially altering, its relationship with
the Company, or (ii) since June 30, 1999, notified or
13
<PAGE>
overtly threatened that it intends to modify or has modified such relationship
with the Company in a manner which is less favorable to the Company or have
agreed not to or will not agree to do business on such terms and subject to such
conditions at least as favorable as the terms and conditions as provided to the
Company as of June 30, 1999. The Company and the Sellers have no knowledge that
any customer intends to decrease its purchase of products or services from the
Company or to terminate or materially alter its relationship with the Company.
3.18 Litigation. Except as described on Schedule 3.18, there are no
---------- -------------
claims, actions, suits, inquiries, hearings or investigations ("Claims") pending
or, to the best knowledge of the Company and Sellers, overtly threatened,
against the Company or any Seller or to which the Company is party. Except as
described on Schedule 3.18, no Claims have been brought within the last three
-------------
years against the Company or any Seller or to which the Company or any Seller is
party. To the knowledge of the Warranting Shareholders and the Company, there
are no facts or circumstances which could serve as the basis for any Claim
against the Company, or, by virtue of the execution, delivery and performance of
this Agreement, against Buyer, except for claims which would not, individually
or in the aggregate, have a material adverse effect on the financial condition,
properties or business of the Company or the Buyer (a "Material Adverse
Effect").
3.19 Compliance with Decrees and Laws. There is not outstanding or, to
--------------------------------
the best knowledge of the Company or Sellers, threatened, any order, writ,
injunction or judgment of any court, governmental agency or arbitration tribunal
against or involving the Company. Except as described in Schedule 3.19, the
-------------
Company is currently, and has been at all times, in material compliance with all
laws, statutes, rules, regulations, orders and licensing requirements of
federal, state, local and foreign agencies and authorities applicable to the
business and properties of the Company (including, without limitation, those
relating to antitrust and trade regulation, civil rights, environment, labor and
employment discrimination, affirmative action, safety and health) ("Rules"),
except for instances of noncompliance which would not have a Material Adverse
Effect. No investigation or review by any federal, state or local body or agency
is pending, or to the best knowledge of the Company and Sellers, threatened or
planned with respect to the Company.
3.20 Permits. The Company has obtained and currently maintains all
-------
permits, authorizations, certificates, approvals, licenses, exemptions and
classifications required for the conduct of its business and the ownership and
operation of its assets, all of which are described on Schedule 3.20 (the
-------------
"Permits"). The Company is not in material violation of any of the Permits, and
no proceedings to revoke or limit any Permit are pending or, to the best
knowledge of the Company and Sellers, threatened, except for violations or
proceedings with respect to any Permits the forfeiture of which would not have a
Material Adverse Effect.
3.21 Taxes.
-----
(a) For purposes of this Section:
(i) "Tax" or "Taxes" means any federal, state, local, or
foreign income, gross receipts, license, payroll, employment, excise,
severance, stamp, occupation, premium, windfall profits, environmental
(including taxes under
14
<PAGE>
Section 59A of the Internal Revenue Code of 1986, as amended (the
"Code")), customs duties, capital stock, franchise, profits,
withholding, social security (or similar), unemployment, disability,
real property, personal property, sales, use, transfer, registration,
value added, alternative or add-on minimum, estimated, or other tax of
any kind whatsoever, including any interest, penalty, or addition
thereto, whether disputed or not; and
(ii) "Tax Return" means any return, declaration, report, claim
for refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any
amendment thereof.
(b) The Company has timely filed all Tax Returns that it was required
to file before the Closing Date. All such Tax Returns were correct and complete
in all respects. All Taxes owed by the Company (whether or not shown on any Tax
Return) have been paid. The Company currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Company does not file Tax
Returns that it is or may be subject to taxation by that jurisdiction. There are
no Liens on any of the assets of the Company that arose in connection with any
failure (or alleged failure) to pay any Tax.
(c) The Company has withheld and paid all Taxes required to have been
withheld and paid by it in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder or other third party.
(d) No Seller or director or officer (or employee responsible for Tax
matters) of the Company expects any Governmental Authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax liability of the Company either (i)
claimed or raised by any Governmental Authority or (ii) as to which any of
Sellers and the directors and officers (and employees responsible for Tax
matters) of the Company has knowledge. To the knowledge of the Warranting
Shareholders and the Company, no such claim is threatened by any Governmental
Authority. Schedule 3.21 lists all federal, state, local and foreign income Tax
-------------
Returns filed with respect to the Company for taxable periods ended on or after
December 31 1993, indicates those Tax Returns that have been audited, and
indicates those Tax Returns that currently are the subject of audit. Sellers
have delivered to Buyer correct and complete copies of all federal income Tax
Returns, examination reports, and statements of deficiencies assessed against or
agreed to by the Company since December 31, 1993.
(e) The Company has not waived any statute of limitations in respect
of Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(f) The Company has not filed a consent under Code (S)341(f)
concerning collapsible corporations. The Company has not made any payments, is
not obligated to make any payments and is not a party to any agreement that
under certain circumstances could obligate it to make any payments that will not
be deductible under Code (S)280G. The Company has not been a United States real
property holding corporation within the meaning of Code (S)897(c)(2) during the
applicable period specified in Code (S)897(c)(1)(A)(ii). The Company is not a
party to any Tax allocation or sharing agreement. The Company (i) has not been a
member of an
15
<PAGE>
affiliated group (within the meaning of Code (S)1504(a)) filing a consolidated
federal income Tax Return (other than a group the common parent of which was the
Company) or (ii) has no liability for the Taxes of any individual, partnership,
corporation, association, joint stock company, trust joint venture or
unincorporated organization (other than the Company) under Reg. (S)1.1502-6 (or
any similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.
(g) Schedule 3.21 sets forth the following information with respect
-------------
to the Company as of December 31, 1998 (i) the tax basis of the Company in its
assets and (ii) the amount of any net operating loss, net capital loss, unused
investment or other credit, unused foreign tax, or excess charitable
contribution allocable to the Company.
(h) Excluding the tax effects of the purchase of the Shares
hereunder, the unpaid Taxes of the Company (i) did not, as of the most recent
fiscal month end, exceed the reserve for Tax liability (excluding any reserve
for deferred Taxes established to reflect timing differences between book and
Tax income) set forth on the face of the most recent balance sheet (rather than
in any notes thereto) and (ii) do not exceed that reserve as adjusted for the
passage of time through the Closing Date in accordance with the past custom and
practice of the Company in filing its Tax Returns.
(i) For the December 31, 1988 tax year and all subsequent tax years,
the Company has a valid election in effect under Section 1362(a) of the Code to
be treated for federal income tax purposes as an S corporation, and as a
consequence of the S election, the Company is and has been exempt from federal
and state income taxation as provided in Subchapter S of the Code and analogous
state provisions, with the exception of Massachusetts, which may impose excise
and/or income taxes on the Company's taxable income. The Company holds no assets
that are subject to Tax on built-in gains under Code (S)1374. All current and
former shareholders of the Company have at all times been persons eligible to be
shareholders of an S corporation under Section 1361(a)(1) of the Code and have
complied with all requirements of such section of the Code.
3.22 Environmental Matters. Except as described in Schedule 3.22,
--------------------- -------------
the Company has not materially violated and is not presently materially
violating any applicable federal, state, county or local statutes, laws,
regulations, rules, ordinances, codes, licenses or permits of any governmental
authorities relating to environmental matters, including by way of illustration
and not by way of limitation the Comprehensive Environmental Response,
Compensation and Liability Act, the Resource Conservation Recovery Act, the
Clean Air Act, the Clean Water Act, the Occupational Safety and Health Act, the
Toxic Substances Control Act, any "Superfund" or "Superlien" law, or any other
federal, state or local statute, law, ordinance, code, rule, regulation, order,
decree or guideline (whether published or unpublished) regulating, relating to
or imposing liability or standards of conduct concerning Hazardous Materials, in
each case as amended from time to time (collectively, "Environmental Laws"). No
event has occurred or condition exists or operating practice is being employed
that will give rise to any liability or losses on the part of the Company either
at the present or at any future time (including, without limitation, any
obligation to conduct any remedial or monitoring work) under any Environmental
Laws or otherwise resulting from or relating to the handling, storage,
treatment, generation, use, transportation or
16
<PAGE>
disposal of any pollutants or contaminants, hazardous, noxious or toxic
materials, commodities or substances by or on behalf of either Company or any of
its predecessors or otherwise in or near the Leased Real Property. For purposes
of this Agreement, "Hazardous Materials" includes but is not necessarily limited
to asbestos, asbestos containing materials ("ACM"), polychlorinated biphenyls,
lead-based paints, any petroleum, petroleum by-product (including, but not
limited to, crude oil, diesel oil, fuel oil, gasoline, lubrication oil, oil
refuse, used motor oil, oil mixed with other waste, oil sludge, and all other
liquid hydrocarbons, regardless of specific gravity), natural or synthetic gas,
or other hazardous or toxic substances, materials, wastes, pollutants or
contaminants defined under or regulated by the Environmental Laws. Specifically,
but not in limitation of the foregoing:
(a) The Company has obtained and is in material compliance with the
terms and provisions of all licenses and permits necessary for the Company's
operations and its assets to be in compliance with the Environmental Laws, all
of which are disclosed on Schedule 3.22. The Company has filed such timely and
-------------
complete renewal applications as may be required prior to Closing. The Company
has materially complied with all reporting and record keeping requirements
applicable to the business under the Environmental Laws.
(b) The assets of the Company are free of Hazardous Materials, except
as used in the ordinary course of business and as permitted under the
Environmental Laws.
(c) The Company has at all times received, handled, used, stored,
treated, transported and disposed of all Hazardous Materials in material
compliance with all Environmental Laws. The Company has transported or arranged
for the transport of any Hazardous Materials from any property that it owns,
leases or uses in its operations.
(d) None of the Leased Real Property has been used at any time by any
person as a landfill or a waste disposal site (provided, however, that the
Warranting Shareholders and the Company have no knowledge regarding the
foregoing with respect to the Leased Real Property in Franklin, Massachusetts).
(e) No equipment containing or using polychlorinated biphenyls (PCBs)
is included in the assets of the Company.
(f) There are no monitoring wells for monitoring Hazardous Materials
on, in, or coming from the Leased Real Property, except as disclosed in the
environmental site assessment prepared by Lycott Environmental Services in 1989
and the Phase I Environmental Assessment and Groundwater Sampling performed by
Capaccio Environmental Engineering in 1999, copies of which have been delivered
to Buyer.
(g) There are no underground or aboveground tanks or pipelines
situated on the Leased Real Property, except as disclosed in the environmental
site assessment prepared by Lycott Environmental Services in 1989 and the Phase
I Environmental Assessment and Groundwater Sampling performed by Capaccio
Environmental Engineering in 1999, copies of which has been delivered to Buyer.
The Company has provided Buyer with copies (or if not available, written
summaries) of all environmental investigations, studies, audits, reviews and
17
<PAGE>
other analyses conducted by or on behalf, or which otherwise are in the
possession, of the Company respecting all Leased Real Property.
(h) There are no liens on the Leased Real Property resulting from any
cleanup or proposed cleanup under the Environmental Laws.
(i) Except as described in Schedule 3.22, no notices of any
-------------
violation, inquiries or requests for information relating to any of the matters
referred to in Subsections (a) through (h) above have been received by Sellers
or the Company, and there is no action of any kind pending (or, to the knowledge
of the Sellers, threatened) against the Company in respect of any alleged
breach, default, violation or noncompliance with any Environmental Law.
3.23 Insurance. Schedule 3.23 describes all insurance policies maintained
--------- -------------
or paid for by the Company with respect to the business of the Company
(including, without limitation, policies on the lives of any shareholders or key
employees). Such policies are valid, binding and enforceable in accordance with
their terms and are in full force and effect, and all premiums due thereon have
been paid and will be paid through the Closing Date.
3.24 Labor and Employment Matters. With respect to employment matters:
----------------------------
(a) No employees of the Company are or have been represented by a
union or other labor organization or covered by any collective bargaining
agreement. To the best knowledge of the Company and Sellers, no union is
currently attempting to organize any such employees nor has there been any
organizing activity or union elections or campaigns.
(b) There is no labor strike, dispute, slowdown, stoppage or similar
labor difficulty pending or, to the best knowledge of the Company and Sellers,
threatened against or affecting the Company, nor have there been any such events
pending or, to the best knowledge of the Company and Sellers, threatened during
the past five years.
(c) The Company is in material compliance with all federal, state and
local laws and regulations respecting employment and employment practices, terms
and conditions of employment and wages and hours, and there is no unfair labor
practice charge or complaint or charge of employment discrimination or
retaliation against the Company pending or, to the best knowledge of the Company
and Sellers, threatened.
(d) Except with respect to Thomas Harrington and Sheila Chartier and
as described in Schedule 3.24(d), no representations have been made by the
----------------
Warranting Shareholders or the Company or its employees or agents to employees
of the Company with respect to Buyer's intentions to continue to employ, or not
to continue to employ, the Company's employees or with respect to the conditions
of any such employment.
(e) The Company's gain sharing plan is provided by the Company in its
sole discretion and may be altered, replaced or discontinued at any time without
cost to the Company and no representations have ever been made to the contrary
by Sellers or the Company or its employees or agents to employees of the
Company.
18
<PAGE>
(f) No key employee or senior manager of the Company listed on
Schedule 3.24(f) has indicated a desire or plan to resign from the Company,
- ----------------
whether as a result of this transaction or otherwise.
(g) There have been no "layoffs" of Company employees or any "plant
closings" by the Company, as such terms are defined in the Work Adjustment and
Retaining Notification Act ("WARN"), within the past 90 days, nor has there been
any previous event which requires the giving of notice under WARN.
(h) Except as set forth in Schedule 3.24(h), the Company is not party
----------------
to any agreement which will require the Company to make any payment or pay any
consideration to any employees or other persons of the Company in connection
with the execution and delivery of this Agreement, any Ancillary Agreement or
the transactions contemplated hereby and thereby.
3.25 Employees; Compensation; Benefit Plans.
--------------------------------------
(a) Compensation. Schedule 3.25(a) contains an accurate and complete
------------ -------------
list of the name, hire date, position, rate of compensation and any incentive
compensation arrangements, bonuses or commissions or fringe or other benefits,
whether payable in cash or in kind, of each current employee, director,
independent contractor, consultant and agent of the Company and each other
person to whom the Company pays or provides, or has an obligation, agreement
(written or unwritten), policy or practice of paying or providing, retirement,
health, welfare or other benefits of any kind or description whatsoever.
(b) Employee Benefit Plans.
(i) Schedule 3.25(b) contains an accurate and complete list of
all Plans, as defined below, contributed to, maintained or sponsored
by the Company, to which the Company is obligated to contribute or
with respect to which the Company has any liability or potential
liability, whether direct or indirect, including all Plans contributed
to, maintained or sponsored by each member of the controlled group of
companies, within the meaning of Sections 414(b), 414(c), and 414(m)
of the Code, of which the Company is a member. For purposes of this
Agreement, the term "Plans" shall mean: (A) employee benefit plans as
defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), whether or not funded and whether or
not terminated; (B) written employment agreements; and (C) personnel
policies or fringe benefit plans, policies, programs and arrangements,
whether or not subject to ERISA, whether or not funded, and whether or
not terminated, including without limitation, stock bonus, deferred
compensation, pension, severance, bonus, vacation, travel, incentive,
and health, disability and welfare plans.
(ii) Except as disclosed on Schedule 3.25(b), the Company does
not contribute to, has no obligation to contribute to or otherwise has
no liability or potential liability with respect to (A) any
Multiemployer Plan (as such term is
19
<PAGE>
defined in Section 3(37) of ERISA), (B) any Plan of the type described
in Sections 4063 and 4064 of ERISA or in Section 413 of the Code (and
regulations promulgated thereunder), or (C) any plan which provides
health, life insurance, accident or other "welfare-type" benefits to
current or future retirees or current former employees, their spouses
or dependents, other than in accordance with Section 4980B of the Code
or applicable state continuation coverage law.
(iii) Except as disclosed on Schedule 3.25(b), none of the Plans
obligates the Company to pay separation, severance, termination or
similar-type benefits solely as a result of any transaction
contemplated by this Agreement or solely as a result of a "change in
control," as such term is used in Section 280G of the Code (and
regulations promulgated thereunder).
(iv) Each Plan and all related trusts, insurance contracts, and
funds have been maintained, funded and administered in material
compliance in all respects with all applicable laws and regulations,
including but not limited to ERISA and the Code. None of the Company,
any trustee or administrator of any Plan, or any other person has
engaged in any transaction with respect to any Plan which could
subject the Company, or any trustee or administrator of any Plan, or
any party dealing with any Plan, or Buyer to any tax or penalty
imposed by ERISA or the Code. No actions, suits, claims, complaints,
charges, proceedings, hearings, investigations or demands with respect
to the Plans (other than routine claims for benefits) are pending or,
to the best knowledge of the Warranting Shareholders or the Company,
overtly threatened, and the Company and Warranting Shareholders have
no knowledge of any actions, suits, claims, complaints, charges,
proceedings, hearings, investigations or demands. No Plan that is
subject to the funding requirements of Section 412 of the Code or
Section 302 of ERISA has incurred any "accumulated funding deficiency"
as such term is defined in such sections of ERISA and the Code,
whether or not waived. No liability to the Pension Benefit Guaranty
Corporation ("PBGC") (except for routine payment of premiums) has been
or is expected to be incurred with respect to any Plan that is subject
to Title IV of ERISA, no reportable event (as such term is defined in
Section 4043 of ERISA) has occurred with respect to any such Plan, and
the PBGC has not commenced or threatened the termination of any Plan.
None of the assets of the Company is the subject of any lien arising
under Section 302(f) or ERISA or Section 412(n) of the Code, the
Company has not been required to post any security pursuant to Section
307 of ERISA or Section 401(a)(29) of the Code, and neither the
Company, any officer or director of the Company nor any Seller has
knowledge of any facts which could be expected to give rise to such
lien or such posting of security.
(v) Each Plan that is intended to be qualified under Section
401(a) of the Code, and each trust (if any) forming a part of such
Plan, has received a favorable determination letter from the Internal
Revenue Service as to the qualification under the Code of such Plan
and the tax exempt status of such related trust, and nothing has
occurred since the date of such determination letter
20
<PAGE>
that could adversely affect the qualification of such Plan or the tax
exempt status of such related trust.
(vi) No underfunded "defined benefit plan" (as such term is
defined in Section 3(35) of ERISA) has been, during the five years
preceding the Closing Date, transferred out of the controlled group of
companies (within the meaning of Code Sections 414(b), (c) and (m)) of
which the Company is a member or was a member during such five-year
period.
(vii) As of the Closing Date, the fair market value of the
assets of each Plan that is a defined benefit pension plan equals or
exceeds the present value of all vested and non-vested liabilities
thereunder determined in accordance with applicable PBGC methods,
factors and assumptions applicable to a defined benefit pension plan
terminating on such date. With respect to each Plan that is subject to
the funding requirements of Section 412 of the Code and Section 302 of
ERISA, all required or recommended contributions for all periods
ending prior to or as of the Closing Date (including periods from the
first day of the then-current plan year to the Closing Date and
including all quarterly contributions required in accordance with
Section 412(m) of the Code) shall have been made. With respect to each
other Plan, all required or recommended payments, premiums,
contributions, reimbursements or accruals for all periods ending prior
to or as of the Closing Date shall have been made. No Plan has any
material unfunded liabilities.
(viii) With respect to each Plan, the Company has provided Buyer
with true, complete and correct copies, to the extent applicable, of
(A) all documents pursuant to which the Plans are maintained, funded
and administered, (B) the two most recent annual reports (Form 5500
series) filed with the Internal Revenue Service (with attachments),
(C) the two most recent actuarial reports, (D) the two most recent
financial statements, (E) all governmental rulings, determinations,
and opinions (and pending requests for governmental rulings,
determinations, and opinions), and (F) the most recent valuation (but
in any case at least one that has been completed within the last
calendar year) of the present and future obligations under each Plan
that provides post-retirement or post-employment health, life
insurance, accident or other "welfare-type" benefits.
3.26 Absence of Certain Changes.
--------------------------
Excluding start up costs related to the leased premises in Franklin,
Massachusetts in an amount not to exceed $78,000 (exclusive of Company supplied
labor), the Company has not, since June 30, 1999, suffered a material adverse
change in the business, financial condition, operating results, earnings,
assets, customer, supplier, employee or sales representative relations, business
prospects, business condition or financing arrangements, or suffered any
material casualty loss or damage to its assets (whether or not covered by
insurance), all of the foregoing taken as a whole and excluding the effect of
general economic conditions. Except as set forth on Schedule 3.26, since
-------------
December 31, 1998, the Company has conducted its operations and business only in
the ordinary course, and has not:
21
<PAGE>
(a) redeemed or repurchased, directly or indirectly, any shares of
capital stock or declared, set aside or paid any dividends or made any other
distributions with respect to any shares of its capital stock;
(b) issued, sold or transferred any notes, bonds or other debt
securities or any equity securities, securities convertible, exchangeable or
exercisable into equity securities, or warrants, options or other rights to
acquire equity securities, of the Company;
(c) borrowed any amount or incurred or become subject to any
liabilities, except liabilities incurred in the ordinary course of business;
(d) discharged or satisfied any lien or encumbrance or paid any
obligation or liability, other than liabilities paid in the ordinary course of
business, or prepaid any amount of indebtedness for borrowed money;
(e) subjected any portion of its properties or assets to any Lien
except as disclosed on Schedule 3.10;
-------------
(f) sold, leased, assigned or transferred (including, without
limitation, transfers to Seller or any employees or affiliates of the Company)
any portion of its tangible assets, except in the ordinary course of business,
or canceled without fair consideration any debts or claims owing to or held by
it;
(g) suffered any extraordinary losses or waived any rights of value
in excess of $20,000 individually or $75,000 in the aggregate, whether or not in
the ordinary course of business or consistent with past custom and practice;
(h) entered into, amended or terminated any lease, contract,
agreement or commitment, or taken any other action or entered into any other
transaction other than in the ordinary course of business and in accordance with
past custom and practice, or entered into any transaction with any employee,
officer or director of the Company or with any Seller;
(i) entered into any transaction not in the ordinary course of
business, or materially changed any business practice;
(j) made or granted any bonus or any wage, salary or compensation
increase to any director, officer, employee or sales representative, group of
employees or consultant (whose regular compensation excluding overtime was in
excess of $30,000 per year as of December 31, 1998), other than individual
increases in the rates of hourly employees in the ordinary course of business,
or made or granted any increase in any employee benefit plan or arrangement, or
amended or terminated any existing employee benefit plan or arrangement or
adopted any new employee benefit plan or arrangement;
22
<PAGE>
(k) incurred intercompany charges or conducted its cash management
customs and practices and accounting methods other than in the usual and
ordinary course of business in accordance with past custom and practice;
(l) made any capital expenditures or commitments for capital
expenditures, except that the Company has made all such expenditures and
commitments in the ordinary course of business consistent with past practice and
current plans for future growth;
(m) made any loans or advances to, or guarantees for the benefit of,
any person or entity;
(n) made any charitable contributions or pledges in excess of $5,000
in the aggregate;
(o) entered into any lease of capital equipment or real estate except
in the ordinary course of business consistent with past practice and current
plans for future growth;
(p) changed or authorized any change in its Articles of Organization
or Bylaws
(q) delayed or postponed any payment of accounts payable or other
liabilities;
(r) modified or changed the application of GAAP from the manner it
was applied in the Financial Statements; or
(s) agreed, committed or planned to do any of the foregoing.
3.27 Related Party Transactions. Except as described on Schedule 3.27, the
-------------------------- -------------
Company is not a party to any agreement with, or any other commitment to (a) any
officer or director of the Company; (b) any person related by blood or marriage
to any such officer or director; (c) any Seller; or (d) any corporation,
partnership, trust or other entity in which the Company, any such officer,
director or related person or any Seller has an equity or participating interest
(collectively, "Affiliates"). Except as set forth in Schedule 3.27, all
-------------
transactions between the Company and any Affiliate which occurred during the
periods covered by the Financial Statements and are required by GAAP to be
reflected therein, are reflected in the Financial Statements at amounts which do
not overstate or understate the net worth or net income of the Company as
compared with fair market values and prices which would have been charged and
paid between parties at arms' length at the time of the entering into of the
transactions in question.
3.28 Brokers. No finder, broker, agent or other intermediary has acted for
-------
or on behalf of the Company in connection with the negotiation or consummation
of this Agreement, and there are no claims for any brokerage commission,
finder's fee or similar payment for which the Sellers or the Company could
become liable, save and except for Stonebridge Associates, LLC.
23
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3.29 Names. During the term of its existence, the Company has not been
-----
known by or conducted business under any other name. All assets and rights are
held by, and all agreements, obligations, expenses and transactions have been
entered into, incurred and conducted by the Company. To the Warranting
Shareholders' and Company's best knowledge the Company has the unencumbered
right to use its name and neither the Company nor Sellers are aware of the use
of any corporate name, trade name, trademark, service mark or other designation
which could create a likelihood of confusion with the Company's name.
3.30 Bank Accounts. Schedule 3.30 sets forth (a) a true and complete list
------------- -------------
of the names of each bank, trust company, securities broker and other financial
institution at which the Company has an account or safe deposit box or maintains
a banking, custodial, trading or other similar relationship; and (b) a true and
complete list and description of each such account, box and relationship,
indicating in each case the account number and the names of the officers,
employees, agents or other representatives of the Company having access,
signatory power or power to give direction with respect to such account, box or
relationship.
3.31 Year 2000. None of the computer software (excluding "shrink wrap
---------
software"), computer hardware, other computer and microprocessor-based
equipment, or any other equipment which performs or is or may be required to
perform functions necessary in the operation of the business that is owned,
licensed or used by Company (collectively, the "Computer Devices") will suffer a
Year 2000 Problem. The Company has prepared and is implementing a written plan
of action to ensure that the Computer Devices will not have a Year 2000 Problem,
which plan of action is scheduled to be complete not later than October 31, 1999
and a copy of which is attached hereto as Schedule 3.31. No material supplier
-------------
of goods and services, including, but not limited to, any supplier of Computer
Devices, has notified Sellers or the Company that any of the computer software,
computer hardware or other computer and microprocessor-based equipment owned,
licensed or used by such supplier will have a Year 2000 Problem, and the
Warranting Shareholders and the Company have no knowledge of any material
supplier whose services may be interrupted by a Year 2000 Problem. For the
purposes of this Section 3.31, "Year 2000 Problem" shall mean any failure of a
Computer Device to: (a) store all date-related information and process all data
interfaces involving dates in a manner that unambiguously identifies the
century, for all date values before, during or after the Year 2000; (b)
calculate, sort, report and otherwise operate correctly and in a consistent
manner and without interruption, regardless whether the date on which the
Computer Device is operated or executed is before, during or after the Year
2000; (c) report and display all dates with a four-digit date so that the
century is unambiguously identified; and (d) handle all leap years, including,
but not limited to, Year 2000 leap year, correctly.
3.32 Disclosure. No representation, warranty or statement made by any
----------
Seller or the Company in this Agreement, or any Schedule attached to this
Agreement or in any of the Ancillary Agreements furnished or to be furnished to
Buyer pursuant to this Agreement, contains or will contain any untrue statement
of a material fact, or omits or will omit to state any material fact necessary
to make the statements contained in this Agreement or such other document not
misleading. The fact that Sellers or the Company has delivered copies of certain
documents to Buyer shall not alone constitute disclosure of facts required to be
disclosed on any Schedule to this Agreement, unless such document is expressly
referenced in such Schedule. A reference to
24
<PAGE>
a document in one Schedule shall not constitute a disclosure for purposes of
another Schedule unless such reference is in itself made with such specificity
that no other explanation or additional information is necessary for a
reasonable person to determine that the disclosure also applies with respect to
such other Schedule.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
Buyer represents and warrants to Sellers and the Company as follows:
4.1 Organization and Good Standing. Buyer is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware.
4.2 Authority. Buyer has all requisite power and authority to execute,
---------
deliver and perform this Agreement and the other agreements referred to herein
to which it is a party (collectively, the "Buyer Agreements") and to consummate
the transactions contemplated by the Buyer Agreements. The execution, delivery
and performance of the Buyer Agreements, and the consummation of the
transactions contemplated by the Buyer Agreements, have been duly and validly
authorized by all necessary corporate and shareholder action on the part of
Buyer. The Buyer Agreements have been, or, with respect to Buyer Agreements to
be executed at the Closing, will be, duly executed and delivered by Buyer and
each constitutes, or will constitute when executed and delivered, a valid and
binding obligation of Buyer, enforceable against Buyer in accordance with its
terms.
4.3 No Conflict or Breach. The execution, delivery and performance of the
---------------------
Buyer Agreements do not and will not:
(a) conflict with or constitute a violation of the Articles of
Incorporation or Bylaws of Buyer;
(b) assuming compliance with the HSR Act, conflict with or constitute
a violation of any statute, judgment, order, decree or regulation of any court,
administrative agency, governmental authority or arbitrator applicable to or
relating to Buyer; or
(c) conflict with, constitute a default under, result in a breach or
acceleration of or require notice to or the consent of any third party under any
contract, agreement, lease, commitment, mortgage, note, license or other
instrument or obligation to which Buyer is party or by which it is bound or by
which its assets are affected.
4.4 Approvals. Except as required by the HSR Act, no consent, approval,
---------
authorization, registration or filing with any federal, state or local judicial
or governmental authority or administrative agency or any other party is
required in connection with the valid execution and delivery by Buyer of the
Buyer Agreements or the consummation by Buyer of the transactions contemplated
in the Buyer Agreements.
25
<PAGE>
4.5 Investment Intent. Buyer is acquiring the Shares for its own account
-----------------
and not with a view to their distribution within the meaning of applicable
federal and state securities laws.
4.6 Brokers. No finder, broker, agent or other intermediary has acted for
-------
or on behalf of Buyer in connection with the negotiation or consummation of this
Agreement, and there are no claims for any brokerage commission, finder's fee or
similar payment due from Buyer, other than amounts due, if any, from Buyer to
its affiliates and to Buis and Co.
