<PAGE>
As filed with the Securities and Exchange Commission on May 23, 2000
Registration No. 333-33208
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Pre-Effective
Amendment No. 1
to
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
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- --------------------------------------------------------------------------------
<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........ 11,025,000 $14.00 $154,350,000 $40,750(2)
- ----------------------------------------------------------------------------------------------
</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.
(2) $33,000 was paid on March 20, 2000.
---------------
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 May 23, 2000.
PROSPECTUS
9,625,000 Shares
SMTC CORPORATION
Common Stock
--------------------------------------------------------
This is our initial public offering of shares of common stock. We are
offering up to 9,625,000 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 $12.00 to $14.00 per share.
Investing in the shares involves risks. "Risk Factors" begin on page 11.
<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 9,625,000 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 1,400,000
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.
--------------------------------------------------------
Lehman Brothers RBC Dominion Securities
-----------
Merrill Lynch & Co. Robertson Stephens
, 2000
<PAGE>
Description of front cover art: The cover art is comprised of a map of the world
showing the location of SMTC's eight manufacturing and technology centers in
"Denver, CO," "San Jose, CA," "Chihuahua, Mexico," "Toronto, Canada," "Boston,
MA," "Charlotte, NC," "Austin, TX" and "Cork, Ireland," with captions over the
map reading, "Fully Integrated Worldwide Facilities" and "Our global reach
enables us to provide OEMs with the flexibility to manufacture products locally
in several regions of the world." Bullet points appear under the map, reading "8
manufacturing & technology centers," "850,000 square feet of facilities," "3,000
employees worldwide" and "40 plus surface mount lines". It is also comprised of
photographs of some of SMTC's facilities, products and processes, with captions
reading "Fully Integrated Worldwide Facilities," "Web-Based Supply Chain
Management Strategy," "Team Oriented Production System Focused by Customer," and
"Comprehensive Suite of Design and Manufacturing Services."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
About this Prospectus............... 10
Risk Factors........................ 11
Use of Proceeds..................... 18
The Reclassification................ 18
Dividend Policy..................... 19
Capitalization...................... 20
Dilution............................ 22
Unaudited Pro Forma Consolidated
Financial Information.............. 23
Selected Consolidated Financial
Data............................... 39
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 45
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 61
Management....................... 73
Related Party Transactions....... 85
Principal Stockholders........... 88
Description of Indebtedness...... 90
Description of Capital Stock..... 91
Shares Eligible for Future Sale.. 95
Underwriting..................... 98
Legal Matters.................... 101
Experts.......................... 101
Additional Information........... 102
Index to Financial Statements.... F-1
</TABLE>
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.
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 pro forma revenue of approximately $503 million, 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, 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, Suite Technologies and Sycamore Networks. In 1999,
approximately 55% 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 our predecessors have completed six acquisitions and one
new site development 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 the former SMTC
Corporation, or Surface Mount, and HTM Holdings, Inc., or HTM. Combining
Toronto, Ontario based Surface Mount 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.
2
<PAGE>
Recent Developments
Pending Acquisition of Pensar Corporation. In May 2000, we entered into an
agreement to acquire Pensar Corporation, or Pensar, an EMS company specializing
in design engineering services, headquartered in Appleton, Wisconsin. We expect
to consummate the Pensar acquisition concurrently with the closing of this
offering or shortly thereafter, subject to satisfaction of customary closing
conditions. The consideration that we will issue and pay to the current
shareholders of Pensar will consist of a combination of our common stock and
cash, and we will assume $4.4 million of outstanding debt. The purchase price
is expected to be approximately $31.9 million. The purchase price represents a
premium over tangible net book value of approximately $22.1 million. For the
fiscal year ended December 31, 1999, Pensar had revenue of $53.0 million and
earnings before interest, taxes, depreciation and amortization of $4.8 million.
Pensar incurred approximately $0.5 million of one-time, non-recurring expenses
and $0.1 million of acquisition related professional fees in 1999. We do not
expect these costs to continue after the acquisition. Pensar's earnings before
interest, taxes, depreciation and amortization for the fiscal year ended
December 31, 1999 adjusted for one-time charges was $5.4 million. We expect the
Pensar acquisition to be accretive to earnings. See "Unaudited Pro Forma
Consolidated Financial Information".
Pensar provides a wide range of electronics design and manufacturing
services to OEM customers primarily in the telecommunications, networking,
medical, transportation and industrial sectors. Pensar operates a 75,000 square
foot design and manufacturing facility in Appleton, Wisconsin, a design center
in Minneapolis, Minnesota, and sales offices in Milwaukee, Wisconsin, Chicago,
Illinois, and Minneapolis, Minnesota. Pensar's front-end design engineering
capabilities, extensive test development, design validation and electromagnetic
compliance testing expertise make it an attractive acquisition for us. Pensar's
focus on comprehensive front-end design services has positioned Pensar to
support the needs of its OEM customers during the critical early phases of a
product's life cycle. As a result of Pensar's design engineering strengths, it
has become a preferred EMS supplier for the production of several customers'
products. Pensar also has technology alliances with key partners such as
Echelon, NETsilicon, SkyTel/MCI WorldCom and Texas Instruments, which
strengthen Pensar's design engineering and build capabilities and enable it to
accelerate the time-to-market of its customers' products. Pensar is also a
developer of applications based on Echelon's LonWorks Technology and has
expertise in providing design services in areas such as embedded Internet
applications, control networking, digital signal processing, power electronics,
and design for compliance with global safety and electromagnetic compatibility
standards. Pensar's largest customer, Power Conversion Products, accounted for
22.2% of revenue in 1999. Pensar's next four largest customers in 1999 were
Best Power Technologies, Computer Network Technology, Hunt Technologies and IMI
Cornelius, together representing 32.9% of revenues.
We believe that our pending acquisition of Pensar is an important component
of our strategy to expand our value-added service offerings. Pensar will
provide us with an enhanced design engineering and test capability, additional
partnerships with leading technology suppliers, a diversification of our
customer base and an expanded geographic presence in the Midwestern United
States. Specifically, Pensar will expand our design engineering and test
capabilities through the addition of 60 engineers and additional manufacturing
capacity. We expect to achieve cost savings by combining our marketing efforts,
shifting selected higher volume production to lower cost regions and through
higher volume purchases of raw materials.
Address
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.
3
<PAGE>
The Offering
Shares offered..................... 9,625,000
Common Stock offered by SMTC.....
shares
Exchangeable Shares offered by
SMTC Canada..................... exchangeable shares
Common Stock to be outstanding after
this offering....................... 24,564,891 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 $111.8 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 and to fund the cash
portion of the pending Pensar
acquisition. See "Use of Proceeds" on
page 18 of this prospectus.
Proposed Nasdaq National Market SMTX
symbol for common stock........
Proposed Toronto Stock Exchange
symbol for exchangeable shares...... SMX
In addition to the 24,564,891 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 9,625,000 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 may not be resold or otherwise transferred 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.
4
<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 Surface Mount 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 Surface Mount from July 30, 1999 through
December 31, 1999 and results for W.F. Wood from September 4, 1999
through December 31, 1999.
. The unaudited as adjusted pro forma consolidated statement of operations
data, other financial data and supplemental data for the year ended
December 31, 1999 and three months ended March 31, 1999 give effect to
the combination of Surface Mount and HTM, the acquisition of W.F. Wood
and the pending acquisition of Pensar and reflect the receipt of the net
proceeds from the sale of shares offered by us at an assumed initial
public offering price of $13.00 per share and the application of the net
proceeds of the offering as if these transactions had occurred on
January 1, 1999. The unaudited as adjusted pro forma consolidated
balance sheet data at December 31, 1999 give effect to the pending
acquisition of Pensar and this offering as if these transactions had
occurred on December 31, 1999. See "Use of Proceeds."
. The unaudited as adjusted pro forma consolidated statement of operations
data, other financial data and supplemental data for the three months
ended April 2, 2000 give effect to the pending acquisition of Pensar and
the offering as if these transactions had occurred on January 1, 1999.
The unaudited as adjusted pro forma consolidated balance sheet data at
April 2, 2000 give effect to the pending acquisition of Pensar and the
offering as if these transactions occurred on April 2, 2000.
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.
5
<PAGE>
<TABLE>
<CAPTION>
Pro forma
as adjusted
Quarter Ended Quarter Ended
Pro forma
as adjusted
Year Ended
Years Ended December 31, December 31, March 31, April 2, March 31, April 2,
--------------------------- ------------ --------- -------- --------- --------
1997 1998 1999 1999 1999 2000 1999 2000
-------- -------- -------- ------------ --------- -------- --------- --------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SMTC Corporation
Consolidated Statement
of Operations Data:
United States GAAP (a)
Revenue................. $ 59.0 $ 89.7 $ 258.0 $502.7 $23.3 $124.3 $115.3 $140.6
Cost of sales........... 53.6 82.5 236.3 452.6 21.6 113.1 104.2 126.8
------- -------- -------- ------ ----- ------ ------ ------
Gross profit.......... 5.4 7.2 21.7 50.1 1.7 11.2 11.1 13.8
Selling, general and
administrative
expenses............... 2.8 3.2 12.6 29.1 0.7 7.5 6.8 8.9
Amortization............ -- 0.2 2.0 6.5 0.1 1.3 1.6 1.7
Recapitalization
expenses (b)........... -- 2.2 -- -- -- -- -- --
Management fees (c)..... -- 0.1 0.7 0.7 0.1 0.1 0.1 0.1
Former shareholders'
compensation (d)....... -- -- -- 0.6 -- -- 0.1 0.1
Acquisition-related
bonuses (e)............ -- -- -- 2.6 -- -- -- --
------- -------- -------- ------ ----- ------ ------ ------
Operating income........ 2.6 1.5 6.4 10.6 0.8 2.3 2.5 3.0
Interest................ 0.7 2.0 7.1 2.4 0.8 3.8 -- 1.9
------- -------- -------- ------ ----- ------ ------ ------
Earnings (loss) before
income taxes........... 1.9 (0.5) (0.7) 8.2 -- (1.5) 2.5 1.1
Income taxes
(recovery)............. 0.7 (0.2) 0.1 4.6 -- (0.1) 1.4 0.8
------- -------- -------- ------ ----- ------ ------ ------
Earnings (loss) before
extraordinary loss..... 1.2 (0.3) (0.8) $ 3.6 (i) $-- $(1.4) $1.1 $ 0.3(i)
====== ===== ====== ====== ======
Extraordinary loss (f).. -- -- (1.3)
------- -------- --------
Net earnings (loss)..... $ 1.2 $ (0.3) $ (2.1)
======= ======== ========
Earnings (loss) before
extraordinary loss per
common share (g):
Basic................. $ 0.40 $ (0.44) $ (1.89) $ 0.14 $0.03 $(1.16) $ 0.04 $ 0.01
Diluted............... 0.40 (0.44) (1.89) 0.14 0.03 (1.16) 0.04 0.01
Weighted average number
of shares outstanding
(g):
Basic................. 3.1 2.1 1.6 24.6 1.4 2.4 24.6 24.6
Diluted............... 3.1 2.1 1.6 25.8 1.4 2.4 25.1 25.2
Other Financial Data:
Depreciation............ $ 2.2 $ 2.9 $ 6.5 $ 10.2 $ 0.9 $ 2.5 $ 2.3 $ 2.7
Amortization of
goodwill............... -- -- 1.5 6.4 -- 1.0 1.6 1.7
Amortization of
financing costs........ -- 0.2 0.5 0.1 0.1 0.3 -- --
Capital expenditures.... 0.9 3.2 4.1 12.3 0.1 2.8 2.3 3.2
Cash flows from
operating activities... (0.4) (3.8) (6.6) 6.0 (25.6)
Cash flows from
financing activities... 1.2 4.3 49.6 (5.1) 31.1
Cash flows from
investing activities... (0.4) (0.5) (41.4) (0.1) (2.5)
Supplemental Data:
EBITDA (h).............. $ 4.8 $ 4.6 $ 14.9 $ 27.3 $ 1.8 $ 6.1 $ 6.4 $ 7.4
Adjusted EBITDA (h)..... 4.9 6.9 15.8 31.4 1.9 6.2 6.6 7.6
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
As of April 2,
As of December 31, 1999 2000
-------------------------- ------------------
Pro forma Pro forma
Actual as adjusted Actual as adjusted
----------- -------------- ------ -----------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and short-term
investments............ $ 2.1 $ 2.6 $ 5.1 $ 5.1
Working capital......... 53.4 66.4 84.3 96.6
Total assets............ 228.1 271.1 265.1 307.2
Total debt, including
current maturities..... 134.0 49.8 165.4 79.9
Shareholders' equity.... 7.8 128.4 6.4 127.3
</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) The expenses will terminate upon the closing of the offering.
(d) Reflects compensation paid to the former shareholders of W.F. Wood and
Pensar.
(e) Acquisition-related bonuses for pro forma as adjusted December 31, 1999
consist of one-time bonuses of $2.3 million paid to management and $0.3
million paid to employees of W.F. Wood.
(f) 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.
(g) Given the changes in our capital structure in connection with the 1999
combination of Surface Mount and HTM, historical earnings (loss) per share
of common stock for the years ended December 31, 1997 and 1998 are not
comparable to subsequent years. Pro forma earnings per share and pro forma
weighted average number of common shares outstanding include all
outstanding common stock and exchangeable shares adjusted to give effect to
the reclassification assuming that this offering closes on June 30, 2000
and that the initial public offering price is $13.00.
(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.
7
<PAGE>
(h) Continued:
The following table sets forth a reconciliation of EBITDA to adjusted
EBITDA for each period included herein:
<TABLE>
<CAPTION>
Pro forma
as adjusted
Quarter Ended Quarter Ended
Pro forma
as adjusted
Year Ended
Year Ended December 31,
December 31, (unaudited) March 31, April 2, March 31, April 2,
--------------- ------------ --------- -------- --------- --------
1997 1998 1999 1999 1999 2000 1999 2000
---- ---- ----- ------------ --------- -------- --------- --------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA.................. $4.8 $4.6 $14.9 $27.3 $1.8 $6.1 $6.4 $7.4
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 0.1 0.1 0.1 0.1
Former W.F. Wood
shareholders'
compensation (4)....... -- -- -- 0.1 -- -- 0.1 --
Acquisition-related
bonuses paid to W.F.
Wood management and
employees (5).......... -- -- -- 2.6 -- -- -- --
Compensation paid to
former Pensar
shareholders (6)....... -- -- -- 0.5 -- -- -- 0.1
---- ---- ----- ----- ---- ---- ---- ----
Adjusted EBITDA......... $4.9 $6.9 $15.8 $31.4 $1.9 $6.2 $6.6 $7.6
==== ==== ===== ===== ==== ==== ==== ====
</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 Partners, Inc. and Kilmer Electronics Group Limited
under our Management Agreement, which are expected to be terminated in
connection with this offering.
(4) These expenses terminated at the time of the W.F. Wood acquisition.
(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.
(6) These expenses will terminate upon completion of the pending Pensar
acquisition.
8
<PAGE>
(i) The pro forma as adjusted earnings (loss) before extraordinary loss for
the year ended December 31, 1999 and for the quarter ended April 2, 2000
does not reflect the after-tax effect of adjusting for the following
acquisition-related, non-recurring adjustments and interest income:
. $0.7 million and $0.1 million of pre-tax management fees paid to Bain
Capital Partners VI, L.P., Celerity Partners, Inc. and Kilmer
Electronics Group Limited for the year ended December 31, 1999 and for
the quarter ended April 2, 2000, respectively, 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 for the year ended December 31, 1999;
. $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) for the
year ended December 31, 1999; and
. $0.5 million and $0.1 million of pre-tax compensation paid to former
Pensar shareholders for the year ended December 31, 1999 and for the
quarter ended April 2, 2000, respectively.
The effect of these adjustments is reflected in the following table:
<TABLE>
<CAPTION>
Pro forma Pro forma
as adjusted as adjusted
Year ended Quarter ended
December 31, 1999 April 2, 2000
----------------- -------------
(in millions)
<S> <C> <C>
Earnings before extraordinary loss....... $ 3.6 $ 0.3
Plus:
Management fees........................ 0.7 0.1
Former W.F. Wood shareholders'
compensation.......................... 0.1
Acquisition-related bonuses paid to
management and employees of
W.F. Wood............................. 2.6
Former Pensar shareholders'
compensation.......................... 0.5 0.1
Less:
Tax effect of above adjustments at
40%................................... (1.6) (0.1)
----- -----
Adjusted earnings before extraordinary
loss.................................. $ 5.9 $ 0.4
===== =====
</TABLE>
9
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ABOUT THIS PROSPECTUS
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 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 this 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.
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 "Surface Mount" 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 in this prospectus to this "offering" are references to SMTC's
offering of common stock and SMTC Canada's offering of exchangeable shares,
and
. references in this prospectus 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.
With the exception of references to "pro forma revenue", unless otherwise
indicated, the information in this prospectus is presented as though the
pending acquisition of Pensar has not been completed.
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<PAGE>
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 31.3%
of our total pro forma revenue in 1999. Our next five largest customers
collectively represented an additional 26.4% of our total pro forma revenue in
1999. We expect to continue to depend upon a relatively small number of
customers for a significant percentage of our revenue. In addition to having a
limited number of customers, we manufacture a limited number of products for
each of our customers. If we lose any of our largest customers or any product
line manufactured for one of our largest customers, we could experience a
significant reduction in our revenue. For example, in 1999 we manufactured two
products for Dell, servers, which represented 13.7% of our total pro forma
revenue in 1999, and riser cards, which represented 17.6% 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, electronics
manufacturing services. Many of our competitors have international operations,
and some may have substantially greater manufacturing, financial, research and
development and marketing resources and lower cost structures than we do. We
also face competition from the manufacturing operations of current and
potential customers, which are continually evaluating the merits of
manufacturing products internally versus the advantages of using external
manufacturers.
We may experience variability in our operating results, which could negatively
impact the price of our shares.
Our annual and quarterly results have fluctuated in the past. The reasons
for these fluctuations may similarly affect us in the future. Historically, our
calendar fourth quarter revenue has been highest and our calendar first quarter
revenue has been lowest. Prospective investors should not rely on results of
operations in any past period to indicate what our results will be for any
future period. Our operating results may fluctuate in the future as a result of
many factors, including:
. variations in the timing and volume of customer orders relative to our
manufacturing capacity;
. variations in the timing of shipments of products to customers;
. introduction and market acceptance of our customers' new products;
11
<PAGE>
. changes in demand for our customers' existing products;
. the accuracy of our customers' forecasts of future production
requirements;
. effectiveness in managing our manufacturing processes;
. changes in competitive and economic conditions generally or in our
customers' markets;
. changes in the cost or availability of components or skilled labor; and
. the timing of, and the price we pay for, acquisitions and related
integration costs.
In addition, most of our customers typically do not commit to firm
production schedules more than 30 to 90 days in advance. Accordingly, we cannot
forecast the level of customer orders with certainty. This makes it difficult
to schedule production and maximize utilization of our manufacturing capacity.
In the past, we have been required to increase staffing, purchase materials and
incur other expenses to meet the anticipated demand of our customers. Sometimes
anticipated orders from certain customers have failed to materialize, and
sometimes delivery schedules have been deferred as a result of changes in a
customer's business needs. Any material delay, cancellation or reduction of
orders from our largest customers could cause our revenue to decline
significantly. In addition, as many of our costs and operating expenses are
relatively fixed, a reduction in customer demand can decrease our gross margins
and adversely affect our business, financial condition and results of
operations. On other occasions, customers have required rapid and unexpected
increases in production which have placed burdens on our manufacturing
capacity.
Any of these factors or a combination of these factors could have a material
adverse effect on our business, financial condition and results of operations.
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 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.
12
<PAGE>
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 Surface Mount 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.
Our pending acquisition of Pensar may not be consummated or may not be
successful.
In May 2000, we entered into a stock purchase agreement to acquire Pensar.
The agreement is subject to customary closing conditions, which must be
satisfied or waived for this transaction to be completed. Although we intend to
consummate this transaction concurrently with this offering or shortly
thereafter, there can be no assurance we will successfully complete this
acquisition. In addition, if we are unable to effectively integrate Pensar's
business into our existing business, it may have an adverse effect on our
earnings or revenue growth.
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
13
<PAGE>
all. In addition, we expect to incur new fixed operating expenses associated
with our expansion efforts, including increases in depreciation expense and
rental expense. If our revenue does not increase sufficiently to offset these
expenses, our business, financial condition and results of operations would be
adversely affected.
We are dependent upon the electronics industry which produces technologically
advanced products with short life cycles.
Substantially all of our customers are in the electronics industry, which is
characterized by intense competition, short product life-cycles and significant
fluctuations in product demand. In addition, the electronics industry is
generally subject to rapid technological change and product obsolescence. If
our customers are unable to create products that keep pace with the changing
technological environment, their products could become obsolete and the demand
for our services could significantly decline. Our success is largely dependent
on the success achieved by our customers in developing and marketing their
products. Furthermore, this industry is subject to economic cycles and has in
the past experienced downturns. A recession or a downturn in the electronics
industry would likely have a material adverse effect on our business, financial
condition and results of operations.
If we are unable to respond to rapidly changing technology and process
development, we may not be able to compete effectively.
The market for our products and services is characterized by rapidly
changing technology and continuing process development. The future success of
our business will depend in large part upon our ability to maintain and enhance
our technological capabilities, to develop and market products and services
that meet changing customer needs, and to successfully anticipate or respond to
technological changes on a cost-effective and timely basis. In addition, the
EMS industry could in the future encounter competition from new or revised
technologies that render existing technology less competitive or obsolete or
that reduce the demand for our services. There can be no assurance that we will
effectively respond to the technological requirements of the changing market.
To the extent we determine that new technologies and equipment are required to
remain competitive, the development, acquisition and implementation of such
technologies and equipment may require us to make significant capital
investments. There can be no assurance that capital will be available for these
purposes in the future or that investments in new technologies will result in
commercially viable technological processes.
Our business will suffer if we are unable to attract and retain key personnel
and skilled employees.
We depend on the services of our key senior executives, including Paul
Walker, Edward Johnson, Philip Woodard, Gary Walker and Derek D'Andrade. Our
business also depends on our ability to continue to recruit, train and retain
skilled employees, particularly executive management, engineering and sales
personnel. Recruiting personnel in our industry is highly competitive. In
addition, our ability to successfully integrate acquired companies depends in
part on our ability to retain key management and existing employees at the time
of the acquisition. There can be no assurance that we will be able to retain
our executive officers and key personnel or attract 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 5.5% in 1999. International operations are subject to inherent
risks, including:
. fluctuations in the value of currencies and high levels of inflation;
. longer payment cycles and greater difficulty in collecting accounts
receivable;
14
<PAGE>
. unexpected changes in and the burdens and costs of compliance with a
variety of foreign laws;
. political and economic instability;
. increases in duties and taxation;
. inability to utilize net operating losses incurred by our foreign
operations to reduce our U.S. and Canadian income taxes;
. imposition of restrictions on currency conversion or the transfer of
funds; and
. trade restrictions.
We are subject to a variety of environmental laws which expose us to potential
financial liability.
Our operations are regulated under a number of federal, state, provincial,
local and foreign environmental and safety laws and regulations, which govern,
among other things, the discharge of hazardous materials into the air and water
as well as the handling, storage and disposal of such materials. Compliance
with these environmental laws is a major consideration for us because we use
metals and other hazardous materials in our manufacturing processes. We may be
liable under environmental laws for the cost of cleaning up properties we own
or operate if they are or become contaminated by the release of hazardous
materials, regardless of whether we caused such release. In addition we, along
with any other person who arranges for the disposal of our wastes, may be
liable for costs associated with an investigation and remediation of sites at
which we have arranged for the disposal of hazardous wastes, if such sites
become contaminated, even if we fully comply with applicable environmental
laws. In the event of a contamination or violation of environmental laws, we
could be held liable for damages including fines, penalties and the costs of
remedial actions and could also be subject to revocation of our discharge
permits. Any such revocations could require us to cease or limit production at
one or more of our facilities, thereby having a material adverse effect on our
operations. Environmental laws could also become more stringent over time,
imposing greater compliance costs and increasing risks and penalties associated
with any violation, which could have a material adverse effect on our business,
financial condition and results of operations.
Risks Related to Our Capital Structure
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;
15
<PAGE>
. We may have difficulty obtaining additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes;
. We may have limited flexibility in planning for, or reacting to, changes
in our business and industry;
. We could be limited by financial and other restrictive covenants in our
credit arrangements in our borrowing of additional funds; and
. We may fail to comply with the covenants under which we borrowed our
indebtedness which could result in an event of default. If an event of
default occurs and is not cured or waived, it could result in all
amounts outstanding, together with accrued interest, becoming
immediately due and payable. If we were unable to repay such amounts,
the lenders could proceed against any collateral granted to them to
secure that indebtedness.
There can be no assurance that our leverage and such restrictions will not
materially 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, Inc., 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., affiliated with Celerity Partners, Inc., Kilmer Electronics
Group Limited and certain members of management will hold approximately 15.5%,
14.1%, 8.3% and 15.6%, 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, Inc.,
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, Inc., 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
16
<PAGE>
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."
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 April
2, 2000, upon completion of this offering we will have outstanding 24,564,891
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 in the United States, 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.
17
<PAGE>
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."
USE OF PROCEEDS
Our net proceeds from the sale of the 9,625,000 shares offered in this
offering, after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us, will be approximately $111.8
million. If the underwriters' over-allotment option is exercised in full, our
net proceeds will be approximately $128.8 million. We intend to use the net
proceeds to: (i) repay a portion of the amounts outstanding under the term
loans and a portion of the amounts outstanding under the revolving credit
facilities under our senior credit facility, (ii) repay all amounts outstanding
under our subordinated notes and (iii) finance the cash portion of the Pensar
acquisition.
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$162.4 million as of
April 2, 2000. 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 April 2, 2000 was 9.7%. We
entered into a senior subordinated loan agreement on May 18, 2000, under which
we issued subordinated notes in the aggregate principal amount of $5 million to
stockholders in order to finance the growth of our business. The subordinated
notes bear simple interest at 15.0% per year and will be repaid on the
completion of the offering. 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 three classes of common stock, designated as Class A
common stock, Class L common stock and Class N 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 June 30, 2000, the
expected closing date of this offering, the preference amount will be $180.58
per share of Class L common stock. The Class N common stock is non-
participating and represents voting rights only.
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 SMTC Canada Class Y shares in exchange for
shares of Class L common stock;
18
<PAGE>
. 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 3.4958 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.
The transactions described above are collectively referred to in this
prospectus as the "reclassification."
As of June 30, 2000, assuming an initial public offering price of $13.00
per share (the mid-point of the range set forth on the cover page of this
prospectus), 14,939,891 shares of common stock will be outstanding immediately
after the reclassification but prior to this offering, assuming the exchange
of all exchangeable shares and the issuance of 1,146,478 shares in connection
with the Pensar acquisition. 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 its Canadian affiliates will enter
into a support agreement under which SMTC will agree to maintain the economic
equivalence of the exchangeable shares and the common stock by, among other
things, not declaring and paying dividends on the common stock unless SMTC
Canada is able to declare and pay economically equivalent dividends on the
exchangeable shares in accordance with the terms of those shares. SMTC Canada
may also declare stock dividends from time to time as necessary to maintain
the one-for-one economic equivalence between exchangeable shares and shares of
common stock. The SMTC Canada exchangeable shares do not carry any other right
to receive dividends from SMTC Canada. Although SMTC Canada has paid dividends
on its shares in the past, it does not currently anticipate paying any cash
dividends on the exchangeable shares in the forseeable future.
19
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents and our
capitalization as of April 2, 2000 and April 30, 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 April 2, 2000 or April 30,
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 $111.8 million from the sale of shares in this offering to repay our
long-term debt as described in "Use of Proceeds", assuming an initial
public offering price of $13.00 per share (the mid-point of the range
set forth on the cover page of this prospectus) 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>
April 2, 2000 April 30, 2000
------------------- ----------------------
Pro Forma Pro Forma
Actual as adjusted Actual as adjusted
------ ----------- ------ -----------
(in millions, except share data)
<S> <C> <C> <C> <C>
Cash and cash equivalents......... $ 5.1 $ 5.1 $ 1.6 $1.6
====== ====== ====== ======
Short-term obligations............ 4.3 1.3 4.1 1.1
Long-term obligations:
Long-term debt.................. 159.4 50.6 156.5 47.7
Capital lease obligations....... 1.6 1.6 1.5 1.5
------ ------ ------ ------
Total long-term obligations... 161.0 52.2 158.0 49.2
Shareholders' equity:
Common Stock, $0.01 par value,
no shares authorized or issued
on an actual basis; 60,000,000
shares authorized and
24,564,891 shares issued and
outstanding on a pro forma
basis.......................... -- 0.2 -- 0.2
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........ 11.8 123.4 11.8 123.4
Retained earnings (deficit)....... (5.8) (8.2)(c) (5.8)(d) (8.2)(c)
Other............................. 0.3 0.3 0.3 0.3
------ ------ ------ ------
Total shareholders' equity.... 6.3 115.7 6.3 115.7
------ ------ ------ ------
Total capitalization.......... $171.6 $169.2 $168.4 $166.0
====== ====== ====== ======
</TABLE>
(a) Does not include (i) 165,000 shares of Class A common stock reserved for
issuance pursuant to our stock option plan or (ii) 479,000 shares of Class
A common stock reserved for issuance pursuant to outstanding warrants as
of April 2, 2000 and April 30, 2000.
20
<PAGE>
(b) Does not include the 4,000 shares of Class L common stock reserved for
issuance pursuant to our stock option plan, 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, or
shares of Class L common stock reserved for issuance pursuant to
outstanding warrants, as of April 2, 2000 and April 30, 2000.
(c) As at April 2, 2000, adjusted to reflect an after-tax charge estimated to
be $2.4 million, net of a $1.6 million tax recovery, on repayment of
indebtedness with the net proceeds of the offering, comprised of the
following items net of tax: $2.5 million for the write-off of unamortized
deferred financing costs and deferred costs associated with the
subordinated notes issued in May 2000; 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 April 30, 2000 reflect the balances as of April 2, 2000,
the most recent period for which such information is available.
21
<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 April 2, 2000, assuming completion of the reclassification, net
tangible book value was approximately $(38.4) million, or $(2.57) 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 9,625,000 shares in this offering, our
pro forma net tangible book value as of April 2, 2000 would have been
approximately $78.7 million, or $3.20 per share. This represents an immediate
increase in pro forma net tangible book value of $5.77 per share to our
existing stockholders and an immediate dilution in pro forma net tangible book
value of $9.80 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.............. $13.00
Pro forma net tangible book value per share at April 2,
2000...................................................... (2.57)
Increase per share attributable to this offering........... 5.77
------
Pro forma net tangible book value per share after this
offering.................................................... 3.20
------
Dilution of pro forma net tangible book value per share to
new investors............................................... $ 9.80
======
</TABLE>
The table below assumes an initial public offering price of $13.00 per
share before deducting underwriting discounts and commissions and estimated
offering expenses payable by us and summarizes, as of April 2, 2000 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>
Average
Shares Purchased Total Consideration Price
------------------ -------------------- Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 14,939,891 60.8% $ 12,100,000 8.8% $ 1.23
New investors................... 9,625,000 39.2 125,000,000 91.2 $13.00
---------- ---- ------------ ---- ------
Total......................... 24,564,891 100% $137,100,000 100%
========== ==== ============ ====
</TABLE>
The above discussion and tables assume no exercise of any stock options or
warrants outstanding as of April 2, 2000. As of April 2, 2000, there were
options and warrants outstanding to purchase a total of 1,052,773 shares with
a weighted average exercise price of $4.63 per share. If all of the currently
exercisable options and warrants were exercised, the percent dilution to new
investors would be 1.4%, and the average price per share to existing
stockholders would be $1.06. See "Capitalization" and "Management."
The above discussion and tables treat the 1,146,478 shares issuable in
conjunction with the acquisition of Pensar as existing shares.
The above discussion and tables also assume that this offering closes on
June 30, 2000.
22
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Quarter ended April 2, 2000
The unaudited pro forma consolidated statement of earnings (loss) for the
quarter ended April 2, 2000 gives pro forma effect to:
. the pending acquisition of Pensar;
. 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
acquisition, the reclassification and the offering as if each occurred on April
2, 2000.
The unaudited pro forma consolidated statement of earnings (loss) gives
effect to 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 has been prepared
based on the unaudited consolidated information of SMTC Corporation (formerly
HTM Holdings, Inc.) as of and for the quarter ended April 2, 2000 and the
unaudited financial information of Pensar as of and for the quarter ended March
31, 2000. 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.) and Pensar.
There are no differences between United States and Canadian GAAP that impact
the pro forma consolidated financial information.
The unaudited pro forma consolidated statement of earnings (loss) does not
reflect the net after tax extraordinary loss of $2.4 million resulting from the
prepayment of the $5.0 million subordinated notes issued in May 2000, 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. The actual amount of this loss may be more
or less depending on the closing date of the transaction.
The Reclassification
Concurrent with the effectiveness of the offering, SMTC Corporation will
complete a share capital reorganization that will be effected as follows,
assuming a closing date for the offering of June 30, 2000 and an initial public
offering price of $13.00 per share:
. each outstanding Class Y share of SMTC Corporation'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;
23
<PAGE>
. each outstanding share of Class A common stock will be converted into
3.4958 shares of common stock;
. all outstanding shares of 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 SMTC Canada 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 SMTC Corporation
will be as follows:
<TABLE>
<CAPTION>
Number of shares
--------------------------------------------------------------------------
Additional Special
Paid in Class A Class L Class N Exchangeable Common Voting
Capital Stock Stock Stock Shares Stock Stock
---------- ---------- -------- -------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 2, 2000.. -- 2,447,782 154,168 113,408 113,408 -- --
Stock conversions....... -- (2,447,782) (154,168) (113,408) 1,858,377 12,968,106 1
-------- ---------- -------- -------- --------- ---------- ----
-- -- -- -- 1,971,785 12,968,106 1
======== ========== ======== ======== ========= ========== ====
<CAPTION>
Common Stock
Class A Class L --------------------------------
Options Options Warrants Options Warrants
---------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance April 2, 2000... 117,960 3,856 115,983
Option conversions...... (117,960) (3,856) 479,406
Warrant conversions..... (115,983) 573,367
-------- ---------- -------- -------- ---------
-- -- -- 479,406 573,367
======== ========== ======== ======== =========
<CAPTION>
Amount (in thousands of dollars)
--------------------------------------------------------------------------
Additional Special
Paid in Class A Class L Class N Exchangeable Common Voting
Capital Stock Stock Stock Shares Stock Stock
---------- ---------- -------- -------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 2, 2000.. $ 11,804 $ 3 $ -- $ -- $ -- $ -- $--
Stock conversions....... (127) (3) -- -- -- 130 --
-------- ---------- -------- -------- --------- ---------- ----
$ 11,677 $ -- $ -- $ -- $ -- $ 130 $--
======== ========== ======== ======== ========= ========== ====
</TABLE>
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.
The Pending Acquisition of Pensar
The unaudited pro forma consolidated financial information gives effect to
our acquisition of all of the issued and outstanding shares of Pensar on the
closing date of the initial public offering for approximately $31.9 million
consisting of $17.0 million cash and the balance in our common shares. The
valuation of our shares to be issued as consideration is based on the initial
public offering price. The total purchase price reflected in the unaudited pro
forma consolidated financial information is preliminary and is based on the
most recently available information. The final purchase price and purchase
price allocation may vary from the preliminary amounts reflected herein and
this may result in significant differences in certain pro forma adjustments.
24
<PAGE>
SMTC CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
(dollars in thousands)
April 2, 2000
(Unaudited)
<TABLE>
<CAPTION>
SMTC Pensar Pro forma Pro forma
Corporation Corporation combined Offering and as adjusted
April 2, March 31, Acquisition April 2, reclassification April 2,
2000 2000 adjustments 2000 adjustments 2000
----------- ----------- ----------- --------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and short-term
investments........... $ 5,111 $ 27 $17,000 (a) $ 5,138 $125,000 (b) $ 5,138
(17,000)(a) (13,238)(b)
(106,762)(b)
(5,000)(b)
(78)(b)
(400)(c)
478 (e)
Accounts receivable.... 80,651 8,334 88,985 88,985
Inventories............ 86,394 6,786 93,180 93,180
Prepaid expenses....... 5,341 246 5,587 5,587
Deferred income taxes.. 1,044 -- 1,044 160 (c)
988 (d)
(191)(e) 2,676
675 (f)
-------- ------- ------- -------- -------- --------
178,541 15,393 193,934 1,632 195,566
Capital assets.......... 35,311 4,859 40,170 40,170
Goodwill and excess of
purchase price over
tangible book value of
net assets acquired.... 39,791 -- 22,102 (a) 61,893 61,893
Other assets............ 10,882 562 11,444 (2,469)(d) 8,975
Deferred income taxes... 592 -- 592 -- 592
-------- ------- ------- -------- -------- --------
$265,117 $20,814 $22,102 $308,033 $ (837) $307,196
======== ======= ======= ======== ======== ========
Liabilities and
Shareholders' Equity
Current liabilities:
Line of credit......... $ -- $ 3,000 $ $ 3,000 $ (3,000)(b) $ --
Accounts payable....... 59,039 4,996 64,035 64,035
Accrued liabilities.... 31,908 1,645 33,553 33,553
Income taxes payable... -- -- --
Current portion of
long-term debt........ 3,000 335 3,335 (3,335)(b) --
Current portion of
capital lease
obligation............ 1,335 1,335 1,335
-------- ------- ------- -------- -------- --------
95,282 9,976 105,258 (6,335) 98,923
Capital lease
obligations............ 1,618 -- 1,618 1,618
Long-term debt.......... 159,417 1,040 17,000 (a) 177,457 (100,505)(b) 76,952
Deferred income taxes... 2,444 -- 2,444 2,444
Shareholders' equity:
Capital stock.......... 3 1 (1)(a) 3 243 (g) 246
Warrants............... 367 -- 367 367
Loans receivable....... (60) (415) 415 (a) (60) (60)
Additional paid-in
capital............... 11,804 1,209 13,691 (a) 26,704 106,762 (b) 135,153
1,687 (f)
Retained earnings
(deficit)............. (5,758) 9,003 (9,003)(a) (5,758) (243)(g) (8,447)
(240)(c)
(1,481)(d)
287 (e)
(1,012)(f)
-------- ------- ------- -------- -------- --------
6,356 9,798 5,102 21,256 106,003 127,259
-------- ------- ------- -------- -------- --------
$265,117 $20,814 $22,102 $308,033 $ (837) $307,196
======== ======= ======= ======== ======== ========
</TABLE>
See accompanying notes to pro forma consolidated financial information.
25
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(dollars in thousands)
April 2, 2000
(Unaudited)
Pro forma adjustments:
(a) Reflects the preliminary allocation of the purchase consideration for the
pending acquisition of Pensar as follows:
<TABLE>
<S> <C>
Current assets.................................................... $15,393
Capital assets.................................................... 4,859
Other long-term assets............................................ 562
Excess of purchase price over tangible book value of net assets
acquired......................................................... 22,102
Liabilities assumed............................................... (11,016)
-------
$31,900
=======
</TABLE>
Purchase consideration consists of $17,000 cash and an ascribed value of
$14,900 in common shares of SMTC Corporation.
The pending acquisition will be accounted for by the purchase method. The
total purchase consideration will be 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 will be amortized over ten years. The valuations and other studies
required to determine the fair values of identifiable assets acquired and
liabilities assumed has not been completed for the Pensar acquisition.
Accordingly, the preliminary allocation is expected to change upon further
study and as more current information becomes available.
(b) Reflects our sale of 9,625,000 shares of common stock and exchangeable
shares generating gross proceeds of $125,000 and the use of the estimated
net proceeds of $111,762, net of underwriting discounts and commissions
and the estimated offering expenses totaling $13,238, and the $78 of
proceeds from termination of the interest rate swap net of the prepayment
penalty (notes (c) and (e)) to repay a portion of the revolving line of
credit and the outstanding balance of the term loans, subordinated debt,
Pensar debt and $5,000 of subordinated notes issued in May 2000. The
adjustment assumes the underwriters' over-allotment option is not
exercised. See "Use of Proceeds" and "Description of Indebtedness."