4.7 Source of Funds. The Initial Purchase Price to be paid at Closing by
---------------
the Buyer to the Sellers shall be funded out of borrowings pursuant to the
Credit and Guarantee Agreement dated as of July 28, 1999 among SMTC Corporation,
the Buyer, the Surface Mount Technology Centre, Inc., Lehman Commercial Paper
Inc., as general administrative agent, the lenders from time to time parties
thereto and the other parties listed therein.
ARTICLE 5
COVENANTS OF SELLERS AND THE COMPANY
------------------------------------
Sellers and the Company jointly and severally covenant and agree with Buyer
as follows:
5.1 Conduct of Business. In the event the Closing does not occur on the
-------------------
date hereof, between the date of this Agreement and the Closing Date (in the
event the parties agree that the Closing Date shall be subsequent to the date of
this Agreement), the Company shall, and Sellers shall cause the Company to,
except as otherwise specifically consented to in writing by Buyer:
(a) Conduct its operations in the normal and customary manner in the
ordinary course of business;
(b) Maintain and keep its tangible assets in good operating order,
repair and condition (ordinary wear and tear excepted);
(c) Keep in full force and effect the insurance described in Section
3.23;
(d) Perform all of its obligations in a timely manner and in the
ordinary course under and not amend, alter or modify any provision of the
Contracts and Real Property Leases;
(e) Use its best efforts to preserve its organization intact and
maintain its relationships with its employees, suppliers and customers;
(f) Promptly advise Buyer in writing of any material adverse change
in the condition (financial or otherwise) of its business or assets;
(g) Promptly advise Buyer in writing of the occurrence of any event
or circumstance which would reasonably be expected to affect the consummation of
the transactions contemplated by this Agreement or which, if in existence on the
date of this Agreement, would have been required to have been disclosed in a
Schedule to this Agreement;
26
<PAGE>
(h) Promptly advise Buyer in writing of any material change in the
list of employees referred to in Section 3.25(a) or in the compensation payable
to any such employee;
(i) Maintain and collect the Receivables and extend credit terms to
its customers in the ordinary course of business consistent with past practices;
(j) Not declare, set aside, or pay any dividend or make any
distribution with respect to its capital stock or redeem, purchase, or otherwise
acquire any of its capital stock;
(k) Not make any capital expenditures without the prior written
consent of Buyer; and
(l) Not take any affirmative action, or fail to take any reasonable
action within Sellers' or the Company's control, as a result of which any of the
changes or events listed in Section 3.26 is likely to occur.
5.2 Access and Information. Sellers and the Company shall permit Buyer
----------------------
and its counsel, accountants and other representatives full access during normal
business hours to all the properties, assets, books, records, agreements and
other documents of the Company. Sellers and the Company shall furnish to Buyer
and its representatives all information concerning the Company as Buyer may
reasonably request. Sellers and the Company shall permit and facilitate
communications between Buyer and the Company's suppliers, customers, landlords
and other persons having relationships with the Company.
5.3 No Other Solicitations. Until the earlier of the Closing Date or the
----------------------
termination of this Agreement, Sellers and the Company agree that they will not,
and the Company will cause its affiliates, directors, officers, employees,
representatives and agents not to, directly or indirectly, solicit or initiate
or engage in discussions or transactions with, or engage, or provide any
information to, any corporation, partnership or other entity or group (other
than Buyer or its designees) concerning any merger, sale of ownership interests
or assets, recapitalization or similar transaction. The Company represents that
neither it nor any of its affiliates is bound by any agreement with respect to
any such transaction other than as contemplated by this Agreement. The Company
and the Sellers also agree to notify Buyer upon receipt of any inquiries from
any entity or group with respect to a potential transaction involving the
Company or its assets.
5.4 Tax Matters.
-----------
(a) Section 338(h)(10) Election. Each Seller agrees, if so directed
---------------------------
by Buyer, to join with Buyer in making an election under Section 338(h)(10) of
the Code (and any corresponding elections under state, local, or foreign tax
law) (collectively, a "338(h)(10) Election") with respect to the purchase and
sale of the Shares. In connection with the 338(h)(10) Election, the Buyer and
the Sellers shall execute and timely file Form 8023, Elections under Section 338
for Corporations Making Qualified Stock Purchases, wherein the "modified
aggregate deemed sales price," as determined by the Buyer, shall be allocated by
the Buyer among the Company's assets in accordance with Treasury Regulation (S)
1.338(h)(10)-1(f). Buyer
27
<PAGE>
shall allocate such amounts no later than 21 days following the delivery of the
Closing Balance Sheet. Sellers shall cooperate and provide all reasonable
assistance to Buyer in the preparation of Form 8023. The Sellers shall timely
prepare and file the Company's final tax returns as an S corporation for its
taxable year ending with the Closing (the "S Termination Year"), in a manner
consistent with the 338(h)(10) Election and the Form 8023 filed thereunder,
subject to any adjustments determined by Buyer to be required under Treasury
Regulation (S) 1.338(b)-3T(h)(3), all subject to Buyer's review and approval.
The Sellers will timely file all of their respective required Tax returns for
their taxable years that include the S Termination Year (the "Shareholder
Returns") in a manner consistent with the 338(h)(10) Election and the Form 8023
filed thereunder, subject to any adjustments determined by Buyer to be required
by Treasury Regulation (S) 1.338(b)-3T(h)(3). The Sellers acknowledge that the
338(h)(10) Election will result in the Company being treated for Federal and
Massachusetts income Tax purposes as having distributed its assets to the
Sellers in complete liquidation on the date of the Closing and that the Company
will be deemed to have sold all of its assets in such liquidation at their fair
market value, with the result that any gain deemed realized by the Company will
be taxable to the Sellers on their respective Shareholder Returns and that some
of such gain may be treated as ordinary income, rather than capital gain. The
Sellers agree that they shall pay any individual state and federal income Taxes
resulting from the 338(h)(10) Election and acknowledge that no distribution
shall be made by the Company to them either at or before Closing or thereafter
with respect to any such Tax liabilities, subject to the provisions of Section
5.4(b) below. Any excise, transfer, documentation, sales use, stamp,
registration, mortgage recordation, or similar Taxes and fees ("Transfer Taxes")
resulting from the sale of the Shares shall be borne by Sellers and Sellers
will, at their own expense, file all necessary Tax Returns and other
documentation with respect to such Transfer Taxes. Any other Transfer Taxes,
including those resulting from the 338(h)(10) Election (except as described
below) shall be borne by the Buyer and Buyer will, at its own expense, file all
necessary Tax Returns and other documentation with respect to such Transfer
Taxes. The term "Transfer Taxes" shall specifically exclude the portion of the
Massachusetts corporation excise tax which is a tax on income. It is anticipated
that the 338(h)(10) Election will cause the company to incur a Massachusetts
corporation excise tax liability on income. It is understood by the Buyer that
the Massachusetts corporation excise tax liability on income will be paid
entirely by the Buyer and will not be reimbursed by the Sellers. If the payment
of such corporate excise tax results in additional income to the Sellers, such
amount shall also be subject to reimbursement under Section 5.4(b) below. It is
also anticipated that there will not be any corporate income tax under Sections
1374 or 1375 of the Code (or any similar provision under state law), but if such
tax is imposed, the Sellers, jointly and severally, shall indemnify the Buyer
for such tax.
(b) 338(h)(10) Reimbursement. Buyer shall pay to the Sellers as
------------------------
additional consideration, to be considered as part of the Purchase Price, an
amount equal to the calculated increase in the Sellers' Taxes resulting from
additional Taxes resulting from the 338(h)(10) Election over the amount of Taxes
that would have been payable had the 338(h)(10) Election not been made and,
instead, the Sellers were treated for Tax purposes as having sold their shares
(other than any additional Taxes under Sections 1374 or 1375 of the Code and
similar provisions of state law). Buyer and Sellers shall agree upon the
reimbursement amount and methodology no later than 15 days following receipt of
the Buyer's allocation of the adjusted purchase price among the Company's
assets. The reimbursement amount shall be paid by the Buyer to the
28
<PAGE>
Sellers within 3 business days after the Buyer and Sellers have agreed to the
calculation of the reimbursement amount. If, subsequent to any reimbursement
under Section 5.4(b) hereof, the Internal Revenue Service finally determines a
tax liability based upon the Company's tax return intended to be covered by this
Section 5.4, the parties agree to make a reasonable equitable adjustment based
on the allocation of liabilities contained in this Section 5.4.
(c) Tax Periods Ending On or Before the Closing Date. Sellers shall
------------------------------------------------
prepare or cause to be prepared and file or cause to be filed all income Tax
Returns for the Company for all periods ending on or prior to the Closing Date
which are to be filed after the Closing Date. Sellers shall permit the Buyer to
review and comment on each such income Tax Return described in the preceding
sentence prior to filing and the calculation of the Final Election Amount.
Sellers shall reimburse Buyer for all Taxes (whether income or other Taxes) of
the Company with respect to such periods within fifteen (15) days before payment
by Buyer or the Company of such Taxes to the extent such Taxes are not reflected
in the reserve for Taxes (excluding any reserve for deferred Taxes established
to reflect timing differences between book and Tax income) shown on the Closing
Balance Sheet (as finally determined in accordance with Section 1.2(e)) used in
calculating the Working Capital. This provision contemplates that there will be
a purchase price adjustment as described in Section 1.2.
-----------
Buyer shall prepare or cause to be prepared and file or cause to be
filed all other Tax Returns for the Company for all periods ending on or prior
to the Closing Date which are to be filed after the Closing Date. Buyer shall
permit the Sellers to review and comment on each such Tax Return described in
the preceding sentence prior to filing. Sellers shall reimburse Buyer for Taxes
of the Company with respect to such periods within fifteen (15) days before
payment by Buyer or the Company of such Taxes to the extent such Taxes are not
reflected in the reserve for Taxes (excluding any reserve for deferred Taxes
established to reflect timing differences between book and Tax income) shown on
the Closing balance sheet used in calculating the Working Capital. This
provision contemplates that there will be a purchase price adjustment as
described in Section 1.2.
-----------
(d) Tax Periods Beginning Before and Ending After the Closing Date.
--------------------------------------------------------------
Buyer shall prepare or cause to be prepared and file or cause to be filed any
Tax Returns of the Company for Tax periods which begin before the Closing Date
and end after the Closing Date. Sellers shall pay to Buyer within fifteen (15)
days after the date on which Taxes are paid with respect to such periods an
amount equal to the portion of such Taxes which relates to the portion of such
Tax period ending on the Closing Date to the extent such Taxes are not reflected
in the reserve for Taxes (excluding any reserve for deferred Taxes established
to reflect timing differences between book and Tax income) shown on the face of
the Closing balance sheet used in calculating the Final Purchase Price. For
purposes of this Section 5.4(d), in the case of any Taxes that are imposed on a
periodic basis and are payable for a Tax period that includes (but does not end
on) the Closing Date, the portion of such Tax which relates to the portion of
such Tax period ending on the Closing Date shall (i) in the case of any Taxes
other than Taxes based upon or related to income or receipts, be deemed to be
the amount of such Tax for the entire Tax period multiplied by a fraction the
numerator of which is the number of days in the Tax period ending on the Closing
Date and the denominator of which is the number of days in the entire Tax
period, and (ii) in the case of any Tax based upon or related to income or
receipts be deemed
29
<PAGE>
equal to the amount which would be payable if the relevant Tax period ended on
the Closing Date. Any credits relating to a Tax period that begins before and
ends after the Closing Date shall be taken into account as though the relevant
Tax period ended on the Closing Date. All determinations necessary to give
effect to the foregoing allocations shall be made in a manner consistent with
prior practice of the Company.
(e) Cooperation on Tax Matters. Buyer, the Company and Sellers shall
--------------------------
cooperate fully, as and to the extent reasonably requested by the other party,
in connection with the filing of Tax Returns pursuant to this Section and any
audit, litigation or other proceeding with respect to Taxes. Such cooperation
shall include the retention and (upon the other party's request) the provision
of records and information which are reasonably relevant to any such audit,
litigation or other proceeding and making employees available on a mutually
convenient basis to provide additional information and explanation of any
material provided hereunder. The Company and Sellers agree (i) to retain all
books and records with respect to Tax matters pertinent to the Company relating
to any taxable period beginning before the Closing Date until the expiration of
the statute of limitations (and, to the extent notified by Buyer, any extensions
thereof) of the respective taxable periods, and to abide by all record retention
agreements entered into with any taxing authority, and (ii) to give the other
party reasonable written notice prior to transferring, destroying or discarding
any such books and records and, if the other party so requests, the Company or
Sellers, as the case may be, shall allow the other party to take possession of
such books and records. Buyer and Sellers further agree, upon request, to use
their best efforts to obtain any certificate or other document from any
Governmental Authority as may be necessary to mitigate, reduce or eliminate any
Tax that could be imposed (including, but not limited to, with respect to the
transactions contemplated hereby). Buyer and Sellers further agree, upon
request, to provide the other party with all information that either party may
be required to report pursuant to Section 6043 of the Code and all Treasury
Department Regulations promulgated thereunder. After the Closing, if any Seller
receives notice (a "Tax Notice") of any examination or audit of any Company Tax
return, or of the imposition of any proposed assessment with respect to the
Company, by the Internal Revenue Service or any state taxing authority, the
recipient Seller shall notify the Buyer and the Company in writing (providing
copies of any written notices or correspondence from the Internal Revenue
Service or other taxing authority respecting such Tax Notice) within ten (10)
days of receiving such notice. If Buyer or the Company receives any Tax Notice,
Buyer or the Company, as applicable, shall notify the Sellers in writing
(providing copies of any written notices or correspondence from the Internal
Revenue Service or other taxing authority respecting such Tax Notice) within ten
(10) days of receiving such notice.
(f) [Reserved.]
-----------
(g) Inadvertent Termination of S Election. In the event at any
-------------------------------------
time prior to the Closing, the Company's election to be an S corporation should
be discovered to be an inadvertent invalid election or to have been
inadvertently terminated within the meaning of Section 1362(f) of the Code, the
Company and the Sellers shall promptly and at the Sellers' expense take all
steps necessary to cause the Company to be treated as an S corporation pursuant
to such Section 1362(f) notwithstanding such inadvertent invalid election or
inadvertent termination.
30
<PAGE>
5.5 Release of Certain Guaranty and Lien
------------------------------------
(a) The Company has guaranteed the obligations of the Trust to the
Fleet National Bank (as indirect successor to the Bank of New England, N.A.) by
a Guaranty dated August 23, 1989 and reaffirmed on October 31, 1996 (the
"Guaranty"). On or before the Closing, the Sellers jointly and severally agree,
at their own cost and expense, to take such action as may be necessary to cause
such Guaranty to be released and to cause the Company to be discharged from any
further liability with respect to the obligations guaranteed thereby or
undertaken in connection therewith.
(b) On or before the Closing, the Company shall cause the liens
against certain fixtures of the Company located on its Leased Real Property and
against other assets pursuant to the Guaranty and Mortgage between the Trust and
New England Bank, N.A. (and its successors) dated August 23, 1989, to be
released and to cause the Company to be discharged from any further liability
with respect to the obligations guaranteed thereby or undertaken in connection
therewith.
5.6 Restrictions on Transfer of Capital Stock. At the Closing, the
-----------------------------------------
Sellers shall have caused the Shareholders' Agreement by and among the Company
and the Sellers, dated September 17, 1991, as amended from time to time, to be
terminated. Sellers additionally shall have caused the Company to waive the
provisions of Article V of the Articles of Organization.
5.7 Environmental Compliance. The Warranting Shareholders jointly and
------------------------
severally covenant and agree that they will, after the Closing, reimburse,
indemnify and hold harmless Buyer from and in respect of all Losses that arise
from, are based on or relate or otherwise are attributable to matters described
in Exhibit 5.7 (including without limitation the costs incurred by the Company
-----------
in becoming compliant with such matters).
ARTICLE 6
MUTUAL COVENANTS
----------------
Each of Buyer, Sellers and the Company covenants and agrees with the other
as follows:
6.1 Best Efforts. Each of Buyer and Sellers and the Company shall use its
------------
commercially reasonable best efforts to make or obtain all consents, approvals,
authorizations, registrations and filings with all federal, state or local
judicial or governmental authorities or administrative agencies as are required
to be obtained by such person in connection with the consummation of the
transactions contemplated by this Agreement, the Buyer Agreements and the Seller
Agreements, respectively. Each party shall cooperate with the other parities in
their efforts to obtain such consents, approvals, authorizations, registrations
and filings.
6.2 Confidentiality. In recognition of the confidential nature of certain
---------------
of the information which will be provided to each party by the others, each of
Buyer, Sellers and the
31
<PAGE>
Company agrees to retain in confidence, and to require its directors, officers,
employees, consultants, professional representatives and agents (collectively,
its "Representatives") to retain in confidence all confidential information
transmitted or disclosed to it by another party to this Agreement, and further
agrees that it will not use for its own benefit and will not use or disclose to
any third party, or permit the use or disclosure to any third party of, any
confidential information obtained from or revealed by the other, except that
each of Buyer, Sellers and the Company may disclose the information to those of
its Representatives who need the information for the proper performance of their
assigned duties with respect to the consummation of the transactions
contemplated by this Agreement. In making such information available to its
Representatives, each of Buyer, Sellers and the Company shall take any and all
precautions necessary to ensure that its Representatives use the information
only as permitted by this Agreement. Notwithstanding anything to the contrary in
the foregoing provisions, such information may be disclosed (a) where it is
necessary to any regulatory authorities or governmental agencies, (b) if it is
required by court order or decree or applicable law, (c) if it is ascertainable
or obtained from public or published information, (d) if it is received from a
third party not known to the recipient to be under an obligation to keep such
information confidential, or (e) if the recipient can demonstrate that such
information was in its possession prior to disclosure of the information in
connection with this Agreement. If any party shall be required to make
disclosure of any such information by operation of law, such disclosing party
shall give the party from whom such information was received prior notice of the
making of such disclosure and shall use all reasonable efforts to afford such
other party an opportunity to contest the making of such disclosure. After the
Closing, Sellers agree to retain in confidence all confidential information
regarding the Company. Nothing in this Section 6.2 shall prevent Buyer from
disclosing confidential information regarding the Company to others, in its sole
discretion, following the Closing. In the event that the Closing shall not
occur, each of Buyer, Sellers and the Company shall immediately deliver, or
cause to be delivered, to the party from whom such information was received
(without retaining any copies) any and all documents, statements or other
written information obtained from the other that contain confidential
information.
6.3 Expenses of the Transactions. Whether or not the transactions
----------------------------
contemplated hereby are consummated, (i) Buyer will pay the fees, expenses and
disbursements of Buyer and their representatives which are incurred in
connection with the subject matter of this Agreement and any amendments to this
Agreement, including all costs and expenses incurred in the performance of and
compliance with all conditions to be performed by Buyer under this Agreement,
and (ii) the Sellers, jointly and severally, will pay from personal funds, and
not from funds of the Company, (A) all fees, expenses and disbursements incurred
by them, their representatives, or the Company, including without limitation the
fees and expenses of accountants and legal counsel incurred in connection with
the transactions contemplated hereby (except to the extent such fees and
expenses have been paid by the Company on or prior to the Closing) and (B) any
late fees, prepayment penalties or other charges beyond principal and interest
with respect to indebtedness required to be terminated by this Agreement.
6.4 Employee Bonus. Prior to or at the time of Closing, Sellers agree to
--------------
pay any and all amounts due to employees or other persons that are required to
be paid as a result of the execution and delivery by the Company of this
Agreement, the Ancillary Agreements or the
32
<PAGE>
consummation of the transactions contemplated hereby and thereby, except as
provided in this Section 6.4. Notwithstanding the foregoing, Buyer agrees that
it will, on or after the Closing, as applicable, cause the Company to pay
employee bonuses to those persons named in Exhibit 6.4(a) and at the times and
--------------
in the full amounts ($500,000 in the aggregate) as therein provided. At the
Closing, Buyer will cause the Company to pay, and will fund with immediately
available funds the payment of, the employee bonuses to the persons and in the
amounts set forth on Exhibit 6.4(b). The employee bonus set forth on Exhibit
-------------- ------
6.4(a) will not reduce the Purchase Price. However, the Purchase Price shall be
- ------
reduced by the aggregate amount set forth on Exhibit 6.4(b).
--------------
ARTICLE 7
CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS
-------------------------------------------
The obligations of Buyer to consummate the transactions contemplated by
this Agreement are subject to the satisfaction of the following conditions on or
before the Closing Date, unless specifically waived in writing by Buyer prior to
the Closing Date:
7.1 Representations and Warranties. The representations and warranties of
------------------------------
Sellers and the Company contained in this Agreement shall have been true and
correct on the date of this Agreement and shall be true and correct in all
material respects on the Closing Date as though made on and as of the Closing
Date.
7.2 Compliance with Covenants. Sellers and the Company shall have duly
-------------------------
performed and complied with all covenants, agreements and obligations required
by this Agreement to be performed or complied with by them on or prior to the
Closing.
7.3 Absence of Litigation. No action or proceeding shall be pending or,
---------------------
in the reasonable opinion of Buyer, overtly threatened by or before any court or
other governmental body or agency seeking to restrain, prohibit or invalidate
the transactions contemplated by this Agreement or which would adversely affect
the right of Buyer to own the Shares, or to operate or control the Company after
the Closing Date.
7.4 Consents and Approvals. All (a) Required Consents, (b) licenses, (c)
----------------------
other orders or notifications of, or registrations, declarations or filings
with, or expiration of waiting periods imposed by, any applicable governmental
or judicial authority and (d) those consents, approvals, authorizations or
notifications of third parties that are described on Schedule 7.4, shall have
-------- ---
been made or obtained or shall have occurred, in a manner reasonably
satisfactory in form and substance to Buyer and in a manner which does not
affect any rights of the Company under any Contract or Real Property Lease.
7.5 [Reserved.]
-----------
7.6 Removal of Liens. All Liens, with the exception of those Liens
----------------
described in Schedule 7.6, indicated to exist by record searches made by Buyer
prior to the Closing Date (specifically including but not limited to those Liens
described on Schedule 3.10) shall have been
-------------
33
<PAGE>
removed, and Sellers and the Company shall have provided evidence satisfactory
to Buyer of such removal; provided however that the Company and/or Sellers may
be permitted to make arrangement for a discharge of any such Lien
contemporaneously with the Closing.
7.7 Legal Opinion. Buyer shall have received from Shapiro, Israel &
-------------
Weiner, P.C., counsel to Sellers and the Company, an opinion, dated the Closing
Date, in the form of Exhibit 7.7.
-----------
7.8 No Claim Regarding Shares. No claim shall have been made or
-------------------------
threatened that any person or entity (other than Sellers) (a) is the holder or
beneficial owner of, or has the right to acquire or to obtain beneficial
ownership of, any of the Shares or any other voting, equity, or ownership
interest in, the Company, or (b) is entitled to all or any portion of the
Purchase Price.
7.9 Employees.
---------
(a) Each of Thomas Harrington and Sheila Chartier shall have executed
new employment agreements (the "New Employment Agreements") with the Company in
the form attached hereto as Exhibits 7.9(a)(1) and 7.9(a)(2). The New
--------------------------------
Employment Agreements are to commence as at the Effective Time and shall
supersede existing employment arrangements made between the Company and these
senior employees and shall be in full force in effect as of the Closing.
(b) Each of Thomas Harrington and Sheila Chartier shall have executed
Releases in the form attached hereto as Exhibits 7.9(b)(1) and 7.9(b)(2).
--------------------------------
(c) Thomas M. Harrington, Inc. shall have executed an agreement, in a
form satisfactory to the Buyer in its sole discretion, terminating the Agreement
among the Company, Thomas M. Harrington, Inc. and Thomas Harrington, dated as of
January 1, 1997.
7.10 Holliston Lease. Buyer shall have entered into a lease (the
---------------
"Holliston Lease") with Airedale Realty Trust, the owner of the premises at 29
Everett Road, Holliston, Massachusetts, presently leased by the Company (the
"Holliston Facility"), in substantially the form attached hereto as Exhibit 7.10
------------
at a lease rate no greater than the Company's present lease rate (plus customary
annual increases).
7.11 Repayment of Debt. The Sellers shall have caused the Company to have
-----------------
paid off all of its outstanding indebtedness other than trade payables, accrued
payables and capitalized equipment lease and loan obligations; provided however
that the Company and/or a discharge of such indebtedness may occur
contemporaneously with the Closing in the amounts and to the persons set forth
in Schedule 7.11.
-------------
7.12 Escrow Agreement. The Sellers and the Escrow Agent shall have entered
----------------
into the Escrow Agreement with Buyer.
7.13 Resignations. Paul A. Keany, Edward J. Stewart III, Thomas M.
------------
Harrington and David Baer shall have resigned their positions as officers and
directors of the Company.
34
<PAGE>
ARTICLE 8
CONDITIONS PRECEDENT TO SELLERS' OBLIGATIONS
--------------------------------------------
The obligations of Sellers to consummate the transactions contemplated by
this Agreement are subject to the satisfaction of each of the following
conditions on or before the Closing Date, unless specifically waived in writing
by Sellers prior to the Closing:
8.1 Representations and Warranties. The representations and warranties of
------------------------------
Buyer contained in this Agreement shall have been true and correct on the date
of this Agreement, and shall be true and correct in all material respects on the
Closing Date as though made on and as of the Closing Date.
8.2 Compliance with Covenants. Buyer shall have duly performed and
-------------------------
complied with all covenants, agreements and obligations required by this
Agreement to be performed or complied with by it on or before the Closing Date.
8.3 Absence of Litigation. No action or proceeding shall be pending by or
---------------------
before any court or other governmental body or agency seeking to restrain,
prohibit or invalidate the transactions contemplated by this Agreement.
8.4 Legal Opinion. Sellers shall have received from Ropes & Gray, counsel
-------------
to Buyer, an opinion, dated the Closing Date, in the form of Exhibit 8.4.
------------
8.5 Holliston Lease. The Company shall have entered into the Holliston
---------------
Lease.
8.6. Employment Agreements. The Company shall have executed the New
---------------------
Employment Agreements with Thomas Harrington and Sheila Chartier.
ARTICLE 9
CLOSING
-------
9.1 Closing. The closing of the sale of the Shares (the "Closing") shall
-------
take place at the offices of Shapiro, Israel & Weiner, P.C., Boston,
Massachusetts, at 10:00 a.m., local time, on the date hereof; provided, however,
as follows: (a) if one or more conditions to this Agreement is not satisfied by
such date, the party benefiting from such condition may elect, in its sole
discretion, one or more postponements of the Closing for the purpose of enabling
such condition to be satisfied; and (b) notwithstanding the provisions of the
preceding clause (a), in no event may the Closing be postponed beyond September
15, 1999. The date of the Closing is referred to as the "Closing Date", and
11:59 p.m. on the Closing Date is referred to as the "Effective Time."
9.2 Deliveries by Sellers. At the Closing, Sellers shall deliver or cause
---------------------
to be delivered to Buyer the following:
35
<PAGE>
(a) stock certificates representing the Shares, duly endorsed in
blank or accompanied by stock powers duly executed in blank, sufficient to
transfer the Shares on the books of the Company;
(b) a release in the form of attached Exhibit 9.2(b) executed by each
--------------
Seller ("Seller Release");
(c) all bank books, financial and bank records, bookkeeping and
accounting records, copies of all Tax Returns and amendments to all of the
foregoing, corporate minute books, stock ledgers and all other books and records
of or relating to the Company;
(d) a certificate signed by each Seller and the Company confirming
the satisfaction of the conditions set forth in Sections 7.1 and 7.2 above as to
representations, warranties and covenants;
(e) a copy of all corporate resolutions authorizing the execution,
delivery and performance of this Agreement by the Company, and the consummation
of the transactions contemplated in this Agreement, accompanied by the
certification of the Secretary of the Company to the effect that such
resolutions are in full force and effect and have not been amended, modified or
rescinded, in the form attached as Exhibit 9.2(e);
(f) the Company's good standing certificates from the Secretary of
State of Massachusetts and each of the states listed on Schedule 3.1, and
------------
certificates from the Departments of Revenue of each such jurisdiction stating
that all required taxes have been paid by the Company in full;
(g) the legal opinion referred to in Section 7.7; and
(h) satisfactory evidence that all Required Consents have been
obtained or satisfied;
(i) Tax Form W-9, executed by each of the Sellers; and
(j) the resignations referred to in Section 7.13.
9.3 Deliveries by Buyer. At the Closing, Buyer shall deliver or cause to
-------------------
be delivered to Sellers the following:
(a) a certificate of the President of Buyer confirming the
satisfaction of the conditions set forth in Sections 8.1 and 8.2 as to
representations, warranties and covenants;
(b) a copy of all corporate resolutions authorizing the execution,
delivery and performance of the Buyer Agreements, and the consummation of the
transactions contemplated in the Buyer Agreements, accompanied by the
certification of the Secretary of Buyer to the effect
36
<PAGE>
that such resolutions are in full force and effect and have not been amended,
modified or rescinded;
(c) the legal opinion referred to in Section 8.4; and
(d) the Initial Purchase Price, payable as provided in Section 1.2.
9.4 Deliveries by Sellers and Buyer. Sellers and Buyer, as are parties
-------------------------------
thereto, shall execute and deliver, or cause to be executed and delivered, to
the other the following:
(a) Escrow Agreement;
(b) each of the New Employment Agreements; and
(c) the Holliston Lease.
9.5 Further Assurances. Sellers shall, at any time on or after the
------------------
Closing Date, take any and all steps requested by Buyer to transfer to Buyer
ownership of the Shares, and will do, execute, acknowledge and deliver all such
further commercially reasonable acts, deeds, assignments, transfers,
conveyances, powers of attorney and assurances as may be required for the more
effective transfer to Buyer, or its successors or assigns, operating control of
the Company.
ARTICLE 10
INDEMNIFICATION
---------------
For purposes of this Section 10, an "Indemnified Party" is a party seeking
to be indemnified hereunder, and an "Indemnity Obligor" is a party from whom
indemnity is sought.
10.1 Indemnification by Sellers. The Warranting Shareholders shall jointly
--------------------------
and severally indemnify, defend and hold harmless Buyer and its officers,
directors and affiliates from, against, and with respect to any and all loss,
damage, claim, obligation, liability, cost and expense (including, without
limitation, reasonable attorneys' fees and costs and expenses incurred in
investigating, preparing, defending against or prosecuting any litigation,
claim, proceeding or demand), of any kind or character (a "Loss") arising out of
or in connection with any of the following:
(a) any inaccuracy, misrepresentation or breach of any of the
representations or warranties of Sellers, the Warranting Shareholders or the
Company contained in or made pursuant to this Agreement (including without
limitation the Schedules thereto), as if all qualifications as to knowledge and
materiality (including without limitation with respect to a Material Adverse
Effect) were not contained therein;
(b) any failure by the Company (prior to Closing) or Sellers or the
Warranting Shareholders (prior to or after Closing) to perform or observe, or to
have performed
37
<PAGE>
or observed, in full, any covenant, agreement or condition to be performed or
observed by each pursuant to this Agreement or in any other agreement or
document; or
(c) any use, release, emission, generation, storage, transportation,
disposal, or arrangement for the disposal of Hazardous Materials by the
Company, including, without limitation, the cost of any environmental response
action or liability under the Comprehensive Environmental Response, Compensation
and Liability Act or similar state or local law, whether such Loss accrues, is
required or is necessary prior to the Closing Date, to the full extent that such
Loss is attributable, in whole or in part, directly or indirectly, to the
presence, use, emission, generation, storage, transportation, release, disposal,
or arrangements for disposal of Hazardous Materials by any person on any of the
properties of the Company or on any other properties to which the Company or
their affiliates have sent or arranged for the disposal of Hazardous Materials
prior to the Closing Date or the exposure of any person, including without
limitation, any third party and any employee or former employee of the Company,
to any Hazardous Material present, or previously present, in or on any of the
properties owned or leased by the Company (other than as a result of such
exposure at the Leased Real Property in Franklin, Massachusetts which was not
due to any act or omission of the Company). The foregoing right of indemnity
against Sellers shall not limit Buyer's or any other indemnified person's rights
of recovery against Sellers or any other person under any Environmental Law or
any other law, including, without limitation, the Comprehensive Environmental
Response, Compensation Liability Act.
10.2 Indemnification by Buyer. Buyer shall indemnify, defend and hold
------------------------
harmless Sellers from, against and with respect to any Loss arising out of or
in connection with any of the following:
(a) any inaccuracy, misrepresentation or breach of any of the
representations and warranties, as if all qualifications as to knowledge and
materiality (including without limitation with respect to a Material Adverse
Effect) were not contained therein, of Buyer contained in or made pursuant to
this Agreement; or
(b) any failure by Buyer to perform or observe, or to have performed
or observed, in full, any covenant, agreement or condition to be performed or
observed by it pursuant to this Agreement or in any other agreement of document.
10.3 Notice of Claim. An Indemnified Party seeking to be indemnified
---------------
hereunder as a result of a claim made by a third party shall notify the
Indemnity Obligor promptly upon receipt of knowledge of the facts upon which
such third party claim is based; provided, however, that the failure to so
notify the Indemnity Obligor shall not reduce or affect the Indemnity Obligor's
obligations with respect thereto except to the extent that the Indemnity Obligor
is materially prejudiced as a result of such failure to notify. Such notice
shall be in writing and specify in reasonable detail the nature of the Loss and
the amount of the liability estimated to arise therefrom. The Indemnified Party
shall provide to the Indemnity Obligor as promptly as practicable thereafter all
information and documentation reasonably requested by the Indemnity Obligor to
verify the claim asserted, and the Indemnified Party shall make reasonable
efforts to mitigate the Loss.
38
<PAGE>
10.4 Defense. If the facts pertaining to a Loss arise out of the claim of
-------
any third party, or if there is any claim against a third party available by
virtue of the circumstances of the Loss, the Indemnity Obligor may, by giving
written notice to the Indemnified Party within 30 days following its receipt of
the notice of such claim, elect to assume the defense or the prosecution of such
claim, including the employment of counsel or accountants at its cost and
expense; provided, however, that during the interim the Indemnified Party shall
use its best efforts to take all action (not including settlement) reasonably
necessary to protect against further damage or loss with respect to the Loss;
provided that such counsel or accountants shall be reasonably satisfactory to
the Indemnified Party; provided that the Indemnity Obligor agrees prior to
assuming such defense or prosecution of the claim that it is obligated to
indemnify the Indemnified Party for the loss suffered by the Indemnified Party
as a result of such claim; provided that the Indemnity Obligor can demonstrate
to the reasonable satisfaction of the Indemnified Party that such Indemnity
Obligor has the financial ability to satisfy such indemnity obligation; and
provided that any compromise or settlement must be reasonably approved by the
Indemnified Party. Notwithstanding the foregoing, if an Indemnified Party
determines in good faith that there is a reasonable probability that a claim may
adversely affect it or its affiliates other than as a result of monetary damages
for which it would be entitled to indemnification under this Agreement, the
Indemnified Party may, by notice to the Indemnity Obligor, assume the exclusive
right to defend, compromise or settle such claim, but the Indemnity Obligor will
not be bound by any determination of a claim so defended or any compromise or
settlement effected without its consent (which may not be unreasonably
withheld). The Indemnified Party shall have the right to employ counsel separate
from counsel employed by the Indemnity Obligor in any such action and to
participate in such action, but the fees and expenses of such counsel shall be
at the Indemnified Party's own expense. Whether or not the Indemnity Obligor
chooses so to defend or prosecute such claim, all the parties to this Agreement
shall cooperate in the defense or prosecution of such claim and shall furnish
such records, information and testimony and shall attend such conferences,
discovery proceedings and trials as may be reasonably requested in connection
therewith. No Indemnity Obligor shall be liable for any settlement of any such
claim effected without its prior written consent, which shall not be
unreasonably withheld.
10.5 Time for Claims. Any claim asserted with respect to the items
---------------
enumerated in Sections 10.1(a) or 10.2(a) must be submitted to the Indemnity
Obligor in writing, or invoked in official proceedings, within one year after
the Closing Date, except for claims for Losses resulting from (i) an inaccuracy,
misrepresentation or breach of the representations and warranties made in
Sections 2.1, 2.3, 3.1, 3.2, 3.5, 4.1 or 4.2, which claims may be made at any
time, (ii) an inaccuracy, misrepresentation or breach of the representations and
warranties made in Sections 3.19 (except to the extent such claim also results
from an inaccuracy, misrepresentation or breach of the representations and
warranties made in Section 3.22), 3.21 and 3.25, which claims may be made at any
time on or prior to (but not after) the date which is 30 days after the
expiration of the applicable statute of limitations, (iii) an inaccuracy,
misrepresentation or breach of the representations and warranties Section 3.22,
which claims may be made at any time on or prior to (but not after) the third
anniversary of the Closing Date. Claims asserted pursuant to Section 1.2(a) or
(e) for payment of any element of the Purchase Price may be made at any time on
or prior to (but not after) the sixth anniversary of the Closing
39
<PAGE>
Date. Claims asserted pursuant to Section 10.1(c) may be made at any time on or
prior to (but not after) the third anniversary of the Closing Date.
10.6 Limitation. Notwithstanding the provisions of Section 10.1,
----------
Warranting Shareholders shall not have any indemnification obligation under
Section 10.1(a) until such time as the aggregate amount of the Losses for which
any Buyer Indemnified Party is otherwise entitled to indemnification hereunder
exceeds one percent of the Final Purchase Price, whereupon Warranting
Shareholders shall be liable to indemnify the Indemnified Party for all Losses
in excess of such aggregate amount; provided, however, that the foregoing
limitation shall not apply to (i) claims resulting from an inaccuracy,
misrepresentation or breach of the representations and warranties made in
Sections 2.1, 2.3, 2.4, 3.1, 3.2, 3.5, 3.21, 3.22, 3.29, 4.1, 4.2 or 4.6 or (ii)
claims based upon fraud.
10.7 Maximum Indemnity Amount. Save and except as provided herein, in no
------------------------
event shall the aggregate amount for which Warranting Shareholders shall be
liable as Indemnity Obligors under Section 10.1(a) exceed ten percent of the
Final Purchase Price, except for (i) claims resulting from an inaccuracy,
------
misrepresentation or breach of the representations and warranties made in
Sections 2.1, 2.3, 2.4, 3.1, 3.2, 3.5, 3.21, 3.29, 4.1, 4.2, or 4.6, as to which
there shall be no limit (ii) claims based upon fraud, as to which there shall be
no limit or (iii) claims based upon Section 3.22, under which the aggregate
amount for which Warranting Shareholders shall be liable as Indemnity Obligors
shall not exceed thirty percent of the Final Purchase Price. The amount for
which Warranting Shareholders shall be liable as Indemnity Obligors pursuant to
claims made under Section 10.1(c), when aggregated with claims referred to in
Clause (iii) of the foregoing sentence, shall not exceed thirty percent of the
Final Purchase Price.
10.8 Exclusive Remedy. The indemnity contained herein shall be the
----------------
parties' exclusive remedy for claims resulting from an inaccuracy,
misrepresentation or breach of any representation or warranty, except for fraud
claims, claims relating to Taxes or environmental claims, with respect to which
Buyer shall retain all common law and statutory causes of action.
ARTICLE 11
TERMINATION
-----------
11.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Closing:
(a) By the mutual written consent of Sellers and Buyer;
(b) By Sellers and the Company (if Sellers and the Company are not
then in breach of any term of this Agreement), if Buyer shall (i) fail to
perform its agreements contained in this Agreement required to be performed on
or prior to the Closing Date, or (ii) breach any of its representations or
warranties contained in this Agreement, which failure or breach is not cured
within ten days after the Company and Sellers have notified Buyer of their
intent to terminate this Agreement pursuant to this subparagraph, which failure
or breach is not cured by Buyer within ten days after the Company and Sellers
have notified Buyer of their intent to terminate this Agreement pursuant to this
subparagraph;
40
<PAGE>
(c) By Buyer (if Buyer is not then in breach of any term of this
Agreement), if Sellers or the Company shall (i) fail to perform its agreements
contained in this Agreement required to be performed on or prior to the Closing
Date, or (ii) breach any of its representations or warranties contained in this
Agreement, which failure or breach is not cured within ten days after Buyer has
notified Sellers or the Company of its intent to terminate this Agreement
pursuant to this subparagraph, which failure or breach is not cured by Sellers
or the Company within ten days after Buyer has notified them of its intent to
terminate this Agreement pursuant to this subparagraph.
(d) By Sellers and the Company or by Buyer, if there shall be any
order, writ, injunction or decree of any court or governmental or regulatory
agency binding on Sellers or the Company, or on Buyer, which prohibits or
restrains any party from consummating the transactions contemplated by this
Agreement; or
(e) By Sellers and the Company or by Buyer, if the Closing has not
occurred by September 15, 1999, for any reason other than delay or
nonperformance of the party seeking such termination.
11.2 Effect on Obligations. Termination of this Agreement pursuant to this
---------------------
Article shall terminate all obligations of the parties hereunder, except for the
obligations under Sections 6.3 (entitled "Expenses"), 12.3 (entitled
"Publicity") and 6.2 (entitled "Confidentiality"); provided, however, that
termination pursuant to subparagraphs (b) or (c) of Section 11.1 shall not
relieve the defaulting or breaching party from any liability to the other party
to this Agreement.
ARTICLE 12
MISCELLANEOUS
-------------
12.1 Survival of Representations. All representations and warranties of
---------------------------
the parties contained in this Agreement (including without limitation the
schedules hereto) or otherwise made in writing in connection with the
transactions contemplated by this Agreement shall survive the execution and
delivery of this Agreement, as provided herein.
12.2 Publicity. Each of Sellers and Buyer agrees it will not make any
---------
press releases or other announcements prior to the Closing with respect to the
transactions contemplated by this Agreement, except as required by applicable
law, without the prior approval of the other party.
12.3 Appointment of Sellers' Agent. Sellers (i) hereby irrevocably
-----------------------------
designate and appoint Edward J. Stewart III ("Sellers' Agent") as Sellers'
exclusive agent and attorney-in-fact, to give and receive notices and generally
to act for and on behalf of the Sellers in connection with all matters related
to or arising out of the transactions contemplated by this Agreement; and (ii)
acknowledge and agree that the Sellers' Agent shall have no liability to the
Sellers or to the Company for their actions taken in such capacity, other than
in cases where the Sellers' Agent acted with gross negligence or willful
misconduct.
41
<PAGE>
12.4 Notices. All notices, demands and other communications made hereunder
-------
shall be in writing and shall be given either by personal delivery, by
nationally recognized overnight courier (with charges prepaid) or by facsimile
(with telephone confirmation), and shall be deemed to have been given or made
when personally delivered, the second day following the date deposited with such
overnight courier service or when transmitted to facsimile machine and confirmed
by telephone, addressed to the respective parties at the following addresses (or
such other address for a party as shall be specified by like notice):
If to the Company (prior to Closing) or to Sellers:
Edward J. Stewart III
53 Temple Road
Wellesley, Massachusetts 02481
With a copy (which shall not constitute notice) to:
Shapiro, Israel & Weiner, P.C.
100 North Washington Street
Boston, Massachusetts 02114
Attention: David Baer, Esquire
Telephone: (617) 472-4200
Facsimile: (617) 742-2355
If to the Company (after Closing) or to Buyer:
HTM Holdings, Inc.
c/o SMTC Corporation
635 Hood Road
Markham, Ontario
Canada L3R 4N6
Telephone: (905) 479-1810
Facsimile: (905) 479-9686
With a copy (which shall not constitute notice) to:
Ropes & Gray
One International Place
Boston, MA 02110-2624
Attention: Alfred O. Rose, Esq.
Telephone: (617) 951-7000
Facsimile: (617) 951-7050
42
<PAGE>
12.5 Counterparts. This Agreement may be executed and delivered in one or
------------
more counterparts and/or by electronic facsimile. Each counterparts shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
12.6 Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the parties to this Agreement and their respective successors and
permitted assigns. Neither this Agreement nor any of the rights, interest or
obligations hereunder shall be assigned by any of the parties to this Agreement
without the prior written consent of all other parties to this Agreement, and
any purported assignment without such consent shall be void, provided, however,
-----------------
that Buyer may assign this Agreement or the rights, interests or obligations
hereunder to any of its affiliates without the consent of any other party to
this Agreement so long as Buyer remains liable for all of Buyer's obligations
hereunder.
12.7 Third Party Beneficiaries. None of the provisions of this Agreement
-------------------------
or any document contemplated by this Agreement is intended to grant any right or
benefit to any person or entity which is not a party to this Agreement.
12.8 Headings. The article and section headings contained in this
--------
Agreement are solely for the purpose of reference, are not part of this
Agreement and shall not in any way affect the meaning or interpretation of this
Agreement.
12.9 Recitals. The recitals set forth at the beginning of this Agreement
--------
are incorporated by reference in, and made a part of, this Agreement.
12.10 Amendments. Any waiver, amendment, modification or supplement of or
----------
to any term or condition of this Agreement shall be effective only if in writing
and signed by all parties hereto, and the parties to this Agreement waive the
right to amend the provisions of this Section orally.
12.11 Specific Performance. Sellers acknowledge that if Sellers fail to
--------------------
consummate the transactions contemplated by this Agreement such failure will
cause irreparable harm to Buyer for which there will be no adequate remedy at
law. Buyer shall be entitled, in addition to its other remedies at law, to
specific performance of this Agreement if Sellers shall, without cause, refuse
to consummate the transactions contemplated by this Agreement.
12.12 Governing Law. This Agreement shall be governed by the laws of the
-------------
State of Delaware, without regard to conflicts of laws principles.
12.13 Jurisdiction: Service of Process. Each of the parties to this
--------------------------------
Agreement submits to the jurisdiction of any state or federal court sitting in
Massachusetts, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of such action or proceeding may
be heard and determined in any such court. Each of the parties to this Agreement
waives any defense of inconvenient forum to the maintenance of any action or
proceeding so brought and waives any bond, surety or other security that may be
required of any party with respect thereto. Any party may make service on any
other party by sending or delivering a copy of the process to the party to be
served at the address and in a manner provided
43
<PAGE>
in Section 12.6 above; provided, however, that nothing in this Section 12.15
will affect the right of any party to serve legal process in any other manner
permitted by law or at equity. Each party agrees that a final judgment in any
action or proceeding so brought shall be conclusive and may be enforced by suit
on the judgment or in any other manner provided by law or at equity.
12.14 Resolution of Purchase Price Adjustment. If, within 15 business
---------------------------------------
days following the delivery of a timely Objection by the Buyer to the Sellers
pursuant to Section 1.2(e), the parties are unable to resolve their differences
with respect to such Objection (the "Disputed Items"), either the Buyer or the
Sellers' Agent may, within five business days after the end of such fifteen
business day period, request that the Disputed Items be resolved by means of an
arbitration conducted pursuant to this Section 12.14 (an "Arbitration"). Any
request for an Arbitration shall be made in writing to the Boston, Massachusetts
office of PriceWaterhouseCoopers or, in the event such firm declines to serve as
the Independent Accounting Firm (as defined below), to the Boston, Massachusetts
office of such other independent accounting firm of recognized national standing
that may be selected by the Buyer with the consent of the Sellers' Agent, which
consent will not be unreasonably withheld. The firm to which such request is
made shall, upon agreeing in writing to resolve the Disputed Items
submitted to it in accordance with the terms of this Agreement, be the
"Independent Accounting Firm", as that term is used in this Agreement. The
---------------------------
Arbitration shall be conducted under the auspices of the Independent Accounting
Firm and, except to the extent said rules conflict with the terms of this
Section 12.14, shall be conducted in accordance with the Commercial Arbitration
Rules of the American Arbitration Association. The Independent Accounting Firm
shall, within five business days of its agreement to resolve the Disputed Items
submitted to it, provide to the Buyer and the Sellers' Agent with the names and
resumes (which shall include a description of the individual's substantial
experience in the preparation and audit of financial statements of corporations
engaged in distribution and a disclosure of the individual's existing or prior
business and/or personal relationships (if any) with the Buyer, the Sellers. or
any employees or counsel of any such Person) of at least three partners of the
Independent Accounting Firm located in its Boston office who are willing to
serve as the individual responsible for conducting the Arbitration (the
"Arbitrator"). If, on or before the third business day after their receipt of
the information called for by the preceding sentence, the Buyer and the Sellers'
Agent have been unable after good faith negotiation to agree upon and select one
of the individuals so identified to act as the Arbitrator, then the Buyer and
the Sellers' Agent shall each have the right on or before the fifth business day
after their receipt of such information to deliver to the Independent Accounting
Firm a confidential communication striking any or all of the individuals
previously identified as a potential Arbitrator as to whom an existing business
and/or personal relationship was disclosed pursuant to the preceding sentence,
and/or striking no more than one of the other individuals previously identified
as a potential Arbitrator.
The Independent Accounting Firm shall then proceed to select the Arbitrator
from among the previously identified individuals who have not been stricken from
consideration; if all such previously identified individuals are so stricken,
the Independent Accounting Firm shall designate at least three additional
partners who are eligible to serve as the Arbitrator and the foregoing selection
procedure shall be repeated until an Arbitrator is selected. Upon being
selected, the Arbitrator shall conduct an Arbitration to determine, with regard
to each of the Disputed Items that were submitted to the Independent Accounting
Firm pursuant to this Section
44
<PAGE>
12.14, whether the Closing Balance Sheet and/or the Adjustments Statement were
prepared in accordance with the requirements of this Agreement and, if not, the
dollar amount of any adjustment that may be required in order for the Disputed
Item in question to conform to the requirements of this Agreement. The locale of
all hearings conducted by the Arbitrator in connections with the Arbitrations
shall be the Boston, Massachusetts office of the Independent Accounting Firm.
The Arbitrator shall make such determination subsequent to conducting the
Arbitration and shall set forth such determination in a written ruling, which
ruling shall be rendered within 120 days of the date on which the Arbitrator was
selected and shall be delivered to the Buyer and the Sellers' Agent in
accordance with the terms of Section 12.4 of this Agreement. The ruling of the
Arbitrator shall be final, binding, and conclusive on the Buyer and the Sellers;
shall have the legal effect of an arbitral award; and shall be subject only to
the judicial review permitted by the Federal Arbitration Act. Judgment on the
ruling of the Arbitrator may be entered and enforced in any court having
jurisdiction over the parties or their assets. The fees and disbursements of the
Independent Accounting Firm shall be allocated between the Sellers on the one
hand (with each Seller responsible for his or her percentage interest) and the
Buyer on the other hand in the same proportion that the aggregate amount of such
Disputed Items so submitted to the Independent Accounting Firm that is
unsuccessfully disputed by each such party (as finally determined by the
Independent Accounting Firm) bears to the total amount of such Disputed Items so
submitted.
12.15 Remedies. In the event litigation shall be necessary to enforce,
--------
interpret or rescind the provisions of this Agreement or any related matter, the
prevailing party shall be entitled to recover from the adverse party, in
addition to any other relief, the prevailing party's reasonable attorneys' fees
for services before trial, at trial, and on any subsequent appeal by the adverse
party.
12.16 Severability. In the event that any provision in this Agreement
------------
shall be determined to be invalid, illegal or unenforceable in any respect, the
remaining provisions of this Agreement shall not be in any way impaired, and the
illegal, invalid or unenforceable provision shall be fully severed from this
Agreement and there shall be automatically added a replacement provision as
similar in terms and intent to such severed provision as may be legal, valid and
enforceable.
12.17 Entire Agreement. This Agreement and the Schedules and Exhibits to
----------------
this Agreement, together with the documents and instruments delivered pursuant
to this Agreement, constitute the entire contract between the parties to this
Agreement pertaining to the subject matter of this Agreement, and supersede all
prior and contemporaneous agreements and understandings between the parties with
respect to such subject matter including without limitation the letter of intent
dated May 18, 1999.
12.18 Currency. All dollar amounts expressed in this Agreement shall be
--------
in United States Dollars.
45
<PAGE>
12.19 Knowledge. As used herein, the terms "to the best knowledge of,"
---------
"to the knowledge of" or words to similar effect shall mean (a) with respect to
the Company, the knowledge of Thomas Harrington or Sheila Chartier, including
their actual knowledge and that which a similarly situated prudent individual
could be expected to know, discover or otherwise become aware in the course of a
reasonable investigation concerning such fact or matter; (b) with respect to the
Warranting Shareholders or the Sellers, the knowledge of those individuals
constituting the Warranting Shareholders or the Sellers, as the case may be,
including such person's actual knowledge and that which such person should have
obtained through reasonable inquiry of Thomas Harrington and Sheila Chartier.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
46
<PAGE>
IN WITNESS WHEREOF, each of the parties has signed this Agreement, or has
caused this Agreement to be signed by its duly authorized officer, as of the
date first above written.
SELLERS:
-------
/s/ Paul A. Keany
_______________________________________
Paul A. Keany
/s/ Edward J. Stewart III
_______________________________________
Edward J. Stewart, III for himself
/s/ Edward J. Stewart III
_______________________________________
Edward J. Stewart, III for
Edward J. Stewart IV
/s/ Edward J. Stewart III
_______________________________________
Edward J. Stewart, III for
Elizabeth Stewart
/s/ Edward J. Stewart, IV
_______________________________________
Edward J. Stewart, IV for himself
/s/ Elizabeth Stewart
_______________________________________
Elizabeth Stewart, for herself
COMPANY:
-------
W. F. WOOD, INCORPORATED
/s/ Paul A. Keany
By: ___________________________________
Paul A. Keany
Name:_______________________________
Title:______________________________
47
<PAGE>
BUYER:
-----
HTM HOLDINGS, INC.
/s/ Paul Walker
By:_______________________________________
Paul Walker
President
48
<PAGE>
List of Exhibits and Schedules to Stock Purchase Agreement (Exhibit 2.2)
We agree to furnish supplementally a copy of any omitted schedule to the
Commission upon request.
<TABLE>
<CAPTION>
Exhibit# Document
- -------- --------
<S> <C>
1.2(a)(i) Escrow agreement between HTM Holdings, Inc. and certain sellers.
1.2(a)(iii) List of sellers.
5.7 W.F. Wood facility audit findings.
6.4(a) W.F. Wood Employee Bonus Plan.
6.4(b) Additional employee bonuses.
7.7 Legal opinion of Shapiro, Israel & Weiner, P.C., counsel to
sellers.
A List of transaction documents.
B Officer's certificate.
C Trustees' certificate.
D Beneficiaries' authorization to Trustees.
E Shareholders certificate.
7.9(a)(1) Employment agreement with Thomas Harrington.
7.9(a)(2) Employment agreement with Sheila Chartier.
7.10 Lease for premises in Holliston, MA.
8.4 Opinion of Ropes & Gray, counsel to buyers.
9.2(e) Certificate of clerk of W.F. Wood.
<CAPTION>
Schedule# Document
- --------- --------
<S> <C>
1.2(d) Reports regarding inventory.
2.3 Share ownership schedule.
2.3(a) Agreements regarding disposition or acquisition of shares.
2.3(b) Schedule of proxies.
3.3 Violation of other agreements.
3.4 Required consents.
3.6 Investments in other companies.
3.7 Schedule of officers and directors.
3.8 Schedule of undisclosed liabilities and indebtedness for borrowed
money.
3.10 Schedule of existing liens, with UCC search reports.
3.13 Schedule of inventory locations.
3.14 Schedule of material contracts.
3.16 Schedule of intellectual property.
3.17 Schedule of suppliers and customers.
3.17(a) List of top ten suppliers.
3.17(b) List of top ten customers.
3.18 Schedule of litigation.
3.19 Schedule of noncompliance with decrees and laws.
3.19(a) W.F. Wood facility audit findings.
3.20 Schedule of permits and licenses.
3.21 Schedule of tax returns filed on or after December 31, 1993.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Schedule Document
- -------- --------
<S> <C>
3.23 Schedule of insurance policies.
3.24(d) Representations regarding employment and Employee Bonus Plan.
3.24(f) Schedule of key employees.
3.25(a) Schedule of employees and compensation.
3.25(b) Schedule of employee benefit plans.
3.26 Schedule regarding absence of changes.
3.27 Schedule of related party transactions.
3.30 Schedule of bank accounts.
3.31 Year 2000 plan.
7.4 Schedule of consents and approvals.
7.6 Schedule of permitted liens.
7.11 Schedule of repayment of debt.
</TABLE>
50
<PAGE>
EXHIBIT 4.3
FORM OF WARRANT TO PURCHASE SHARES OF CLASS L COMMON STOCK
THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON JULY
30, 1999, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT
AND APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION
THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
ADDITIONAL RESTRICTIONS ON TRANSFER AND CERTAIN OTHER AGREEMENTS SET FORTH IN A
STOCKHOLDERS AGREEMENT DATED AS OF JULY 30, 1999 AMONG SMTC CORPORATION AND
CERTAIN STOCKHOLDERS THEREOF, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE BY
THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS.
No. W-L-__ __________ Class L Shares
WARRANT TO PURCHASE
SHARES OF CLASS L COMMON STOCK
OF
SMTC CORPORATION
Incorporated Under the Laws of the State of Delaware
THIS CERTIFIES THAT, for value received, and subject to the provisions
hereinafter set forth, ________________________, or its registered assigns is
entitled to purchase from SMTC Corporation, a Delaware corporation (the
"Company"), during the period specified in this Warrant, ________________ shares
(subject to adjustment as hereinafter provided) of the duly authorized, validly
issued, fully paid and non-assessable Class L Common Stock, par value $.001 per
share, of the Company at an initial exercise price of $____________ per share
(the "Initial Exercise Price"). Certain capitalized terms used in this Warrant
are defined in Section 9.
1. Duration. The right to subscribe for and purchase shares of Class L Common
--------
Stock represented hereby shall commence on the date of issuance of this Warrant
and shall expire at 5:00 P.M., Eastern Time, on June 8, 2008 (the "Expiration
Date").
<PAGE>
2. Method of Exercise; Payment, Issuance of New Warrant; Transfer and Exchange.
---------------------------------------------------------------------------
2.1. Method of Exercise.
------------------
2.1.1. Exercise. This Warrant may be exercised by the holder hereof,
--------
in whole or in part, during normal business hours on any business day on or
prior to the Expiration Date, by surrender of this Warrant to the Company
at its principal office, accompanied by a subscription substantially in the
form attached to this Warrant duly executed by such holder and accompanied
by (a) wire transfer of immediately available funds, (b) certified or
official bank check payable to the order of the Company or (c) delivery to
the Company of a principal amount of notes, in each case in the amount
obtained by multiplying (i) the number of shares of Class L Common Stock
(without giving effect to any adjustment thereof pursuant to the provisions
hereof) for which this Warrant is then being exercised, as designated in
such subscription, by (ii) the Initial Exercise Price, and such holder
shall thereupon be entitled to receive the number of duly authorized,
validly issued, fully paid and nonassessable shares of Class L Common Stock
(or Other Securities) determined as provided in Sections 4 and 5.
2.1.2. Conversion. This Warrant may be converted by the holder hereof,
----------
in whole or in part, into shares of Class L Common Stock (or Other
Securities), during normal business hours on any business day on or prior
to the Expiration Date, by surrender of this Warrant to the Company at its
principal office, accompanied by a conversion notice substantially in the
form attached to this Warrant duly executed by such holder, and such holder
shall thereupon be entitled to receive a number of duly authorized, validly
issued, fully paid and nonassessable shares of Class L Common Stock (or
Other Securities) equal to:
(a) the excess of
(i) (x) the number of shares of Class L Common Stock (or Other
Securities) determined as provided in Sections 4 and 5 hereof which such
holder would be entitled to receive upon exercise of this Warrant for the
number of shares of Class L Common Stock designated in such conversion
notice (without giving effect to any adjustment thereof pursuant to
Section 4 or 5 hereof) multiplied by (y) the Current Market Price of each
such share of Class L Common Stock (or such Other Securities) so
receivable upon such exercise
over
(ii) (x) the number of shares of Class L Common Stock (without giving
effect to any adjustment thereof pursuant to the provisions hereof) for
which this Warrant may be exercised, as designated in such conversion
notice, multiplied by (y) the Initial Exercise Price
divided by
-2-
<PAGE>
(b) such Current Market Price of each such share of Class L Common Stock
(or Other Securities).
For all purposes of this Warrant (other than this Section 2.1), any reference
herein to the exercise of this Warrant shall be deemed to include a reference
to the conversion of this Warrant into Class L Common Stock (or Other
Securities) in accordance with the terms of this Section 2.1.2.