(c) 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 of $240 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.
(d) Reflects the write-off of $2,469 in capitalized debt issuance costs,
before $988 of related income tax recovery (at a 40% effective tax rate),
resulting in an after-tax extraordinary loss of $1,481 in connection with
the repayment of outstanding debt. Amounts will differ based on the
effective date of the offering.
(e) 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.
(f) Reflects the value of the warrants, in excess of proceeds received, issued
in May 2000 in connection with the subordinated notes and the related
write-off of $1,687 before $675 of related income tax expense (at a 40%
effective tax rate) resulting in an extraordinary loss of $1,012 related
to the prepayment of the subordinated notes.
(g) Represents the par value of shares issued in the offering and the
reclassification of the existing common stock.
26
<PAGE>
SMTC CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS (LOSS)
(dollars in thousands, except share quantities and per share amounts)
Quarter ended April 2, 2000
(Unaudited)
<TABLE>
<CAPTION>
Pre-
combination
SMTC Pensar Pro forma
Corporation Corporation as adjusted
Quarter Quarter Offering Quarter
ended ended and ended
April 2, March 31, Acquisition Pro forma reclassification April 2,
2000 2000 adjustments combined adjustments 2000
----------- ----------- ----------- --------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 124,333 $16,283 $ -- $140,616 $ 140,616
Cost of sales........... 113,127 13,735 -- 126,862 126,862
--------- ------- ----- -------- ----------
Gross profit............ 11,206 2,548 -- 13,754 13,754
Selling, general and
administrative
expenses............... 7,548 1,359 -- 8,907 8,907
Amortization............ 1,272 -- 553 (a) 1,825 $ (116)(e) 1,709
Management fees......... 131 -- -- 131 131
Former Pensar
shareholders'
compensation........... -- 114 -- 114 114
--------- ------- ----- -------- ------ ----------
Operating income........ 2,255 1,075 (553) 2,777 116 2,893
Interest................ 3,789 103 373 (b) 4,265 (2,361)(f) 1,904
--------- ------- ----- -------- ------ ----------
Earnings (loss) before
income taxes........... (1,534) 972 (926) (1,488) 2,477 989
Income taxes (recovery):
Current................ (316) -- (297)(c) (408) 944 (g) 536
389 (d)
Deferred............... 225 -- (74)(c) 299 49 (g) 250
--------- ------- ----- -------- ------ ----------
(91) -- (18) (109) 993 786
--------- ------- ----- -------- ------ ----------
Earnings (loss) ........ $ (1,443) $ 972 $(908) $ (1,379)(h) $1,484 $ (203)(h)
========= ======= ===== ======== ====== ==========
Income (loss) per common
share:
Earnings (loss) ....... $ (1,443)
Less Class L preferred
entitlement........... (1,366)
---------
Earnings (loss)
attributable to common
shareholders .......... $ (2,809)
=========
Earnings (loss) per
common share
before extraordinary
loss................... $ (1.16) $ 0.01
========= ==========
Weighted average number
of shares outstanding:
Basic.................. 2,414,642 24,564,891
========= ==========
</TABLE>
Diluted earnings (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.
27
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS (LOSS)
(dollars in thousands)
Quarter ended April 2, 2000
(Unaudited)
Pro forma adjustments:
(a) Reflects the additional amortization expense related to the excess of
purchase price over the tangible net book value of net assets to be
acquired. The valuations and other studies required to determine the fair
values of identifiable assets acquired and liabilities assumed has not
been completed for the Pensar acquisition. The amortization is based on
the estimated useful life of 10 years.
(b) Reflects the additional interest expense related to the borrowings
required by us to complete the Pensar acquisition, based on our current
incremental borrowing rate on April 2, 2000 of LIBOR plus 350 basis
points.
(c) Reflects the income tax effect of adjustments (a) and (b) at a 40%
effective tax rate. The goodwill amortization of $553 in connection with
the pending acquisition of Pensar is tax deductible.
(d) Reflects the income tax effect of treating Pensar as a "C" Corporation.
Prior to its pending acquisition by SMTC, Pensar held "S Corp." status for
federal and state income tax purposes, thereby consenting to include the
company's income in the shareholders' individual income tax returns.
(e) Reflects the decrease in amortization of debt issuance costs.
(f) 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................................. $ 4,265
Elimination of historical and pro forma interest.................... (2,361)
-------
Pro forma interest expense subsequent to the offering............... $ 1,904
=======
</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 to outstanding debt balances (including the debt
related to our pending acquisition of Pensar) net of $5,000 to be applied
to the subordinated notes issued in May 2000 as if the proceeds were
applied at January 1, 1999. The proceeds were applied against the entire
balance outstanding on the subordinated debt, term loans, Pensar debt and a
portion of the revolving credit facility.
(g) Reflects the income tax effect of adjustments (e) and (f) at a 40%
effective tax rate.
(h) 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:
. $131 of pre-tax management fees paid to Bain Capital Partners VI, L.P.,
Celerity Partners, Inc. and Kilmer Electronics Group Limited under a
management agreement which will be terminated in connection with this
offering.
. $114 of pre-tax compensation paid to Pensar shareholders.
28
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS (LOSS)
(dollars in thousands)
Quarter ended April 2, 2000
(Unaudited)
The effect of these adjustments is reflected in the following table:
<TABLE>
<CAPTION>
Pro forma Pro forma
combined as adjusted
--------- -----------
<S> <C> <C>
Earnings (loss) ....................................... $(1,504) $203
Plus:
Management fees...................................... 131 131
Former Pensar shareholders' compensation............. 114 114
Less:
Tax effect of above adjustments at 40%............... (98) (98)
------- ----
Adjusted earnings (loss) ............................ $(1,357) $350
======= ====
</TABLE>
29
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Year Ended December 31, 1999
The unaudited pro forma consolidated statement of earnings (loss) for the
year ended December 31, 1999 gives pro forma effect to:
. the combination of Surface Mount and HTM;
. the acquisition of W.F. Wood;
. the pending acquisition of Pensar;
. 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
pending acquisition of Pensar, 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 acquisitions, 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 has been prepared
based on the audited consolidated financial statements of SMTC Corporation (HTM
Holdings, Inc.) as of and for the year ended December 31, 1999, the unaudited
financial statements of Surface Mount as of and for the period from January 1,
1999 to July 29, 1999, the audited financial statements of W.F. Wood,
Incorporated as of and for the period from January 1, 1999 to September 3, 1999
and the audited financial statements of Pensar as of and for the year ended
December 31, 1999. 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, Surface Mount, W.F. Wood, Incorporated and Pensar.
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 $2.8 million resulting from the
prepayment of the $5.0 million subordinated notes issued in May 2000, 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. The actual amount of this loss may be more
or less than the pro forma amount based on the closing date of the transaction.
30
<PAGE>
The Reclassification
Concurrent with the effectiveness of the offering, SMTC Corporation will
complete a share capital reorganization that will be effected as follows,
assuming a closing date for the offering of June 30, 2000 and an initial public
offering price of $13.00 per share:
. each outstanding Class Y share of SMTC Corporation'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
3.4958 shares of common stock;
. all outstanding shares of 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 SMTC Canada 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 SMTC Corporation
will be as follows:
<TABLE>
<CAPTION>
Number of shares
--------------------------------------------------------------------------
Additional Special
Paid in Class A Class L Class N Exchangeable Common Voting
Capital Stock Stock Stock Shares Stock Stock
---------- ---------- -------- -------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 2, 2000.. -- 2,447,782 154,168 113,408 113,408 -- --
Stock conversions....... -- (2,447,782) (154,168) (113,408) 1,858,377 12,968,106 1
-------- ---------- -------- -------- --------- ---------- -----
-- -- -- -- 1,971,785 12,968,106 1
======== ========== ======== ======== ========= ========== =====
<CAPTION>
Common Stock
--------------------------------
Class A Class L
Options Options Warrants Options Warrants
---------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 2, 2000.. 117,960 3,856 115,983
Option conversions...... (117,960) (3,856) 479,406
Warrant conversions..... (115,983) 573,367
-------- ---------- -------- -------- ---------
-- -- -- 479,406 573,367
======== ========== ======== ======== =========
<CAPTION>
Amount (in thousands of dollars)
--------------------------------------------------------------------------
Additional Special
Paid in Class A Class L Class N Exchangeable Common Voting
Capital Stock Stock Stock Shares Stock Stock
---------- ---------- -------- -------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 2, 2000.. $ 11,804 $ 3 $ -- $ -- $ -- $ -- $ --
Stock conversions....... (127) (3) -- -- -- 130 --
-------- ---------- -------- -------- --------- ---------- -----
$ 11,677 $ -- $ -- $ -- $ -- $ 130 $ --
======== ========== ======== ======== ========= ========== =====
</TABLE>
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.
31
<PAGE>
The Pending Acquisition of Pensar
The unaudited pro forma consolidated financial information gives effect to
our acquisition of all of the issued and outstanding shares of Pensar on the
closing date of the initial public offering for approximately $31.9 million
consisting of $17.0 million cash and the balance in our common shares. The
valuation of our shares to be issued as consideration is based on the initial
public offering price. The total purchase price reflected in the unaudited pro
forma consolidated financial information is preliminary and is based on the
most recently available information. The final purchase price and purchase
price allocation may vary from the preliminary amounts reflected herein and
this may result in significant differences in certain pro forma adjustments.
32
<PAGE>
SMTC CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
(dollars in thousands)
December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
SMTC Pensar Pro forma
Corporation Corporation Offering and as adjusted
December 31, December 31, Acquisition Pro forma reclassification December 31,
1999 1999 adjustments combined adjustments 1999
------------ ------------ ----------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and short-term
investments........... $ 2,083 $ 512 $17,000 (a) $ 2,595 $ 125,000 (b) $ 2,595
(17,000)(a) (13,238)(b)
(106,762)(b)
(5,000)(b)
(78)(b)
(400)(c)
478 (e)
Accounts receivable.... 71,597 9,781 81,378 81,378
Inventories............ 61,680 5,273 66,953 66,953
Prepaid expenses....... 3,647 201 3,848 3,848
Deferred income taxes.. 1,527 -- 1,527 160 (c) 3,327
1,156 (d)
(191)(e)
675 (f)
-------- ------- ------- -------- --------- --------
140,534 15,767 156,301 1,800 158,101
Capital assets.......... 35,003 4,721 39,724 39,724
Goodwill and excess of
purchase price over
tangible book value of
net assets acquired.... 40,800 -- 23,099 (a) 63,899 63,899
Other assets............ 11,145 511 11,656 (2,890)(d) 8,766
Deferred income taxes... 623 -- 623 623
-------- ------- ------- -------- --------- --------
$228,105 $20,999 $23,099 $272,203 $ (1,090) $271,113
======== ======= ======= ======== ========= ========
Liabilities and
Shareholders' Equity
Current liabilities:
Line of credit......... $ -- $ 4,215 $ $ 4,215 $ (4,215)(b) $ --
Accounts payable....... 53,119 5,277 58,396 58,396
Accrued liabilities.... 29,307 1,293 30,600 30,600
Income taxes payable... 1,127 -- 1,127 1,127
Current portion of
long-term debt........ 2,000 332 2,332 (2,332)(b) --
Current portion of
capital lease
obligation............ 1,541 -- 1,541 1,541
-------- ------- ------- -------- --------- --------
87,094 11,117 98,211 (6,547) 91,664
Capital lease
obligations............ 1,537 -- 1,537 1,537
Long-term debt.......... 128,942 1,081 17,000 (a) 147,023 (100,293)(b) 46,730
Deferred income taxes... 2,733 -- 2,733 2,733
Shareholders' equity:
Capital stock.......... 3 1 (1)(a) 3 243(g) 246
Warrants............... 367 -- 367 367
Loans receivable....... (60) (455) 455 (a) (60) (60)
Additional paid-in
capital............... 11,804 1,209 13,691 (a) 26,704 106,762 (b) 134,910
(243)(g)
1,687 (f)
Retained earnings......
Deficit................ (4,315) 8,046 (8,046)(a) (4,315) (240)(c) (7,014)
(1,734)(d)
287 (e)
(1,012)(f)
-------- ------- ------- -------- --------- --------
7,799 8,801 6,099 22,699 105,750 128,449
-------- ------- ------- -------- --------- --------
$228,105 $20,999 $23,099 $272,203 $ (1,090) $271,113
======== ======= ======= ======== ========= ========
</TABLE>
See accompanying notes to pro forma consolidated financial information.
33
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(dollars in thousands)
December 31, 1999
(Unaudited)
Pro forma adjustments:
(a) Reflects the preliminary allocation of the purchase consideration for the
pending acquisition of Pensar as follows:
<TABLE>
<S> <C>
Current assets................................................... $ 15,767
Capital assets................................................... 4,721
Other long-term assets........................................... 511
Goodwill and excess of purchase price over tangible book value of
net assets acquired............................................. 23,099
Liabilities assumed.............................................. (12,198)
--------
$ 31,900
========
</TABLE>
Purchase consideration consists of $17,000 cash and an ascribed value of
$14,900 in common shares of SMTC Corporation.
The pending acquisition will be accounted for by the purchase method. The
total purchase consideration will be 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 will be amortized over ten years. The valuations and other studies
required to determine the fair values of identifiable assets acquired and
liabilities assumed has not been completed for the Pensar acquisition.
Accordingly, the preliminary allocation is expected to change upon further
study and as more current information becomes available.
(b) Reflects our sale of 9,625,000 shares of common stock and exchangeable
shares generating gross proceeds of $125,000 and the use of the estimated
net proceeds of $111,762, net of underwriting discounts and commissions
and the estimated offering expenses totaling $13,238, and the $78 of
proceeds from termination of the interest rate swap net of the prepayment
penalty (notes (c) and (e)) to repay a portion of the revolving line of
credit, the outstanding balance of the term loans, subordinated debt,
Pensar debt and $5,000 subordinated notes issued in May 2000. The
adjustment assumes the underwriters' over-allotment option is not
exercised. See "Use of Proceeds" and "Description of Indebtedness."
(c) 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 of $240 in connection with the prepayment ofthe subordinated debt in
connection with the offering. Amounts will differ based on the effective
date of the offering.
(d) Reflects the write-off of $2,890 in capitalized debt issuance costs,
before $1,156 of related income tax recovery (at a 40% effective tax
rate), resulting in an after-tax extraordinary loss of $1,734 in
connection with the repayment of outstanding debt. Amounts will differ
based on the effective date of the offering.
(e) 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.
(f) Reflects the value of the warrants, in excess of proceeds received, issued
in May 2000 in connection with the subordinated notes and the related
write-off of $1,687 before $675 of related income tax expense (at a 40%
effective tax rate), resulting in an extraordinary loss of $1,012 related
to the prepayment of the subordinated notes.
(g) Represents the par value of shares issued in the offering and the
reclassification of the existing common stock.
34
<PAGE>
SMTC CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS (LOSS)
(dollars in thousands, except share quantities and per share amounts)
Year ended December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Pre-
combination
W.F. Wood, Pre-
Incorporated combination
SMTC Surface Mount from Pensar Offering
Corporation from January 1, January 1, Corporation and
Year ended 1999 to 1999 to Year ended reclassi-
December 31, July 29, September 3, December 31, Acquisition Pro forma fication
1999 1999 1999 1999 adjustments combined adjustments
------------ --------------- ------------ ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue......... $ 257,962 $168,553 $23,198 $52,996 $ $502,709 $
Cost of sales... 236,331 152,330 20,072 43,859 452,592
--------- -------- ------- ------- ------- -------- -------
Gross profit.... 21,631 16,223 3,126 9,137 50,117
Selling, general
and
administrative
expenses....... 12,615 10,268 1,718 4,533 29,134
Amortization.... 1,990 -- -- -- 4,906 (a) 6,896 (359)(f)
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
Former Pensar
shareholders'
compensation... -- -- -- 498 498
Acquisition-
related
professional
fees........... -- -- 403 75 (478)(b) --
--------- -------- ------- ------- ------- -------- -------
Operating
income......... 6,309 5,955 (1,702) 4,031 (4,428) 10,165 359
Interest........ 7,066 2,215 58 267 2,522 (c) 12,128 (9,698)(g)
--------- -------- ------- ------- ------- -------- -------
Earnings (loss)
before income
taxes.......... (757) 3,740 (1,760) 3,764 (6,950) (1,963) 10,057
Income taxes
(recovery):
Current........ 442 2,064 -- -- (2,131)(d) 1,177 3,879 (h)
802 (e)
Deferred....... (335) (195) -- -- (77)(d) (607) 144 (h)
--------- -------- ------- ------- ------- -------- -------
107 1,869 -- -- (1,406) 570 4,023
--------- -------- ------- ------- ------- -------- -------
Earnings
(loss)......... $ (864) $ 1,871 $(1,760) $ 3,764 $(5,544) $ (2,533)(i) $ 6,034
========= ======== ======= ======= ======= ======== =======
Income (loss) per common share:
Earnings
(loss)........ $ (864)
Less Class L
preferred
entitlement... (2,185)
---------
Earnings (loss)
attributable to
common
shareholders... $ (3,049)
=========
Earnings (loss)
per
common share
Basic.......... $ (1.89)
=========
Diluted........ $ (1.89)
=========
Weighted average
number of
shares
outstanding:
Basic.......... 1,617,356
=========
Diluted........ 1,617,356
=========
<CAPTION>
Pro forma
as adjusted
Year ended
December 31,
1999
--------------
<S> <C>
Revenue......... $ 502,709
Cost of sales... 452,592
--------------
Gross profit.... 50,117
Selling, general
and
administrative
expenses....... 29,134
Amortization.... 6,537
Management
fees........... 717
Former W.F. Wood
shareholders'
compensation... 136
Acquisition-
related bonuses
paid to
management and
employees of
W.F. Wood...... 2,571
Former Pensar
shareholders'
compensation... 498
Acquisition-
related
professional
fees........... --
--------------
Operating
income......... 10,524
Interest........ 2,430
--------------
Earnings (loss)
before income
taxes.......... 8,094
Income taxes
(recovery):
Current........ 5,056
Deferred....... (463)
--------------
4,593
--------------
Earnings
(loss)......... $ 3,501(i)
==============
Income (loss) per common share:
Earnings
(loss)........
Less Class L
preferred
entitlement...
Earnings (loss)
attributable to
common
shareholders...
Earnings (loss)
per
common share
Basic.......... $ 0.14
==============
Diluted........ $ 0.14
==============
Weighted average
number of
shares
outstanding:
Basic.......... 24,564,891
==============
Diluted........ 25,820,374
==============
</TABLE>
See accompanying notes to pro forma consolidated financial information.
35
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENT 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 and excess of purchase price over tangible
net book value of net assets acquired for the acquisitions. The valuations
and other studies required to determine the fair values of identifiable
assets acquired and liabilities assumed has not been completed for the
Pensar acquisition. The amortization is based on an estimated useful life
of 10 years for the goodwill.
(b) Reflects the elimination of the non-recurring acquisition-related
professional fees incurred by W.F. Wood and Pensar.
(c) Reflects the additional interest expense related to the borrowings
required by us to complete the W.F. Wood acquisition and the pending
Pensar 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 goodwill amortization of $4,058 in connection with
the acquisition of W.F. Wood and the pending acquisition of Pensar is tax
deductible.
(e) Reflects the income tax effect of treating W.F. Wood and Pensar as "C"
Corporations. Prior to their acquisition by SMTC, W.F. Wood and Pensar
held "S Corp." status for federal and state income tax purposes, thereby
consenting to include the companies' 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................................. $12,128
Elimination of historical and pro forma interest.................... (9,698)
-------
Pro forma interest expense subsequent to the offering............... $ 2,430
=======
</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 to outstanding debt balances (including the debt
related to our acquisition of W.F. Wood and our pending acquisition of
Pensar) as if the proceeds were applied at the beginning of the year. The
proceeds, net of $5,000 applied to the subordinated notes issued in May
2000, were applied against the entire balance outstanding on the
subordinated debt, term loans and a portion of the revolving credit
facility.