2.2. When Exercise Effective. Each exercise of this Warrant shall be deemed
-----------------------
to have been effected immediately prior to the close of business on the business
day on which this Warrant shall have been surrendered to the Company as provided
in Section 2.1 hereof, and at such time the Person or Persons in whose name or
names any certificate or certificates for shares of Class L Common Stock (or
Other Securities) shall be issuable upon such exercise as provided in Section
2.3 hereof shall be deemed to have become the holder or holders of record
thereof.
2.3. Delivery of Stock Certificates, etc. As soon as practicable after each
-----------------------------------
exercise of this Warrant, in whole or in part, the Company at its expense
(including the payment by it of any applicable issue taxes) will cause to be
issued in the name of and delivered to the holder hereof or, subject to the
provisions of the Stockholders Agreement, as such holder (upon payment by such
holder of any applicable transfer taxes) may direct:
(a) a certificate or certificates for the number of duly authorized,
validly issued, fully paid and nonassessable shares of Class L Common Stock
(or Other Securities) to which such holder shall be entitled upon such
exercise plus, in lieu of any fractional share to which such holder would
otherwise be entitled, cash in an amount equal to the same fraction of the
current Market Price per share on the business day next preceding the date of
such exercise; and
(b) in case such exercise is in part only, a new Warrant or Warrants of
like tenor, dated the date hereof and calling in the aggregate on the face or
faces thereof for the number of shares of Class L Common Stock equal (without
giving effect to any adjustment thereof pursuant to the terms hereof) to the
number of such shares called for on the face of this Warrant minus the number
of such shares designated by the holder upon such exercise as provided in
Section 2.1 hereof.
2.4. Exchange of Warrant. This Warrant is exchangeable at the aforesaid
-------------------
principal office of the Company for Warrants for the purchase of the same
aggregate number of shares of Class L Common Stock, each new Warrant to
represent the right to purchase such number of shares of Class L Common Stock as
the holder hereof shall designate at the time of such exchange. All Warrants
issued on transfers or exchanges shall be dated the date hereof and shall be
identical with this Warrant except as to the number of shares of Class L Common
Stock issuable pursuant hereto.
2.5. Company to Reaffirm Obligations. The Company will, at the time of or
-------------------------------
at any time after each exercise of this Warrant, upon the request of the holder
hereof, acknowledge in writing its continuing obligation to afford to such
holder all rights to which such holder shall continue to
-3-
<PAGE>
be entitled after such exercise in accordance with the terms of this Warrant,
provided that if any such holder shall fail to make any such request, the
failure shall not affect the continuing obligation of the Company to afford such
rights to such holder.
3. Stock Fully Paid; Reservation of Shares. The Company represents, warrants,
---------------------------------------
covenants and agrees that all shares of Class L Common Stock which may be issued
upon the exercise of the rights represented by this Warrant will, upon issuance,
be duly authorized, validly issued, fully paid and non-assessable. The Company
further covenants and agrees that during the period within which the rights
represented by this Warrant may be exercised, the Company will at all times have
authorized and reserved solely for the purpose of the issuance upon exercise of
this Warrant a sufficient number of shares of Class L Common Stock to provide
for the exercise of the rights represented by this Warrant.
If any shares of Class L Common Stock required to be reserved for issuance
upon exercise of this Warrant require registration or qualification with any
governmental authority under any federal or state law before such shares may be
so issued, the Company will in good faith and as expeditiously as reasonably
possible use reasonable efforts to cause such shares to be duly registered or
qualified; provided, however, that the Company shall not be required to effect
-------- -------
any registration under federal or state securities laws other than as provided
in Section 7 of the Stockholders Agreement.
The Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this Warrant, and (c) use its reasonable efforts to obtain
all such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant; provided, however, that the Company shall
-------- -------
not be required to effect any registration under federal or state securities
laws other than as provided in Section 6 of the Stockholders Agreement.
4. Adjustment of Number of Shares Purchasable Upon Exercise. The number of
--------------------------------------------------------
shares of Class L Common Stock purchasable upon the exercise of this Warrant and
the payment of the Initial Exercise Price shall be determined by multiplying the
number of shares of Class L Common Stock which would otherwise (but for the
provisions of this Section 4) be issuable upon such exercise, as designated by
the holder hereof pursuant to Section 2.1 hereof, by a fraction (a) the
numerator of which shall be the Initial Exercise Price and (b) the denominator
of which shall be the Exercise Price in effect on the date of such exercise.
The "Exercise Price" shall initially be the Initial Exercise Price and shall be
adjusted and readjusted from time to time as provided in this Section 4 and, as
so adjusted or readjusted, shall remain in effect until a further adjustment or
readjustment thereof is required by this Section 4.
-4-
<PAGE>
4.1. Subdivision or Combination of Shares. If the Company, at any time
------------------------------------
while this Warrant is outstanding, shall subdivide (by stock split or otherwise)
or combine (by consolidation or otherwise) any outstanding shares of Class L
Common Stock, the Exercise Price shall be (a) proportionately decreased, to the
nearest one hundredth of one cent, in the case of a subdivision of shares, to
reflect the increase in the total number of shares of Class L Common Stock
outstanding as a result of such subdivision or (b) proportionately increased, to
the nearest one hundredth of one cent, in the case of a combination of shares,
to reflect the decrease in the total number of shares of Class L Common Stock
outstanding as a result of such combination, as of the effective date of such
subdivision or combination, or if the Company shall take a record of holders of
Class L Common Stock for the purpose of so subdividing or combining, as of the
applicable record date, whichever is earlier.
4.2. Certain Dividends. If the Company, at any time while this Warrant is
-----------------
outstanding, shall pay any stock dividend on the Class L Common Stock, the
Exercise Price shall be adjusted, as of the date the Company shall take a record
of the holders of the Class L Common Stock, for the purpose of receiving such
dividend (or if no such record is taken, as of the date of such dividend), to
the nearest one hundredth of one cent, to the product obtained by multiplying
the Exercise Price in effect immediately prior to such stock dividend by a
fraction (a) the numerator of which shall be the total number of shares of the
Class L Common Stock outstanding immediately prior to such dividend and (b) the
denominator of which shall be the total number of shares of the Class L Common
Stock outstanding immediately after such dividend (plus in the event that the
Company paid cash for fractional shares, the number of additional shares which
would have been outstanding had the Company issued fractional shares in
connection with said dividends).
4.3. Other Events. If any event occurs as to which the foregoing provisions
------------
of Section 4.1 and 4.2 are not strictly applicable or, if strictly applicable,
would not, in the good faith judgment of the Board, fairly and adequately
protect the purchase rights represented by the Warrants in accordance with the
essential intent and principles of such provisions, then the Board shall make
such adjustments in the application of such provisions, in accordance with such
essential intent and principles, as shall be reasonably necessary, in the good
faith opinion of the Board, to protect such purchase rights as aforesaid.
4.4. Adjustment of Exercise Price. If at any time, as a result of any
----------------------------
adjustments hereunder, the sum of the Exercise Price plus a proportionate
portion of the consideration paid by the holder for this Warrant shall be less
than the par value per share of Class L Common Stock, then the price payable per
share of Class L Common Stock by the holder hereunder in the event of an
exercise of this Warrant, in whole or in part, shall be an amount equal to the
par value per share of the Class L Common Stock.
5. Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, etc.
--------------------------------------------------------------------------
In case the Company after the date hereof (a) shall consolidate with or merge
into any other Person and shall not be the continuing or surviving corporation
of such consolidation or merger, or (b) shall permit any other Person to
consolidate with or merge into the Company and the Company shall be the
continuing or surviving Person but, in connection with such consolidation or
merger, the Common
-5-
<PAGE>
Stock or Other Securities shall be changed into or exchanged for stock or other
securities of any other Person or cash or any other property, or (c) shall
transfer all or substantially all of its properties or assets to any other
Person or (d) shall effect a capital reorganization or reclassification of the
Class L Common Stock or Other Securities, then, and in the case of each such
transaction, proper provision shall be made so that, upon the basis and the
terms and in the manner provided in this Warrant, the holder of this Warrant,
upon the exercise hereof at any time after the consummation of such transaction,
shall be entitled to receive (at the aggregate Exercise Price in effect at the
time of such consummation for all Class L Common Stock or Other Securities
issuable upon such exercise immediately prior to such consummation), in lieu of
the Class L Common Stock or Other Securities issuable upon such exercise prior
to such consummation, the greatest amount of securities, cash or other property
to which such holder would actually have been entitled as a shareholder upon
such consummation if such holder had exercised the rights represented by this
Warrant immediately prior thereto.
6. Notice of Adjustments. Whenever the Exercise Price is adjusted pursuant to
----------------------
Section 4 hereof, the Company will promptly deliver to the holder of this
Warrant at the address provided in the Stockholders Agreement a certificate
setting forth, in reasonable detail, the event that triggered the adjustment,
the amount of the adjustment, the method by which such adjustment was calculated
(including a description of the basis on which the Board made any determination
hereunder), and the Exercise Price after giving effect to such adjustment.
7. Dividends/Distributions. The Company shall give the Holder of this Warrant
-----------------------
not less than 15 days prior written notice of its intent to pay a dividend or
make any other distribution on any shares of its capital stock and shall set
forth in such notice the amount and type of such dividend or distribution and
the share of capital stock on which such dividend or distribution will be paid.
If the Holder of this Warrant does not elect to exercise this Warrant prior to
such dividend or distribution, an amount equal to the cash which the Holder
would have received on the Class L Common Stock had the Holder exercised this
Warrant immediately prior to such dividend or distribution shall at the option
of the Holder (a) be used as a credit against the Exercise Price or (b) be
retained by the Company and paid to such Holder upon the exercise of this
Warrant.
8. Restrictions; Legends.
---------------------
8.1. Restrictions; Legends. This Warrant and the Class L Common Stock (or
---------------------
Other Securities) issuable upon the exercise hereof are subject in all respects
to the provisions of the Stockholders Agreement. This Warrant and each
certificate issued upon the exercise of this Warrant and each certificate issued
upon any direct or indirect transfer of this Warrant or of any share of Class L
Common Stock (or Other Securities) issuable upon exercise of this Warrant shall
be transferable only upon satisfaction of the conditions set forth in the
Stockholders Agreement, and shall be stamped or otherwise imprinted with legends
in the form required under Section 9 of the Stockholders Agreement.
8.2. Termination of Restrictions; Removal of Legends. The restrictions
imposed by this Section 8 upon the transferability of this Warrant and the Class
L Common Stock (or Other
-6-
<PAGE>
Securities) issuable upon exercise of this Warrant shall cease and terminate at
such time as this Warrant or any such shares of Class L Common Stock shall no
longer be subject to the provisions of Section 9 of the Stockholders Agreement.
Whenever such restrictions cease and terminate as to this Warrant or any such
Class L Common Stock, the holder thereof shall be entitled to receive from the
Company, without expense (other than applicable transfer taxes, if any), new
certificates not bearing the applicable legends required by Section 8.1 hereof.
9. No Rights or Liabilities as Stockholder. Nothing contained in this Warrant
---------------------------------------
shall be construed as conferring upon the holder hereof any rights as a
stockholder of the Company or as imposing any obligation on such holder to
purchase any Securities or as imposing any liabilities on such holder as a
stockholder of the Company, whether such obligation or liabilities are asserted
by the Company or by creditors of the Company.
10. Definitions. For the purposes of this Warrant, the following terms have
-----------
the following meanings:
"Board" shall mean the Board of Directors of the Company.
"Class L Common Stock" shall mean the Company's Class L Common Stock, par
value $.001 per share, for which this Warrant may be exercised.
"Company" shall mean SMTC Corporation, a Delaware corporation, its
successors and assigns.
"Current Market Price" shall mean on any date specified herein, the average
daily Market Price during the period of the most recent 20 days, ending on
such date, on which the national securities exchanges were open for trading,
except that if no Class L Common Stock is then listed or admitted to trading
on any national securities exchange or quoted in the over-the-counter market,
the Current Market Price shall be the Market Price on such date.
"Expiration Date" shall have the meaning set forth in Section 1.
"Initial Exercise Price" shall have the meaning set forth in the first
paragraph hereof.
"Market Price" shall mean on any date specified herein, the amount per
share of Class L Common Stock equal to (a) the last sale price of Class L
Common Stock, regular way, on such date or, if no such sale takes place on
such date, the average of the closing bid and asked prices thereof on such
date, in each case as officially reported on the principal national
securities exchange on which Class L Common Stock is then listed or admitted
to trading, or (b) if Class L Common Stock is not then listed or admitted to
trading on any national securities exchange but is designated as a national
market system security by the NASD, the last trading price of Class L Common
Stock on such date, or (c) if there shall have been no trading on such date
or if Class L Common Stock is not so designated, the average of the closing
bid and asked prices of Class L Common Stock on such date as shown by the
NASD automated quotation system, or (d) if the Class L Common Stock
-7-
<PAGE>
is not then listed or admitted to trading on any national exchange or
quoted in the over-the-counter market, the fair market value thereof
determined in good faith by the Board.
"Other Securities" shall mean any stock (other than Class L Common Stock)
and other securities of the Company or any other Person which the holders of
the Warrants at any time shall be entitled to receive, or shall have
received, upon the exercise of the Warrants, in lieu of or in addition to
Class L Common Stock, or which at any time shall be issuable or shall have
been issued in exchange for or in replacement of Class L Common Stock or
Other Securities pursuant to Section 4 hereof or otherwise.
"Person" shall mean an individual, a corporation, a partnership, a trust,
an unincorporated organization or a government organization or an agency or
political subdivision thereof.
"Securities" shall mean any debt or equity securities of the Company,
whether now or hereafter authorized, and any instrument convertible into or
exchangeable for Securities or a Security. ASecurity@ shall mean one of the
Securities.
"Securities Act" shall mean as of any date of the Securities Act of 1933,
as amended, or any similar Federal statute then in effect.
"Stock" shall include any and all shares, interests or other equivalents
(however designated) of, or participants in, the capital stock of a
corporation of any class.
"Stockholders Agreement" shall mean the Stockholders Agreement dated as of
July 30, 1999 among the Company and certain holders of the Company's
outstanding capital stock, as such Stockholders Agreement may hereafter from
time to time be amended, modified or supplemented in accordance with its
terms.
"Majority Holders" shall mean at any time holders of Warrants exercisable
for 50% of the shares of Class L Common Stock issuable under the Warrants at
such time outstanding.
"Warrants" shall mean the Warrants issued by the Company on the date
hereof. The term "Warrants" shall include, without limitation, this Warrant
and any Warrants issued in substitution or exchange for any thereof.
11. Amendment and Waiver. Any term, covenant, agreement or condition in this
--------------------
Warrant may be amended, or compliance therewith may be waived (either generally
or in a particular instance and either retroactively or prospectively), by a
written instrument or written instruments executed by the Company and the
Majority Holders; provided, however, that no such amendment or waiver shall
-------- -------
increase the Exercise Price, shorten the period during which the Warrants may be
exercised or modify any provision of this Section 11 without consent of the
holders of all Warrants then outstanding affected by such amendment or waiver.
-8-
<PAGE>
12. Governing Law. This Warrant shall be governed by and construed in
accordance with the internal laws of the State of Delaware (without giving
effect to the choice of law principles of such state).
Dated: ___________________
SMTC CORPORATION
By:_______________________________________________
Name: Paul Walker
Title: President
<PAGE>
FORM OF SUBSCRIPTION
[To be executed only upon exercise of Warrant]
To SMTC Corporation.:
The undersigned registered holder of the within Warrant hereby irrevocably
exercises such Warrant for, and purchases thereunder, ____________________/1/
shares of the Class L Common Stock and herewith makes payment of $__________
therefor, and requests that the certificates for such shares be issued in the
name of, and delivered to ______________________________, whose address is
Dated: ---------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of Warrant)
---------------------------------
(Street Address)
---------------------------------
(City) (State) (Zip Code)
- ------------------------------
/1/ Insert here the number of shares called for on the face of this Warrant
(or, in the case of a partial exercise, the portion thereof as to which this
Warrant is being exercised), in either case without making any adjustment for
any stock or other securities or property or cash which, pursuant to the
adjustment provisions of this Warrant, may be delivered upon exercise. In the
case of a partial exercise, a new Warrant or Warrants will be issued and
delivered, representing the unexercised portion of the Warrant, to the holder
surrendering the Warrant.
<PAGE>
FORM OF ASSIGNMENT
[To be executed only upon transfer of Warrant]
For value received, the undersigned registered holder of the within Warrant
hereby sells, assigns and transfers unto ___________________________________ the
right represented by such Warrant to purchase _______________/2/ shares of Class
L Common Stock of SMTC Corporation to which such Warrant relates, and appoints
_______________Attorney to make such transfer on the books of SMTC Corporation
maintained for such purpose, with full power of substitution in the premises.
Dated:
---------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of Warrant)
---------------------------------
(Street Address)
---------------------------------
(City) (State) (Zip Code)
Signed in the presence of:
- ---------------------------
/2/ Insert here the number of shares called for on the face of this Warrant
(or, in the case of a partial exercise, the portion thereof as to which this
Warrant is being exercised), in either case without making any adjustment for
any stock or other securities or property or cash which, pursuant to the
adjustment provisions of this Warrant, may be delivered upon exercise. In the
case of a partial exercise, a new Warrant or Warrants will be issued and
delivered, representing the unexercised portion of the Warrant, to the holder
surrendering the Warrant.
<PAGE>
FORM OF CONVERSION NOTICE
To SMTC Corporation:
The undersigned registered holder of the within Warrant hereby irrevocably
converts such Warrant with respect to _________________/3/ shares of the Class L
Common Stock which such holder would be entitled to receive upon the exercise
hereof, and requests that the certificates for such shares be issued in the name
of, and delivered to __________________________________, whose address is
Dated: -----------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of Warrant)
-----------------------------------
(Street Address)
-----------------------------------
(City) (State) (Zip Code)
/3/ Insert here the number of shares called for on the face of this Warrant
(or, in the case of a partial conversion, the portion thereof as to which this
Warrant is being converted), in either case without making any adjustment for
additional shares of Common Stock or any other stock or other securities or
property or cash which, pursuant to the adjustment provisions of this Warrant,
may be delivered upon exercise. In the case of a partial conversion, a new
Warrant or Warrants will be issued and delivered, representing the unconverted
portion of the Warrant, to the holder surrendering the Warrant.
<PAGE>
EXHIBIT 4.4
FORM OF WARRANT TO PURCHASE SHARES OF CLASS A-1 COMMON STOCK
THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON JULY
30, 1999, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT
AND APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION
THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
ADDITIONAL RESTRICTIONS ON TRANSFER AND CERTAIN OTHER AGREEMENTS SET FORTH IN A
STOCKHOLDERS AGREEMENT DATED AS OF JULY 30, 1999 AMONG SMTC CORPORATION AND
CERTAIN STOCKHOLDERS THEREOF, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE BY
THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS.
No. W-A-__ _______________ Class A-1 Shares
WARRANT TO PURCHASE
SHARES OF CLASS A-1 COMMON STOCK
OF
SMTC CORPORATION
Incorporated Under the Laws of the State of Delaware
THIS CERTIFIES THAT, for value received, and subject to the provisions
hereinafter set forth, __________________________, or its registered assigns is
entitled to purchase from SMTC Corporation, a Delaware corporation (the
"Company"), during the period specified in this Warrant, _______________ shares
(subject to adjustment as hereinafter provided) of the duly authorized, validly
issued, fully paid and non-assessable Class A-1 Common Stock, par value $.001
per share, of the Company at an initial exercise price of $_________ per share
(the "Initial Exercise Price"). Certain capitalized terms used in this Warrant
are defined in Section 9.
1. Duration. The right to subscribe for and purchase shares of Class A-1
--------
Common Stock represented hereby shall commence on the date of issuance of this
Warrant and shall expire at 5:00 P.M., Eastern Time, on June 8, 2008 (the
"Expiration Date").
<PAGE>
2. Method of Exercise; Payment, Issuance of New Warrant; Transfer and Exchange.
---------------------------------------------------------------------------
2.1. Method of Exercise.
------------------
2.1.1. Exercise. This Warrant may be exercised by the holder hereof, in whole
--------
or in part, during normal business hours on any business day on or prior to the
Expiration Date, by surrender of this Warrant to the Company at its principal
office, accompanied by a subscription substantially in the form attached to this
Warrant duly executed by such holder and accompanied by (a) wire transfer of
immediately available funds, (b) certified or official bank check payable to the
order of the Company or (c) delivery to the Company of a principal amount of
notes, in each case in the amount obtained by multiplying (i) the number of
shares of Class A-1 Common Stock (without giving effect to any adjustment
thereof pursuant to the provisions hereof) for which this Warrant is then being
exercised, as designated in such subscription, by (ii) the Initial Exercise
Price, and such holder shall thereupon be entitled to receive the number of duly
authorized, validly issued, fully paid and nonassessable shares of Class A-1
Common Stock (or Other Securities) determined as provided in Sections 4 and 5.
2.1.2. Conversion. This Warrant may be converted by the holder hereof, in whole
----------
or in part, into shares of Class A-1 Common Stock (or Other Securities), during
normal business hours on any business day on or prior to the Expiration Date, by
surrender of this Warrant to the Company at its principal office, accompanied by
a conversion notice substantially in the form attached to this Warrant duly
executed by such holder, and such holder shall thereupon be entitled to receive
a number of duly authorized, validly issued, fully paid and nonassessable shares
of Class A-1 Common Stock (or Other Securities) equal to:
(a) the excess of
(i) (x) the number of shares of Class A-1 Common Stock (or Other
Securities) determined as provided in Sections 4 and 5 hereof which such
holder would be entitled to receive upon exercise of this Warrant for the
number of shares of Class A-1 Common Stock designated in such conversion
notice (without giving effect to any adjustment thereof pursuant to
Section 4 or 5 hereof) multiplied by (y) the Current Market Price of each
such share of Class A-1 Common Stock (or such Other Securities) so
receivable upon such exercise
over
(ii) (x) the number of shares of Class A-1 Common Stock (without giving
effect to any adjustment thereof pursuant to the provisions hereof) for
which this Warrant may be exercised, as designated in such conversion
notice, multiplied by (y) the Initial Exercise Price
divided by
-2-
<PAGE>
(b) such Current Market Price of each such share of Class A-1 Common Stock
(or Other Securities).
For all purposes of this Warrant (other than this Section 2.1), any reference
herein to the exercise of this Warrant shall be deemed to include a reference
to the conversion of this Warrant into Class A-1 Common Stock (or Other
Securities) in accordance with the terms of this Section 2.1.2.
2.2. When Exercise Effective. Each exercise of this Warrant shall be deemed to
-----------------------
have been effected immediately prior to the close of business on the business
day on which this Warrant shall have been surrendered to the Company as provided
in Section 2.1 hereof, and at such time the Person or Persons in whose name or
names any certificate or certificates for shares of Class A-1 Common Stock (or
Other Securities) shall be issuable upon such exercise as provided in Section
2.3 hereof shall be deemed to have become the holder or holders of record
thereof.
2.3. Delivery of Stock Certificates, etc. As soon as practicable after each
-----------------------------------
exercise of this Warrant, in whole or in part, the Company at its expense
(including the payment by it of any applicable issue taxes) will cause to be
issued in the name of and delivered to the holder hereof or, subject to the
provisions of the Stockholders Agreement, as such holder (upon payment by such
holder of any applicable transfer taxes) may direct:
(a) a certificate or certificates for the number of duly authorized,
validly issued, fully paid and nonassessable shares of Class A-1 Common Stock
(or Other Securities) to which such holder shall be entitled upon such
exercise plus, in lieu of any fractional share to which such holder would
otherwise be entitled, cash in an amount equal to the same fraction of the
current Market Price per share on the business day next preceding the date of
such exercise; and
(b) in case such exercise is in part only, a new Warrant or Warrants of
like tenor, dated the date hereof and calling in the aggregate on the face or
faces thereof for the number of shares of Class A-1 Common Stock equal
(without giving effect to any adjustment thereof pursuant to the terms
hereof) to the number of such shares called for on the face of this Warrant
minus the number of such shares designated by the holder upon such exercise
as provided in Section 2.1 hereof.
2.4. Exchange of Warrant. This Warrant is exchangeable at the aforesaid
-------------------
principal office of the Company for Warrants for the purchase of the same
aggregate number of shares of Class A-1 Common Stock, each new Warrant to
represent the right to purchase such number of shares of Class A-1 Common Stock
as the holder hereof shall designate at the time of such exchange. All Warrants
issued on transfers or exchanges shall be dated the date hereof and shall be
identical with this Warrant except as to the number of shares of Class A-1
Common Stock issuable pursuant hereto.
2.5. Company to Reaffirm Obligations. The Company will, at the time of or at
-------------------------------
any time after each exercise of this Warrant, upon the request of the holder
hereof, acknowledge in writing
-3-
<PAGE>
its continuing obligation to afford to such holder all rights to which such
holder shall continue to be entitled after such exercise in accordance with the
terms of this Warrant, provided that if any such holder shall fail to make any
such request, the failure shall not affect the continuing obligation of the
Company to afford such rights to such holder.
3. Stock Fully Paid; Reservation of Shares. The Company represents, warrants,
---------------------------------------
covenants and agrees that all shares of Class A-1 Common Stock which may be
issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be duly authorized, validly issued, fully paid and non-assessable.
The Company further covenants and agrees that during the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized and reserved solely for the purpose of the issuance upon
exercise of this Warrant a sufficient number of shares of Class A-1 Common Stock
to provide for the exercise of the rights represented by this Warrant.
If any shares of Class A-1 Common Stock required to be reserved for issuance
upon exercise of this Warrant require registration or qualification with any
governmental authority under any federal or state law before such shares may be
so issued, the Company will in good faith and as expeditiously as reasonably
possible use reasonable efforts to cause such shares to be duly registered or
qualified; provided, however, that the Company shall not be required to effect
any registration under federal or state securities laws other than as provided
in Section 7 of the Stockholders Agreement.
The Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this Warrant, and (c) use its reasonable efforts to obtain
all such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant; provided, however, that the Company shall
not be required to effect any registration under federal or state securities
laws other than as provided in Section 6 of the Stockholders Agreement.
4. Adjustment of Number of Shares Purchasable Upon Exercise. The number of
--------------------------------------------------------
shares of Class A-1 Common Stock purchasable upon the exercise of this Warrant
and the payment of the Initial Exercise Price shall be determined by multiplying
the number of shares of Class A-1 Common Stock which would otherwise (but for
the provisions of this Section 4) be issuable upon such exercise, as designated
by the holder hereof pursuant to Section 2.1 hereof, by a fraction (a) the
numerator of which shall be the Initial Exercise Price and (b) the denominator
of which shall be the Exercise Price in effect on the date of such exercise.
The "Exercise Price" shall initially be the Initial Exercise Price and shall be
adjusted and readjusted from time to time as provided in this Section 4 and, as
so adjusted or readjusted, shall remain in effect until a further adjustment or
readjustment thereof is required by this Section 4.
-4-
<PAGE>
4.1. Subdivision or Combination of Shares. If the Company, at any time while
------------------------------------
this Warrant is outstanding, shall subdivide (by stock split or otherwise) or
combine (by consolidation or otherwise) any outstanding shares of Class A-1
Common Stock, the Exercise Price shall be (a) proportionately decreased, to the
nearest one hundredth of one cent, in the case of a subdivision of shares, to
reflect the increase in the total number of shares of Class A-1 Common Stock
outstanding as a result of such subdivision or (b) proportionately increased, to
the nearest one hundredth of one cent, in the case of a combination of shares,
to reflect the decrease in the total number of shares of Class A-1 Common Stock
outstanding as a result of such combination, as of the effective date of such
subdivision or combination, or if the Company shall take a record of holders of
Class A-1 Common Stock for the purpose of so subdividing or combining, as of the
applicable record date, whichever is earlier.
4.2. Certain Dividends. If the Company, at any time while this Warrant is
-----------------
outstanding, shall pay any stock dividend on the Class A-1 Common Stock, the
Exercise Price shall be adjusted, as of the date the Company shall take a record
of the holders of the Class A-1 Common Stock, for the purpose of receiving such
dividend (or if no such record is taken, as of the date of such dividend), to
the nearest one hundredth of one cent, to the product obtained by multiplying
the Exercise Price in effect immediately prior to such stock dividend by a
fraction (a) the numerator of which shall be the total number of shares of the
Class A-1 Common Stock outstanding immediately prior to such dividend and (b)
the denominator of which shall be the total number of shares of the Class A-1
Common Stock outstanding immediately after such dividend (plus in the event that
the Company paid cash for fractional shares, the number of additional shares
which would have been outstanding had the Company issued fractional shares in
connection with said dividends).
4.3. Other Events. If any event occurs as to which the foregoing provisions of
------------
Section 4.1 and 4.2 are not strictly applicable or, if strictly applicable,
would not, in the good faith judgment of the Board, fairly and adequately
protect the purchase rights represented by the Warrants in accordance with the
essential intent and principles of such provisions, then the Board shall make
such adjustments in the application of such provisions, in accordance with such
essential intent and principles, as shall be reasonably necessary, in the good
faith opinion of the Board, to protect such purchase rights as aforesaid.
4.4. Adjustment of Exercise Price. If at any time, as a result of any
----------------------------
adjustments hereunder, the sum of the Exercise Price plus a proportionate
portion of the consideration paid by the holder for this Warrant shall be less
than the par value per share of Class A-1 Common Stock, then the price payable
per share of Class A-1 Common Stock by the holder hereunder in the event of an
exercise of this Warrant, in whole or in part, shall be an amount equal to the
par value per share of the Class A-1 Common Stock.
5. Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, etc.