(h) Reflects the income tax effect of adjustments (f) and (g) at a 40%
effective tax rate.
36
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENT 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 Partners, 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
. $498 of pre-tax compensation paid to Pensar shareholders.
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).................................. $(2,553) $ 3,501
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
Former Pensar shareholders' compensation....... 498 498
Less:
Tax effect of above adjustments at 40%......... (1,569) (1,569)
------- -------
Adjusted earnings (loss)....................... $ (200) $ 5,854
======= =======
</TABLE>
37
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENT 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 and termination of the
interest rate swap 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.................................................. $10,524
Interest.......................................................... 2,430
Debt extinguishment costs......................................... 5,092
-------
Earnings before income taxes...................................... 3,002
Income taxes (recovery):
Current......................................................... 3,061
Deferred........................................................ (463)
-------
2,598
-------
Net earnings ..................................................... $ 404
=======
</TABLE>
38
<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 Surface Mount 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 Surface Mount from July 30, 1999 through December 31, 1999 and
results for W.F. Wood from September 4, 1999 through December 31, 1999.
. The unaudited combined pro forma results of operations, other financial
data and supplemental data for the year ended December 31, 1999 and the
three months ended March 31, 1999 give effect to the combination of
Surface Mount and HTM, the acquisition of W.F. Wood and the pending
acquisition of Pensar as if these transactions had occurred on January
1, 1999.
. The unaudited combined pro forma results of operations, other financial
data and supplemental data for the three months ended April 2, 2000 give
effect to the pending acquisition of Pensar as if this transaction had
occurred on January 1, 1999. The unaudited combined pro forma
consolidated balance sheet data as at April 2, 2000 give effect to the
pending acquisition of Pensar as if this transaction had occurred on
April 2, 2000.
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 Surface Mount 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 Surface Mount's consolidated financial
statements.
39
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
combined
Year Ended December 31, Year Ended
------------------------------------- December 31,
1995 1996 1997 1998 1999 1999
------ ------ ----- ------ ------ ------------
(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 $502.7
Cost of sales.............. 65.7 68.9 53.6 82.5 236.3 452.6
------ ------ ----- ------ ------ ------
Gross profit............. 1.8 1.9 5.4 7.2 21.7 50.1
Selling, general and
administrative expenses... 2.5 2.8 2.8 3.2 12.6 29.1
Amortization............... -- -- -- 0.2 2.0 6.9
Relocation expenses (b).... -- 0.5 -- -- -- --
Recapitalization expenses
(c)....................... -- -- -- 2.2 -- --
Management fees (d)........ -- -- -- 0.1 0.7 0.7
Former shareholders'
compensation (e).......... -- -- -- -- -- 0.6
Acquisition-related bonuses
paid to management and
employees of W.F. Wood
(f)....................... -- -- -- -- -- 2.6
------ ------ ----- ------ ------ ------
Operating income (loss).... (0.7) (1.4) 2.6 1.5 6.4 10.2
Interest................... 0.6 0.7 0.7 2.0 7.1 12.1
------ ------ ----- ------ ------ ------
Earnings (loss) before
income taxes.............. (1.3) (2.1) 1.9 (0.5) (0.7) (1.9)
Income taxes (recovery).... (0.4) (0.8) 0.7 (0.2) 0.1 0.6
------ ------ ----- ------ ------ ------
Earnings (loss) before
extraordinary loss........ (0.9) (1.3) 1.2 (0.3) (0.8) $ 2.5(j)
======
Extraordinary loss (g)..... -- -- -- -- (1.3)
------ ------ ----- ------ ------
Net earnings (loss)........ $ (0.9) $ (1.3) $ 1.2 $ (0.3) $ (2.1)
====== ====== ===== ====== ======
Earnings (loss) before
extraordinary loss per
common share (h):
Basic.................... $(0.30) $(0.40) $0.40 $(0.44) $(1.89)
Weighted average number of
shares outstanding (h):
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 $ 10.2
Amortization of goodwill... -- -- -- -- 1.5 6.4
Amortization of deferred
financing costs........... -- -- -- 0.2 0.5 0.5
Capital expenditures....... 0.8 0.6 0.9 3.2 4.1 12.3
Cash flows from operating
activities................ (5.3) 6.1 (0.4) (3.8) (6.6)
Cash flows from financing
activities................ 4.9 (5.5) 1.2 4.3 49.6
Cash flows from investing
activities................ (0.6) (0.6) (0.4) (0.5) (41.4)
Supplemental Data:
EBITDA (i)................. $ 0.7 $ 0.5 $ 4.8 $ 4.6 $ 14.9 $ 27.3
Adjusted EBITDA (i)........ 0.7 1.0 4.9 6.9 15.8 31.4
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------
Pro forma
Actual combined
---------------- ----------------
April April
March 31, 2, March 31, 2,
1999 2000 1999 2000
--------- ------ --------- ------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
SMTC Corporation
Consolidated Statement of
Operations Data:
United States GAAP (a)
Revenue...................... $23.3 $124.3 $115.3 $140.6
Cost of sales................ 21.6 113.1 104.2 126.8
----- ------ ------ ------
Gross profit............... 1.7 11.2 11.1 13.8
Selling, general and
administrative expenses..... 0.7 7.5 6.8 8.9
Amortization................. 0.1 1.3 1.7 1.8
Management fees (d).......... 0.1 0.1 0.1 0.1
Former shareholders'
compensation (e)............ -- -- 0.1 0.1
----- ------ ------ ------
Operating income (loss)...... 0.8 2.3 2.4 2.9
Interest..................... 0.8 3.8 2.3 4.3
----- ------ ------ ------
Earnings (loss) before income
taxes....................... -- (1.5) 0.1 (1.4)(j)
Income taxes (recovery).... -- (0.1) 0.5 --
----- ------ ------ ------
Net earnings (loss).......... $ -- $ (1.4) $ (0.4) $ (1.4)
===== ====== ====== ======
Earnings (loss) per common
share (h):
Basic...................... $0.03 $(1.16)
Weighted average number of
shares outstanding (h):
Basic...................... 1.4 2.4
Other Financial Data:
Depreciation................. $ 0.9 $ 2.5 $ 2.3 $ 2.7
Amortization of goodwill..... -- 1.0 1.6 1.5
Amortization of deferred
financing costs............. 0.1 0.3 0.1 0.3
Capital expenditures......... 0.1 2.8 2.3 3.2
Cash flows from operating
activities.................. 6.0 (25.6)
Cash flows from financing
activities.................. (5.1) 31.1
Cash flows from investing
activities.................. (0.1) (2.5)
Supplemental Data:
EBITDA (i)................... $ 1.8 $ 6.1 $ 6.4 $ 7.4
Adjusted EBITDA (i).......... 1.9 6.2 6.6 7.6
</TABLE>
<TABLE>
<CAPTION>
As of April 2,
As of December 31, 2000
-------------------------------- ----------------
Pro forma
1995 1996 1997 1998 1999 Actual combined
----- ----- ----- ------ ------ ------ ---------
(in millions)
<S> <C> <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 $ 5.1 $ 5.1
Working capital............. 2.5 0.7 4.1 8.1 53.4 84.3 89.7
Total assets................ 46.9 22.9 31.7 44.2 228.1 265.1 308.0
Total debt, including
current maturities......... 12.3 7.0 8.2 35.5 134.0 165.4 186.7
Shareholders' equity
(deficit).................. 8.3 7.1 8.4 (10.5) 7.8 6.4 21.3
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
Ended August 31, Period from
------------------ September 1, 1998
1997 1998 to July 29, 1999
-------- --------- -----------------
Statement of Operations Data: (in millions)
<S> <C> <C> <C>
Surface Mount
<CAPTION>
Canadian GAAP (k)
<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 December 31, January 1, 1999
------------------ to September 3,
1997 1998 1999
-------- --------- -----------------
W.F. Wood (in millions)
United States GAAP (l)
<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>
<TABLE>
<CAPTION>
Year Ended Quarter
December 31, Ended
----------------- April 2,
1997 1998 1999 2000
----- ----- ----- --------
Pensar (in millions)
United States GAAP (m)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $51.0 $50.9 $53.0 $16.2
Cost of sales........... 41.9 41.9 43.9 13.7
----- ----- ----- -----
Gross profit.......... $ 9.1 $ 9.0 $ 9.1 $ 2.5
===== ===== ===== =====
</TABLE>
- --------
(a) Refer to Note 23 to our consolidated financial statements for a
description of differences between United States GAAP and Canadian GAAP.
(b) Relocation expenses include costs incurred to move equipment and employees
from a facility in Longmont, Colorado to Denver, Colorado.
(c) 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.
(d) These expenses will terminate in connection with the completion of this
offering.
(e) Reflects compensation paid to the former shareholders of W.F. Wood and
Pensar.
(f) Acquisition-related bonuses consist of one-time bonuses of $2.3 million
paid to management and $0.3 million paid to employees.
(g) 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.
(h) Given the changes in our capital structure in connection with the 1999
combination of Surface Mount and HTM, historical earnings (loss) per share
of common stock for the years ended December 31, 1997 and 1998 are not
comparable to subsequent years. Diluted earnings (loss) per share has not
been disclosed as the effect of the potential conversion of dilutive
securities is anti-dilutive.
(i) 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.
42
<PAGE>
The following table sets forth a reconciliation of EBITDA to adjusted
EBITDA for each period included herein:
<TABLE>
<CAPTION>
Pro forma Quarter Pro forma
combined Quarter Ended combined
Year Ended Year Ended Ended April Quarter Ended
December 31, December 31, March 31, 2, April 2,
--------------- ------------ --------- ------- -------------
1997 1998 1999 1999 1999 1999 2000
---- ---- ----- ------------ --------- ------- -------------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA.................. $4.8 $4.6 $14.9 $27.3 $1.8 $6.1 $7.4
Loss on disposal of
capital assets (a)..... 0.1 -- 0.2 0.2 -- -- --
Recapitalization
expenses (b)........... -- 2.2 -- -- -- -- --
Management fees (c)..... -- 0.1 0.7 0.7 0.1 0.1 0.1
Former W.F. Wood
shareholders'
compensation (d)....... -- -- -- 0.1 -- -- --
Acquisition-related
bonuses paid to W.F.
Wood management and
employees (e).......... -- -- -- 2.6 -- -- --
Former Pensar
shareholders'
compensation (f)....... -- -- -- 0.5 -- -- 0.1
---- ---- ----- ----- ---- ---- ----
Adjusted EBITDA......... $4.9 $6.9 $15.8 $31.4 $1.9 $6.2 $7.6
==== ==== ===== ===== ==== ==== ====
</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 Partners, Inc. and Kilmer Electronics Group Limited
under our Management Agreement, which is expected to be terminated in
connection with the offering.
(d) These expenses terminated at the time of the W.F. Wood acquisition.
(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.
(f) These expenses will terminate upon the completion of the pending
Pensar acquisition.
(j) The pro forma combined earnings (loss) before extraordinary loss for the
year ended December 31, 1999 and for the quarter ended April 2, 2000 does
not reflect the after-tax effect of adjusting for the following
acquisition-related and non-recurring adjustments:
. $0.7 million and $0.1 million of pre-tax management fees paid to Bain
Capital Partners VI, L.P., Celerity Partners, Inc. and Kilmer
Electronics Group Limited for the year ended December 31, 1999 and for
the quarter ended April 2, 2000, respectively, 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 for the year ended December 31, 1999;
. $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) for the
year ended December 31, 1999; and
. $0.5 million and $0.1 million of pre-tax compensation paid to former
Pensar shareholders for the year ended December 31, 1999 and for the
quarter ended April 2, 2000, respectively.
43
<PAGE>
The effect of these adjustments is reflected in the following table:
<TABLE>
<CAPTION>
Pro forma Pro forma
combined combined
December 31, April 2,
1999 2000
------------ ---------
(in millions)
<S> <C> <C>
Earnings (loss) before extraordinary loss........... $(2.5) $(1.4)
Plus:
Management fees................................... 0.7 0.1
Former W.F. Wood shareholders' compensation....... 0.1 --
Acquisition-related bonuses paid to management and
employees of W.F. Wood........................... 2.6 --
Former Pensar shareholders' compensation.......... 0.5 0.1
Less:
Tax effect of above adjustments at 40%............ (1.6) (0.1)
----- -----
Adjusted earnings (loss) before extraordinary
loss............................................. $(0.2) $(1.3)
===== =====
</TABLE>
(k) Refer to Note 17 to Surface Mount'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.
(l) Refer to Note 14 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.
(m) Refer to Note 15 to Pensar'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.
44
<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 Surface Mount, and HTM Holdings, Inc., or HTM. Upon
completion of the combination, the former stockholders of HTM held
approximately 58.0% of the outstanding shares of SMTC. We have accounted for
the combination under the purchase method of accounting as a reverse
acquisition of Surface Mount by HTM. Because HTM acquired Surface Mount for
accounting purposes, HTM's assets and liabilities are included in our
consolidated financial statements at their historical cost and the comparative
figures reflect the results of operations of HTM. The results of operations of
Surface Mount are included in our consolidated financial statements from the
date of the combination. Results of operations of Surface Mount for the three
years prior to the combination are disclosed in separate financial statements
which are also included in this prospectus. Surface Mount was established in
Toronto, Ontario in 1985. HTM was established in Denver, Colorado in 1990. SMTC
was established in 1998.
Our revenue has grown from approximately $59.0 million in 1997 to pro forma
revenue of $502.7 million in 1999 through both internal growth and strategic
acquisitions. Surface Mount developed a strategically located new site in San
Jose, California in 1995. The July 1999 combination of Surface Mount and HTM
provided us with increased strategic and operating scale and greater geographic
breadth. In addition, as a result of the combination, we gained Carrier Access,
Netopia, IBM and Lucent Technologies as customers. Collectively, since 1995 we
have completed the following five acquisitions:
. Radian Electronics' operations, which enabled our expansion into Austin,
Texas and established our relationship with Dell, in 1996;
. Ogden Atlantic Design's operations in Charlotte, North Carolina, which
provided us with a facility in a major technology center in the
Southeastern United States, in 1997;
. Ogden International Europe's operations in Cork, Ireland, which expanded
our global presence into Europe, in 1998;
. Zenith Electronics' facility in Chihuahua, Mexico, which expanded our
cost-effective manufacturing capabilities and added Zenith as a
customer, in July 1999; 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, and added EMC and Sycamore Networks as customers, in
September 1999.
45
<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 Surface Mount and HTM, and the acquisitions we
completed in 1999 were financed with funds borrowed under the $155.0 million
senior credit facility which we established in July 1999. As of April 2, 2000,
we had borrowed approximately $162.4 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, 96.9% 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.
46
<PAGE>
We service our customers through a total of eight facilities located in the
United States, Canada, Mexico and Europe. In 1999, approximately 85.0% of our
pro forma revenue was generated from operations in the United States,
approximately 9.0% from Canada, approximately 2.0% from Mexico and
approximately 3.5% 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 Surface Mount, HTM, W.F. Wood,
and Pensar as if both the combination of Surface Mount and HTM and the
acquisition of W.F. Wood and the pending acquisition of Pensar 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 Surface Mount 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 acquisition of Surface Mount by HTM, eight months of additional
goodwill amortization related to the acquisition of W.F. Wood, twelve months of
additional goodwill amortization related to the pending acquisition of Pensar,
eight months of additional interest expense and income tax effects related to
the borrowings required to complete the W.F. Wood acquisition, and twelve
months of additional interest expense and income tax effects related to the
borrowings required to complete the pending Pensar acquisition.
Our fiscal year end is December 31. Prior to the combination, Surface Mount
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 Surface Mount 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.
47
<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 Pro forma
Years ended December 31, combined Quarter ended combined
----------------------------- Year ended ------------------ Quarter ended
December 31, March 31, April 2, April 2,
1997 1998 1999 1999 1999 2000 2000
-------- -------- -------- ------------ --------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 90.8 92.0 91.6 90.0 92.7 91.0 90.2
-------- -------- -------- ----- ----- ----- -----
Gross profit............ 9.2 8.0 8.4 10.0 7.3 9.0 9.8
Selling, general and
administrative
expenses............... 4.7 3.6 4.9 5.8 3.1 6.1 6.3
Amortization............ -- 0.2 0.8 1.5 0.3 1.0 1.4
Recapitalization
expenses............... -- 2.5 -- -- -- -- --
Management fees......... -- 0.1 0.3 0.2 0.2 0.1 0.1
Acquisition-related
bonuses paid to
management and
employees of
W.F. Wood.............. -- -- -- 0.5 -- -- --
Former shareholders'
compensation........... -- -- -- 0.1 -- -- 0.1
-------- -------- -------- ----- ----- ----- -----
Operating income........ 4.5 1.6 2.4 1.9 3.7 1.8 1.9
Interest................ 1.2 2.2 2.7 2.4 3.4 3.0 3.0
-------- -------- -------- ----- ----- ----- -----
Earnings (loss) before
income taxes........... 3.3 (0.6) (0.3) (0.5) 0.3 (1.2) (1.1)
Income taxes
(recovery)............. 1.2 (0.2) -- 0.1 0.1 -- (0.1)
-------- -------- -------- ----- ----- ----- -----
Earnings (loss) before
extraordinary loss..... 2.1 (0.4) (0.3) (0.6)% 0.2 (1.2) (1.0)%
===== =====
Extraordinary loss...... -- -- (0.5) -- --
-------- -------- -------- ----- -----
Net earnings (loss)..... 2.1% (0.4)% (0.8)% 0.2% (1.2)%
======== ======== ======== ===== =====
</TABLE>
48
<PAGE>
SMTC Corporation
Pro Forma quarter ended April 2, 2000 compared to the quarter ended March 31,
1999
Pro Forma Revenue
Pro forma revenue increased $25.3 million, or 21.9%, from $115.3 million in
the first quarter of 1999 to $140.6 million in the first quarter of 2000. This
increase resulted from the growth of revenue generated by our United States
operations and the acquisition of our Chihuahua facility in July 1999. In the
first quarter of 2000, 86.1% of our revenue was generated from operations in
the United States, 8.4% from Canada, 3.7% from Europe and 2.3% from Mexico. In
the first quarter of 1999, 85.5% of our revenue was generated from operations
in the United States, 10.4% from Canada, 4.1% from Europe and none from Mexico.
Revenue from Dell for the first quarter of 2000 was $32.6 million, or 23.2%
of total revenue. In the first quarter of 1999, revenue from Dell was $32.2
million, or 27.9% of total revenue. No other customer represented more than
10.0% of revenue in the first quarter of 1999 or 2000.
Pro Forma Gross Profit
Gross profit increased $2.7 million from $11.1 million in the first quarter
of 1999 to $13.7 million in the first quarter of 2000. Our gross profit margin
improved from 9.6% in the first quarter of 1999 to 9.8% in the first quarter of
2000. The improvement in gross profit was due to the effect of the growth in
revenue and the addition of our Chihuahua facility. The gross margin was higher
in the first quarter of 2000 because revenues from our Chihuahua facility were
on a consignment basis. Consignment sales typically result in lower revenue and
higher gross profit margins but lower gross profit compared to turnkey
services. In the second quarter of 2000 our Chihuahua facility became a turnkey
operation.
Pro Forma Selling, General and Administrative Expense
Selling, general and administrative expenses increased $2.1 million from
$6.8 million in the first quarter of 1999 to $8.9 million in the first quarter
of 2000. As a percentage of revenue, selling, general and administrative
expenses increased from 5.9% to 6.3% because the Chihuahua facility was
operating at less than capacity during the quarter. As the Chihuahua facility
provides higher revenue, we expect that selling, general and administrative
expenses will decline as a percentage of revenue.
Pro Forma Management Fees, Shareholder Bonuses
Management fees to shareholders of $0.1 million were expensed in both the
first quarter of 1999 and 2000. The Pensar shareholder bonuses increased by
$0.1 million from none in 1999 to $0.1 million in the first quarter of 2000.
Both of these expenses will be discontinued following our initial public
offering of shares.
Pro Forma Amortization
Amortization of intangible assets of $1.7 million and $1.8 million were
expensed in the first quarter of 1999 and the first quarter of 2000,
respectively. Amortization includes the amortization of $0.6 million of
goodwill related to the combination of Surface Mount and HTM, $0.4 million of
goodwill related to the acquisition of W.F. Wood and $0.5 million related to
the pending acquisition of Pensar. Also included in the amortization of
intangible assets is the amortization of $0.2 million of deferred finance costs
related to the establishment of our $155.0 million senior credit facility in
July 1999 and $0.1 million of deferred equipment lease costs.
Pro Form Interest Expense
Interest expense increased $2.0 million from $2.3 million in the first
quarter of 1999 to $4.3 million in the first quarter of 2000 due to the debt
incurred to purchase our Chihuahua facility and increased working capital
requirements with the growth of the business.
49
<PAGE>
Pro Forma Income Tax Expense
In the first quarter of 1999, we had an income tax expense of $0.5 million
on a loss of $0.1 million as we were not able to claim a recovery on losses of
$0.4 million incurred by our Irish subsidiary or deduct $0.1 million of
goodwill expense related to the combination of Surface Mount and HTM.
In the first quarter of 2000, we had no income tax recovery on a loss before
tax of $1.4 million as we were not able to claim a recovery on losses of $0.5
million incurred by our Irish subsidiary or deduct $0.6 million of goodwill
expense related to the combination of Surface Mount and HTM.
SMTC Corporation
Pro forma year ended December 31, 1999
Pro Forma Revenue
Pro forma revenue for 1999 was $502.7 million, which consisted of $303.0
million contributed by Surface Mount, $102.6 million contributed by HTM, $34.2
million contributed by W.F. Wood, $53.0 million contributed by Pensar 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 of $157.5 million represented
approximately 31.4% of total pro forma revenue in 1999. Our next four largest
customers in 1999, Carrier Access, EFI, EMC and IBM, together represented
approximately 22.3% of our total pro forma revenue in 1999.
Pro Forma Gross Profit
Pro forma gross profit for 1999 was $50.1 million at a pro forma gross
margin of 10.0%. Of this total, Surface Mount 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%, Pensar contributed $9.1 million at a gross margin of 17.2% 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 earned 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 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 $29.1
million, or 5.8% of pro forma revenue. Of this total, Surface Mount contributed
$17.7 million, or 5.8% of pro forma revenue, HTM contributed $2.9 million, or
2.8% of pro forma revenue, W.F. Wood contributed $2.6 million, or 7.6% of pro
forma revenue, Pensar contributed $4.5 million, or 8.7% of revenue, and our
Chihuahua facility contributed $1.4 million, or 14.1% of 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
50
<PAGE>
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 $2.4 million of
goodwill amortization related to the combination of Surface Mount and HTM, $1.7
million of goodwill amortization related to the acquisition of W.F. Wood and
$2.3 million of goodwill amortization related to the pending acquisition of
Pensar, 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
Surface Mount and HTM, goodwill of $17.4 million resulting from the acquisition
of W.F. Wood and goodwill of $23.1 million resulting from the pending
acquisition of Pensar, 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. We expect to write-off $2.5 million
of the outstanding unamortized deferred costs at April 2, 2000 upon application
of the offering proceeds to repay a portion of our long-term 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. Pensar
paid discretionary shareholder bonuses of $0.5 million.
Pro Forma Interest Expense
Pro forma interest expense of $12.1 million includes an adjustment of $2.5
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 and the
$17.0 million of debt incurred in connection with the pending acquisition of
Pensar.
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 Surface Mount and HTM is non-deductible and the benefit of the
losses of our Irish subsidiary has not been recorded. The $1.7 million of
goodwill amortization and $2.3 million of goodwill amortization in connection
with our acquisition of W.F. Wood and our pending acquisition of Pensar,
respectively, is deductible.
Adjusted Pro Forma EBITDA
Adjusted EBITDA was $31.4 million, or 6.2% of pro forma revenue. For a
description of our calculation of adjusted EBITDA refer to note (i) of the
Selected Consolidated Financial Data.
51
<PAGE>
Quarterly Pro Forma Combined Results of Operations
The following tables set forth our unaudited historical quarterly results
and pro forma quarterly results for the nine quarters ended April 2, 2000 and
the five quarters ended April 2, 2000, respectively. This information has been
prepared on the same basis as our annual consolidated financial statements and
it includes all adjustments necessary for a fair presentation of the financial
results of such periods. This information should be read in conjunction with
our annual consolidated financial statements, and our consolidated pro forma
statements for the years ended December 31, 1999 and 1998 and the quarter ended
April 2, 2000. The operating results for any previous quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Historical Results
Quarter ended
----------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31, April 2,
1998 1998 1998 1998 1999 1999 1999 1999 2000
--------- -------- ------------- ------------ --------- -------- ------------- ------------ --------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............ $19.4 $17.3 $20.0 $33.0 $23.3 $23.3 $87.8 $123.6 $124.3
Gross profit....... 1.6 1.2 1.6 2.6 1.7 1.5 6.7 11.8 11.2
Earnings (loss)
before
extraordinary
loss.............. 0.4 (1.3) 0.1 0.5 -- -- (0.7) (0.2) (1.4)
Net (loss) earnings
.................. 0.4 (1.3) 0.1 0.5 -- -- (2.0) (0.2) (1.4)
Earnings (loss)
before
extraordinary loss
per share......... 0.13 (0.71) 0.07 0.36 -- -- (0.76) (0.62) (1.16)
</TABLE>
<TABLE>
<CAPTION>
Pro forma results
Quarter ended (a)
----------------------------------------------------
April
March 31, June 30, September 31, December 31, 2,
1999 1999 1999 1999 2000
--------- -------- ------------- ------------ ------
(in millions)
<S> <C> <C> <C> <C> <C>
Revenue................. $115.3 $111.7 $135.1 $140.6 $140.6
Gross profit............ 11.1 10.4 13.2 15.4 13.8
Loss before extraordi-
nary loss.............. (0.4) (1.2) (2.2) (0.1) (1.4)
</TABLE>
- --------
(a) Prior to the combination of Surface Mount and HTM and the acquisition of
W.F. Wood, the companies had different quarter ending dates. For Surface
Mount, 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.
SMTC Corporation (formerly HTM Holdings, Inc.)
Quarter ended April 2, 2000 compared to the quarter ended March 31, 1999
Revenue
Revenue increased $101.0 million, or 433.5%, from $23.3 million in the first
quarter of 1999 to $124.3 million in the first quarter of 2000. This increase
resulted from the combination of Surface Mount and HTM, the acquisition of our
Chihuahua facility in July 1999 and our acquisition of W.F. Wood in September
1999. Surface Mount, W.F. Wood and our Chihuahua facility contributed $75.4
million, $11.3 million and $2.9 million, respectively to the increase in
revenue. Revenue from Dell for the current quarter was $32.6 million, or 26.2%
of total revenue. No other customer represented more than 10.0% of revenue.
Revenue generated by our Denver facility, formerly HTM, increased $11.4
million, or 48.9%, from $23.3 million in 1999 to $34.7 million in 2000. In
1999, revenue from IBM of $11.0 million, from Carrier Access of $4.0 million
and from Netopia of $2.8 million represented 47.2%, 17.2% and 12.0%,
respectively, of total revenue.
In the first quarter of 2000, 85.4% of our revenue was generated from
operations in the United States, 9.7% from Canada, 2.6% from Europe and 2.3%
from Mexico. In the first quarter of 1999, all of HTM's revenue was generated
in the United States from our Denver facility.
52
<PAGE>
Gross profit
Gross profit increased $9.5 million from $1.7 million in the first quarter
of 1999 to $11.2 million in the first quarter of 2000. Our gross profit margin
improved from 7.3% in the first quarter of 1999 to 9.0% in the first quarter of
2000. The improvements in gross profit and gross margin were due to the
combination of Surface Mount and HTM as well as the acquisitions completed in
1999. The combination of Surface Mount and HTM added $5.8 million of gross
profit at a gross margin of 7.7%, our W.F. Wood operation contributed $1.8
million at a gross margin of 15.9% and our Chihuahua facility added $1.2
million of gross profit at a gross margin of 41.4%.
Our W.F. Wood operation contributed higher gross margins because the high
precision enclosure products manufactured by that facility have higher profit
margins than the products we have historically manufactured.
Our Chihuahua facility provided us with higher gross margins because all of
its sales were on a consignment basis during the quarter. Consignment sales
typically result in lower revenue and higher gross profit margins but lower
gross profit compared to turnkey services. In the second quarter of 2000 our
Chihuahua facility became a turnkey operation.
At our Denver facility, formerly HTM, gross profit increased $0.7 million,
from $1.7 million in the first quarter of 1999 to $2.4 million in the first
quarter of 2000 but the gross margin declined from 7.3% to 6.9% due to a change
in customer mix.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased $6.8 million from
$0.7 million in the first quarter of 1999 to $7.5 million in the first quarter
of 2000. As a percentage of revenue, selling, general and administrative
expenses increased from 3.1% to 6.1% because the facilities added in the
combination of Surface Mount and HTM and through the acquisitions were
operating at a lower rate of capacity than our Denver facility. At our Denver
facility, selling, general and administrative expenses were unchanged at $0.7
million, but declined as a percentage of revenue from 3.1% to 2.0%.
Management Fees
In the first quarter of 2000, management fees of $0.1 million were paid to
our principal stockholders. In the first quarter of 1999, management fees of
$0.1 million were paid to the principal stockholders of HTM.
Amortization
Amortization of intangible assets in the first quarter of 2000 includes the
amortization of $0.6 million of goodwill related to the combination of Surface
Mount and HTM and $0.4 million of goodwill related to the acquisition of W.F.
Wood. 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
$0.1 million of deferred equipment lease costs.
Interest Expense
Interest expense increased $3.0 million from $0.8 million in the first
quarter of 1999 to $3.8 million in the first quarter of 2000 due to the debt
incurred in connection with the combination of Surface Mount and HTM, the debt
incurred to purchase our Chihuahua facility and W.F. Wood and increased working
capital requirements with the growth of our business. The weighted average
interest rates with respect to the debt for the first quarter of 1999 and the
first quarter of 2000 were 9.8% and 10.0%, respectively.
Income Tax Expense
In the first quarter of 2000, an income tax recovery of $0.1 million on a
loss before tax of $1.5 million produced an effective income tax recovery rate
of 6.7% as we were not able to claim a recovery on losses of
53
<PAGE>
$0.5 million incurred by our Irish subsidiary or deduct $0.6 million of
goodwill expense related to the combination of Surface Mount and HTM. The
effective income tax rate in the first quarter of 1999 was 37.5% on income
before tax of $0.1 million recorded by our Denver facility, formerly HTM.
Year ended December 31, 1999 compared to the year ended December 31, 1998
Revenue
Revenue increased $168.3 million, or 187.6%, from $89.7 million in 1998 to
$258.0 million in 1999. This increase resulted largely from the combination of
Surface Mount and HTM, the acquisition of our Chihuahua facility in July 1999
and our acquisition of W.F. Wood in September 1999. Surface Mount, W.F. Wood
and our Chihuahua facility contributed $134.5 million, $11.0 million and $9.9
million, respectively, to the increase in revenue. Surface Mount's largest
customer was Dell. Revenue from Dell for the five month period from the date of
the combination of Surface Mount and HTM to December 31, 1999 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 $53.3 million, from nil in 1998
to $36.4 million or 14.1% of revenue in 1999. The increase is due to the
combination of Surface Mount 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 Surface Mount and HTM. The
combination of Surface Mount and HTM added $11.1 million of gross profit at a
gross margin of 8.3%, our Chihuahua facility contributed $1.1 million of gross
profit at a gross margin of 11.1% and our W.F. Wood business added $1.8 million
of gross profit at a gross margin of 16.4%.
Our Chihuahua facility provided us with higher gross margins because it had
a higher percentage of consignment sales, which typically result in lower
revenue and higher gross profit margins but lower gross profit compared to
turnkey services. 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.
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 Surface Mount
54
<PAGE>
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 Surface Mount 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 Surface Mount 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 Surface
Mount 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. In 1998, amortization of deferred finance costs was $0.2
million. 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 Surface Mount and HTM and the debt incurred
to purchase our Chihuahua facility and W.F. Wood. Debt of $35.5 million and
$134.0 million was outstanding at December 31, 1998 and December 31, 1999,
respectively. The weighted average interest rates with respect to such debt for
1998 and 1999 were 10.1% and 9.6%, 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 recovery 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 Surface Mount and HTM. We were able to reduce our
tax expense by $0.4 million by applying $1.0 million of net operating tax
losses available to our subsidiaries in the United States. Income tax expense
in 1998 amounted to a recovery of $0.2 million on a loss before tax of $0.5
million, at an effective tax rate of 37.0%. 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 subordinated notes which were refinanced under the $155.0 million
senior credit facility entered into in connection with the July 1999
combination of Surface Mount and HTM. There were no extraordinary gains or
losses in 1998. The $1.3 million charge would not be presented as an
extraordinary loss in accordance with
55
<PAGE>
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.
Leveraged Recapitalization Expenses
Leveraged recapitalization expenses 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%.
Surface Mount
We have provided Management's Discussion and Analysis of revenue and gross
profit of Surface Mount for the eleven months ended July 29, 1999. Our revenue
and gross profit for the year ended December 31, 1999
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only includes the revenue and gross profit of Surface Mount from the date of
acquisition and does not provide investors with information that reflects the
historical operating results of the combined entity for periods prior to
July 30, 1999. Due to the relative size of Surface Mount's revenue and gross
profit compared to ours, we believe that this information is useful in
understanding the impact of HTM's combination with Surface Mount on future
operating results of the combined entity.
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 Surface Mount 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
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 million
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 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 beyond our Austin facility.
Revenue from Dell 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 in 1998. In 1997, revenue
from EFI, Aironet, IVI and Dell 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 and the start-up costs associated with our Cork facility.
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
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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 provided by operating activities for the quarter ended March 31,
1999 was $6.0 million compared to net cash used in operating activities of
$25.6 million for the quarter ended April 2, 2000. In 1999, our Denver
facility, formerly HTM, reduced its working capital requirements while the
growth of the combined companies in 2000 led to increased working capital
needs.
Net cash used by financing activities for the quarter ended March 31, 1999
was $5.1 million on the repayment of borrowings and capital lease payments. Net
cash provided by financing activities for the quarter ended April 2, 2000 was
$31.1 million due to increased borrowings under the revolving line of credit.
Net cash used in investing activities was for capital expenditures of $0.1
million in the quarter ended March 31, 1999 compared to $2.5 million in the
quarter ended April 2, 2000.
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 Surface Mount 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 April 2, 2000, we had borrowings of approximately $162.4 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 $2.4 million, net of a $1.6 million tax
recovery, on repayment of the debt comprised of the following items net of tax:
$1.6 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 and a $1.0 million charge for the excess of the value of the warrants
over proceeds received issued in connection with the subordinated notes.
The senior credit facility is described below under "Description of
Indebtedness."
On May 18, 2000, the senior credit facility was amended to increase the
revolving credit facility by $7.5 million to $67.5 million, and certain of the
financial covenants were modified to give us more flexibility to support our
continued business growth. Certain stockholders purchased notes in the amount
of $5 million and warrants in the amount of $2.5 million in connection with a
senior subordinated loan agreement dated May 18, 2000. The warrants have been
valued at $4.2 million based on an initial public offering share price of
$13.00 per share.
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 December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101 and
in March 2000 issued SAB 101A "Revenue Recognition," which provide guidelines
in applying U.S. generally accepted accounting principles to revenue
recognition in financial statements. We will be required to implement SAB 101
and 101A by the second quarter of 2000. We believe that our revenue recognition
practices are consistent with the guidelines.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. SFAS No. 133 requires all derivatives to be recognized either as
assets or liabilities and measured at fair value. SFAS No. 137 delays the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
We will be required to implement SFAS No. 133 for our fiscal year ended
December 31, 2001. We have not assessed the impact of the adoption of SFAS No.
133 on our financial position, results of operations or cash flows.
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In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost
of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. As required, we implemented this standard in
1999. The implementation did not have a material impact on our financial
position, results of operations or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities." SOP 98-5 requires that all start-up costs related to 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 $503 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, 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, Suite Technologies and Sycamore Networks. In 1999,
approximately 55% 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 APPEAR 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, 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, Suite Technologies 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
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capabilities and value-added service offerings. We have successfully completed
six acquisitions and one new site development 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.
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Our Customers
We target industry leading OEMs primarily in the networking, fixed and
wireless communications, and computing sectors. Pro forma 1999 revenue from
customers was allocated as follows:
[PIE CHART APPEARS HERE]
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, 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, Suite Technologies and Sycamore Networks. The electronic
products we assemble and manufacture can be found in a wide array of end-
products including:
. PBX switches
. Routers
. Personal computers
. Wireless base
stations . Hubs . Multimedia
peripherals
. Wireless loop . Switches
systems . Video broadcasting
. Mass storage
. Modems devices . Ethernet PCMCIA
cards
. Fax machines . Servers
. Semiconductor test
. Components for T1 . Workstations 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.
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<PAGE>
We have a direct sales force with a global presence that focuses on new and
existing customers to take advantage of our worldwide capabilities. We also
have a mix of established direct sales representatives and manufacturer
representative companies throughout Canada, the United States and Europe. Our
sales offices are located within our manufacturing facilities. In addition, we
have a sales office in Boston, Massachusetts. When a customer opportunity is
identified by our direct or outside sales force, we dedicate a team to the
potential customer, 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.
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.
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<PAGE>
Surface mount technology is the principal technology for the assembly of
printed circuit boards. Our customer-focused factories include predominantly
surface mount technology lines, which are highly flexible and are continually
reconfigured to meet customer-specific product requirements. In addition to
expertise in conventional surface mount technology, we have extensive
capabilities utilizing a broad range of technologies, including:
. chip scale packaging, which are micro electronic components utilized in
specialized assembly-process technologies;
. flip chips, which are structures that house interconnected circuits and
are utilized to minimize printed circuit board surface area when compact
packaging is required;
. tape automated bonding, which are micro electronic components utilized in
specialized assembly- process technologies;
. multichip module-laminates, which are a type of printed circuit board
design that allows for the placement of multiple integrated circuits or
other components in a limited surface area; and
. micro ball grid array, which is a method of mounting an integrated
circuit or other component to a printed circuit board. Rather than using
pins, also called leads, the component is attached with small balls of
solder at each contact. This method allows for greater component density
and is used in printed circuit boards with higher layer counts.
We also work with a wide range of substrate types from thin flexible
printed circuit boards to highly complex, dense multilayer boards.
Our assembly capabilities are complemented by advanced test capabilities.
These technologies include:
. high speed functional testing, a method of testing products by simulating
actual use modes in high volume;
. burn-in testing, a test method where products are powered on for 24 hours
to ensure product functionality;
. vibration testing, a method that tests whether products can withstand
forces encountered under normal use;
. in-circuit testing, an automated test for workmanship defects; and
. in-situ dynamic thermal cycling stress testing, a test method of exposing
products from high to low temperature extremes for several cycles, which
identifies any early product failures.
We believe that our inspection technology, is among the most sophisticated
in the EMS industry. Our inspection technology includes:
. x-ray laminography, a method that utilizes an x-ray to view thin layers
of a circuit board;
. three-dimensional laser paste, a volumetric inspection method that
utilizes a microscope with lasers; and
. scanning electron microscopy, a scanning method that utilizes a
microscope with 200 times magnification or greater.
Our ongoing research and development activities include the development of
processes and test technologies as well as some focused product development.
We are proactive in developing manufacturing techniques which take advantage
of the latest component and product designs and packaging.
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<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 April 2, 2000, we employed approximately 3,000 full time employees
worldwide. In addition, we employ varying levels of temporary employees as our
production demands. Given the variable nature of our project flow and the quick
response time required by our customers, it is critical that we be able to
quickly ramp-up and ramp-down our production to maximize efficiency. To achieve
this, our strategy has been to
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<PAGE>
employ a skilled temporary labor force, as required. We use outside contractors
to qualify our temporary employees on a site-by-site basis. Our production
level temporary employees are compensated by the hour. We do not have any
permanent leased employees. We believe we are team-oriented, dynamic and
results-oriented with an emphasis on customer service and quality at all
levels. We believe this environment is a critical factor for us to be able to
fully utilize the intellectual capital of our employees. From time to time we
relocate our management level employees as needed to fill open positions at our
sites. Because of our training programs, we have not experienced difficulty in
adequately staffing skilled employees.