--------------------------------------------------------------------------
In case the Company after the date hereof (a) shall consolidate with or merge
into any other Person and shall not be the continuing or surviving corporation
of such consolidation or merger, or (b) shall permit any other Person to
consolidate with or merge into the Company and the Company shall be the
continuing or surviving Person but, in connection with such consolidation or
merger, the Common
-5-
<PAGE>
Stock or Other Securities shall be changed into or exchanged for stock or other
securities of any other Person or cash or any other property, or (c) shall
transfer all or substantially all of its properties or assets to any other
Person or (d) shall effect a capital reorganization or reclassification of the
Class A-1 Common Stock or Other Securities, then, and in the case of each such
transaction, proper provision shall be made so that, upon the basis and the
terms and in the manner provided in this Warrant, the holder of this Warrant,
upon the exercise hereof at any time after the consummation of such transaction,
shall be entitled to receive (at the aggregate Exercise Price in effect at the
time of such consummation for all Class A-1 Common Stock or Other Securities
issuable upon such exercise immediately prior to such consummation), in lieu of
the Class A-1 Common Stock or Other Securities issuable upon such exercise prior
to such consummation, the greatest amount of securities, cash or other property
to which such holder would actually have been entitled as a shareholder upon
such consummation if such holder had exercised the rights represented by this
Warrant immediately prior thereto.
6. Notice of Adjustments. Whenever the Exercise Price is adjusted pursuant to
----------------------
Section 4 hereof, the Company will promptly deliver to the holder of this
Warrant at the address provided in the Stockholders Agreement a certificate
setting forth, in reasonable detail, the event that triggered the adjustment,
the amount of the adjustment, the method by which such adjustment was calculated
(including a description of the basis on which the Board made any determination
hereunder), and the Exercise Price after giving effect to such adjustment.
7. Dividends/Distributions. The Company shall give the Holder of this Warrant
-----------------------
not less than 15 days prior written notice of its intent to pay a dividend or
make any other distribution on any shares of its capital stock and shall set
forth in such notice the amount and type of such dividend or distribution and
the share of capital stock on which such dividend or distribution will be paid.
If the Holder of this Warrant does not elect to exercise this Warrant prior to
such dividend or distribution, an amount equal to the cash which the Holder
would have received on the Class A-1 Common Stock had the Holder exercised this
Warrant immediately prior to such dividend or distribution shall at the option
of the Holder (a) be used as a credit against the Exercise Price or (b) be
retained by the Company and paid to such Holder upon the exercise of this
Warrant.
8. Restrictions; Legends.
---------------------
8.1. Restrictions; Legends. This Warrant and the Class A-1 Common Stock (or
---------------------
Other Securities) issuable upon the exercise hereof are subject in all respects
to the provisions of the Stockholders Agreement. This Warrant and each
certificate issued upon the exercise of this Warrant and each certificate issued
upon any direct or indirect transfer of this Warrant or of any share of Class A-
1 Common Stock (or Other Securities) issuable upon exercise of this Warrant
shall be transferable only upon satisfaction of the conditions set forth in the
Stockholders Agreement, and shall be stamped or otherwise imprinted with legends
in the form required under Section 9 of the Stockholders Agreement.
8.2. Termination of Restrictions; Removal of Legends. The restrictions imposed
-----------------------------------------------
by this Section 8 upon the transferability of this Warrant and the Class A-1
Common Stock (or Other
-6-
<PAGE>
Securities) issuable upon exercise of this Warrant shall cease and terminate at
such time as this Warrant or any such shares of Class A-1 Common Stock shall no
longer be subject to the provisions of Section 9 of the Stockholders Agreement.
Whenever such restrictions cease and terminate as to this Warrant or any such
Class A-1 Common Stock, the holder thereof shall be entitled to receive from the
Company, without expense (other than applicable transfer taxes, if any), new
certificates not bearing the applicable legends required by Section 8.1 hereof.
9. No Rights or Liabilities as Stockholder. Nothing contained in this Warrant
---------------------------------------
shall be construed as conferring upon the holder hereof any rights as a
stockholder of the Company or as imposing any obligation on such holder to
purchase any Securities or as imposing any liabilities on such holder as a
stockholder of the Company, whether such obligation or liabilities are asserted
by the Company or by creditors of the Company.
10. Definitions. For the purposes of this Warrant, the following terms have
-----------
the following meanings:
"Board" shall mean the Board of Directors of the Company.
"Class A-1 Common Stock" shall mean the Company's Class A-1 Common Stock,
par value $.001 per share, for which this Warrant may be exercised.
"Company" shall mean SMTC Corporation, a Delaware corporation, its
successors and assigns.
"Current Market Price" shall mean on any date specified herein, the average
daily Market Price during the period of the most recent 20 days, ending on
such date, on which the national securities exchanges were open for trading,
except that if no Class A-1 Common Stock is then listed or admitted to
trading on any national securities exchange or quoted in the over-the-counter
market, the Current Market Price shall be the Market Price on such date.
"Expiration Date" shall have the meaning set forth in Section 1.
"Initial Exercise Price" shall have the meaning set forth in the first
paragraph hereof.
"Market Price" shall mean on any date specified herein, the amount per
share of Class A-1 Common Stock equal to (a) the last sale price of Class A-1
Common Stock, regular way, on such date or, if no such sale takes place on
such date, the average of the closing bid and asked prices thereof on such
date, in each case as officially reported on the principal national
securities exchange on which Class A-1 Common Stock is then listed or
admitted to trading, or (b) if Class A-1 Common Stock is not then listed or
admitted to trading on any national securities exchange but is designated as
a national market system security by the NASD, the last trading price of
Class A-1 Common Stock on such date, or (c) if there shall have been no
trading on such date or if Class A-1 Common Stock is not so designated, the
average of the closing bid and asked prices of Class A-1 Common Stock on such
date as shown by the NASD automated quotation system, or (d) if the Class
-7-
<PAGE>
A-1 Common Stock is not then listed or admitted to trading on any national
exchange or quoted in the over-the-counter market, the fair market value
thereof determined in good faith by the Board.
"Other Securities" shall mean any stock (other than Class A-1 Common Stock)
and other securities of the Company or any other Person which the holders of
the Warrants at any time shall be entitled to receive, or shall have
received, upon the exercise of the Warrants, in lieu of or in addition to
Class A-1 Common Stock, or which at any time shall be issuable or shall have
been issued in exchange for or in replacement of Class A-1 Common Stock or
Other Securities pursuant to Section 4 hereof or otherwise.
"Person" shall mean an individual, a corporation, a partnership, a trust,
an unincorporated organization or a government organization or an agency or
political subdivision thereof.
"Securities" shall mean any debt or equity securities of the Company,
whether now or hereafter authorized, and any instrument convertible into or
exchangeable for Securities or a Security. "Security" shall mean one of the
Securities.
"Securities Act" shall mean as of any date of the Securities Act of 1933,
as amended, or any similar Federal statute then in effect.
"Stock" shall include any and all shares, interests or other equivalents
corporation of any class.
"Stockholders Agreement" shall mean the Stockholders Agreement dated as of
July 30, 1999 among the Company and certain holders of the Company=s
outstanding capital stock, as such Stockholders Agreement may hereafter from
time to time be amended, modified or supplemented in accordance with its
terms.
"Majority Holders" shall mean at any time holders of Warrants exercisable
for 50% of the shares of Class A-1 Common Stock issuable under the Warrants
at such time outstanding.
"Warrants" shall mean the Warrants issued by the Company on the date
hereof. The term AWarrants@ shall include, without limitation, this Warrant
and any Warrants issued in substitution or exchange for any thereof.
11. Amendment and Waiver. Any term, covenant, agreement or condition in this
--------------------
Warrant may be amended, or compliance therewith may be waived (either generally
or in a particular instance and either retroactively or prospectively), by a
written instrument or written instruments executed by the Company and the
Majority Holders; provided, however, that no such amendment or waiver shall
increase the Exercise Price, shorten the period during which the Warrants may be
exercised or modify any provision of this Section 11 without consent of the
holders of all Warrants then outstanding affected by such amendment or waiver.
-8-
<PAGE>
12. Governing Law. This Warrant shall be governed by and construed in
-------------
accordance with the internal laws of the State of Delaware (without giving
effect to the choice of law principles of such state).
Dated:
------------
SMTC CORPORATION
By:
--------------------------------------
Name: Paul Walker
Title: President
<PAGE>
SMTC Corporation
Class A-1 Warrants
FORM OF SUBSCRIPTION
[To be executed only upon exercise of Warrant]
To SMTC Corporation.:
The undersigned registered holder of the within Warrant hereby irrevocably
exercises such Warrant for, and purchases thereunder, ____________________/1/
shares of the Class A-1 Common Stock and herewith makes payment of $__________
therefor, and requests that the certificates for such shares be issued in the
name of, and delivered to ______________________________, whose address is
Dated: -----------------------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of Warrant)
-----------------------------------------------
(Street Address)
-----------------------------------------------
(City) (State) (Zip Code)
- -------------------------
/1/ Insert here the number of shares called for on the face of this Warrant
(or, in the case of a partial exercise, the portion thereof as to which this
Warrant is being exercised), in either case without making any adjustment for
any stock or other securities or property or cash which, pursuant to the
adjustment provisions of this Warrant, may be delivered upon exercise. In the
case of a partial exercise, a new Warrant or Warrants will be issued and
delivered, representing the unexercised portion of the Warrant, to the holder
surrendering the Warrant.
<PAGE>
SMTC Corporation
Class A-1 Warrants
FORM OF ASSIGNMENT
[To be executed only upon transfer of Warrant]
For value received, the undersigned registered holder of the within Warrant
hereby sells, assigns and transfers unto ___________________________________ the
right represented by such Warrant to purchase _______________/2/ shares of Class
A-1 Common Stock of SMTC Corporation to which such Warrant relates, and appoints
_______________Attorney to make such transfer on the books of SMTC Corporation
maintained for such purpose, with full power of substitution in the premises.
Dated:
---------------------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of Warrant)
---------------------------------------------
(Street Address)
---------------------------------------------
(City) (State) (Zip Code)
Signed in the presence of:
- ---------------------------
/2/ Insert here the number of shares called for on the face of this Warrant
(or, in the case of a partial conversion, the portion thereof as to which this
Warrant is being converted), in either case without making any adjustment for
additional shares of Common Stock or any other stock or other securities or
property or cash which, pursuant to the adjustment provisions of this Warrant,
may be delivered upon exercise. In the case of a partial conversion, a new
Warrant or Warrants will be issued and delivered, representing the unconverted
portion of the Warrant, to the holder surrendering the Warrant.
<PAGE>
SMTC Corporation
Class A-1 Warrants
FORM OF CONVERSION NOTICE
To SMTC Corporation:
The undersigned registered holder of the within Warrant hereby irrevocably
converts such Warrant with respect to _________________/3/ shares of the Class
A-1 Common Stock which such holder would be entitled to receive upon the
exercise hereof, and requests that the certificates for such shares be issued in
the name of, and delivered to __________________________________, whose
address is
Dated:
----------------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of Warrant)
----------------------------------------
(Street Address)
----------------------------------------
(City) (State) (Zip Code)
- ---------------------------
/3/ Insert here the number of shares called for on the face of this Warrant
(or, in the case of a partial exercise, the portion thereof as to which this
Warrant is being exercised), in either case without making any adjustment for
any stock or other securities or property or cash which, pursuant to the
adjustment provisions of this Warrant, may be delivered upon exercise. In the
case of a partial exercise, a new Warrant or Warrants will be issued and
delivered, representing the unexercised portion of the Warrant, to the holder
surrendering the Warrant.
<PAGE>
EXHIBIT 10.2
AMENDED AND RESTATED
SMTC (HTM)
1998 EQUITY INCENTIVE PLAN
ARTICLE I
Purpose of Plan
This Amended and Restated SMTC (HTM) 1998 Equity Incentive Plan (the
"Plan") of SMTC Corporation, a Delaware corporation (the "Company"), adopted by
the Board of Directors and stockholders of the Company and effective as of
September 30, 1999 amends and restates the SMTC (HTM) 1998 Equity Incentive
Plan adopted by the Board of Directors and stockholders of the Company as of
July 30, 1999. This Plan is intended to advance the best interests of the
Company by providing directors, executive officers and other key employees of
the Company and its Subsidiaries who have substantial responsibility for the
management and growth of the Company with additional incentives by allowing such
employees to acquire an ownership interest in the Company. The Plan is a
compensatory benefit plan within the meaning of Rule 701 under the Securities
Act of 1933 (the "Securities Act"). The issuance of Common Stock pursuant to the
Plan is intended to qualify for the exemption from registration under the
Securities Act provided by Rule 701.
ARTICLE II
Definitions
For purposes of the Plan the following terms have the indicated meanings:
"Board" means the Board of Directors of the Company.
"Cause" means cause as defined in a Participant's written employment
agreement with the Company or, if no written employment agreement exists, shall
mean (i) a Participant's willful and repeated failure to comply with the lawful
directives of the Board or such Participant's supervisory personnel, (ii) any
criminal act or act of dishonesty, disloyalty, misconduct or moral turpitude by
a Participant that is injurious in any significant respect to the property,
operations, business or reputation of the Company or any subsidiary thereof,
(iii) a Participant's failure to exercise good faith efforts to discharge such
Participant's assigned duties as an employee, or (iv) material breach by a
Participant of his or her written employment agreement (if any) with the Company
after notice by the Company and reasonable opportunity to cure.
"Class A-1 Common Stock" means the Class A-1 Common Stock, $.001 par value
per share, of the Company.
"Class L Common Stock" means the Class L Common Stock, $.001 par value per
share, of the Company.
<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor statute.
"Committee" means the Compensation Committee or such other committee of the
Board as the Board may designate to administer the Plan or, if for any reason
the Board has not designated such a committee, the Board.
"Common Stock" means the common stock of the Company, including without
limitation the Class A-1 Common Stock and the Class L Common Stock.
"Fair Market Value" of any share of Common Stock as of any date means the
fair market value of such share of Common Stock as of such date, as determined
in good faith by the Committee based on the consolidated results of operations,
financial condition and future prospects of the Company and such other factors
as the Committee may deem appropriate or, in the event that the Common Stock is
listed on a national securities exchange or traded in the NASDAQ National Market
System, the average of the closing sales prices of such Common Stock for the ten
trading days preceding the date of determination. Fair Market Value shall be
determined without regard to any restriction on transferability of any share of
Common Stock other than any such restriction which by its terms will never
lapse.
"Option Shares" means any Common Stock purchased pursuant to Options which
Common Stock is not, pursuant to the terms of the written agreement embodying
such Options, Restricted Stock.
"Participant" means any executive or other key employee of the Company or
any Subsidiary who has been selected to participate in the Plan by the Committee
or the Board.
"Restricted Stock" shall mean Common Stock purchased pursuant to Options,
which Common Stock is subject to restrictions under the Plan requiring that such
stock be redelivered to the Company if specified conditions are not satisfied.
The conditions to be satisfied in connection with any Restricted Stock, the
terms on which such stock must be redelivered to the Company, and all other
terms shall be determined by the Committee.
"Sale of the Company" means the acquisition of a majority or more of the
outstanding voting securities of the Company by any person or "group" (as that
term is used in Regulation 13D under the Securities Exchange Act of 1934) other
than the stockholders of the Company as of the date hereof and their respective
affiliates.
"Subsidiary" means any subsidiary corporation (as such term is defined in
Section 424(f) of the Code) of the Company.
ARTICLE III
Administration
-2-
<PAGE>
The Plan shall be administered by the Committee. Subject to the limitations
of the Plan, the Committee acting in good faith shall have the sole and complete
authority to: (i) select Participants, (ii) grant stock purchase options
("Options") to Participants in such forms and amounts as it shall determine,
(iii) impose such limitations, restrictions and conditions upon such Options
and/or shares of Common Stock issued upon exercise thereof as it shall deem
appropriate, (iv) interpret the Plan and adopt, amend and rescind administrative
guidelines and other rules and regulations relating to the Plan, (v) correct any
defect or omission or reconcile any inconsistency in the Plan or in any Option
granted under the Plan and (vi) make all other determinations and take all other
actions necessary or advisable for the implementation and administration of the
Plan. The Committee's determinations on matters within its authority shall be
conclusive and binding upon the Participants, the Company and all other persons.
All expenses associated with the administration of the Plan shall be borne by
the Company. The Committee may, as approved by the Board and to the extent
permissible by law, delegate any of its authority hereunder to such persons or
entities as it deems appropriate.
ARTICLE IV
Limitation on Shares
The number of shares of Common Stock with respect to which Options may be
granted under the Plan shall not exceed 165,000 shares of Class A-1 Common Stock
and 4,000 shares of Class L Common Stock, respectively, subject to adjustment in
accordance with paragraph 6.5 herein. To the extent any Options expire
unexercised or are canceled, terminated or forfeited in any manner without the
issuance of Common Stock or to the extent that Restricted Stock or Option Shares
are repurchased by the Company, such shares of Common Stock shall again be
available under the Plan. The shares of Common Stock available under the Plan
may consist of authorized and unissued shares, treasury shares of a combination
thereof, as the Committee shall determine.
ARTICLE V
Awards
5.1. Grant of Options. The Committee may grant Options to Participants
----------------
from time to time in accordance with this Article V. Options granted under the
Plan may be nonqualified stock options or "incentive stock options" within the
meaning of Section 422 of the Code or any successor provision, as specified by
the Committee; provided, however, that no Option intended as an incentive stock
option shall so qualify unless such Option satisfies all of the requirements of
Section 422 of the Code. Options shall have a term not to exceed ten years from
the date of grant as specified by the Committee, and shall be exercisable at
such time or times as the Committee shall determine.
-3-
<PAGE>
5.2. Exercise Procedure.
------------------
(a) Time and Manner of Exercise. Unless the Committee expressly
---------------------------
provides otherwise, an Option will not be deemed to have been exercised until
the Company receives a written notice of exercise (in form acceptable to the
Committee) signed by the appropriate person and accompanied by payment in full
of the applicable exercise price.
(b) Payment of Exercise Price. Payment of such exercise price may be
-------------------------
made (i) in cash (including check, bank draft or money order), (ii) at the
discretion of the Committee, by delivery of a full recourse promissory note
bearing interest at a rate not less than the applicable federal rate determined
pursuant to Section 1274 of the Code as of the date of purchase or exercise (a
"Note"), (iii) in shares of Common Stock valued at their Fair Market Value as of
the date of exercise, or (iv) a combination of the foregoing.
5.3. Conditions and Limitations on Exercise. At the discretion of the
--------------------------------------
Committee, Options may be made exercisable, in one or more installments, upon
(i) the happenings of certain events, (ii) the passage of a specified period of
time, (iii) the fulfillment of certain conditions, or (iv) the achievement by
the Company or any Subsidiary of certain performance goals. As a condition to
the exercise of any Options, the Participant shall agree to be bound by the
Stockholders Agreement dated July 30, 1999 among the Company, EMSIcon
Investments, LLC and the other equity security holders of the Company, with the
shares issued under the Options constituting "Management Shares" for purposes of
such Stockholders Agreement. In the event of a Sale of the Company, the
Committee may provide, in its discretion, that the outstanding Options shall
become immediately exercisable and/or that such Options shall terminate if not
exercised as of the date of the Sale of the Company or any other designated date
or that such Options shall thereafter represent only the right to receive the
excess of the consideration per share of Common Stock offered in such Sale of
the Company over the exercise price of such Options.
5.4. Expiration of Options.
---------------------
(a) Normal Expiration. In no event shall any part of any Option be
-----------------
exercisable after the tenth anniversary of the date of grant or earlier stated
date of expiration thereof.
(b) Early Expiration Upon Termination of Employment. Except as
-----------------------------------------------
otherwise provided by the Committee at the time of grant of such Options, upon
termination for any reason of a Participant's employment by the Company and its
Subsidiaries
(i) all Options or portions thereof held by such Participant
that are not vested and exercisable on the date of such termination shall
expire and be forfeited as of such date and all vested Options held by such
Participant shall expire to the extent not exercised within 90 days
following the date of such termination or, in the case of termination due
to the Participant's death or disability, within one year following the
date of such termination. Notwithstanding the foregoing, in the event of
termination of
-4-
<PAGE>
a Participant's employment by the Company for Cause, all Options held by
such Participant (whether or not vested) shall expire on the date of such
termination;
(ii) all Restricted Stock held by the Participant at the time of
such termination must be transferred to the Company (and, in the event the
certificates representing such Restricted Stock are held by the Company,
such Restricted Stock will be so transferred without any further action by
the Participant, provided that except in the event the reason for such
termination is the death of the Participant, the Participant shall deliver
a duly executed stock power at such time) in consideration of the payment
by the Company of an amount equal to the applicable Exercise Price for each
share of Restricted Stock and will be deemed for all purposes to have been
so transferred when the Company has tendered such payment.
5.5. Repurchase Rights. In the event of termination of a Participant's
-----------------
employment with the Company and its subsidiaries for any reason, the Company
shall have the right, exercisable by delivery of written notice to the
Participant within 90 days after the date of such termination, to repurchase all
or any portion of the Restricted Stock as to which restrictions have lapsed, the
Option Shares and vested Options then held by such Participant at a repurchase
price in cash equal to Fair Market Value (over the applicable per-share Exercise
Price in the case of vested Options) or, in the case of termination of the
Participant's employment for Cause, at a repurchase price equal to the
applicable Exercise Price. The closing of such repurchase shall occur within 30
days after delivery of the Company's notice of exercise.
ARTICLE VI
General Provisions
6.1. Written Agreement. Each Option granted hereunder shall be embodied in
-----------------
a written agreement in substantially the form attached hereto (with such
modifications thereto as may be approved by the Committee) which shall be signed
by the Participant to whom the Option is granted and shall be subject to the
terms and conditions set forth herein.
6.2. Listing, Registration and Legal Compliance. If at any time the
------------------------------------------
Committee determines, in its discretion, that the listing, registration or
qualification of the shares subject to Options upon any securities exchange or
under any state or federal securities or other law or regulation, or the consent
or approval of any governmental regulatory body, is necessary or desirable as a
condition to or in connection with the granting of Options or the purchase or
issuance of shares thereunder, no Options may be granted or exercised, in whole
or in part, unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Committee. The holders of such Options will supply the
Company with such certificates, representations and information as the Company
shall request and shall otherwise cooperate with the Company in obtaining such
listing, registration, qualification, consent or approval. In the case of
officers and other persons subject to Section
-5-
<PAGE>
16(b) of the Securities Exchange Act of 1934, as amended, the Committee may at
any time impose any limitations upon the exercise of Options that, in the
Committee's discretion, are necessary or desirable in order to comply with such
Section 16(b) and the rules and regulations thereunder. If the Company, as part
of an offering of securities or otherwise, finds it desirable because of federal
or state regulatory requirements to reduce the period during which any Options
may be exercised, the Committee may, in its discretion and without the
Participant's consent, so reduce such period on not less than 20 days' prior
written notice to the holders thereof.
6.3. Options Not Transferable. Options may not be transferred other than
------------------------
by will or the laws of descent and distribution and, during the lifetime of the
Participant to whom they were granted, may be exercised only by such Participant
(or his or her legal guardian or legal representative). In the event of the
death of a Participant, exercise of Options granted hereunder to such
Participant may be made only by the executor or administrator of such
Participant's estate or the person or persons to whom such Participant's rights
under the Option will pass by will or the laws of descent and distribution.
6.4. Withholding of Taxes. The Company may, if necessary or desirable,
--------------------
withhold from any amounts due and payable by the Company to any Participant (or
secure payment from such Participant in lieu of withholding) the amount of any
withholding or other tax due from the Company with respect to any issuance or
exercise of Options granted under the Plan to such Participant, and the Company
may defer such issuance or exercise unless indemnified to its satisfaction
against the payment of any such amount.
6.5. Adjustments. In the event of a reorganization, recapitalization,
-----------
merger in which there is no Sale of the Company, stock dividend or stock split,
or combination or other change in the shares of Common Stock, the Committee
shall, in order to prevent the dilution or enlargement of rights under
outstanding Options, make such adjustments in the number and type of shares
authorized by the Plan, the number and type of shares covered by outstanding
Options and the exercise prices specified therein as may be determined to be
appropriate and equitable. In the event of any stock split or reverse stock
split effected in connection with the initial public offering and sale of Common
Stock for cash pursuant to an effective registration statement Form S-1 (or any
successor form) under the Securities Act of 1933, as in effect from time to
time, if any adjustment of the number of shares covered by any outstanding
Option pursuant to the immediately preceding sentence results in such Option
becoming exercisable for a fractional number of shares, the number of shares
issuable upon exercise of such Option shall be rounded to the nearest number of
whole shares.
6.6. Rights of Participants. Nothing in the Plan shall interfere with or
----------------------
limit in any way the right of the Company or any Subsidiary to terminate any
Participant's employment at any time (with or without cause), or confer upon any
Participant any right to continue in the employ of the Company or any Subsidiary
for any period of time or to continue to receive such Participant's current (or
other) rate of compensation. No employee shall have a right to be selected as a
Participant or, having been so selected, to be selected again as a Participant.
6.7. Amendment, Suspension and Termination of Plan. The Committee may
---------------------------------------------
suspend or terminate the Plan or any portion thereof at any time and may amend
it from time to time in such respects as the Committee may deem advisable
provided, however, that no such amendment shall be made without stockholder
approval to the extent such approval is required by law, agreement or the rules
of any exchange upon which the Common Stock is listed, and no such amendment,
suspension or termination shall impair the rights of Participants under
outstanding Options
-6-
<PAGE>
without the consent of the Participants affected thereby, except as provided
below. No Options shall be granted hereunder after the tenth anniversary of the
approval of the Plan by the stockholders of the Company.
6.8. Amendment of Outstanding Options. The Committee may amend or modify
--------------------------------
any Option in any manner to the extent that the Committee would have had the
authority under the Plan initially to grant such Option; provided that, except
as expressly contemplated elsewhere herein or in any agreement evidencing such
Option, no such amendment or modification shall impair the rights of any
Participant under any outstanding Option without the consent of such
Participant.
6.9. Indemnification. In addition to such other rights of indemnification
---------------
as they may have as members of the Board or the Committee, the members of the
Committee shall be indemnified by the Company against all costs and expenses
reasonably incurred by them in connection with any action, suit or proceeding to
which they or any of them may be party by reason of any action taken or failure
to act under or in connection with the Plan or any Option granted under the
Plan, and against all amounts paid by them in settlement thereof (provided such
settlement is approved by independent legal counsel selected by the Company) or
paid by them in satisfaction of a judgment in any such action, suit or
proceeding; provided, however, that any such Committee member shall be entitled
to the indemnification rights set forth in this paragraph 6.9 only if such
member has acted in good faith and in a manner that such member reasonably
believed to be in or not opposed to the best interests of the Company and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
that such conduct was unlawful, and further provided that upon the institution
of any such action, suit or proceeding a Committee member shall give the Company
written notice thereof and an opportunity to handle and defend the same before
such Committee member undertakes to handle and defend it on his own behalf.
6.10. Restrictive Legend.
------------------
(a) All stock certificates representing Common Stock issued pursuant
to an Option shall, unless otherwise determined by the Company, have affixed
thereto a legend substantially in the following form, in addition to any other
legend required by the Stockholders Agreement:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A PRIVATE
PLACEMENT, WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND MAY NOT BE SOLD, ASSIGNED, PLEDGED OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE ACT
COVERING THE TRANSFER OR AN OPINION OF COUNSEL, SATISFACTORY TO THE ISSUER,
THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED."
-7-
<PAGE>
(b) All stock certificates representing Restricted Stock shall,
unless otherwise determined by the Company, have affixed thereto a legend
substantially in the following form, in addition to any other legend required by
the Stockholders Agreement or any Pledge Agreement:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED SECURITIES
AND ARE SUBJECT TO FORFEITURE UNDER CERTAIN PROVISIONS OF THAT CERTAIN SMTC
(HTM) 1998 EQUITY INCENTIVE PLAN OF THE COMPANY AND THAT CERTAIN GRANT OF
STOCK OPTION AGREEMENT DATED JULY 30, 1999 BETWEEN THE COMPANY AND
______________________, A COPY OF WHICH MAY BE INSPECTED AT THE PRINCIPAL
OFFICE OF THE COMPANY."
6.11. Governing Law. All questions concerning the construction,
-------------
interpretation and validity of this Plan shall be governed by and construed and
enforced in accordance with the domestic laws of the State of Delaware, without
giving effect to any choice or conflict of law provision or rule (whether in the
State of Delaware or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Delaware. In furtherance
of the foregoing, the internal law of the State of Delaware will control the
interpretation and construction of this Plan, even if under such jurisdiction's
choice of law or conflict of law analysis, the substantive law of some other
jurisdiction would ordinarily apply.
-8-
<PAGE>
SMTC CORPORATION
635 HOOD ROAD
MARKHAM, ONTARIO, CANADA, L3R 4N6
As of September 30, 1999
[Participant's Name]
[Business Address]
Re: Grant of Stock Purchase Options
Dear [Participant]:
SMTC Corporation, a Delaware corporation (the "Company"), is pleased to advise
-------
you that you have been granted options under the Amended and Restated SMTC (HTM)
1998 Equity Incentive Plan (the "Plan") as provided below (the "Agreement").
---- ---------
Capitalized terms used and not defined herein have the meaning set forth in the
Plan (copy attached).
1. Option Terms.
------------
(a) Grant. On the terms and subject to the conditions of this Agreement,
-----
you hereby are granted an option to purchase up to ___________ shares of the
Company's Class A-1 Common Stock, $.001 par value (the "Option Shares"), at an
-------------
exercise price of $19.6792 per share (the "Exercise Price") (the "Option").
-------------- ------
Your Option will expire at the close of business on September 30, 2009 (the
"Expiration Date"), subject to earlier expiration in connection with the
---------------
termination of your employment as provided below. The Option is intended to be
a nonqualified option.
(b) Vesting. Your Option will be exercisable only to the extent it has
-------
vested. The Option will be vested with respect to 25% of your total Option
Shares on each of the first, second and third anniversaries of September 30,
1999, and will become 100% vested on September 30, 2003, in each case if and
only if you have been continuously employed by the Company and/or its
subsidiaries from the date of the Agreement through such dates; provided,
however, that in the event of a Sale of the Company during the term of your
employment with the Company and/or its subsidiaries, your Option will
automatically become 100% vested. In connection with any Sale of the Company,
the Company may provide on not less than 20 days' notice to you that any portion
of your Option which has not been exercised prior to or in connection with the
Sale of the Company will be forfeited. In lieu of requiring such exercise,
-9-
<PAGE>
the Company may provide for the cancellation of your Option in exchange for
payment equal to the excess (if any) of the consideration per share of the
Option Shares receivable in connection with such Sale of the Company over the
Exercise Price.