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>
We have exercised an option under our Austin, Texas lease to purchase 20
acres adjacent to our existing facility. We are in the process of selling the
property back to the developer in order to build a 145,000 square foot
facility, which we intend to lease back. We expect to move our Austin
operations to the new building and to be operational in the second quarter of
2001. We are also in the process of consolidating our two Boston, Massachusetts
facilities into a new, approximately 100,000 square foot facility which we plan
to occupy in late 2000.
All of our principal facilities are ISO certified to ISO 9001 or ISO 9002
standards. ISO 9001 and ISO 9002 are commonly recognized standards in the EMS
industry that are published by the International Standardization Organization
and relate to quality management systems. ISO 9001 contains requirements for
quality assurance in design, development, production, installation and
servicing. ISO 9002 contains requirements for quality assurance in production,
installation and servicing.
The principal executive office of SMTC and SMTC Canada is located at 635
Hood Road, Markham, Ontario, Canada L3R 4N6.
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Our Structure and Our History
The following chart shows our current 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]
SMTC Corporation
Our company's present corporate structure resulted from the July 1999
combination of Surface Mount and HTM in a transaction accounted for under the
purchase method of accounting as the acquisition of Surface Mount by HTM. The
transaction provided us with increased strategic and operating scale, as well
as greater geographic breadth. Subsequent to the combination, all of Surface
Mount's operating subsidiaries other than SMTC Canada 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, Surface
Mount, completed a reorganization such that Surface Mount 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, Inc., and
HTM, a Delaware corporation, was organized such that Hi-Tech
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<PAGE>
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.
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<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 Surface Mount 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.
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<PAGE>
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.
Paul Walker founded Surface Mount 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 Surface Mount 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 Surface Mount 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 Surface Mount 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 Surface Mount 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 Surface Mount in April 1996. 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 Surface Mount 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 Surface Mount 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 Surface Mount 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.
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<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, Inc. Prior to joining Celerity Partners, Inc., 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, Inc., 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
class vote pursuant to our certificate of incorporation. Our executive officers
are elected by and serve at the discretion of the board of directors. Our
stockholders' agreement provides that our principal stockholders and
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<PAGE>
our management team are entitled to representation on our board of directors.
Messrs. Dominik and Ashe are representatives of Bain Capital, Inc., Messrs.
Adamson and Benham are representatives of Celerity Partners, Inc., Messrs.
Griffiths and Sigel are representatives of Kilmer Electronics Group Limited and
Paul Walker, Gary Walker and Mr. Johnson are representatives of management.
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."
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<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 Surface Mount during periods prior to the
July 30, 1999 combination of Surface Mount 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 Surface Mount 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 Surface Mount 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 Surface Mount 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 Surface Mount 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 Surface Mount and HTM.
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(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 Surface Mount 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.
(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.
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(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.
(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.
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<PAGE>
(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 Surface Mount
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 Surface Mount
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 his 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 May , 2000 which is
effective until May , 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 to participate in any bonus compensation
program made available to management as determined by our board of directors.
Mr. Johnson's employment agreement contains customary confidentiality
provisions and a non-solicitation clause, which is effective during the term of
the agreement and for six months following termination or expiration of his
employment. In the event Mr. Johnson's employment is terminated by us without
cause, or we elect not to renew Mr. Johnson's employment for an additional
term, the employment agreement provides that we will pay Mr. Johnson his base
salary for six months following such termination or expiration.
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 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 his 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
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<PAGE>
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 his 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 his
base salary for two years following such termination.
Mr. Laurion is currently employed as our Vice President, Program Management
and Internal Audit pursuant to an employment agreement dated May , 2000 which
is effective until May , 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. Laurion receives an annual salary of
$165,000 per year and is eligible to participate in any bonus compensation
program made available to management as determined by our board of directors.
Mr. Laurion's employment agreement contains customary confidentiality
provisions and a non-solicitation clause, which is effective during the term of
this agreement and for six months following termination or expiration of his
employment. In the event Mr. Laurion's employment is terminated by us without
cause, or we elect not to renew Mr. Laurion's employment for an additional
term, the employment agreement provides that we will pay Mr. Laurion his base
salary for six months following such termination or expiration.
Mr. Koss is currently employed as our Vice President, Strategic Accounts
pursuant to an employment agreement dated May , 2000 which is effective until
May , 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. Koss receives an annual salary of $105,000 per year
and is eligible to participate in any bonus compensation program made available
to management as determined by our board of directors. Mr. Koss's employment
agreement contains customary confidentiality provisions and a non-solicitation
clause, which is effective during the term of the agreement and for six months
following termination or expiration of his employment. In the event Mr. Koss's
employment is terminated by us without cause, or we elect not to renew Mr.
Koss's employment for an additional term, the employment agreement provides
that we will pay Mr. Koss his base salary for six months following such
termination or expiration.
Mr. Tesch is currently employed as our Vice President, Access Centers
pursuant to an employment agreement dated May , 2000 which is effective until
May , 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. Tesch receives an annual salary of $150,000 per year
and is eligible to participate in any bonus compensation program made available
to management as determined by our board of directors. Mr. Tesch's employment
agreement contains customary confidentiality provisions and a non-solicitation
clause, which is effective during the term of the agreement and for six months
following termination or expiration of his employment. In the event Mr. Tesch's
employment is terminated by us without cause, or we elect not to renew Mr.
Tesch's employment for an additional term, the employment agreement provides
that we will pay Mr. Tesch's base salary for six months following such
termination or expiration.
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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 Surface Mount 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. On May , 2000, the terms
of the options held by four former HTM executives were amended to provide for
the restrictions to lapse with respect to 100% of the Class A common stock held
by such optionholders, a total of 24,197 shares, on June 8, 2000, and for 100%
of the options exercisable for Class L common stock, a total of 2,815 shares,
to become fully vested on June 8, 2000. 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 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.
2000 Equity Incentive Plan
The 2000 Equity Incentive Plan, or the 2000 Plan, is expected to be adopted
by our board of directors and approved by our stockholders prior to the
completion of this offering. As of the date of this prospectus, no awards have
been made under the 2000 Plan. We intend to grant to some of our executive
officers and employees options to purchase a total of approximately shares
of our common stock and exchangeable shares with an exercise price equal to
[the initial public offering price at the closing of this offering]. No future
grants will be made under existing plans upon the effectiveness of the 2000
Plan.
The 2000 Plan provides for the grant of options to all employees, officers,
directors and consultants of SMTC and its affiliates worldwide. In the United
States, incentive stock options may be granted to our employees (including
officers and employee directors) and nonstatutory stock options may be granted
to our employees, directors and consultants. A nonstatutory stock option is a
stock option that is not intended to qualify as an incentive stock option under
Section 422 of the Internal Revenue Code. The holder of a nonstatutory stock
option generally is taxed on the difference between the exercise price and the
fair market value when exercised. The 2000 Plan also provides for the grant of
stock appreciation rights, restricted stock, unrestricted stock, deferred
stock, and securities (other than stock options) which are convertible into or
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exchangeable for common stock, including options exercisable for SMTC Canada
exchangeable shares, on such terms and conditions as our board determines.
A total of (1) shares of common stock, (2) any shares returned to
existing plans as a result of the termination of options and (3) annual
increases of 1.0% of our outstanding common stock to be added on the date of
each annual meeting of our stockholders commencing in 2001, or such lesser
amounts as may be determined by the board of directors, will be reserved for
issuance pursuant to the 2000 Plan. For purposes of the preceding sentence, the
following will not be considered to have been delivered under the 2000 Plan:
. shares remaining under an award that terminates without having been
exercised in full;
. shares subject to an award, where cash is delivered to a participant in
lieu of such shares;
. shares of restricted stock that have been forfeited in accordance with
the terms of the applicable award; and
. shares held back, in satisfaction of the exercise price or tax
withholding requirements, from shares that would otherwise have been
delivered pursuant to an award.
The number of shares of stock delivered under an award shall be determined
net of any previously acquired shares tendered by the participant in payment of
the exercise price or of withholding taxes. The maximum number of incentive
stock options that may be issued pursuant to the 2000 Plan is . The maximum
number of options exercisable for exchangeable shares that may be issued
pursuant to the 2000 Plan is .
The administrator of the 2000 Plan has the power to determine the terms of
the options granted, including the exercise price of the option, the number of
shares subject to each option, the exercisability thereof, and the form of
consideration payable upon such exercise. In addition, our board of directors
has the authority to amend, suspend or terminate the 2000 Plan, provided that
no such action may affect any shares previously issued and sold or any option
previously granted under the 2000 Plan. Cash performance grants, intended to
qualify as "performance-based compensation," may be issued under the plan,
subject to shareholder approval as required by Section 162(m) of the Internal
Revenue Code.
Options granted under the 2000 Plan are generally not transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
and only by such optionee. Options granted under the 2000 Plan must generally
be exercised within three months after the end of an optionee's status as an
employee, director or consultant of SMTC, or within 12 months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option term.
The exercise price of all incentive stock options granted under the 2000
Plan must be at least equal to the fair market value of the underlying common
stock or exchangeable shares on the date of the grant. The exercise price of
nonstatutory stock options granted under the 2000 Plan is determined by the
administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Internal Revenue Code, the exercise price must be at least equal
to the fair market value of the common stock on the date of grant. With respect
to any participant who owns stock possessing more than 10% of the voting power
of all classes of our outstanding capital stock, the exercise price of any
incentive stock option granted must be at least equal to 110% of the fair
market value on the grant date and the term of such incentive stock option must
not exceed five years. The term of all other options granted under the 2000
Plan shall be determined by the administrator, provided that the term of an
option exercisable for exchangeable shares must not exceed 10 years.
The 2000 Plan provides that in the event of our merger with or into another
corporation, or a sale of substantially all of our assets, each option shall be
assumed or an equivalent option substituted for by the successor corporation.
If the outstanding options are not assumed or substituted for by the successor
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corporation, the administrator shall provide for the optionee to have the right
to exercise the option as to all of the optioned stock, including shares as to
which it would not otherwise be exercisable. This may have the effect of
discouraging a potential acquiror from making a tender offer or otherwise
attempting to gain control of us because our employees might have a reduced
incentive to remain with us following a merger or sale. If the administrator
makes an option exercisable in full in the event of a merger or sale of assets,
the administrator shall notify the optionee that the option shall be fully
exercisable for a period of fifteen days from the date of such notice, and the
option will terminate upon the expiration of such period.
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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 Surface Mount and HTM contains indemnification provisions
binding on us. Specifically, we have agreed to indemnify (a) each of the former
stockholders of Surface Mount 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 Surface Mount 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 Surface
Mount, prior to the combination of Surface Mount and HTM, of any covenant or
agreement of Surface Mount contained in the Reorganization and Merger
Agreement, and (ii) any breach of any representation or warranty made by
Surface Mount or any of its subsidiaries in the Reorganization and Merger
Agreement.
Immediately prior to the consummation of the combination of Surface Mount
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 Surface Mount 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 Surface Mount 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 Partners, Inc., or Celerity, and
Kilmer, since the July 1999 combination of Surface Mount 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 Surface Mount 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 connection with the
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combination of Surface Mount 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 Surface Mount and HTM in July of 1999.
Certain Loans from Major Stockholders
On April 26, 2000, Celerity Partners III, L.P., Kilmer, Paul Walker, Derek
D'Andrade, Gary Walker and Philip Woodard purchased demand notes from us in the
amount of $1,400,000, $910,000, $520,000, $520,000, $520,000 and $130,000,
respectively. The demand notes bore interest at 15% per year, had a fee of 2%
of the principal amount that was due upon repayment and were payable to the
holders of the notes upon demand. The demand notes were repaid on May 18, 2000.
Under a senior subordinated loan agreement dated May 18, 2000, funds
affiliated with Bain Capital, Celerity Partners III, L.P., Kilmer, Paul Walker,
Derek D'Andrade and Philip Woodard purchased notes from us in the amount of
$1,589,782.10, $1,268,381.32, $909,605.75, $529,190.68, $529,190.68 and
$101,694.84, respectively. The notes bear interest at 15% per year. Interest on
the notes shall be paid through the issuance of additional notes on
substantially the same terms. The notes, together with all accrued interest
thereon, are mandatorily prepayable upon the consummation of this offering.
In connection with the sale of notes under the Senior Subordinated Loan
Agreement dated May 18, 2000 described above, the Company sold warrants for
$2,500,000 that are exercisable, given an offering price per share of $13.00
and a closing date of the offering of June 30, 2000, for an aggregate of
shares of common stock immediately prior to the consummation of this offering.
Upon exercising these warrants, funds affiliated with Bain Capital, Celerity
Partners III, L.P., Kilmer, Paul Walker, Derek D'Andrade and Philip Woodard
will receive , , , , , , and shares, respectively.
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 Surface
Mount and HTM. In connection with the combination of Surface Mount and HTM, the
Bain Capital Funds and Celerity Partners, Inc. 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 Surface Mount stockholders received a combination of cash and stock in
exchange for their shares of Surface Mount. 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.
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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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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of each class of our common stock as of April 2, 2000 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 April 2, 2000, 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 23,093 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 April 2, 2000 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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<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)......... 680,111.5 103,894.9 784,006.5 30.7 75,575.2 12,088.2 87,663.4 31.3
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts
02116
Celerity EMSIcon
L.L.C.(2)(4)........... 625,250.6 -- 625,250.6 24.5 69,502.7 -- 69,502.7 24.8
c/o Celerity Partners
11111 Santa Monica
Boulevard
Suite 1127
Los Angeles, California
90025
Kilmer Electronics
Group, Limited......... 357,234.9 -- 357,234.9 14.0 39,692.8 -- 39,692.8 14.1
50 Ashwarren Road
Downsview, Ontario M3J
1Z5
Directors and Executive
Officers:
Paul Walker(5).......... 207,832.2 -- 207,832.2 8.2 23,092.5 -- 23,092.5 8.2
Gary Walker............. 207,832.2 -- 207,832.2 8.2 23,092.5 -- 23,092.5 8.2
Derek D'Andrade(6)...... 207,832.2 -- 207,832.2 8.2 23,092.5 -- 23,092.5 8.2
Philip Woodard.......... 39,939.3 -- 39,939.3 1.6 4,437.7 -- 4,437.7 1.6
Edward Johnson(2)(4).... 23,131.2 -- 23,131.2 * 730.8 299.9 990.9 *
David Dominik(2)(4)(7).. 157,702.6 1,090.8 158,793.4 6.2 17,510.3 126.9 17,637.2 6.6
Prescott Ashe(2)(4)(8).. 23,381.4 -- 23,387.4 * 2,596.6 -- 2,596.6 *
Mark Benham(9).......... 625,250.6 -- 625,250.6 24.5 69,502.7 -- 69,502.7 24.8
Stephen Adamson(9)...... 625,250.6 -- 625,250.6 24.5 69,502.7 -- 69,502.7 24.8
Michael Griffiths....... -- -- -- -- -- -- -- --
Anthony Sigel........... -- -- -- -- -- -- -- --
All Directors and
executive officers as a
group (19 persons)..... 1,506,794.8 1,090.8 1,507,885.6 59.1 164,055.6 830.7 164,886.3 58.4
</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 April 2, 2000 with respect to a person or group
includes (a) 2,551,006.08 shares of Class A common stock and an aggregate
of 281,913.54 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 April 2, 2000 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 $59,062,500 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$8,437,500 in revolving
credit loans, swing line loans, letters of credit, depository notes and
bills of exchange.
The indebtedness under this facility was approximately $162.4 million as of
April 2, 2000.
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.
We intend to repay the US Tranche A, US Tranche B, US Tranche C and Canadian
term loan facilities in full and to repay an aggregate of $7,500,000 of our
borrowings under the U.S. and Canadian revolving credit facilities, with
proceeds from this offering. The prepayment of the US Tranche C will require us
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 revolving credit facility terminates in July 2004. We anticipate
obtaining credit, in the form of an amendment to our current facility or a new
facility, in conjunction with the closing of this offering.
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 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).
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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 April 2, 2000 was 9.7%. 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.
Senior Subordinated Loan Agreement
Under a Senior Subordinated Loan Agreement dated May 18, 2000, we issued
subordinated notes in the aggregate principal amount of $5 million. The notes
bear simple interest at 15% per year and will be repaid on completion of this
offering.
The above summaries of the material provisions of the senior credit facility
and the senior subordinated loan agreement are qualified in their entirety by
reference to all of the provisions of the senior credit facility and the senior
subordinated loan agreement, which have been filed as exhibits 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 60,000,000 shares of common stock and 5,000,000 shares of
one or more series of preferred stock.
After giving effect to the offerings, assuming an offering price of $13.00
per share (the mid-point of the range set forth on the cover page of this
prospectus) and a closing date of June 30, 2000, we will have 24,564,891 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
April 2, 2000, we had 22 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
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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. 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.
On closing of this offering, we will also enter into a support agreement
under which we will agree to maintain the economic equivalency of the
exchangeable shares and the common stock by, among other things, not declaring
and paying dividends on the common stock unless SMTC Canada is able to declare
and pay economically equivalent dividends on the SMTC Canada exchangeable
shares in accordance with the terms of those shares. SMTC Canada may also
declare stock dividends from time to time as necessary to maintain the one-for-
one economic equivalence between SMTC Canada exchangeable shares and shares of
common stock. The SMTC Canada exchangeable shares do not carry any other right
to receive dividends from SMTC Canada.
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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.
The exchangeable shares of SMTC Canada that will be outstanding on closing
of the concurrent offering may not be resold or otherwise transferred in the
United States 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 under the symbol "SMX", 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
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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.
All shares could potentially be required to be registered in connection with
the exercise of any of the registration rights described above.
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.
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 those directors who are affiliated with the Bain Capital Funds,
Celerity Partners or Kilmer Electronics Group Limited. 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.
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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;
. 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. However, our
Certificate of Incorporation provides that a stockholder affiliated or
associated with the Bain Capital Funds, the Celerity Partners or the Kilmer
Electronics Group Limited will not be considered an "interested stockholder,"
notwithstanding that stockholder's percentage of our 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
24,564,891 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
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<PAGE>
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.
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, both Lehman Brothers and RBC Dominion Securities may 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 both Lehman Brothers and RBC Dominion
Securities;
. 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.
After this offering, there will be shares eligible for sale under Rule
144(k).
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Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchased shares from us in
connection with a compensatory stock plan or other written agreement is
eligible to resell those shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with some of the
restrictions, including the holding period, contained in Rule 144.
No precise prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price of our common stock prevailing from time to time. We are unable to
estimate the number of our shares that may be sold in the public market
pursuant to Rule 144 or Rule 701 because this will depend on the market price
of our common stock, the personal circumstances of the sellers and other
factors. After this offering, there will be shares available for sale under
Rule 701. Nevertheless, sales of significant amounts of our common stock in the
public market could adversely affect the market price of our common stock.
Stock Plans
We intend to file a registration statement under the Securities Act covering
shares of common stock reserved for issuance under our 1998 Plan and our
2000 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. In addition, we intend to grant options to purchase a total of
approximately shares of common stock under our 2000 Plan prior to the
effective date of this offering. 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 and options to purchase 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).
Exchangeable shares issuable upon exercise of such options may not be sold
or otherwise disposed of for value in Canada, except pursuant to a prospectus,
a discretionary exemption or a statutory exemption available only in specific
limited circumstances, for 12 months from the date that the Ontario Securities
Commission issues a receipt for the prospectus to be used by SMTC Canada in
connection with the concurrent offering of exchangeable shares.
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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<PAGE>
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 both Lehman Brothers and
RBC Dominion Securities, 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
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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 have agreed under lock-up agreements that, without the prior
written consent of both Lehman Brothers and RBC Dominion Securities, 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 under
the symbol "SMX", 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.
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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 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.
Merrill Lynch will be facilitating Internet distribution for this offering
to certain of its Internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its online brokerage customers.
An electronic prospectus is available on the website maintained by Merrill
Lynch. Other than the prospectus in electronic format, the information on the
Merrill Lynch website relating to this offering is not a part of this
prospectus.
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 .
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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.
EXPERTS
Our consolidated financial statements and financial statement schedule as of
December 31, 1999 and for the year then ended and the consolidated financial
statements of SMTC Corporation, or Surface Mount, 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 years in the two year 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 said firm as experts in accounting
and auditing.
The audited consolidated financial statements and financial statement
schedule of SMTC Corporation (formerly HTM Holdings, Inc.) as of and for the
year 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 reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
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.
The financial statements of Pensar as of December 31, 1998 and 1999 and for
each of the years in the three-year period ended December 31, 1999 included in
this prospectus and elsewhere in the registration statement have been so
included in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
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
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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 uncertainty, 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.
On September 20, 1999, we notified KPMG LLP that it would be engaged as our
independent auditors, replacing Arthur Andersen LLP, who were dismissed as our
independent auditors on September 20, 1999. KPMG LLP was the independent
auditor for Surface Mount prior to the July 1999 combination of Surface Mount
and HTM. The decision to change independent auditors was approved by our board
of directors on September 17, 1999. During their engagement, Arthur Andersen
LLP issued no audit report which was qualified or modified as to uncertainty,
audit scope or accounting principles, no adverse opinions or disclaimers of
opinion on any of our financial statements, and there were no disagreements
with Arthur Andersen LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures.
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.
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SMTC CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SMTC Corporation:
Unaudited Pro Forma Consolidated Financial Information for the three
months ended April 2, 2000............................................... F-3
Notes to Pro Forma Consolidated Financial Information for the three months
ended April 2, 2000 (unaudited).......................................... F-4
Pro Forma Consolidated Balance Sheet as of April 2, 2000 (unaudited)...... F-7
Notes to Pro Forma Consolidated Balance Sheet as of April 2, 2000
(unaudited).............................................................. F-8
Pro Forma Consolidated Statement of Earnings (Loss) for the three months
ended April 2, 2000 (unaudited).......................................... F-9
Notes to Pro Forma Consolidated Statement of Earnings (Loss) for the three
months ended April 2, 2000 (unaudited)................................... F-10
Unaudited Pro Forma Consolidated Financial Information for the year ended
December 31, 1999........................................................ F-12
Notes to Pro Forma Consolidated Financial Information for the year ended
December 31, 1999 (unaudited)............................................ F-13
Pro Forma Consolidated Balance Sheet as of December 31, 1999 (unaudited).. F-17
Notes to Pro Forma Consolidated Balance Sheet as of December 31, 1999
(unaudited).............................................................. F-18
Pro Forma Consolidated Statement of Earnings (Loss) for the year ended
December 31, 1999 (unaudited)............................................ F-19
Notes to Pro Forma Consolidated Statement of Earnings (Loss) for the year
ended December 31, 1999 (unaudited)...................................... F-20
SMTC Corporation (formerly HTM Holdings, Inc.):
Independent Auditors' Report.............................................. F-23
Report of Independent Public Accountants.................................. F-24
Report of Independent Accountants......................................... F-25
Consolidated Balance Sheets as of December 31, 1998 and 1999 and April 2,
2000 (unaudited)......................................................... F-26
Consolidated Statements of Earnings (Loss) for the years ended December
31, 1997, 1998 and 1999 and the three months ended March 31, 1999 and
April 2, 2000 (unaudited)................................................ F-27
Consolidated Statements of Changes in Shareholders' Equity (Deficiency)
for the years ended December 31, 1997, 1998 and 1999 and the three months
ended April 2, 2000 (unaudited).......................................... F-28
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999 and the three months ended March 31, 1999 and April
2, 2000 (unaudited)...................................................... F-29
Notes to Consolidated Financial Statements................................ F-30
SMTC Corporation (formerly The Surface Mount Technology Centre
Inc.)("Surface Mount"):
Auditors' Report.......................................................... F-54
Consolidated Balance Sheets as of August 31, 1998 and July 29, 1999....... F-55
Consolidated Statements of Earnings and Retained Earnings (Deficit) for
the years ended August 31, 1997 and 1998 and the period from September 1,
1998 to July 29, 1999.................................................... F-56
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-57
Notes to Consolidated Financial Statements................................ F-58
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
W.F. Wood, Incorporated:
Independent Auditor's Report............................................. F-70
Balance Sheets as of December 31, 1997 and 1998 and September 3, 1999.... F-71
Statements of Income for the years ended December 31, 1996, 1997 and 1998
and the period from January 1, 1999 to September 3, 1999................ F-72
Statements of Stockholders Equity for the years ended December 31, 1996,
1997 and 1998 and the period from January 1, 1999 to September 3, 1999.. F-73
Statements of Cash Flows for years ended December 31, 1996, 1997, 1998,
and the period from January 1, 1999 to September 3, 1999................ F-74
Notes to Financial Statements............................................ F-76
Pensar Corporation:
Independent Auditors' Report............................................. F-82
Balance Sheets as of December 31, 1998 and 1999 and March 31, 2000
(unaudited)............................................................. F-83
Statements of Income for the years ending December 31, 1997, 1998 and
1999 and the three months ended March 31, 1999 and 2000 (unaudited)..... F-84
Statements of Stockholders' Equity for the years ending December 31,
1997, 1998 and 1999 and the three months ended March 31, 2000
(unaudited)............................................................. F-85
Statements of Cash Flows for the years ending December 31, 1997, 1998 and
1999 and the three months ended March 31, 1999 and 2000 (unaudited)..... F-86
Notes to Financial Statements............................................ F-87
</TABLE>
F-2
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION OF SMTC CORPORATION
Three months ended April 2, 2000
The unaudited pro forma consolidated statement of earnings (loss) for the
three months ended April 2, 2000 gives pro forma effect to (1) the pending
acquisition of Pensar Corporation by SMTC Corporation, (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 acquisition, the reclassification and the offering
as if each of these occurred on January 1, 1999. The unaudited pro forma
consolidated balance sheet as at April 2, 2000 gives effect to the acquisition,
reclassification and offering as if each had occurred on April 2, 2000. 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 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 acquired operations or potential cost savings or
improvements in revenue that SMTC Corporation believes can be realized as a
result of the acquisition. The pro forma financial information should be read
in conjunction with the consolidated financial statements of SMTC Corporation
and the acquired operation, 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. There are no differences between United
States and Canadian GAAP that impact the unaudited pro forma consolidated
financial information.
The unaudited pro forma consolidated statement of earnings (loss) does not
reflect the net after-tax extraordinary loss of $2.4 million resulting from the
prepayment of the $5.0 million subordinated notes that were issued in May 2000,
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. The actual amount of this loss may be more
or less depending on the closing date of the transaction.
F-3
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(In thousands of U.S. dollars)
Three months ended April 2, 2000
(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 and statement of earnings
(loss) give 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", note 22(b) of the SMTC Corporation consolidated
financial statements for the year ended December 31, 1999 and note
3 to the pro forma consolidated financial information.
(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".
(iii) SMTC Corporation's pending acquisition of all of the issued and
outstanding shares of Pensar Corporation on the closing date of
the initial public offering for approximately $31,900 consisting
of $17,000 in cash and the balance in common shares of SMTC
Corporation. The valuation of the Company's shares to be issued
as consideration is based on the Company's initial public
offering price. The total purchase price reflected in the
unaudited pro forma consolidated financial information is
preliminary and is based on the most recently available
information. The final purchase price and purchase price
allocation may vary from the preliminary amounts reflected
herein and this may result in significant differences in certain
pro forma adjustments.
The unaudited pro forma consolidated financial information for the three
months ended April 2, 2000 has been prepared by management of SMTC
Corporation based on the unaudited consolidated financial information of
SMTC Corporation (formerly HTM Holdings, Inc.) for the three months ended
April 2, 2000, and the unaudited financial information of Pensar
Corporation for the three months ended April 2, 2000.
The pending acquisition will be accounted for by the purchase method.
The total purchase consideration will be 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 will be amortized over ten years. The valuations and other
studies required to determine the fair values of identifiable assets
acquired and liabilities assumed has not been completed for the Pensar
Corporation acquisition. Accordingly, the preliminary allocation is
expected to change upon further study and as more current information
becomes available.
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 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.), and Pensar Corporation.
F-4
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(In thousands of U.S. dollars)
Three months ended April 2, 2000
(Unaudited)
The pro forma consolidated financial information is not necessarily
indicative of the actual results that would have occurred had the
acquisition 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 acquisition 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 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
pending Pensar acquisition, the reclassification and offering as if they
had taken place April 2, 2000.
The unaudited pro forma consolidated statement of earnings (loss) for
the three months ended April 2, 2000 gives effect to the pending
acquisition, the reclassification and offering as if these transactions had
taken place on January 1, 1999.
3.The Reclassification
Concurrent with the effectiveness of the offering, SMTC Corporation will
complete a share capital reorganization that will be effected as follows,
assuming a closing date for the offering of June 30, 2000 and an initial public
offering price of $13.00 per share:
. 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
3.4958 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.
F-5
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(In thousands of U.S. dollars)
Three months ended April 2, 2000
(Unaudited)
Subsequent to the reclassification, the share capital of the company will be
as follows:
<TABLE>
<CAPTION>
Number of shares
--------------------------------------------------------------------------
Additional Special
Paid in Class A Class L Class N Exchangeable Common Voting
Capital Stock Stock Stock Shares Stock Stock
---------- ---------- -------- -------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 2, 2000.. -- 2,447,782 154,168 113,408 113,408 -- --
Stock Conversions....... -- (2,447,782) (154,168) (113,408) 1,858,377 12,968,106 1
-------- ---------- -------- -------- --------- ---------- -----
-- -- -- -- 1,971,785 12,968,106 1
======== ========== ======== ======== ========= ========== =====
<CAPTION>
Common Stock
Class A Class L --------------------------------
Options Options Warrants Options Warrants
---------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Apri1 2, 2000... 117,960 3,856 115,983
Option Conversions...... (117,960) (3,856) 479,406
Warrant Conversions..... (115,983) 573,367
-------- ---------- -------- -------- ---------
-- -- -- 479,406 573,367
======== ========== ======== ======== =========
<CAPTION>
Amount
--------------------------------------------------------------------------
Additional Special
Paid in Class A Class L Class N Exchangeable Common Voting
Capital Stock Stock Stock Shares Stock Stock
---------- ---------- -------- -------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 2, 2000.. $ 11,804 $ 3 $ -- $ -- $ -- $ -- $ --
Stock Conversions....... (127) (3) -- -- -- 130 --
-------- ---------- -------- -------- --------- ---------- -----
$ 11,677 $ -- $ -- $ -- $ -- $ 130 $ --
======== ========== ======== ======== ========= ========== =====
</TABLE>
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.
The Pending Acquisition of Pensar
The unaudited pro forma consolidated financial information gives effect to
our acquisition of all of the issued and outstanding shares of Pensar on the
closing date of the initial public offering for approximately $31,900
consisting of $17,000 cash and the balance in our common shares. The valuation
of our shares to be issued as consideration is based on the initial public
offering price. The total purchase price reflected in the unaudited pro forma
consolidated financial information is preliminary and is based on the most
recently available information. The final purchase price and purchase price
allocation may vary from the preliminary amounts reflected herein and this may
result in significant differences in certain pro forma adjustments.
F-6
<PAGE>
SMTC CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
(In thousands of U.S. dollars)
April 2, 2000
(Unaudited)
<TABLE>
<CAPTION>
SMTC Pensar Pro forma Pro forma
Corporation Corporation combined Offering and as adjusted
April 2, March 31, Acquisition April 2, reclassification April 2,
2000 2000 adjustments 2000 adjustments 2000
----------- ----------- ----------- --------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and short-term
investments........... $ 5,111 $ 27 $17,000 (a) $ 5,138 $125,000 (b) $ 5,138
(17,000)(a) (13,238)(b)
(106,762)(b)
(5,000)(b)
(78)(b)
(400)(c)
478 (e)
Accounts receivable.... 80,651 8,334 88,985 88,985
Inventories............ 86,394 6,786 93,180 93,180
Prepaid expenses....... 5,341 246 5,587 5,587
Deferred income taxes.. 1,044 -- 1,044 160 (c)
988 (d)
(191)(e) 2,676
675 (f)
-------- ------- ------- -------- -------- --------
178,541 15,393 193,934 1,632 195,566
Capital assets.......... 35,311 4,859 40,170 40,170
Goodwill and excess of
purchase price over
tangible book value of
net assets acquired.... 39,791 -- 22,102 (a) 61,893 61,893
Other assets............ 10,882 562 11,444 (2,469)(d) 8,975
Deferred income taxes... 592 -- 592 -- 592
-------- ------- ------- -------- -------- --------
$265,117 $20,814 $22,102 $308,033 $ (837) $307,196
======== ======= ======= ======== ======== ========
Liabilities and
Shareholders' Equity
Current liabilities:
Line of credit......... $ -- $ 3,000 $ $ 3,000 $ (3,000)(b) $ --
Accounts payable....... 59,039 4,996 64,035 64,035
Accrued liabilities.... 31,908 1,645 33,553 33,553
Income taxes payable... -- -- --
Current portion of
long-term debt........ 3,000 335 3,335 (3,335)(b) --
Current portion of
capital lease
obligation............ 1,335 1,335 1,335
-------- ------- ------- -------- -------- --------
95,282 9,976 105,258 (6,335) 98,923
Capital lease
obligations............ 1,618 -- 1,618 1,618
Long-term debt.......... 159,417 1,040 17,000 (a) 177,457 (100,505)(b) 76,952
Deferred income taxes... 2,444 -- 2,444 2,444
Shareholders' equity:
Capital stock.......... 3 1 (1)(a) 3 243 (g) 246
Warrants............... 367 -- 367 367
Loans receivable....... (60) (415) 415 (a) (60) (60)
Additional paid-in
capital............... 11,804 1,209 13,691 (a) 26,704 106,762 (b) 135,153
(243)(g)
1,687 (f)
Retained earnings
(deficit)............. (5,758) 9,003 (9,003)(a) (5,758) (240)(c) (8,447)
(1,481)(d)
287 (e)
(1,012)(f)
-------- ------- ------- -------- -------- --------
6,356 9,798 5,102 21,256 106,003 127,259
-------- ------- ------- -------- -------- --------
$265,117 $20,814 $22,102 $308,033 $ (837) $307,196
======== ======= ======= ======== ======== ========
</TABLE>
See accompanying notes to pro forma consolidated financial information.
F-7
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(In thousands of U.S. dollars)
April 2, 2000
(Unaudited)
Pro forma adjustments:
(a) Reflects the preliminary allocation of the purchase consideration for the
pending acquisition of Pensar Corporation as follows:
<TABLE>
<S> <C>
Current assets................................................... $ 15,393
Capital assets................................................... 4,859
Other long-term assets........................................... 562
Excess of purchase price over tangible book value of net assets
acquired........................................................ 22,102
Liabilities assumed.............................................. (11,016)
--------
$ 31,900
========
</TABLE>
Purchase consideration consists of $17,000 cash and an ascribed value of
$14,900 in common shares of SMTC Corporation.
(b) Reflects the sale of 9,625,000 shares of common stock and exchangeable
shares generating gross proceeds of $125,000 and the use of the estimated
net proceeds of $111,762, net of underwriting discounts and commissions
and the estimated offering expenses totaling $13,238, and the $78 of
proceeds from termination of the interest rate swap net of the prepayment
penalty (notes (c) and (e)) to repay a portion of the revolving line of
credit and the outstanding balance of the term loans, subordinated debt,
Pensar Corporation debt and $5,000 of subordinated notes issued in May
2000. The adjustment assumes the underwriters' over-allotment option is
not exercised. See "Use of Proceeds" and "Description of Indebtedness."
(c) 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 of $240 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.
(d) Reflects the write-off of $2,469 in capitalized debt issuance costs,
before $988 of related income tax recovery (at a 40% effective tax rate),
resulting in an after-tax extraordinary loss of $1,481 in connection with
the repayment of outstanding debt. Amounts will differ based on the
effective date of the offering.
(e) 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.
(f) Reflects the value of the warrants, in excess of proceeds received, issued
in May 2000 in connection with the subordinated notes and the related
write-off of $1,687 before $675 of related income tax expense (at a 40%
effective tax rate) resulting in an extraordinary loss of $1,012 related
to the prepayment of the subordinated notes.
(g) Represents the par value of shares issued in the offering and the
reclassification of the existing common stock.
F-8
<PAGE>
SMTC CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS (LOSS)
(dollars in thousands, except share quantities and per share amounts)
Three months ended April 2, 2000
(Unaudited)
<TABLE>
<CAPTION>
Pre-
SMTC combination
Corporation Pensar Pro forma
Three Corporation as adjusted
months Three months Offering Three months
ended ended and ended
April 2, March 31, Acquisition Pro forma reclassification April 2,
2000 2000 adjustments combined adjustments 2000
----------- ------------ ----------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 124,333 $16,283 $140,616 $ 140,616
Cost of sales........... 113,127 13,735 126,862 126,862
--------- ------- -------- ----------
Gross profit............ 11,206 2,548 13,754 13,754
Selling, general and
administrative
expenses............... 7,548 1,359 8,907 8,907
Management fees......... 131 -- 131 131
Amortization............ 1,272 -- $ 553 (a) 1,825 $ (116)(e) 1,709
Pensar Corporation
shareholder bonuses.... -- 114 114 114
--------- ------- ----- -------- ------ ----------
Operating income........ 2,255 1,075 (553) 2,777 116 2,893
Interest................ 3,789 103 373 (b) 4,265 (2,361)(f) 1,904
--------- ------- ----- -------- ------ ----------
Earnings (loss) before
income taxes........... (1,534) 972 (926) (1,488) 2,477 989
Income taxes (recovery):
Current................ (316) -- (297)(c) (408) 944 (g) 536
389(d)
Deferred............... 225 -- (74)(c) 299 49 (g) 250
--------- ------- ----- -------- ------ ----------
(91) -- (18) (109) 993 786
--------- ------- ----- -------- ------ ----------
Earnings (loss)......... $ (1,443) $ 972 $(908) $ (1,379) $1,484 $ 203
========= ======= ===== ======== ====== ==========
Income (loss) per common
share:
Earnings (loss)........ $ (1,443)
Less Class L preferred
entitlement........... (1,366)
---------
Earnings (loss)
attributable to common
shareholders........... $ (2,809)
=========
Earnings (loss) per
common share........... $ (1.16) $ (0.01)
========= ==========
Weighted average number
of shares outstanding:
Basic.................. 2,414,642 24,564,891
========= ==========
</TABLE>
Diluted earnings (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-9
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(In thousands of U.S. dollars)
Three months ended April 2, 2000
(Unaudited)
Pro forma adjustments:
The pro forma consolidated statement of earnings (loss) gives effect to the
acquisition of Pensar Corporation as if it had taken place on January 1, 1999.
The following reflects the preliminary allocation of the purchase consideration
for the pending acquisition in accordance with the purchase method of
accounting.
<TABLE>
<S> <C>
Current assets................................................... $ 15,393
Capital assets................................................... 4,859
Other long-term assets........................................... 562
Excess of purchase price over tangible book value of net assets
acquired........................................................ 22,102
Liabilities assumed.............................................. (11,016)
--------
Net assets acquired.............................................. $ 31,900
========
</TABLE>
(a) Reflects the additional amortization expense related to the excess of
purchase price over tangible book value of net assets to be acquired. The
valuations and other studies required to determine the fair values of
identifiable assets acquired and liabilities assumed has not been
completed for the Pensar acquisition. The amortization is based on an
estimated useful life of 10 years.
(b) Reflects the additional interest expense related to the borrowings
required by SMTC Corporation to complete the Pensar Corporation
acquisition based on the Company's current incremental borrowing rate on
April 2, 2000 of LIBOR plus 350 basis points.
(c) Reflects the income tax effect of adjustments (a) and (b) at a 40%
effective tax rate. The goodwill amortization of $553 in connection with
the acquisition of Pensar Corporation is tax deductible.