(c) Termination of Options. In no event shall any part of your Option be
----------------------
exercisable after the Expiration Date set forth in paragraph 1(a). If your
employment with the Company and/or subsidiaries is terminated by the Company for
Cause, all of your Option not previously exercised shall expire and be forfeited
whether or not vested. If your employment with the Company and/or its
subsidiaries terminates for any other reason, that portion of your Option that
is not vested and exercisable on the date of termination of your employment
shall expire and be forfeited, and the portion of your Option that is vested and
exercisable on the date of such termination shall expire, to the extent not
theretofore exercised, 90 days following such date of termination.
2. Procedure for Purchase or Exercise.
----------------------------------
(a) You may exercise all or any portion of your Option in any of the
methods described in Section 5.2 of the Plan, including the delivery of a full
recourse promissory note in form and substance satisfactory to the Company for
the product of the Exercise Price multiplied by the number of Option Shares that
you elect to purchase and a pledge agreement, executed by you, pledging your
Option Shares as collateral for the full recourse promissory note.
(b) As a condition to any exercise of your Option, you agree to be bound by
the provisions of the Stockholders Agreement dated July 30, 1999 among the
Company and the stockholders signatory thereto, with the Option Shares
constituting "Management Stock" as defined therein. In addition, you will
permit the Company to deliver to you all financial and other information
regarding the Company that the Company deems necessary to enable you to make an
informed investment decision, and you will make all customary investment
representations which the Company requires.
3. Securities Law Restrictions. You represent that when you exercise your
---------------------------
Option you will be purchasing the Common Stock covered thereby for your own
account and not on behalf of others. You may not sell, transfer or dispose of
any Common Stock issued or purchased pursuant to this Agreement (except pursuant
to an effective registration statement under the Securities Act of 1933) without
first delivering to the Company an opinion of counsel reasonably acceptable in
form and substance to the Company that registration under the Securities Act or
any applicable state securities laws is not required in connection with such
transfer. You further understand that the certificates for any Common Stock you
purchase will bear such legends as are required by the Plan or as the Company
deems necessary or desirable. In connection with an IPO, you agree to execute a
customary "holdback" agreement (not to exceed 180 days) in the form requested by
the underwriters for such offering.
-10-
<PAGE>
4. Restriction on Transfer. Your Option and Option Shares are personal to you
-----------------------
and are not transferable by you other than by will or the laws of descent and
distribution. During your lifetime, only you (or your guardian or legal
representative) may exercise your Option. In the event of your death, your
Option may be exercised only by the executor or administrator of your estate or
the person or persons to whom your rights under the Option shall pass by will or
the laws of intestate succession. Your Option Shares are subject to certain
repurchase rights set forth in the Plan.
5. Conformity with Plan. Your Option is intended to conform in all respects
--------------------
with, and is subject to all applicable provisions of, the Plan, which is
incorporated herein by reference. Inconsistencies between this Agreement and the
Plan shall be resolved in accordance with the terms of the Plan. By executing
and returning the enclosed copy of this Agreement, you acknowledge your receipt
of this Agreement and the Plan and agree to be bound by all of the terms of this
Agreement and the Plan.
6. Rights of Participants. Nothing in this Agreement shall interfere with or
----------------------
limit in any way the right of the Company and/or its subsidiaries to terminate
your employment at any time (with or without Cause), or confer upon you any
right to continue in the employ of the Company and/or its subsidiaries for any
period of time or to continue to receive your current (or other) rate of
compensation. Nothing in this Agreement shall confer upon you any right to be
selected to receive additional options under the Plan.
7. Withholding of Taxes. The Company may, if necessary or desirable, withhold
--------------------
from any amounts due and payable by the Company to you (or secure payment from
you in lieu of withholding) the amount of any withholding or other tax due from
the Company with respect to the issuance or exercise of your Option, and the
Company may defer such issuance, exercise or conversion unless indemnified by
you to its satisfaction against the payment of any such amount.
8. Adjustments. In the event of a reorganization, recapitalization, merger in
-----------
which there is no Sale of the Company, stock dividend or stock split, or
combination or other change in the shares of Common Stock, the Company may, in
order to prevent the dilution or enlargement of rights under your Options, make
such adjustments in the number and type of shares authorized by the Plan, the
number and type of shares covered by your Option and the Exercise Price
specified herein as may be determined to be appropriate and equitable. In the
event of any stock split or reverse stock split effected in connection with the
initial public offering and sale of Common Stock for cash pursuant to an
effective registration statement on Form S-1 (or any successor form) under the
Securities Act of 1933, as in effect from time to time, if any adjustment of the
number of shares covered by your Option pursuant to the immediately preceding
sentence results in your Option becoming exercisable for a fractional number of
shares, the number of shares issuable upon exercise of your Option shall be
rounded to the nearest number of whole shares.
-11-
<PAGE>
9. Entire Agreement. This Agreement and the documents referenced herein
----------------
constitute the entire understanding and agreement of the parties hereto with
respect to the subject matter hereof and thereof and supersede all prior and
contemporaneous agreements or understandings, inducements or conditions, express
or implied, written or oral, between the parties with respect hereto and
thereto.
*******
-12-
<PAGE>
Please execute a copy of this Agreement in the space below and return it to the
Company's Secretary at its executive offices to confirm your understanding and
acceptance of the agreements contained in the Agreement.
Very Truly Yours,
SMTC Corporation
By____________________
Name:
Title:
The undersigned hereby acknowledges that he or she has read this Agreement and
the Plan and hereby agrees to be bound by all provisions set forth herein and
therein.
[Participant]
________________________
Dated as of: September 30, 1999
-13-
<PAGE>
EXHIBIT 10.3 Execution Copy
--------------
Management Agreement
This Management Agreement (this "Agreement") dated as of July 30, 1999
---------
among SMTC Corporation, a Delaware corporation (the "Company"), Bain Capital
-------
Partners VI, L.P., a Delaware limited partnership ("Bain"), Celerity Management
----
Co., Inc., a Delaware corporation ("Celerity") and Kilmer Electronics Group
--------
Limited, an Ontario corporation ("KEGL").
----
WHEREAS, pursuant to the Reorganization and Merger Agreement dated as
of July 26, 1999 among The Surface Mount Technology Centre Inc, an Ontario
corporation, the Company, HTM Holdings, Inc., a Delaware corporation
("HTM") and their respective stockholders (the "Merger Agreement"), HTM is
--- ----------------
to be merged into a newly organized subsidiary of the Company;
WHEREAS, funds (the "Bain Funds") affiliated with Bain and Celerity
----------
EMSIcon, LLC (the "Celerity Fund"), an affiliate of Celerity will provide
-------------
equity financing in connection with the transactions contemplated by the
Merger Agreement and the Bain Funds, the Celerity Fund and KEGL each,
directly or indirectly, will be holders of equity interests in the Company
upon consummation of such transactions;
WHEREAS, subject to the terms and conditions of this Agreement, the
Company desires to retain each of Bain, Celerity and KEGL (each a "Service
-------
Provider" and collectively, the "Service Providers") to provide certain
-------- -----------------
management and advisory services to the Company, and each of Bain, Celerity
and KEGL desire to provide such services;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Services. Each Service Provider hereby severally agrees that, during the
term of this Agreement (the "Term"), it will:
----
a. provide the Company with advice in connection with the negotiation and
consummation of agreements, contracts, documents and instruments
necessary to provide the Company with financing from banks or other
financial institutions or other entities on terms and conditions
satisfactory to the Company; and
<PAGE>
b. provide the Company with financial, managerial and operational advice
in connection with its day-to-day operations, including, without
limitation:
i. advice with respect to the investment of funds; and
ii. advice with respect to the development and implementation of
strategies for improving the operating, marketing and financial
performance of the Company.
2. Payment of Fees. The Company hereby agrees to:
a. during the Term, pay to each Service Provider (or, in each case, an
affiliate designated by it) a management fee in an amount equal to its
Pro Rata Share of $625,000 per annum in exchange for the services
provided to the Company by such Service Provider, as more fully
described in Section 1 of this Agreement, such fee being payable by
the Company quarterly in advance, the first such payment to be made on
the Merger Closing Date (as defined in the Merger Agreement); and
b. during the Term, allow each Service Provider to participate in the
negotiation and consummation of senior financing for any acquisition
transactions by the Company or any of its direct or indirect
subsidiaries, and pay to each Service Provider (or, in each case, an
affiliate designated by it) a fee in connection therewith equal to its
Pro Rata Share of one percent (1%) of the gross purchase price of the
transaction (including all liabilities assumed or otherwise included
in the transaction), such fee to be due and payable for the foregoing
services at the closing of such transaction, whether or not any such
senior financing is actually committed or drawn upon.
For purposes of this Agreement, Bain's "Pro Rata Share" shall be equal to
40%, Celerity's "Pro Rata Share" shall be equal to 40% and KEGL's "Pro Rata
Share" shall be equal to 20%.
The Company further agrees to pay on demand all expenses incurred by the
Service Providers in connection with this Agreement and any out-of-pocket
expenses incurred by the Service Providers in connection with the provision
of services hereunder.
Each payment made to a Service Provider pursuant to this Section 2 shall be
paid by wire transfer of immediately available federal funds to the account
specified on Schedule 1 hereto, or to such other account(s) as such Service
Provider may specify to the Company in writing prior to such payment.
-2-
<PAGE>
3. Term. This Agreement shall continue in full force and effect with respect
to each Service Provider for so long as such Service Provider (or any
successor or permitted assign, as the case may be) continues to carry on
the business of providing services of the type described in Section 1
above; provided, however, that (a) this Agreement shall terminate upon the
-------- -------
earlier of (i) a Change of Control (as defined in the Stockholders
Agreement dated as of the date hereof among the Company and the
stockholders listed on the signature pages thereto, as amended or otherwise
modified from time to time) and (ii) the fifth anniversary of the Merger
Closing Date (as defined in the Merger Agreement), (b) the Company may
terminate this Agreement with respect to any Service Provider following a
material breach of the terms of this Agreement by such Service Provider and
a failure to cure such breach within 30 days following written notice
thereof and (c) each Service Provider may terminate this Agreement with
respect to itself (i) following a material breach of this Agreement by the
Company and failure to cure such breach within 30 days following written
notice thereof or (ii) at any time upon not less than 60 days written
notice to the Company; and provided further that each of (x) the
-------- -------
obligations of the Company under Section 4 below, (y) any and all accrued
and unpaid obligations of the Company owed under Section 2 above and (z)
the provisions of Section 7 shall survive any termination of this Agreement
to the maximum extent permitted under applicable law.
4. Indemnification. In consideration of the execution and delivery of this
Agreement by each Service Provider, the Company hereby agrees to indemnify,
exonerate and hold each of Bain, Bain Capital, Inc., each Bain Fund,
Celerity, the Celerity Fund and KEGL, and each of their respective
partners, shareholders, members, affiliates, directors, officers,
fiduciaries, employees and agents and each of the partners, shareholders,
members, affiliates, directors, officers, fiduciaries, employees and agents
of each of the foregoing (collectively, the "Indemnitees") free and
-----------
harmless from and against any and all actions, causes of action, suits,
losses, liabilities and damages, and expenses in connection therewith,
including without limitation reasonable attorneys' fees and disbursements
(collectively, the "Indemnified Liabilities"), incurred by the Indemnitees
-----------------------
or any of them as a result of, or arising out of, or relating to the
execution, delivery, performance, enforcement or existence of this
Agreement or the provision of services hereunder except for any such
Indemnified Liabilities arising on account of such Indemnitee's gross
negligence or willful misconduct, and if and to the extent that the
foregoing undertaking may be unenforceable for any reason, the Company
hereby agrees to make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible
under applicable law.
5. Assignment, etc. Except as provided below, no party shall have the right
to assign this Agreement. Each Service Provider acknowledges that its
services under this Agreement are unique. Accordingly, any purported
assignment by a Service Provider (other than as provided below) shall be
void. Notwithstanding the foregoing, (a) a
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<PAGE>
Service Provider may assign all or part of its rights and obligations
hereunder to any affiliate of such Service Provider which provides services
similar to those called for by this Agreement, in which event such Service
Provider shall be released of all of its rights and obligations hereunder
and (b) the provisions hereof for the benefit of the Bain Funds and the
Celerity Fund shall inure to the benefit of their successors and assigns.
6. Amendments and Waivers. No amendment or waiver of any term, provision or
condition of this Agreement shall be effective as against any party, unless
in writing and executed such party. No waiver on any one occasion shall
extend to or effect or be construed as a waiver of any right or remedy on
any future occasion. No course of dealing of any person nor any delay or
omission in exercising any right or remedy shall constitute an amendment of
this Agreement or a waiver of any right or remedy of any party hereto.
7. Miscellaneous.
a. Freedom to Pursue Opportunities, Etc. In anticipation that the
Company and one or more of the Service Providers (or one or more of
their respective affiliates, associated investment funds or portfolio
companies, or clients) may engage in the same or similar activities or
lines of business and have an interest in the same areas of corporate
opportunities, and in recognition of the benefits to be derived by the
Company under this Agreement and in recognition of the difficulties
which may confront any advisor who desires and endeavors fully to
satisfy such advisor's duties in determining the full scope of such
duties in any particular situation, the provisions of this clause (a)
are set forth to regulate, define and guide the conduct of certain
affairs of the Company as they may involve any Service Provider.
Except as any Service Provider may otherwise agree in writing (solely
as to itself), after the date hereof:
i. each Service Provider shall have the right to, and shall have no
duty (contractual or otherwise) not to, directly or indirectly:
(A) engage in the same or similar business activities or lines
of business as the Company, including those competing with the
Company and (B) do business with any client or customer of the
Company;
ii. No Service Provider nor any officer, director, employee,
partner, affiliate or associated entity thereof shall be liable
to the Company or its affiliates for breach of any duty
(contractual or otherwise) by reason of any such activities of
or of such person's participation therein; and
iii In the event that any Service Provider acquires knowledge of a
potential transaction or matter that may be a corporate
opportunity for both the
-4-
<PAGE>
Company and one or more Service Providers or any other person,
such Service Provider shall have no duty (contractual or
otherwise) to communicate or present such corporate opportunity
to the Company and, notwithstanding any provision of this
Agreement to the contrary, shall not be liable to the Company or
its affiliates for breach of any duty (contractual or otherwise)
by reason of the fact that Bain directly or indirectly pursues or
acquires such opportunity for itself, directs such opportunity to
another person, or does not present such opportunity to the
Company.
b. Limitation of Liability. In no event will any party hereto be liable
to any other party hereto for any indirect, special, incidental or
consequential damages, including lost profits or savings, whether or
not such damages are foreseeable, or for any third party claims
(whether based in contract, tort or otherwise), relating to the
services to be provided by any Service Provider hereunder.
c. Choice of Law. This Agreement shall be governed by and construed in
accordance with the domestic substantive laws of the State of Delaware
without giving effect to any choice or conflict of law provision or
rule that would cause the application of the domestic substantive laws
of any other jurisdiction.
d. Consent to Jurisdiction. Each of the parties agrees that all actions,
suits or proceedings arising out of or based upon this Agreement or
the subject matter hereof shall be brought and maintained exclusively
in the federal and state courts of the State of Delaware. Each of the
parties hereto by execution hereof (i) hereby irrevocably submits to
the jurisdiction of the federal and state courts in the State of
Delaware for the purpose of any action, suit or proceeding arising out
of or based upon this Agreement or the subject matter hereof and (ii)
hereby waives to the extent not prohibited by applicable law, and
agrees not to assert, by way of motion, as a defense or otherwise, in
any such action, suit or proceeding, any claim that it is not subject
personally to the jurisdiction of the above-named courts, that it is
immune from extraterritorial injunctive relief or other injunctive
relief, that its property is exempt or immune from attachment or
execution, that any such action, suit or proceeding may not be brought
or maintained in one of the above-named courts, that any such action,
suit or proceeding brought or maintained in one of the above-named
courts should be dismissed on grounds of forum non conveniens, should
----- --- ----------
be transferred to any court other than one of the above-named courts,
should be stayed by virtue of the pendency of any other action, suit
or proceeding in any court other than one of the above-named courts,
or that this Agreement or the subject matter hereof may not be
enforced in or by any of the above-named courts. Each of the parties
hereto hereby consents to service of process in any such suit, action
or proceeding in any manner permitted by the laws of the State of
Delaware,
-5-
<PAGE>
agrees that service of process by registered or certified mail, return
receipt requested, at the address specified in or pursuant to Section
9 is reasonably calculated to give actual notice and waives and agrees
not to assert by way of motion, as a defense or otherwise, in any such
action, suit or proceeding any claim that service of process made in
accordance with Section 9 does not constitute good and sufficient
service of process. The provisions of this Section 7(b) shall not
restrict the ability of any party to enforce in any court any judgment
obtained in a federal or state court of the State of Delaware.
e. Waiver of Jury Trial. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW
WHICH CANNOT BE WAIVED, EACH OF THE PARTIES HERETO HEREBY WAIVES, AND
COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT, OR
OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY
ISSUE, CLAIM, DEMAND, CAUSE OF ACTION, ACTION, SUIT OR PROCEEDING
ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE SUBJECT MATTER
HEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING AND
WHETHER IN CONTRACT OR TORT OR OTHERWISE. Each of the parties hereto
acknowledges that it has been informed by each other party that the
provisions of this Section 7(c) constitute a material inducement upon
which such party is relying and will rely in entering into this
Agreement and the transactions contemplated hereby. Any of the
parties hereto may file an original counterpart or a copy of this
Agreement with any court as written evidence of the consent of each of
the parties hereto to the waiver of its right to trial by jury.
8. Merger/Entire Agreement. This Agreement contains the entire understanding
of the parties with respect to the subject matter hereof and supersedes any
prior communication or agreement with respect thereto.
9. Notice. All notices, demands, and communications of any kind which any
party may require or desire to serve upon any other party under this
Agreement shall be in writing and shall be served upon such other party and
such other party's copied persons as specified below by personal delivery
to the address set forth for it below or to such other address as such
party shall have specified by notice to each other party or by mailing a
copy thereof by certified or registered mail, or by Federal Express or any
other reputable overnight courier service, postage prepaid, with return
receipt requested, addressed to such party and copied persons at such
addresses. In the case of service by personal delivery, it shall be deemed
complete on the first business day after the date of actual delivery to
such address. In case of service by mail or by overnight courier, it shall
be deemed complete, whether or not received, on the third day after the
date of mailing as shown by the registered or certified mail receipt or
courier service receipt. Notwithstanding the foregoing, notice to any party
or copied person of change
-6-
<PAGE>
of address shall be deemed complete only upon actual receipt by an officer
or agent of such party or copied person.
If to the Company, to it at:
SMTC Corporation
c/o EMSIcon Investments, LLC
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
Attention: David Dominik
Prescott Ashe
with a copy to:
The Surface Mount Technology Centre Inc.
625 Hood Road
Markham, Ontario L3R 4N6
Canada
Attention: President
If to Bain, to it at:
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
Attention: David Dominik
Prescott Ashe
with a copy to:
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Attention: Alfred O. Rose
If to Celerity, to it at:
Celerity Management Co., Inc.
11111 Santa Monica Boulevard, Suite 1111
Los Angeles, CA 90025
Attention: Stephen E. Adamson
-7-
<PAGE>
with a copy to:
Brownstein, Hyatt & Farber, P.C.
410 Seventeenth Street, Suite 2200
Denver, CO 80202-4437
Attention: Jacquelyn Kilmer
If to KEGL, to it at:
50 Ashwarren Road
Downsview, Ontario M3J 1Z5
Canada
Attention: Michael Griffiths
with a copy to:
McMillian Binch
Royal Bank Plaza South Tower
Suite 3800
Toronto, Ontario M5J 2J7
Canada
Attention: Ted Scott
10. Severability. If in any judicial or arbitral proceedings a court or
arbitrator shall refuse to enforce any provision of this Agreement, then
such unenforceable provision shall be deemed eliminated from this Agreement
for the purpose of such proceedings to the extent necessary to permit the
remaining provisions to be enforced. To the full extent, however, that the
provisions of any applicable law may be waived, they are hereby waived to
the end that this Agreement be deemed to be valid and binding agreement
enforceable in accordance with its terms, and in the event that any
provision hereof shall be found to be invalid or unenforceable, such
provision shall be construed by limiting it so as to be valid and
enforceable to the maximum extent consistent with and possible under
applicable law.
11. Counterparts. This Agreement may be executed in any number of counterparts
and by each of the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which
together shall constitute one and the same agreement.
-8-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf as an instrument under seal as of the date first above
written by its officer or representative thereunto duly authorized.
The Company: SMTC CORPORATION
By /s/ Prescott Ashe
____________________________
Title:
Bain: Bain Capital Partners VI, L.P.
By Bain Capital Investors VI, Inc.,
its general partner
By /s/ David Dominik
____________________________
Title:
Celerity: Celerity Management Co., Inc.
By /s/ Stephen Adamson
____________________________
Title: President
KEGL: Kilmer Electronics Group Limited
By /s/ Michael Griffiths
____________________________
Title:
<PAGE>
Schedule 1 to
Management Agreement
--------------------
Wire Transfer Instructions for
Bain Capital Partners VI, L.P.
Citibank N.A.
ABA # 021 000 089
For Brown Brothers Harriman
Account # 09250276
To Further Credit:
Bain Capital Partners VI, L.P.
Acct. # 610276-8
Wire Instructions for
Celerity Management Co., INC.
City National Bank
400 North Roxbury Drive
Beverly Hills, CA 90210
ABA # 122 016 066
For credit to the account of: Celerity Management Co., Inc.
Account: 101 113 531
Wire Instructions for
Kilmer Electronics Group Limited
Bank of Montreal
100 King St. West
Toronto, Ontario
M5X 1A3
Bank Code: 001
Transit #: 00022
Account #: 1286108
SWIFT #: BOFMCAM2
Beneficiary #: 21027937
<PAGE>
EXHIBIT 10.12
THE SURFACE MOUNT TECHNOLOGY CENTRE INC.
July 30, 1999
Derek D'Andrade
12 Grove Park
Richmond Hill, Ontario L4E 3L4
Re: Employment Agreement
Dear Mr. D'Andrade:
This letter sets forth the terms and conditions of your employment with The
Surface Mount Technology Centre Inc., an Ontario corporation (the "COMPANY") to
be effective as of the date of closing of the transactions (the "EFFECTIVE
DATE") described in the Reorganization and Merger Agreement dated as of July 26,
1999 among the Company, SMTC Corporation ("HOLDINGS"), HTM Holdings, Inc.
("HTM"), EMSIcon Investments LLC, the Company's stockholders, the HTM
stockholders and warrantholders and others (the "REORGANIZATION AGREEMENT").
This Agreement is entered into in connection with the transactions described in
the Reorganization Agreement pursuant to which you, as a stockholder of the
Company, will receive certain payments upon the repurchase for cancellation of a
portion of your interest in the Company.
1. EMPLOYMENT AND SERVICES. You shall be employed as a Vice President of
the Company, Holdings and its subsidiaries (the "SMTC GROUP") for the period
beginning on the Effective Date and ending on December 31, 2001 or on such
earlier date as your employment is terminated pursuant to paragraph 4 hereof
(the "EMPLOYMENT PERIOD"). The Employment Period shall automatically be
extended for successive one-year terms on December 31, 2001 and each anniversary
thereof, unless (i) either party has given written notice of non-renewal to the
other party at least 90 days prior to the scheduled expiration date of the
Employment Period or (ii) your employment has been terminated pursuant to
paragraph 4 hereof.
During the Employment Period, you shall render such services of a senior
executive nature to the SMTC Group and shall have such powers, duties and
responsibilities as may from time to time be prescribed by the Holdings Board of
Directors (the "BOARD"). You shall perform and discharge, faithfully,
diligently and competently, such services, duties and responsibilities. You
shall devote all of your business time and attention and your best efforts and
ability to the business and affairs of the SMTC Group and shall not engage in
other business activities (whether or not compensated) during the Employment
Period without prior
<PAGE>
Derek D'Andrade
Employment Agreement
July 30, 1999
written consent of the Board. You agree to serve, if elected or appointed
thereto, in one or more positions as an officer or director of any one or more
current or future members of the SMTC Group, or any one or more of the present
or future subsidiaries or affiliates of Holdings, or as an officer, trustee,
director or other fiduciary of any pension or other employee benefit plan of the
Company, or any one or more of the present or future subsidiaries or affiliates
of Holdings. Service in such additional positions will be without additional
compensation except for reimbursement of reasonably related business expenses on
the same terms as provided elsewhere in this Agreement.
2. COMPENSATION. As compensation for your services performed under this
Agreement during the Employment Period, the Company shall pay you a base salary
at the rate of $200,000 per year. Such salary shall be payable in installments
in accordance with the Company's regular payroll practices. During the
Employment Period, you will be eligible to receive an annual bonus payment based
on the achievement by Holdings of the EBITDA Targets and the Target Performance
Bonus set forth on Annex A hereto. Such EBITDA Targets may be adjusted by the
Board from time to time to reflect any future acquisitions, mergers or other
business combinations by or involving Holdings or its affiliates. For the
fiscal year ending December 31, 1999, the EBITDA Targets shall be calculated on
a pro forma basis as if the combination of HTM and SMTC had occurred on January
1, 1999. Beginning in fiscal year 2000 you will be entitled to receive a mid-
year advance against your annual bonus payment in an amount equal to 40% of the
annual bonus payment that you would receive based on the Board's mid-year
projection of the year-end EBITDA.
3. BENEFITS. During the Employment Period, you shall be entitled to
participate in or receive benefits under any life insurance plan, health and
accident insurance plan, retirement plan and all other benefit arrangements
generally available to the Company's executive officers and employees (other
than severance plans or arrangements) as in effect from time to time. Without
limiting the foregoing, you shall be entitled to receive up to Cdn$15,000
annually in accordance with past practice in connection with your contribution
to a registered retirement savings plan. In addition to any life insurance plan
described above as being generally available to the Company's executive officers
and employees, the Company will at all times maintain a life insurance policy
with a death benefit of $200,000 to be paid to a beneficiary of your choice. In
addition, the Company will reimburse your reasonable out-of-pocket expenses
incurred in connection with the performance of your services hereunder, in each
case subject to and consistent with Company policy. During the Employment
Period you shall be entitled to twenty paid vacation days in each fiscal year
and shall also be entitled to all paid holidays given by the Company to its
employees. Your paid vacation days shall be prorated for any period of service
hereunder less than a full year. You will not be entitled to cash compensation
for any vacation time not taken during the term hereof.
2
<PAGE>
Derek D'Andrade
Employment Agreement
July 30, 1999
4. TERMINATION AND SEVERANCE. The Employment Period shall terminate
prior to its scheduled expiration date on the first to occur of (i) your death
or permanent disability (defined as your actual inability to perform normal
duties for a period of 90 consecutive days or for a total of 120 days in any
two-year period or your prospective inability to perform such duties for such
period as determined in good faith by the Board), (ii) a vote of the Board
directing such termination for Cause, (iii) a vote of the Board directing such
termination without Cause, or (iv) termination by you upon not less than 30
days' prior written notice for Good Reason. In the event of termination of the
Employment Period pursuant to clauses (iii) or (iv) above and so long as you
comply with the restrictions set forth in paragraphs 5 and 6 below, the Company
shall continue to pay your base salary for two years following the date of such
termination. Except as set forth in this paragraph 4, you shall not be entitled
to any compensation or other payment from any current or future member, or
affiliate of any such member, of the SMTC Group in connection with the
termination of your employment. For purposes of this Agreement, (x) "CAUSE"
shall mean (i) your willful and repeated failure to comply with the lawful
directives of the Board, (ii) any criminal act or act of dishonesty, disloyalty,
misconduct or moral turpitude by you that is injurious to the property,
operations, business or reputation of any member of the SMTC Group, or (iii)
your material breach of this Agreement that is not cured within 30 days after
written notice thereof to you by the Company, and (y) "GOOD REASON" shall mean
(i) the Company's material breach of this Agreement that is not cured within 30
days after written notice thereof to the Company by you or (ii) a reduction in
your responsibilities and authority such that you no longer function as a Vice
President of the Company, provided however, that if you do not terminate within
30 days after the Company has provided you notice of any such reduction in
responsibilities, then you shall be deemed to have waived your right to
terminate for Good Reason based on such reduction.
5. CONFIDENTIAL INFORMATION. You acknowledge that information obtained
by you during your employment with the Company (including during the term prior
to the Employment Period) concerning the business or affairs of the Company or
any member of the SMTC Group ("CONFIDENTIAL INFORMATION") is the property of the
Company. You shall not at any time during or after the Employment Period,
without the prior written consent of the Board, disclose to any unauthorized
person or use for your own account or for the account of any person other than
the Company or its affiliates any Confidential Information, except to the extent
necessary to comply with applicable laws or to the extent that such information
becomes generally known to and available for use by the public other than as a
result of (i) your acts or (ii) during the Employment Period, your omissions to
act. Upon termination of the Employment Period or at the request of the Board
at any time, you shall deliver to the Board all documents containing
Confidential Information or relating to the business or affairs of the Company
or its affiliates that you may then possess or have under your control.
3
<PAGE>
Derek D'Andrade
Employment Agreement
July 30, 1999
6. NON-COMPETITION; NON-SOLICITATION.
a. NON-COMPETITION. You acknowledge that you are and will be in
possession of Confidential Information, that your services are of unique and
great value to the Company, and that some restrictions on your activities during
and after your employment are necessary to protect the goodwill, Confidential
Information and other legitimate interests of the Company and its affiliates.
Accordingly, during the Employment Period and for the period thereafter during
which you receive continued payments of your base salary pursuant to Section 4
or, in the case of termination of your employment for Cause pursuant to Section
4(ii), for a period of one year following the date of termination of your
employment (the "NON-COMPETE PERIOD"), you shall not, directly or indirectly,
own, manage, control, participate in, consult with, render services to, or in
any manner engage in, any enterprise engaged in the assembly of printed circuit
boards or other electronic manufacturing services within any geographical area
in which the Company or its affiliates do business on the date of termination of
your employment. Such geographical area shall include but not be limited to
North America (including Mexico), Europe, Southeast Asia and China. Nothing
herein shall prohibit you from being a passive owner of not more than 5% of any
publicly-traded class of capital stock of any entity engaged in a competing
business.
b. NON-SOLICITATION OF EMPLOYEES, SUPPLIERS AND CUSTOMERS. During
the Non-Compete Period, you shall not (i) interfere with the relationship
between the Company or any of its affiliates, and any of their employees, or
induce or attempt to induce any employee of the Company or its affiliates to
terminate his or her employment, (ii) hire directly or through another entity
any person who was an employee of the Company or any of its affiliates at any
time during the Employment Period (other than a former employee of the Company
who left his or her employment without any inducement by you), (iii) induce or
attempt to induce any independent contractor providing services to the Company
or any of its affiliates to terminate or diminish its relationship with the
Company or its affiliates, (iv) induce or attempt to induce any customer,
supplier, licensee or other business relation of the Company or its affiliates
to cease doing business with such entity, or (v) in any way interfere in any
material respect with the relationship between any such customer, supplier,
licensee or business relation and the Company or its affiliates.
c. SCOPE OF RESTRICTION. If, at the time of enforcement of this
paragraph 6, a court shall hold that the duration, scope or area restrictions
stated herein are unreasonable under circumstances then existing, you agree that
the maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area.
4
<PAGE>
Derek D'Andrade
Employment Agreement
July 30, 1999
d. NECESSITY OF RESTRAINTS. You acknowledge that the restraints
imposed by this paragraph 6 and by paragraph 5 above are reasonable and
necessary for the protection of the Company and its affiliates, and that any
such entity would be irreparably harmed by a breach by you of these provisions.
7. WITHHOLDING; CURRENCY. All payments made by the Company under this
Agreement shall be net of any tax or other amounts required to be withheld by
the Company under any applicable law or legal requirement. Except as
specifically noted, all amounts set forth in this Agreement are denominated in
US Dollars.
8. PRIOR AGREEMENTS. Except as expressly provided herein, all prior
agreements, arrangements or understandings, written or oral, with respect to
your employment with the Company or any subsidiary or affiliate thereof are
superseded by this Agreement and shall be of no further force and effect.
9. SURVIVAL. The provisions of paragraphs 5 and 6 hereof will survive
any termination of this Agreement in accordance with their respective terms.
10. GOVERNING LAW. All questions concerning the construction, validity
and interpretation of this Agreement shall be governed by the laws of the
Province of Ontario without giving effect to any choice or conflict of laws
provision or rule that would cause the application of the domestic substantive
laws of any other jurisdiction.
11. NOTICES. All notices, requests and demands to or upon the parties
hereto to be effective shall be in writing, by facsimile, by overnight courier
or by registered or certified mail, postage prepaid and return receipt
requested, and shall be deemed to have been duly given or made upon: (i)
delivery by hand, (ii) one business day after being sent by overnight courier;
or (iii) in the case of transmission by facsimile, when confirmation of receipt
is obtained. Such communications shall be addressed and directed to the parties
as follows (or to such other address as either party shall designate by giving
like notice of such change to the other party):
If to you, at the address first stated above.
5
<PAGE>
Derek D'Andrade
Employment Agreement
July 30, 1999
If to the Company:
The Surface Mount Technology Centre Inc.
625 Hood Road
Markham, Ontario L3R 4N6
Canada
with a copy to:
Ropes & Gray
One International Place
Boston, MA 02110
Attention: Alfred O. Rose
Facsimile: 617-951-7050
12. AMENDMENT; WAIVER. No provision of this Agreement may be amended
modified, waived or discharged unless such amendment waiver, modification or
discharge is approved by the Board and agreed to in writing signed by you and
such officer as may be specifically authorized by the Board in connection with
such approval. No waiver of any condition or provision of this Agreement shall
be deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time.
13. ASSIGNMENT. This Agreement shall inure to the benefit of and be
binding upon (i) you, your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees and (ii)
the Company and its successors (including, without limitation, by means of
reorganization, merger, amalgamation, consolidation or liquidation) and
permitted assigns. The Company may assign this Agreement to Holdings or any
subsidiary or affiliate of Holdings or to any successor of the Company or
Holdings by reorganization, merger, amalgamation, consolidation or liquidation
and any transferee of all or substantially all of the business or assets of the
Company, Holdings or of any division or line of business of the Company or
Holdings with which you are at any time associated. The Company and Holdings
require your personal services hereunder and you may not assign this Agreement.
* * * * *
6
<PAGE>
Derek D'Andrade
Employment Agreement
July 30, 1999
Please execute the extra copy of this letter Agreement in the space below
and return it to the undersigned at the address set forth above to confirm your
understanding and acceptance of the agreements contained herein.
Very truly yours,
THE SURFACE MOUNT TECHNOLOGY CENTRE INC.
By: /s/ Paul Walker
----------------
Name: Paul Walker
Title: President
Accepted and agreed to:
EMPLOYEE
/s/ Derek D'Andrade
- -------------------
Derek D'Andrade
7
<PAGE>
EXHIBIT 10.13
SMTC CORPORATION
July 30, 1999
Edward A. Johnson
12520 Grant Drive
Thornton, CO 80241
Re: Employment Agreement
Dear Mr. Johnson:
This letter sets forth the terms and conditions of your employment with
SMTC Corporation, a Delaware corporation (the "COMPANY") to be effective as of
the date of closing of the transactions (the "EFFECTIVE DATE") described in the
Reorganization and Merger Agreement dated as of July 26, 1999 among the Company,
HTM Holdings, Inc. ("HTM"), The Surface Mount Technology Centre Inc. ("SMTC"),
EMSIcon Investments LLC, the SMTC stockholders, and the HTM stockholders and
warrantholders (the "REORGANIZATION AGREEMENT").
1. EMPLOYMENT AND SERVICES. You shall be employed as the Executive Vice
President of Business Development of the Company for the period beginning on the
Effective Date and ending on December 31, 2001 or on such earlier date as your
employment is terminated pursuant to paragraph 4 hereof (the "EMPLOYMENT
PERIOD"). The Employment Period shall automatically be extended for successive
one-year terms on December 31, 2001 and each anniversary thereof, unless (i)
either party has given written notice of non-renewal to the other party at least
90 days prior to the scheduled expiration date of the Employment Period or (ii)
your employment has been terminated pursuant to paragraph 4 hereof.
During the Employment Period, you shall render such services of a senior
executive nature to the Company, its subsidiaries and its affiliates and shall
have such powers, duties and responsibilities as may from time to time be
prescribed by the Company's Board of Directors (the "BOARD"). You shall perform
and discharge, faithfully, diligently and competently, such services, duties and
responsibilities. You shall devote all of your business time and attention and
your best efforts and ability to the business and affairs of the Company and its
subsidiaries and shall not engage in other business activities (whether or not
compensated) during the term of this Agreement without prior written consent of
the Board. You agree to serve, if elected or appointed thereto, in one or more
positions as an officer or director of the Company or any one or more of the
Company's present or future subsidiaries or affiliates, or as an officer,
trustee, director or other fiduciary of any pension or other employee benefit
plan of the Company
<PAGE>
or any of its subsidiaries or affiliates. Service in such additional positions
will be without additional compensation except for reimbursement of reasonably
related business expenses on the same terms as provided elsewhere in this
Agreement.
2. COMPENSATION.
a. As compensation for your services performed under this Agreement
during the Employment Period, the Company shall pay you a base salary at the
rate of $225,000 per year. Such salary shall be payable in installments in
accordance with the Company's regular payroll practices. During the Employment
Period, you will be eligible to receive an annual bonus payment based on the
Company's achievement of the EBITDA Targets and the Target Performance Bonus set
forth on Annex A hereto. Such EBITDA Targets may be adjusted by the Board from
time to time to reflect any future acquisitions, mergers or other business
combinations by or involving the Company. For the fiscal year ending December
31, 1999, the EBITDA Targets shall be calculated on a pro forma basis as if the
combination of HTM and SMTC had occurred on January 1, 1999. Beginning in
fiscal year 2000 you will be entitled to receive a mid-year payment to be
credited against your annual bonus payment in an amount equal to 40% of the
annual bonus payment that you would receive based on the Board's mid-year
projection of the Company's year-end EBITDA, provided that in no case shall you
have any liability to repay any portion of this payment to the Company in the
event that the Company's actual year-end EBITDA is below the Board's projection.
b. The Company will pay you an additional bonus on or before April
15, 2000 equal to the amount that would cause your after tax proceeds from such
bonus to equal the amount of your tax liability, if any, arising from your
receipt of an ownership interest in J&L Investments, LLC, a Delaware limited
liability company, as described in the Reorganization Agreement.
3. BENEFITS. During the Employment Period, you shall be entitled to
participate in or receive benefits under any life insurance plan, health and
accident insurance plan, retirement plan and all other benefit arrangements
generally available to the Company's executive officers and employees (other
than severance plans or arrangements) as in effect from time to time. The
Company will at all times maintain a life insurance policy with a death benefit
of $225,000 to be paid to a beneficiary of your choice. In addition, the Company
will reimburse your reasonable out-of-pocket expenses incurred in connection
with the performance of your services hereunder, in each case subject to and
consistent with Company policy. During the Employment Period you shall be
entitled to 20 paid vacation days in each fiscal year and shall also be entitled
to all paid holidays given by the Company to its employees. Your paid vacation
days shall be prorated for any period of service hereunder less than a full
year. You will not be entitled to cash compensation for any vacation time not
taken during the term hereof.
2
<PAGE>
4. TERMINATION AND SEVERANCE. The Employment Period shall terminate
prior to its scheduled expiration date on the first to occur of (i) your death
or permanent disability (defined as your actual inability to perform normal
duties for a period of 90 consecutive days or for a total of 120 days in any
two-year period or your prospective inability to perform such duties for such
period as determined in good faith by the Board), (ii) a vote of the Board
directing such termination for Cause, (iii) a vote of the Board directing such
termination without Cause, or (iv) termination by you upon not less than 30
days' prior written notice for Good Reason. In the event of termination of the
Employment Period pursuant to clauses (iii) or (iv) above and so long as you
comply with the restrictions set forth in paragraphs 5 and 6 below, the Company
shall continue to pay your base salary for two years following the date of such
termination. Except as set forth in this paragraph 4, you shall not be entitled
to any compensation or other payment from the Company or any of its affiliates
in connection with the termination of your employment. For purposes of this
agreement, (x) "CAUSE" shall mean (i) your willful and repeated failure to
comply with the lawful directives of the Board, (ii) any criminal act or act of
dishonesty, disloyalty, misconduct or moral turpitude by you that is injurious
to the property, operations, business or reputation of the Company, or (iii)
your material breach of this agreement that is not cured within 30 days after
written notice thereof to you by the Company, and (y) "GOOD REASON" shall mean
(i) the Company's material breach of this agreement that is not cured within 30
days after written notice thereof to the Company by you, (ii) a reduction in
your responsibilities and authority such that you no longer function as the
Executive Vice President of Business Development for the Company, (iii) a change
in the location of the Hi-Tech Manufacturing, Inc. facility where you regularly
report for work, which change extends your commute to such facility by more than
25 miles going one way, or (iv) your removal from the Board, provided however,
that (a) if you do not terminate within 30 days after the Company has provided
you notice of a reduction of your responsibilities, or (b) if you resign from
the Board, then you shall be deemed to have waived your right to terminate for
Good Reason based on such action.
5. CONFIDENTIAL INFORMATION. You acknowledge that information obtained
by you during your employment with the Company (including during the term of
your employment by HTM Holdings, Inc. or Hi-Tech Manufacturing, Inc.) concerning
the business or affairs of the Company ("CONFIDENTIAL INFORMATION") is the
property of the Company. You shall not at any time during or after the
Employment Period, without the prior written consent of the Board, disclose to
any unauthorized person or use for your own account or for the account of any
person other than the Company and its subsidiaries any Confidential Information,
except to the extent necessary to comply with applicable laws or to the extent
that such information becomes generally known to and available for use by the
public other than as a result of your acts or omissions to act. Upon
termination of the Employment Period or at the request of the Board at any time,
you shall deliver to the Board all documents containing Confidential Information
or relating to the business or affairs of the Company that you may then possess
or have under your control.
3
<PAGE>
6. NON-COMPETITION; NON-SOLICITATION.
a. NON-COMPETITION. You acknowledge that you are and will be in
possession of Confidential Information, that your services are of unique and
great value to the Company, and that some restrictions on your activities during
and after your employment are necessary to protect the goodwill, Confidential
Information and other legitimate interests of the Company and its subsidiaries
and affiliates. Accordingly, during the Employment Period and for the period
thereafter during which you receive continued payments of your base salary
pursuant to Section 4 or, in the case of termination of your employment for
Cause pursuant to Section 4(ii), for a period of one year following the date of
termination of your employment (the "NON-COMPETE PERIOD"), you shall not,
directly or indirectly, own, manage, control, participate in, consult with,
render services to, or in any manner engage in, any enterprise engaged in the
assembly of printed circuit boards or other electronic manufacturing services
within any geographical area in which the Company and its subsidiaries do
business on the date of termination of your employment. Such geographical area
shall include but not be limited to North America (including Mexico), Europe,
Southeast Asia and China. Nothing herein shall prohibit you from being a
passive owner of not more than 5% of any publicly-traded class of capital stock
of any entity engaged in a competing business.
b. NON-SOLICITATION OF EMPLOYEES, SUPPLIERS AND CUSTOMERS. During
the Non-Compete Period, you shall not (i) interfere with the relationship
between the Company and any of its employees, or induce or attempt to induce any
employee of the Company to terminate his or her employment, (ii) hire directly
or through another entity any person who was an employee of the Company at any
time during the Employment Period (iii) induce or attempt to induce any
independent contractor providing services to the Company or any of its
subsidiaries to terminate or diminish its relationship with the Company or its
subsidiaries, (iv) induce or attempt to induce any customer, supplier, licensee
or other business relation of the Company to cease doing business with the
Company, or in any way interfere in any material respect with the relationship
between any such customer, supplier, licensee or business relation and the
Company.
c. SCOPE OF RESTRICTION. If, at the time of enforcement of this
paragraph 6, a court shall hold that the duration, scope or area restrictions
stated herein are unreasonable under circumstances then existing, you agree that
the maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area.
d. NECESSITY OF RESTRAINTS. You acknowledge that the restraints
imposed by this paragraph 6 and by paragraph 5 above are reasonable and
necessary for the protection of the Company and its subsidiaries, and that the
Company would be irreparably harmed by a breach by you of these provisions.
7. WITHHOLDING; CURRENCY. All payments made by the Company under this
Agreement shall be net of any tax or other amounts required to be withheld by
the Company
4
<PAGE>
under any applicable law or legal requirement. All amounts set
forth in this agreement are denominated in US Dollars.
8. PRIOR AGREEMENTS. With the exception of terms that relate to your
employment in each of (i) the Grant of Stock Purchase Options, dated the date
hereof, delivered to you by the Company, (ii) the Operating Agreement of J&L
Investments, LLC and (iii) the Stockholders Agreement of the Company, dated the
date hereof, all prior agreements, arrangements or understandings, written or
oral, with respect to your employment with the Company, HTM or any subsidiary or
affiliate thereof are superseded by this Agreement and shall be of no further
force and effect.
9. SURVIVAL. The provisions of paragraphs 5 and 6 hereof will survive
any termination of this Agreement in accordance with their respective terms.
10. GOVERNING LAW. All questions concerning the construction, validity
and interpretation of this Agreement shall be governed by the laws of the State
of Delaware without giving effect to any choice or conflict of laws provision or
rule that would cause the application of the domestic substantive laws of any
other jurisdiction.
11. NOTICES. All notices, requests and demands to or upon the parties
hereto to be effective shall be in writing, by facsimile, by overnight courier
or by registered or certified mail, postage prepaid and return receipt
requested, and shall be deemed to have been duly given or made upon: (i)
delivery by hand, (ii) one business day after being sent by overnight courier;
or (iii) in the case of transmission by facsimile, when confirmation of receipt
is obtained. Such communications shall be addressed and directed to the parties
as follows (or to such other address as either party shall designate by giving
like notice of such change to the other party):
If to you, at the address first stated above.
5
<PAGE>
If to the Company:
SMTC Corporation
c/o EMSIcon Investments, LLC
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
with a copy to:
Ropes & Gray
One International Place
Boston, MA 02110
Attention: Alfred O. Rose
Facsimile: 617-951-7050
with a copy to:
The Surface Mount Technology Centre Inc.
635 Hood Road
Markham, Ontario
L3R 4N6
12. AMENDMENT; WAIVER. No provision of this Agreement may be amended
modified, waived or discharged unless such amendment waiver, modification or
discharge is approved by the Board and agreed to in writing signed by you and
such officer as may be specifically authorized by the Board in connection with
such approval. No waiver of any condition or provision of this Agreement shall
be deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time.
13. ASSIGNMENT. This Agreement shall inure to the benefit of and be
binding upon (i) you, your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees and (ii)
the Company and its successors (including, without limitation, by means of
reorganization, merger, consolidation or liquidation) and permitted assigns.
The Company may assign this Agreement to any of its subsidiaries or to any
successor of the Company by reorganization, merger, consolidation or liquidation
and any transferee of all or substantially all of the business or assets of the
Company or of any division or line of business of the Company with which you are
at any time associated. The Company requires your personal services hereunder
and you may not assign this Agreement.
* * * * *
6
<PAGE>
Please execute the extra copy of this letter Agreement in the space below
and return it to the undersigned at the address set forth above to confirm your
understanding and acceptance of the agreements contained herein.
Very truly yours,
SMTC CORPORATION
By:/s/ Prescott Ashe
-----------------
Name: Prescott Ashe
Title: Vice President
Accepted and agreed to:
EMPLOYEE
/s/ Edward A. Johnson
- ---------------------
Edward A. Johnson
7
<PAGE>
EXHIBIT 10.14
SMTC CORPORATION
July 30, 1999
Gary Walker
17583 Dawes Avenue
Monte Sereno, CA 95030
Re: Employment Agreement
Dear Mr. Walker:
This letter sets forth the terms and conditions of your employment with
SMTC Corporation, a Delaware corporation (the "COMPANY") to be effective as of
the date of closing of the transactions (the "EFFECTIVE DATE") described in the
Reorganization and Merger Agreement dated as of July 26, 1999 among the Company,
HTM Holdings, Inc. ("HTM"), The Surface Mount Technology Centre Inc. ("SMTC"),
EMSIcon Investments LLC, the SMTC stockholders, and the HTM stockholders and
warrantholders (the "REORGANIZATION AGREEMENT"). This Agreement is entered into
in connection with the transactions described in the Reorganization Agreement
pursuant to which you, as a stockholder of SMTC, will receive certain payments
upon the repurchase for cancellation of a portion of your interest in SMTC.
1. EMPLOYMENT AND SERVICES. You shall be employed as a Vice President of
the Company and its subsidiaries (the "SMTC GROUP") for the period beginning on
the Effective Date and ending on December 31, 2001 or on such earlier date as
your employment is terminated pursuant to paragraph 4 hereof (the "EMPLOYMENT
PERIOD"). The Employment Period shall automatically be extended for successive
one-year terms on December 31, 2001 and each anniversary thereof, unless (i)
either party has given written notice of non-renewal to the other party at least
90 days prior to the scheduled expiration date of the Employment Period or (ii)
your employment has been terminated pursuant to paragraph 4 hereof.
During the Employment Period, you shall render such services of a senior
executive nature to the SMTC Group and shall have such powers, duties and
responsibilities as may from time to time be prescribed by the Company's Board
of Directors (the "BOARD"). You shall perform and discharge, faithfully,
diligently and competently, such services, duties and responsibilities. You
shall devote all of your business time and attention and your best efforts and
ability to the business and affairs of the SMTC Group and shall not engage in
other business activities (whether or not compensated) during the Employment
Period without prior written consent of the Board. You agree to serve, if
elected or appointed thereto, in one or
<PAGE>
Gary Walker
Employment Agreement
July 30, 1999
more positions as an officer or director of any one or more current or future
members of the SMTC Group or any of their affiliates, or as an officer, trustee,
director or other fiduciary of any pension or other employee benefit plan of any
member of the SMTC Group. Service in such additional positions will be without
additional compensation except for reimbursement of reasonably related business
expenses on the same terms as provided elsewhere in this Agreement.
2. COMPENSATION. As compensation for your services performed under this
Agreement during the Employment Period, the Company shall pay you a base salary
at the rate of $200,000 per year. Such salary shall be payable in installments
in accordance with the Company's regular payroll practices. During the
Employment Period, you will be eligible to receive an annual bonus payment based
on the achievement by the Company of the EBITDA Targets and the Target
Performance Bonus set forth on Annex A hereto. Such EBITDA Targets may be
adjusted by the Board from time to time to reflect any future acquisitions,
mergers or other business combinations by or involving the Company or its
affiliates. For the fiscal year ending December 31, 1999, the EBITDA Targets
shall be calculated on a pro forma basis as if the combination of HTM and SMTC
had occurred on January 1, 1999. Beginning in fiscal year 2000 you will be
entitled to receive a mid-year advance against your annual bonus payment in an
amount equal to 40% of the annual bonus payment that you would receive based on
the Board's mid-year projection of the year-end EBITDA.
3. BENEFITS. During the Employment Period, you shall be entitled to
participate in or receive benefits under any life insurance plan, health and
accident insurance plan, retirement plan and all other benefit arrangements
generally available to the Company's executive officers and employees (other
than severance plans or arrangements) as in effect from time to time. Without
limiting the foregoing, you shall be entitled to receive up to $10,000 annually
in accordance with past practice in connection with your contribution to a
401(k) plan maintained by a member of the SMTC Group. In addition to any life
insurance plan described above as being generally available to the Company's
executive officers and employees, the Company will at all times maintain a life
insurance policy with a death benefit of $200,000 to be paid to a beneficiary of
your choice. In addition, the Company will reimburse your reasonable out-of-
pocket expenses incurred in connection with the performance of your services
hereunder, in each case subject to and consistent with Company policy. During
the Employment Period you shall be entitled to twenty paid vacation days in each
fiscal year and shall also be entitled to all paid holidays given by the Company
to its employees. Your paid vacation days shall be prorated for any period of
service hereunder less than a full year. You will not be entitled to cash
compensation for any vacation time not taken during the term hereof.
4. TERMINATION AND SEVERANCE. The Employment Period shall terminate
prior to its scheduled expiration date on the first to occur of (i) your death
or permanent disability
2
<PAGE>
Gary Walker
Employment Agreement
July 30, 1999
(defined as your actual inability to perform normal duties for a period of 90
consecutive days or for a total of 120 days in any two-year period or your
prospective inability to perform such duties for such period as determined in
good faith by the Board), (ii) a vote of the Board directing such termination
for Cause, (iii) a vote of the Board directing such termination without Cause,
or (iv) termination by you upon not less than 30 days' prior written notice for
Good Reason. In the event of termination of the Employment Period pursuant to
clauses (iii) or (iv) above and so long as you comply with the restrictions set
forth in paragraphs 5 and 6 below, the Company shall continue to pay your base
salary for two years following the date of such termination. Except as set forth
in this paragraph 4, you shall not be entitled to any compensation or other
payment from any current or future member, or affiliate of any such member, of
the SMTC Group in connection with the termination of your employment. For
purposes of this Agreement, (x) "CAUSE" shall mean (i) your willful and repeated
failure to comply with the lawful directives of the Board, (ii) any criminal act
or act of dishonesty, disloyalty, misconduct or moral turpitude by you that is
injurious to the property, operations, business or reputation of any member of
the SMTC Group, or (iii) your material breach of this Agreement that is not
cured within 30 days after written notice thereof to you by the Company, and (y)
"GOOD REASON" shall mean (i) the Company's material breach of this Agreement
that is not cured within 30 days after written notice thereof to the Company by
you or (ii) a reduction in your responsibilities and authority such that you no
longer function as a Vice President of the Company, provided however, that if
you do not terminate within 30 days after the Company has provided you notice of
any such reduction in responsibilities, then you shall be deemed to have waived
your right to terminate for Good Reason based on such reduction.
5. CONFIDENTIAL INFORMATION. You acknowledge that information obtained
by you during your employment with the Company (including during the term prior
to the Employment Period) concerning the business or affairs of the Company or
any member of the SMTC Group ("CONFIDENTIAL INFORMATION") is the property of the
Company. You shall not at any time during or after the Employment Period,
without the prior written consent of the Board, disclose to any unauthorized
person or use for your own account or for the account of any person other than
the Company or its affiliates any Confidential Information, except to the extent
necessary to comply with applicable laws or to the extent that such information
becomes generally known to and available for use by the public other than as a
result of (i) your acts or (ii) during the Employment Period, your omissions to
act. Upon termination of the Employment Period or at the request of the Board
at any time, you shall deliver to the Board all documents containing
Confidential Information or relating to the business or affairs of the Company
or its affiliates that you may then possess or have under your control.
3
<PAGE>
Gary Walker
Employment Agreement
July 30, 1999
6. NON-COMPETITION; NON-SOLICITATION.
a. NON-COMPETITION. You acknowledge that you are and will be in
possession of Confidential Information, that your services are of unique and
great value to the Company, and that some restrictions on your activities during
and after your employment are necessary to protect the goodwill, Confidential
Information and other legitimate interests of the Company and its affiliates.
Accordingly, during the Employment Period and for the period thereafter during
which you receive continued payments of your base salary pursuant to Section 4
or, in the case of termination of your employment for Cause pursuant to Section
4(ii), for a period of one year following the date of termination of your
employment (the "NON-COMPETE PERIOD"), you shall not, directly or indirectly,
own, manage, control, participate in, consult with, render services to, or in
any manner engage in, any enterprise engaged in the assembly of printed circuit
boards or other electronic manufacturing services within any geographical area
in which the Company or its affiliates do business on the date of termination of
your employment. Such geographical area shall include but not be limited to
North America (including Mexico), Europe, Southeast Asia and China. Nothing
herein shall prohibit you from being a passive owner of not more than 5% of any
publicly-traded class of capital stock of any entity engaged in a competing
business.
b. NON-SOLICITATION OF EMPLOYEES, SUPPLIERS AND CUSTOMERS. During
the Non-Compete Period, you shall not (i) interfere with the relationship
between the Company or any of its affiliates, and any of their employees, or
induce or attempt to induce any employee of the Company or its affiliates to
terminate his or her employment, (ii) hire directly or through another entity
any person who was an employee of the Company or any of its affiliates at any
time during the Employment Period (other than a former employee of the Company
who left his or her employment without any inducement by you), (iii) induce or
attempt to induce any independent contractor providing services to the Company
or any of its affiliates to terminate or diminish its relationship with the
Company or its affiliates, (iv) induce or attempt to induce any customer,
supplier, licensee or other business relation of the Company or its affiliates
to cease doing business with such entity, or (v) in any way interfere in any
material respect with the relationship between any such customer, supplier,
licensee or business relation and the Company or its affiliates.
c. SCOPE OF RESTRICTION. If, at the time of enforcement of this
paragraph 6, a court shall hold that the duration, scope or area restrictions
stated herein are unreasonable under circumstances then existing, you agree that
the maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area.
4
<PAGE>
Gary Walker
Employment Agreement
July 30, 1999
d. NECESSITY OF RESTRAINTS. You acknowledge that the restraints
imposed by this paragraph 6 and by paragraph 5 above are reasonable and
necessary for the protection of the Company and its affiliates, and that any
such entity would be irreparably harmed by a breach by you of these provisions.
7. WITHHOLDING; CURRENCY. All payments made by the Company under this
Agreement shall be net of any tax or other amounts required to be withheld by
the Company under any applicable law or legal requirement. All amounts set
forth in this Agreement are denominated in US Dollars.
8. PRIOR AGREEMENTS. Except as expressly provided herein, all prior
agreements, arrangements or understandings, written or oral, with respect to
your employment with the Company or any subsidiary or affiliate thereof are
superseded by this Agreement and shall be of no further force and effect.
9. SURVIVAL. The provisions of paragraphs 5 and 6 hereof will survive
any termination of this Agreement in accordance with their respective terms.
10. GOVERNING LAW. All questions concerning the construction, validity
and interpretation of this Agreement shall be governed by the laws of the State
of Delaware without giving effect to any choice or conflict of laws provision or
rule that would cause the application of the domestic substantive laws of any
other jurisdiction.
11. NOTICES. All notices, requests and demands to or upon the parties
hereto to be effective shall be in writing, by facsimile, by overnight courier
or by registered or certified mail, postage prepaid and return receipt
requested, and shall be deemed to have been duly given or made upon: (i)
delivery by hand, (ii) one business day after being sent by overnight courier;
or (iii) in the case of transmission by facsimile, when confirmation of receipt
is obtained. Such communications shall be addressed and directed to the parties
as follows (or to such other address as either party shall designate by giving
like notice of such change to the other party):
If to you, at the address first stated above.
5
<PAGE>
Gary Walker
Employment Agreement
July 30, 1999
If to the Company:
SMTC Corporation
c/o EMSIcon Investments, LLC
Two Copley Place
Boston, MA 02116
with a copy to:
Ropes & Gray
One International Place
Boston, MA 02110
Attention: Alfred O. Rose
Facsimile: 617-951-7050
with a copy to:
The Surface Mount Technology Centre Inc.
635 Hood Road
Markham, Ontario
L3R 4N6
12. AMENDMENT; WAIVER. No provision of this Agreement may be amended
modified, waived or discharged unless such amendment waiver, modification or
discharge is approved by the Board and agreed to in writing signed by you and
such officer as may be specifically authorized by the Board in connection with
such approval. No waiver of any condition or provision of this Agreement shall
be deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time.
13. ASSIGNMENT. This Agreement shall inure to the benefit of and be
binding upon (i) you, your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees and (ii)
the Company and its successors (including, without limitation, by means of
reorganization, merger, amalgamation, consolidation or liquidation) and
permitted assigns. The Company may assign this Agreement to any of its
subsidiaries or affiliates or to any successor of the Company by reorganization,
merger, consolidation or liquidation and any transferee of all or substantially
all of the business or assets of the Company or of any division or line of
business of the Company with which you are at any time associated. The Company
and the members of the SMTC Group require your personal services hereunder and
you may not assign this Agreement.
* * * * *
6
<PAGE>
Gary Walker
Employment Agreement
July 30, 1999
Please execute the extra copy of this letter Agreement in the space below
and return it to the undersigned at the address set forth above to confirm your
understanding and acceptance of the agreements contained herein.
Very truly yours,
SMTC CORPORATION
By:/s/ Paul Walker
-----------------
Name: Paul Walker
Title: President
Accepted and agreed to:
EMPLOYEE
/s/ Gary Walker
- ---------------
Gary Walker
7
<PAGE>
EXHIBIT 10.15
THE SURFACE MOUNT TECHNOLOGY CENTRE INC.
July 30, 1999
Paul Walker
48 42nd Street
Unionville, Ontario L3P 7K1
CANADA
Re: Employment Agreement
Dear Mr. Walker:
This letter sets forth the terms and conditions of your employment with The
Surface Mount Technology Centre Inc., an Ontario corporation (the "COMPANY") to
be effective as of the date of closing of the transactions (the "EFFECTIVE
DATE") described in the Reorganization and Merger Agreement dated as of July 26,
1999 among the Company, SMTC Corporation ("HOLDINGS"), HTM Holdings, Inc.
("HTM"), EMSIcon Investments LLC, the Company's stockholders, the HTM
stockholders and warrantholders and others (the "REORGANIZATION AGREEMENT").
This Agreement is entered into in connection with the transactions described in
the Reorganization Agreement pursuant to which you, as a stockholder of the
Company, will receive certain payments upon the repurchase for cancellation of a
portion of your interest in the Company.
1. EMPLOYMENT AND SERVICES. You shall be employed as the President and
Chief Executive Officer of the Company, Holdings and its subsidiaries (the "SMTC
GROUP") for the period beginning on the Effective Date and ending on December
31, 2001 or on such earlier date as your employment is terminated pursuant to
paragraph 4 hereof (the "EMPLOYMENT PERIOD"). The Employment Period shall
automatically be extended for successive one-year terms on December 31, 2001 and
each anniversary thereof, unless (i) either party has given written notice of
non-renewal to the other party at least 90 days prior to the scheduled
expiration date of the Employment Period or (ii) your employment has been
terminated pursuant to paragraph 4 hereof.
During the Employment Period, you shall render such services of a senior
executive nature to the SMTC Group and shall have such powers, duties and
responsibilities as may from time to time be prescribed by the Holdings Board of
Directors (the "BOARD"). You shall perform and discharge, faithfully,
diligently and competently, such services, duties and responsibilities. You
shall devote all of your business time and attention and your best efforts and
ability to the business and affairs of the SMTC Group and shall not engage in
other
<PAGE>
Paul Walker
Employment Agreement
July 30, 1999
business activities (whether or not compensated) during the Employment Period
without prior written consent of the Board. You agree to serve, if elected or
appointed thereto, in one or more positions as an officer or director of any one
or more current or future members of the SMTC Group, or any one or more of the
present or future subsidiaries or affiliates of Holdings, or as an officer,
trustee, director or other fiduciary of any pension or other employee benefit
plan of the Company, or any one or more of the present or future subsidiaries or
affiliates of Holdings. Service in such additional positions will be without
additional compensation except for reimbursement of reasonably related business
expenses on the same terms as provided elsewhere in this Agreement.
2. COMPENSATION. As compensation for your services performed under this
Agreement during the Employment Period, the Company shall pay you a base salary
at the rate of $250,000 per year. Such salary shall be payable in installments
in accordance with the Company's regular payroll practices. During the
Employment Period, you will be eligible to receive an annual bonus payment based
on the achievement by Holdings of the EBITDA Targets and the Target Performance
Bonus set forth on Annex A hereto. Such EBITDA Targets may be adjusted by the
Board from time to time to reflect any future acquisitions, mergers or other
business combinations by or involving Holdings or its affiliates. For the
fiscal year ending December 31, 1999, the EBITDA Targets shall be calculated on
a pro forma basis as if the combination of HTM and SMTC had occurred on January
1, 1999. Beginning in fiscal year 2000 you will be entitled to receive a mid-
year advance against your annual bonus payment in an amount equal to 40% of the
annual bonus payment that you would receive based on the Board's mid-year
projection of the year-end EBITDA.
3. BENEFITS. During the Employment Period, you shall be entitled to
participate in or receive benefits under any life insurance plan, health and
accident insurance plan, retirement plan and all other benefit arrangements
generally available to the Company's executive officers and employees (other
than severance plans or arrangements) as in effect from time to time. Without
limiting the foregoing, you shall be entitled to receive up to Cdn$15,000
annually in accordance with past practice in connection with your contribution
to a registered retirement savings plan. In addition to any life insurance plan
described above as being generally available to the Company's executive officers
and employees, the Company will at all times maintain a life insurance policy
with a death benefit of $250,000 to be paid to a beneficiary of your choice. In
addition, the Company will reimburse your reasonable out-of-pocket expenses
incurred in connection with the performance of your services hereunder, in each
case subject to and consistent with Company policy. During the Employment
Period you shall be entitled to twenty paid vacation days in each fiscal year
and shall also be entitled to all paid holidays given by the Company to its
employees. Your paid vacation days shall be prorated for any period of service
hereunder less than a full year. You will not be entitled to cash compensation
for any vacation time not taken during the term hereof.
2
<PAGE>
Paul Walker
Employment Agreement
July 30, 1999
4. TERMINATION AND SEVERANCE. The Employment Period shall terminate
prior to its scheduled expiration date on the first to occur of (i) your death
or permanent disability (defined as your actual inability to perform normal
duties for a period of 90 consecutive days or for a total of 120 days in any
two-year period or your prospective inability to perform such duties for such
period as determined in good faith by the Board), (ii) a vote of the Board
directing such termination for Cause, (iii) a vote of the Board directing such
termination without Cause, or (iv) termination by you upon not less than 30
days' prior written notice for Good Reason. In the event of termination of the
Employment Period pursuant to clauses (iii) or (iv) above and so long as you
comply with the restrictions set forth in paragraphs 5 and 6 below, the Company
shall continue to pay your base salary for two years following the date of such
termination. Except as set forth in this paragraph 4, you shall not be entitled
to any compensation or other payment from any current or future member, or
affiliate of any such member, of the SMTC Group in connection with the
termination of your employment. For purposes of this Agreement, (x) "CAUSE"
shall mean (i) your willful and repeated failure to comply with the lawful
directives of the Board, (ii) any criminal act or act of dishonesty, disloyalty,
misconduct or moral turpitude by you that is injurious to the property,
operations, business or reputation of any member of the SMTC Group, or (iii)
your material breach of this Agreement that is not cured within 30 days after
written notice thereof to you by the Company, and (y) "GOOD REASON" shall mean
(i) the Company's material breach of this Agreement that is not cured within 30
days after written notice thereof to the Company by you or (ii) a reduction in
your responsibilities and authority such that you no longer function as the
President and Chief Executive Officer of the Company and the members of the SMTC
Group or are required to report to any person other than the Board, provided
however, that (a) if you do not terminate within 30 days after the Company has
provided you notice of any such reduction in responsibilities, or (b) if, in
your capacity as a director of any member of the SMTC Group, you vote to appoint
someone else to serve as President or Chief Executive Officer of any member of
the SMTC Group, then you shall be deemed to have waived your right to terminate
for Good Reason based on such reduction.
5. CONFIDENTIAL INFORMATION. You acknowledge that information obtained
by you during your employment with the Company (including during the term prior
to the Employment Period) concerning the business or affairs of the Company or
any member of the SMTC Group ("CONFIDENTIAL INFORMATION") is the property of the
Company. You shall not at any time during or after the Employment Period,
without the prior written consent of the Board, disclose to any unauthorized
person or use for your own account or for the account of any person other than
the Company or its affiliates any Confidential Information, except to the extent
necessary to comply with applicable laws or to the extent that such information
becomes generally known to and available for use by the public other than as a
result of (i) your acts or (ii) during the Employment Period, your omissions to
act. Upon termination of the
3
<PAGE>
Paul Walker
Employment Agreement
July 30, 1999
Employment Period or at the request of the Board at any time, you shall deliver
to the Board all documents containing Confidential Information or relating to
the business or affairs of the Company or its affiliates that you may then
possess or have under your control.
6. NON-COMPETITION; NON-SOLICITATION.
a. NON-COMPETITION. You acknowledge that you are and will be in
possession of Confidential Information, that your services are of unique and
great value to the Company, and that some restrictions on your activities during
and after your employment are necessary to protect the goodwill, Confidential
Information and other legitimate interests of the Company and its affiliates.
Accordingly, during the Employment Period and for the period thereafter during
which you receive continued payments of your base salary pursuant to Section 4
or, in the case of termination of your employment for Cause pursuant to Section
4(ii), for a period of one year following the date of termination of your
employment (the "NON-COMPETE PERIOD"), you shall not, directly or indirectly,
own, manage, control, participate in, consult with, render services to, or in
any manner engage in, any enterprise engaged in the assembly of printed circuit
boards or other electronic manufacturing services within any geographical area
in which the Company or its affiliates do business on the date of termination of
your employment. Such geographical area shall include but not be limited to
North America (including Mexico), Europe, Southeast Asia and China. Nothing
herein shall prohibit you from being a passive owner of not more than 5% of any
publicly-traded class of capital stock of any entity engaged in a competing
business.
b. NON-SOLICITATION OF EMPLOYEES, SUPPLIERS AND CUSTOMERS. During
the Non-Compete Period, you shall not (i) interfere with the relationship
between the Company or any of its affiliates, and any of their employees, or
induce or attempt to induce any employee of the Company or its affiliates to
terminate his or her employment, (ii) hire directly or through another entity
any person who was an employee of the Company or any of its affiliates at any
time during the Employment Period (other than a former employee of the Company
who left his or her employment without any inducement by you), (iii) induce or
attempt to induce any independent contractor providing services to the Company
or any of its affiliates to terminate or diminish its relationship with the
Company or its affiliates, (iv) induce or attempt to induce any customer,
supplier, licensee or other business relation of the Company or its affiliates
to cease doing business with such entity, or (v) in any way interfere in any
material respect with the relationship between any such customer, supplier,
licensee or business relation and the Company or its affiliates.
c. SCOPE OF RESTRICTION. If, at the time of enforcement of this
paragraph 6, a court shall hold that the duration, scope or area restrictions
stated herein are unreasonable
4
<PAGE>
Paul Walker
Employment Agreement
July 30, 1999
under circumstances then existing, you agree that the maximum duration, scope or
area reasonable under such circumstances shall be substituted for the stated
duration, scope or area.
d. NECESSITY OF RESTRAINTS. You acknowledge that the restraints
imposed by this paragraph 6 and by paragraph 5 above are reasonable and
necessary for the protection of the Company and its affiliates, and that any
such entity would be irreparably harmed by a breach by you of these provisions.
7. WITHHOLDING; CURRENCY. All payments made by the Company under this
Agreement shall be net of any tax or other amounts required to be withheld by
the Company under any applicable law or legal requirement. Except as
specifically noted, all amounts set forth in this Agreement are denominated in
US Dollars.
8. PRIOR AGREEMENTS. Except as expressly provided herein, all prior
agreements, arrangements or understandings, written or oral, with respect to
your employment with the Company or any subsidiary or affiliate thereof are
superseded by this Agreement and shall be of no further force and effect.
9. SURVIVAL. The provisions of paragraphs 5 and 6 hereof will survive
any termination of this Agreement in accordance with their respective terms.
10. GOVERNING LAW. All questions concerning the construction, validity
and interpretation of this Agreement shall be governed by the laws of the
Province of Ontario without giving effect to any choice or conflict of laws
provision or rule that would cause the application of the domestic substantive
laws of any other jurisdiction.
11. NOTICES. All notices, requests and demands to or upon the parties
hereto to be effective shall be in writing, by facsimile, by overnight courier
or by registered or certified mail, postage prepaid and return receipt
requested, and shall be deemed to have been duly given or made upon: (i)
delivery by hand, (ii) one business day after being sent by overnight courier;
or (iii) in the case of transmission by facsimile, when confirmation of receipt
is obtained. Such communications shall be addressed and directed to the parties
as follows (or to such other address as either party shall designate by giving
like notice of such change to the other party):
If to you, at the address first stated above.
5
<PAGE>
Paul Walker
Employment Agreement
July 30, 1999
If to the Company:
The Surface Mount Technology Centre Inc.
625 Hood Road
Markham, Ontario L3R 4N6
Canada
with a copy to:
Ropes & Gray
One International Place
Boston, MA 02110
Attention: Alfred O. Rose
Facsimile: 617-951-7050
12. AMENDMENT; WAIVER. No provision of this Agreement may be amended
modified, waived or discharged unless such amendment waiver, modification or
discharge is approved by the Board and agreed to in writing signed by you and
such officer as may be specifically authorized by the Board in connection with
such approval. No waiver of any condition or provision of this Agreement shall
be deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time.
13. ASSIGNMENT. This Agreement shall inure to the benefit of and be
binding upon (i) you, your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees and (ii)
the Company and its successors (including, without limitation, by means of
reorganization, merger, amalgamation, consolidation or liquidation) and
permitted assigns. The Company may assign this Agreement to Holdings or any
subsidiary or affiliate of Holdings or to any successor of the Company or
Holdings by reorganization, merger, amalgamation, consolidation or liquidation
and any transferee of all or substantially all of the business or assets of the
Company, Holdings or of any division or line of business of the Company or
Holdings with which you are at any time associated. The Company and Holdings
require your personal services hereunder and you may not assign this Agreement.
* * * * *
6
<PAGE>
Paul Walker
Employment Agreement
July 30, 1999
Please execute the extra copy of this letter Agreement in the space below
and return it to the undersigned at the address set forth above to confirm your
understanding and acceptance of the agreements contained herein.
Very truly yours,
THE SURFACE MOUNT TECHNOLOGY CENTRE INC.
By: /s/ Paul Walker
---------------
Name: Paul Walker
Title:
Accepted and agreed to:
EMPLOYEE
/s/ Paul Walker
- ---------------
Paul Walker
7
<PAGE>
EXHIBIT 10.16
THE SURFACE MOUNT TECHNOLOGY CENTRE INC.
July 30, 1999
Philip Woodard
356 Kelly Crescent
Newmarket, Ontario L3Y 7K1
Re: Employment Agreement
Dear Mr. Woodard:
This letter sets forth the terms and conditions of your employment with The
Surface Mount Technology Centre Inc., an Ontario corporation (the "COMPANY") to
be effective as of the date of closing of the transactions (the "EFFECTIVE
DATE") described in the Reorganization and Merger Agreement dated as of July 26,
1999 among the Company, SMTC Corporation ("HOLDINGS"), HTM Holdings, Inc.
("HTM"), EMSIcon Investments LLC, the Company's stockholders, the HTM
stockholders and warrantholders and others (the "REORGANIZATION AGREEMENT").
This Agreement is entered into in connection with the transactions described in
the Reorganization Agreement pursuant to which you, as a stockholder of the
Company, will receive certain payments upon the repurchase for cancellation of a
portion of your interest in the Company.
1. EMPLOYMENT AND SERVICES. You shall be employed as a Vice President of
the Company, Holdings and its subsidiaries (the "SMTC GROUP") for the period
beginning on the Effective Date and ending on December 31, 2001 or on such
earlier date as your employment is terminated pursuant to paragraph 4 hereof
(the "EMPLOYMENT PERIOD"). The Employment Period shall automatically be
extended for successive one-year terms on December 31, 2001 and each anniversary
thereof, unless (i) either party has given written notice of non-renewal to the
other party at least 90 days prior to the scheduled expiration date of the
Employment Period or (ii) your employment has been terminated pursuant to
paragraph 4 hereof.
During the Employment Period, you shall render such services of a senior
executive nature to the SMTC Group and shall have such powers, duties and
responsibilities as may from time to time be prescribed by the Holdings Board of
Directors (the "BOARD"). You shall perform and discharge, faithfully,
diligently and competently, such services, duties and responsibilities. You
shall devote all of your business time and attention and your best efforts and
ability to the business and affairs of the SMTC Group and shall not engage in
other business activities (whether or not compensated) during the Employment
Period without prior
<PAGE>
Phil Woodard
Employment Agreement
July 30, 1999
written consent of the Board. You agree to serve, if elected or appointed
thereto, in one or more positions as an officer or director of any one or more
current or future members of the SMTC Group, or any one or more of the present
or future subsidiaries or affiliates of Holdings, or as an officer, trustee,
director or other fiduciary of any pension or other employee benefit plan of the
Company, or any one or more of the present or future subsidiaries or affiliates
of Holdings. Service in such additional positions will be without additional
compensation except for reimbursement of reasonably related business expenses on
the same terms as provided elsewhere in this Agreement.
2. COMPENSATION. As compensation for your services performed under this
Agreement during the Employment Period, the Company shall pay you a base salary
at the rate of $200,000 per year. Such salary shall be payable in installments
in accordance with the Company's regular payroll practices. During the
Employment Period, you will be eligible to receive an annual bonus payment based
on the achievement by Holdings of the EBITDA Targets and the Target Performance
Bonus set forth on Annex A hereto. Such EBITDA Targets may be adjusted by the
Board from time to time to reflect any future acquisitions, mergers or other
business combinations by or involving Holdings or its affiliates. For the
fiscal year ending December 31, 1999, the EBITDA Targets shall be calculated on
a pro forma basis as if the combination of HTM and SMTC had occurred on January
1, 1999. Beginning in fiscal year 2000 you will be entitled to receive a mid-
year advance against your annual bonus payment in an amount equal to 40% of the
annual bonus payment that you would receive based on the Board's mid-year
projection of the year-end EBITDA.
3. BENEFITS. During the Employment Period, you shall be entitled to
participate in or receive benefits under any life insurance plan, health and
accident insurance plan, retirement plan and all other benefit arrangements
generally available to the Company's executive officers and employees (other
than severance plans or arrangements) as in effect from time to time. Without
limiting the foregoing, you shall be entitled to receive up to Cdn$15,000
annually in accordance with past practice in connection with your contribution
to a registered retirement savings plan. In addition to any life insurance plan
described above as being generally available to the Company's executive officers
and employees, the Company will at all times maintain a life insurance policy
with a death benefit of $200,000 to be paid to a beneficiary of your choice. In
addition, the Company will reimburse your reasonable out-of-pocket expenses
incurred in connection with the performance of your services hereunder, in each
case subject to and consistent with Company policy. During the Employment
Period you shall be entitled to twenty paid vacation days in each fiscal year
and shall also be entitled to all paid holidays given by the Company to its
employees. Your paid vacation days shall be prorated for any period of service
hereunder less than a full year. You will not be entitled to cash compensation
for any vacation time not taken during the term hereof.
2
<PAGE>
Phil Woodard
Employment Agreement
July 30, 1999
4. TERMINATION AND SEVERANCE. The Employment Period shall terminate
prior to its scheduled expiration date on the first to occur of (i) your death
or permanent disability (defined as your actual inability to perform normal
duties for a period of 90 consecutive days or for a total of 120 days in any
two-year period or your prospective inability to perform such duties for such
period as determined in good faith by the Board), (ii) a vote of the Board
directing such termination for Cause, (iii) a vote of the Board directing such
termination without Cause, or (iv) termination by you upon not less than 30
days' prior written notice for Good Reason. In the event of termination of the
Employment Period pursuant to clauses (iii) or (iv) above and so long as you
comply with the restrictions set forth in paragraphs 5 and 6 below, the Company
shall continue to pay your base salary for two years following the date of such
termination. Except as set forth in this paragraph 4, you shall not be entitled
to any compensation or other payment from any current or future member, or
affiliate of any such member, of the SMTC Group in connection with the
termination of your employment. For purposes of this Agreement, (x) "CAUSE"
shall mean (i) your willful and repeated failure to comply with the lawful
directives of the Board, (ii) any criminal act or act of dishonesty, disloyalty,
misconduct or moral turpitude by you that is injurious to the property,
operations, business or reputation of any member of the SMTC Group, or (iii)
your material breach of this Agreement that is not cured within 30 days after
written notice thereof to you by the Company, and (y) "GOOD REASON" shall mean
(i) the Company's material breach of this Agreement that is not cured within 30
days after written notice thereof to the Company by you or (ii) a reduction in
your responsibilities and authority such that you no longer function as a Vice
President of the Company, provided however, that if you do not terminate within
30 days after the Company has provided you notice of any such reduction in
responsibilities, then you shall be deemed to have waived your right to
terminate for Good Reason based on such reduction.
5. CONFIDENTIAL INFORMATION. You acknowledge that information obtained
by you during your employment with the Company (including during the term prior
to the Employment Period) concerning the business or affairs of the Company or
any member of the SMTC Group ("CONFIDENTIAL INFORMATION") is the property of the
Company. You shall not at any time during or after the Employment Period,
without the prior written consent of the Board, disclose to any unauthorized
person or use for your own account or for the account of any person other than
the Company or its affiliates any Confidential Information, except to the extent
necessary to comply with applicable laws or to the extent that such information
becomes generally known to and available for use by the public other than as a
result of (i) your acts or (ii) during the Employment Period, your omissions to
act. Upon termination of the Employment Period or at the request of the Board
at any time, you shall deliver to the Board all documents containing
Confidential Information or relating to the business or affairs of the Company
or its affiliates that you may then possess or have under your control.
3
<PAGE>
Phil Woodard
Employment Agreement
July 30, 1999
6. NON-COMPETITION; NON-SOLICITATION.
a. NON-COMPETITION. You acknowledge that you are and will be in
possession of Confidential Information, that your services are of unique and
great value to the Company, and that some restrictions on your activities during
and after your employment are necessary to protect the goodwill, Confidential
Information and other legitimate interests of the Company and its affiliates.
Accordingly, during the Employment Period and for the period thereafter during
which you receive continued payments of your base salary pursuant to Section 4
or, in the case of termination of your employment for Cause pursuant to Section
4(ii), for a period of one year following the date of termination of your
employment (the "NON-COMPETE PERIOD"), you shall not, directly or indirectly,
own, manage, control, participate in, consult with, render services to, or in
any manner engage in, any enterprise engaged in the assembly of printed circuit
boards or other electronic manufacturing services within any geographical area
in which the Company or its affiliates do business on the date of termination of
your employment. Such geographical area shall include but not be limited to
North America (including Mexico), Europe, Southeast Asia and China. Nothing
herein shall prohibit you from being a passive owner of not more than 5% of any
publicly-traded class of capital stock of any entity engaged in a competing
business.
b. NON-SOLICITATION OF EMPLOYEES, SUPPLIERS AND CUSTOMERS. During
the Non-Compete Period, you shall not (i) interfere with the relationship
between the Company or any of its affiliates, and any of their employees, or
induce or attempt to induce any employee of the Company or its affiliates to
terminate his or her employment, (ii) hire directly or through another entity
any person who was an employee of the Company or any of its affiliates at any
time during the Employment Period (other than a former employee of the Company
who left his or her employment without any inducement by you), (iii) induce or
attempt to induce any independent contractor providing services to the Company
or any of its affiliates to terminate or diminish its relationship with the
Company or its affiliates, (iv) induce or attempt to induce any customer,
supplier, licensee or other business relation of the Company or its affiliates
to cease doing business with such entity, or (v) in any way interfere in any
material respect with the relationship between any such customer, supplier,
licensee or business relation and the Company or its affiliates.
c. SCOPE OF RESTRICTION. If, at the time of enforcement of this
paragraph 6, a court shall hold that the duration, scope or area restrictions
stated herein are unreasonable under circumstances then existing, you agree that
the maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area.
4
<PAGE>
Phil Woodard
Employment Agreement
July 30, 1999
d. NECESSITY OF RESTRAINTS. You acknowledge that the restraints
imposed by this paragraph 6 and by paragraph 5 above are reasonable and
necessary for the protection of the Company and its affiliates, and that any
such entity would be irreparably harmed by a breach by you of these provisions.
7. WITHHOLDING; CURRENCY. All payments made by the Company under this
Agreement shall be net of any tax or other amounts required to be withheld by
the Company under any applicable law or legal requirement. Except as
specifically noted, all amounts set forth in this Agreement are denominated in
US Dollars.
8. PRIOR AGREEMENTS. Except as expressly provided herein, all prior
agreements, arrangements or understandings, written or oral, with respect to
your employment with the Company or any subsidiary or affiliate thereof are
superseded by this Agreement and shall be of no further force and effect.
9. SURVIVAL. The provisions of paragraphs 5 and 6 hereof will survive
any termination of this Agreement in accordance with their respective terms.
10. GOVERNING LAW. All questions concerning the construction, validity
and interpretation of this Agreement shall be governed by the laws of the
Province of Ontario without giving effect to any choice or conflict of laws
provision or rule that would cause the application of the domestic substantive
laws of any other jurisdiction.
11. NOTICES. All notices, requests and demands to or upon the parties
hereto to be effective shall be in writing, by facsimile, by overnight courier
or by registered or certified mail, postage prepaid and return receipt
requested, and shall be deemed to have been duly given or made upon: (i)
delivery by hand, (ii) one business day after being sent by overnight courier;
or (iii) in the case of transmission by facsimile, when confirmation of receipt
is obtained. Such communications shall be addressed and directed to the parties
as follows (or to such other address as either party shall designate by giving
like notice of such change to the other party):
If to you, at the address first stated above.
5
<PAGE>
Phil Woodard
Employment Agreement
July 30, 1999
If to the Company:
The Surface Mount Technology Centre Inc.
625 Hood Road
Markham, Ontario L3R 4N6
Canada
with a copy to:
Ropes & Gray
One International Place
Boston, MA 02110
Attention: Alfred O. Rose
Facsimile: 617-951-7050
12. AMENDMENT; WAIVER. No provision of this Agreement may be amended
modified, waived or discharged unless such amendment waiver, modification or
discharge is approved by the Board and agreed to in writing signed by you and
such officer as may be specifically authorized by the Board in connection with
such approval. No waiver of any condition or provision of this Agreement shall
be deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time.
13. ASSIGNMENT. This Agreement shall inure to the benefit of and be
binding upon (i) you, your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees and (ii)
the Company and its successors (including, without limitation, by means of
reorganization, merger, amalgamation, consolidation or liquidation) and
permitted assigns. The Company may assign this Agreement to Holdings or any
subsidiary or affiliate of Holdings or to any successor of the Company or
Holdings by reorganization, merger, amalgamation, consolidation or liquidation
and any transferee of all or substantially all of the business or assets of the
Company, Holdings or of any division or line of business of the Company or
Holdings with which you are at any time associated. The Company and Holdings
require your personal services hereunder and you may not assign this Agreement.
* * * * *
6
<PAGE>
Phil Woodard
Employment Agreement
July 30, 1999
Please execute the extra copy of this letter Agreement in the space below
and return it to the undersigned at the address set forth above to confirm your
understanding and acceptance of the agreements contained herein.
Very truly yours,
THE SURFACE MOUNT TECHNOLOGY CENTRE INC.
By: /s/ Paul Walker
----------------
Name: Paul Walker
Title: President
Accepted and agreed to:
EMPLOYEE
/s/ Phil Woodard
- -------------------
Phil Woodard
7
<PAGE>
EXHIBIT 16.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We have read the section entitled "Experts" in the Registration Statement on
Form S-1 of SMTC Corporation (formerly Hi-Tech Manufacturing, Inc., subsequently
HTM Holdings, Inc.) to be filed with the Securities and Exchange Commission and
are in agreement with the statements contained therein regarding
PricewaterhouseCoopers LLP.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Broomfield, Colorado
March 22, 2000
<PAGE>
EXHIBIT 16.2
March 21, 2000
Office of the Chief Accountant
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Ladies and Gentlemen:
We have read paragraph six of the section entitled "Experts" included in this
registration statement on Form S-1 of SMTC Corporation (formerly HTM Holdings,
Inc.) to be filed with the Securities and Exchange Commission, and are in
agreement with the statements contained therein.
Very truly yours,
/s/ Arthur Andersen LLP
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Registrant
Jurisdiction of
Name Incorporation
- ---- ---------------
HTM Holdings, Inc. Delaware
SMTC de Chihuahua S.A. de C.V. Mexico
SMTC Manufacturing Corporation of California California
SMTC Manufacturing Corporation of Canada Ontario, Canada
SMTC Manufacturing Corporation of Colorado Delaware
SMTC Manufacturing Corporation of Ireland Ireland
SMTC Manufacturing Corporation of Massachusetts Delaware
SMTC Manufacturing Corporation of North Carolina North Carolina
SMTC Manufacturing Corporation of Texas Texas
SMTC Nova Scotia Company Nova Scotia,
Canada
<PAGE>
EXHIBIT 23.1
The Board of Directors
SMTC Corporation:
We consent to the use of the form of our reports included herein and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Toronto, Canada
March 22, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Denver, Colorado
March 22, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated March 22, 2000, relating to the financial statements, which appears
in such Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Broomfield, Colorado
March 22, 2000
<PAGE>
EXHIBIT 23.4
CONSENT OF CANBY, MALONEY & CO., INC.
To the Board of Directors and Stockholders of
SMTC Corporation:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ Canby, Maloney & Co., Inc.
Canby, Maloney & Co., Inc.
Framingham, MA 01701
March 22, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF SMTC CORPORATION (FORMERLY HTM HOLDINGS,
INC.)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 486 2,083
<SECURITIES> 0 0
<RECEIVABLES> 21,780 71,597
<ALLOWANCES> (195) (514)
<INVENTORY> 12,485 61,680
<CURRENT-ASSETS> 35,685 140,534
<PP&E> 7,071 35,003
<DEPRECIATION> (9,479) (15,749)
<TOTAL-ASSETS> 44,245 228,105
<CURRENT-LIABILITIES> 27,631 87,094
<BONDS> 0 0
0 0
0 0
<COMMON> 6 3
<OTHER-SE> (10,474) 7,796
<TOTAL-LIABILITY-AND-EQUITY> 44,245 228,105
<SALES> 89,687 257,962
<TOTAL-REVENUES> 89,687 257,962
<CGS> 82,528 236,331
<TOTAL-COSTS> 85,672 248,946
<OTHER-EXPENSES> 2,506 2,707
<LOSS-PROVISION> 15 90
<INTEREST-EXPENSE> 2,030 7,066
<INCOME-PRETAX> (521) (757)
<INCOME-TAX> (193) 107
<INCOME-CONTINUING> (328) (864)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (1,279)
<CHANGES> 0 0
<NET-INCOME> (328) (2,143)
<EPS-BASIC> (0.44) (2.68)
<EPS-DILUTED> (0.44) (2.68)
</TABLE>