(d) Reflects the income tax effect of treating Pensar Corporation as a "C"
Corporation. Prior to its acquisition by SMTC Corporation, Pensar
Corporation held subchapter "S" status for federal and state income tax
purposes, thereby consenting to include the Company's income in the
shareholders' individual income tax returns.
(e) Reflects the decrease in amortization of debt issuance costs.
(f) 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................................. $ 4,265
Elimination of historical and pro forma interest.................... (2,361)
-------
Pro forma interest expense subsequent to the offering............... $ 1,904
=======
</TABLE>
The elimination of historical and pro forma interest is calculated by
applying the assumed offering proceeds net of the prepayment penalty,
interest rate swap termination proceeds to outstanding debt balances
(including the debt related to the Pensar Corporation acquisition) net of
$5,000 to be applied to the subordinated notes issued in May 2000, as if
the proceeds were applied at January 1, 1999. The proceeds were applied
against the entire balance outstanding on the subordinated debt, term
loans, Pensar Corporation debt and a portion of the revolving credit
facility.
(g) Reflects the income tax effect of adjustments (e) and (f) at a 40%
effective tax rate.
F-10
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(In thousands of U.S. dollars)
Three months ended April 2, 2000
(Unaudited)
(h) 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:
. $131 of pre-tax management fees paid to Bain Capital Partners VI, L.P.,
Celerity Partners, 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; and
. $114 of pre-tax bonuses paid to Pensar Corporation shareholders.
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)........................................ $(1,504) $203
Plus:
Management fees...................................... 131 131
Former W.F. Wood shareholders' compensation.......... 114 114
Less:
Tax effect of above adjustments at 40%............... (98) (98)
------- ----
Adjusted earnings (loss)............................. $(1,357) $350
======= ====
</TABLE>
F-11
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION OF SMTC CORPORATION
Year ended December 31, 1999
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.), W.F.
Wood, Incorporated and the pending acquisition of Pensar Corporation 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 acquisition of Pensar
Corporation, 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 statement of earnings (loss) 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 $2.8 million resulting from the
prepayment of the $5.0 million subordinated notes issued in May 2000, 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. The actual amount of this loss may be
more or less than the pro forma amount based on the closing date of the
transaction.
F-12
<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", note 22(b) of the SMTC Corporation consolidated
financial statements for the year ended December 31, 1999 and note
3 to the pro forma consolidated financial information.
(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".
(iii) SMTC Corporation's pending acquisition of all of the issued and
outstanding shares of Pensar Corporation on the closing date of
the initial public offering for approximately $31,900 consisting
of $17,000 in cash and the balance in common shares of SMTC
Corporation. The valuation of the Company's shares to be issued
as consideration is based on the Company's initial public
offering price. The total purchase price reflected in the
unaudited pro forma consolidated financial information is
preliminary and is based on the most recently available
information. The final purchase price and purchase price
allocation may vary from the preliminary amounts reflected
herein and this may result in significant differences in certain
pro forma adjustments.
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 of the issued and
outstanding shares of W.F. Wood, Incorporated on September 3,
1999 for a total cash consideration of $19,672.
(iii) SMTC Corporation's pending acquisition of all of the issued and
outstanding shares of Pensar Corporation on the closing date of
the initial public offering for approximately $31,900 consisting
of $17,000 in cash and the balance in common shares of SMTC
Corporation. The valuation of the Company's shares to be issued
as consideration is based on the Company's initial public
offering price. The total purchase price reflected in the
unaudited pro forma consolidated financial information is
preliminary and is based on the most recently available
F-13
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(In thousands of U.S. dollars)
Year ended December 31, 1999
(Unaudited)
information. The final purchase price and purchase price allocation
may vary from the preliminary amounts reflected herein and this may
result in significant differences in certain pro forma adjustments.
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, the audited financial statements of W.F. Wood, Incorporated for
the period from January 1, 1999 to September 3, 1999, and the audited
financial statements of Pensar Corporation for the year ended December 31,
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. The valuations and other studies
required to determine the fair values of identifiable assets acquired and
liabilities assumed has not been completed for the Pensar Corporation
acquisition. Accordingly, the preliminary allocation is expected to change
upon further study and as more current information becomes available.
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 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.), W.F. Wood, Incorporated and Pensar Corporation.
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
Pensar acquisition, 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-14
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(In thousands of U.S. dollars)
Year ended December 31, 1999
(Unaudited)
3. The Reclassification
Concurrent with the effectiveness of the offering, SMTC Corporation will
complete a share capital reorganization that will be effected as follows,
assuming a closing date for the offering of June 30, 2000 and an initial
public offering price of $13.00 per share:
. 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
3.4958 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:
<TABLE>
<CAPTION>
Number of shares
---------------------------------------------------------------
Additional Special
Paid in Class A Class L Class N Exchangeable Common Voting
Capital Stock Stock Stock Stock Stock Stock
---------- ---------- -------- -------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 2, 2000.. -- 2,447,782 154,168 113,408 113,408 -- --
Stock Conversions ...... (2,447,782) (154,168) (113,408) 1,858,377 12,968,106 1
-------- ---------- -------- -------- --------- ---------- ---
-- -- -- -- 1,971,785 12,968,106 1
======== ========== ======== ======== ========= ========== ===
<CAPTION>
Common Stock
Class A Class L --------------------------------
Options Options Warrants Options Warrants
---------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance April 2, 2000... 117,960 3,856 115,983
Option conversions...... (117,960) (3,856) 479,406
Warrant conversions..... (115,983) 573,367
-------- ---------- -------- -------- ---------
-- -- -- 479,406 573,367
======== ========== ======== ======== =========
</TABLE>
F-15
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(In thousands of U.S. dollars)
Year ended December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Amount
--------------------------------------------------------------
Additional Special
Paid in Class A Class L Class N Exchangeable Common Voting
Capital Stock Stock Stock Stock Stock Stock
---------- ------- ------- ------- ------------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 2, 2000.. $11,804 $ 3 $ -- $ -- $ -- $ -- $ --
Stock Conversions ...... (127) (3) -- -- -- 130 --
------- ---- ----- ----- ----- ----- -----
$11,677 $-- $ -- $ -- $ -- $ 130 $ --
======= ==== ===== ===== ===== ===== =====
</TABLE>
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.
The Pending Acquisition of Pensar
The unaudited pro forma consolidated financial information gives effect to
our acquisition of all of the issued and outstanding shares of Pensar on the
closing date of the initial public offering for approximately $31,900
consisting of $17,000 cash and the balance in our common shares. The valuation
of our shares to be issued as consideration is based on the initial public
offering price. The total purchase price reflected in the unaudited pro forma
consolidated financial information is preliminary and is based on the most
recently available information. The final purchase price and purchase price
allocation may vary from the preliminary amounts reflected herein and this may
result in significant differences in certain pro forma adjustments.
F-16
<PAGE>
SMTC CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
(In thousands of U.S. dollars)
December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
SMTC Pensar Pro forma
Corporation Corporation Offering and as adjusted
December 31, December 31, Acquisition Pro forma reclassification December 31,
1999 1999 adjustments combined adjustments 1999
------------ ------------ ----------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and short-term
investments........... $ 2,083 $ 512 $17,000 (a) $ 2,595 $125,000 (b) $ 2,595
(17,000)(a) (13,238)(b)
(106,762)(b)
(5,000)(b)
(78)(b)
(400)(c)
478 (e)
Accounts receivable.... 71,597 9,781 81,378 81,378
Inventories............ 61,680 5,273 66,953 66,953
Prepaid expenses....... 3,647 201 3,848 3,848
Deferred income taxes.. 1,527 -- 1,527 160 (c) 3,327
1,156 (d)
(191)(e)
675 (f)
-------- ------- ------- -------- -------- --------
140,534 15,767 156,301 1,800 158,101
Capital assets.......... 35,003 4,721 39,724 39,724
Goodwill and excess of
purchase price over
tangible book value of
net assets acquired.... 40,800 -- 23,099 (a) 63,899 63,899
Other assets............ 11,145 511 11,656 (2,890)(d) 8,766
Deferred income taxes... 623 -- 623 623
-------- ------- ------- -------- -------- --------
$228,105 $20,999 $23,099 $272,203 $ (1,090) $271,113
======== ======= ======= ======== ======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Line of credit......... $ -- $ 4,215 $ $ 4,215 $ (4,215)(b) $ --
Accounts payable....... 53,119 5,277 58,396 58,396
Accrued liabilities.... 29,307 1,293 30,600 30,600
Income taxes payable... 1,127 -- 1,127 1,127
Current portion of
long-term debt........ 2,000 332 2,332 (2,332)(b) --
Current portion of
capital lease
obligation............ 1,541 -- 1,541 1,541
-------- ------- ------- -------- -------- --------
87,094 11,117 98,211 (6,547) 91,664
Capital lease
obligations............ 1,537 -- 1,537 1,537
Long-term debt.......... 128,942 1,081 17,000 (a) 147,023 (100,293)(b) 46,730
Deferred income taxes... 2,733 -- 2,733 2,733
Shareholders' equity:
Capital stock.......... 3 1 (1)(a) 3 243 (g) 246
Warrants............... 367 -- 367 367
Loans receivable....... (60) (455) 455 (a) (60) (60)
Additional paid-in
capital............... 11,804 1,209 13,691 (a) 26,704 106,762 (b) 134,910
(243)(g)
1,687 (f)
Retained earnings
(deficit)............. (4,315) 8,046 (8,046)(a) (4,315) (240)(c) (7,014)
(1,734)(d)
287 (e)
(1,012)(f)
-------- ------- ------- -------- -------- --------
7,799 8,801 6,099 22,699 105,750 128,449
-------- ------- ------- -------- -------- --------
$228,105 $20,999 $23,099 $272,203 $ (1,090) $271,113
======== ======= ======= ======== ======== ========
</TABLE>
See accompanying notes to pro forma consolidated financial information.
F-17
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(In thousands of U.S. dollars)
December 31, 1999
(Unaudited)
Pro forma adjustments:
(a) Reflects the preliminary allocation of the purchase consideration for the
pending acquisition of Pensar Corporation as follows:
<TABLE>
<S> <C>
Current assets.................................................... $15,767
Capital assets.................................................... 4,721
Other long-term assets............................................ 511
Excess of purchase price over tangible book value of net assets
acquired......................................................... 23,099
Liabilities assumed............................................... (12,198)
-------
$31,900
=======
</TABLE>
Purchase consideration consists of $17,000 cash and an ascribed value of
$14,900 in common shares of SMTC Corporation.
(b) Reflects the sale of 9,625,000 shares of common stock and exchangeable
shares generating gross proceeds of $125,000 and the use of the estimated
net proceeds of $111,762, net of underwriting discounts and commissions
and the estimated offering expenses totaling $13,238, and the $78 of
proceeds from termination of the interest rate swap net of the prepayment
penalty (notes (c) and (e)), to repay a portion of the revolving line of
credit and the outstanding balance of the term loans, subordinated debt,
Pensar Corporation debt and $5,000 of subordinated notes issued in May
2000. The adjustment assumes the underwriters' over-allotment option is
not exercised. See "Use of Proceeds" and "Description of Indebtedness."
(c) 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 of $240 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.
(d) Reflects the write-off of $2,890 in capitalized debt issuance costs,
before $1,156 of related income tax recovery (at a 40% effective tax
rate), resulting in an after-tax extraordinary loss of $1,734 in
connection with the repayment of outstanding debt. Amounts will differ
based on the effective date of the offering.
(e) 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.
(f) Reflects the value of the warrants, in excess of proceeds received, issued
in May 2000 in connection with the subordinated notes and the related
write-off of $1,687 before $675 of related income tax expense (at a 40%
effective tax rate) resulting in an extraordinary loss of $1,012 related
to the prepayment of the subordinated notes.
(g) Represents the par value of shares issued in the offering and the
reclassification of the existing common stock.
F-18
<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 Pre-
(formerly The combination
Surface Mount W.F. Wood Pre-
Technology Incorporated combination
SMTC Centre Inc.) from Pensar Offering
Corporation from January 1, January 1, Corporation and
year ended 1999 to 1999 to year ended reclassi-
December 31, July 29, September 3, December 31, Acquisition Pro forma fication
1999 1999 1999 1999 adjustments combined adjustments
------------ ---------------- ------------ ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue.......... $ 257,962 $168,553 $23,198 $52,996 $ $502,709 $
Cost of sales.... 236,331 152,330 20,072 43,859 452,592
---------- -------- ------- ------- ------- -------- ------
Gross profit..... 21,631 16,223 3,126 9,137 50,117
Selling, general
and
administrative
expenses........ 12,615 10,268 1,718 4,533 29,134
Management fees.. 717 -- -- -- 717
Amortization..... 1,990 -- -- -- 4,906 (a) 6,896 (359)(f)
Former W.F. Wood
shareholders'
compensation.... -- -- 136 -- 136
Acquisition-
related bonuses
paid to
management and
employees of
W.F. Wood....... -- -- 2,571 -- 2,571
Pensar
Corporation
shareholder
bonuses......... -- -- -- 498 498
Acquisition-
related
professional
fees............ -- -- 403 75 (478)(b) --
---------- -------- ------- ------- ------- -------- ------
Operating income
(loss).......... 6,309 5,955 (1,702) 4,031 (4,428) 10,165 359
Interest......... 7,066 2,215 58 267 2,522 (c) 12,128 (9,698)(g)
---------- -------- ------- ------- ------- -------- ------
Earnings (loss)
before income
taxes........... (757) 3,740 (1,760) 3,764 (6,950) (1,963) 10,057
Income taxes
(recovery):
Current......... 442 2,064 -- -- (2,131)(d) 1,177 3,879 (h)
802 (e)
Deferred........ (335) (195) -- -- (77)(d) (607) 144 (h)
---------- -------- ------- ------- ------- -------- ------
107 1,869 -- -- (1,406) 570 4,023
---------- -------- ------- ------- ------- -------- ------
Earnings (loss)
................ $ (864) $ 1,871 $(1,760) $ 3,764 $(5,544) $ (2,533)(i) $6,034
========== ======== ======= ======= ======= ======== ======
Income (loss) per
common share:
Earnings (loss)
............... $ (864)
Less Class L
preferred
entitlement.... (2,185)
----------
Earnings (loss)
attributable
to common shareholders.. $ (3,049)
==========
Earnings (loss)
per common
share........... $ (1.89)
==========
Diluted......... $ (1.89)
==========
Weighted average
number of shares
outstanding:
Basic........... 1,617,356
==========
Diluted......... 1,617,356
==========
<CAPTION>
Pro forma
as adjusted
year ended
December 31,
1999
---------------
<S> <C>
Revenue.......... $ 502,709
Cost of sales.... 452,592
---------------
Gross profit..... 50,117
Selling, general
and
administrative
expenses........ 29,134
Management fees.. 717
Amortization..... 6,537
Former W.F. Wood
shareholders'
compensation.... 136
Acquisition-
related bonuses
paid to
management and
employees of
W.F. Wood....... 2,571
Pensar
Corporation
shareholder
bonuses......... 498
Acquisition-
related
professional
fees............ --
---------------
Operating income
(loss).......... 10,524
Interest......... 2,430
---------------
Earnings (loss)
before income
taxes........... 8,094
Income taxes
(recovery):
Current......... 5,056
Deferred........ (463)
---------------
4,593
---------------
Earnings (loss)
................ $ 3,501(i)
===============
Income (loss) per
common share:
Earnings (loss)
...............
Less Class L
preferred
entitlement....
Earnings (loss)
attributable
to common shareholders..
Earnings (loss)
per common
share........... $ 0.14
===============
Diluted......... $ 0.14
===============
Weighted average
number of shares
outstanding:
Basic........... 24,564,891
===============
Diluted......... 25,820,374
===============
</TABLE>
See accompanying notes to pro forma consolidated financial information.
F-19
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENT 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, Pensar
Technology Centre Inc.) Incorporated Corporation
----------------------- ------------ -----------
<S> <C> <C> <C>
Current assets............. $ 84,423 $ 6,354 $15,767
Capital assets............. 21,093 1,695 4,721
Other long-term assets..... -- 20 511
Goodwill and excess of
purchase price over
tangible book value of net
assets acquired........... 24,863 17,468 23,099
Liabilities assumed........ (105,676) (5,865) (12,198)
-------- ------- -------
Net assets acquired........ $ 24,703 $19,672 $31,900
======== ======= =======
</TABLE>
(a) Reflects the additional amortization expense related to the allocation of
the purchase price to goodwill and excess of purchase price over tangible
book value of net assets acquired for the acquisitions. The valuations and
other studies required to determine the fair values of identifiable assets
acquired and liabilities assumed has not been completed for the Pensar
acquisition. The amortization is based on an estimated useful life of 10
years for the goodwill.
(b) Reflects the elimination of acquisition-related professional fees incurred
by W.F. Wood and Pensar Corporation.
(c) Reflects the additional interest expense related to the borrowings
required by SMTC Corporation to complete the W.F. Wood, Incorporated and
Pensar Corporation acquisitions, 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 $4,058 of goodwill in connection
with the acquisitions of W.F. Wood and Pensar Corporation is tax
deductible.
(e) Reflects the income tax effect of treating W.F. Wood, Incorporated and
Pensar Corporation as "C" Corporations. Prior to acquisition by SMTC
Corporation, W.F. Wood, Incorporated and Pensar Corporation held "S Corp."
status for federal and state income tax purposes, thereby consenting to
include the Companies' 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................................. $12,128
Elimination of historical and pro forma interest.................... (9,698)
-------
Pro forma interest expense subsequent to the offering............... $ 2,430
=======
</TABLE>
F-20
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS (LOSS)
(In thousands of U.S. dollars)
Year ended December 31, 1999
(Unaudited)
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 to outstanding debt balances
(including the debt related to the W.F. Wood and Pensar Corporation
acquisitions) net of $5,000 to be applied to the subordinated notes issued
in May 2000 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.
(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 Partners, 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
. $498 of pre-tax bonuses paid to Pensar Corporation shareholders.
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)...................................... $(2,553) $3,501
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
Pensar Corporation shareholder bonuses............. 498 498
Less:
Tax effect of above adjustments at 40%............. (1,569) (1,569)
------- ------
Adjusted earnings (loss)........................... $ (200) $5,854
======= ======
</TABLE>
F-21
<PAGE>
SMTC CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENT 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 and termination of the
interest rate swap 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> <C>
Operating income............................................. $ $10,524
Interest..................................................... 2,430
Debt extinguishment costs.................................... 5,092
-------
Earnings before income taxes................................. 3,002
Income taxes (recovery):
Current.................................................... 3,061
Deferred................................................... (463)
-------
2,598
-------
Net earnings................................................. $ 404
=======
</TABLE>
F-22
<PAGE>
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.
KPMG LLP
Chartered Accountants
Toronto, Canada
February 18, 2000, except
as to note 22 which is as of
May 23, 2000
F-23
<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 10, 1999
F-24
<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-25
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of U.S. dollars)
<TABLE>
<CAPTION>
December 31,
------------------ April 2,
1998 1999 2000
-------- -------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and short-term investments......... $ 486 $ 2,083 $ 5,111
Accounts receivable (note 4)............ 21,780 71,597 80,651
Inventories (note 5).................... 12,485 61,680 86,394
Prepaid expenses........................ 79 3,647 5,341
Deferred income taxes................... 855 1,527 1,044
-------- -------- --------
35,685 140,534 178,541
Capital assets (note 6)................... 7,071 35,003 35,311
Goodwill (note 7)......................... -- 40,800 39,791
Other assets (note 8)..................... 1,489 11,145 10,882
Deferred income taxes..................... -- 623 592
-------- -------- --------
$ 44,245 $228,105 $265,117
======== ======== ========
Liabilities and Shareholders' Equity
(Deficiency)
Current liabilities:
Bank indebtedness (note 9).............. $ 6,559 $ -- $ --
Accounts payable........................ 10,399 53,119 59,039
Accrued liabilities..................... 8,208 29,307 31,908
Income taxes payable.................... -- 1,127 --
Current portion of long-term debt (note
9)..................................... 725 2,000 3,000
Current portion of capital lease
obligations (note 9)................... 1,740 1,541 1,335
-------- -------- --------
27,631 87,094 95,282
Capital lease obligations (note 9)........ 2,419 1,537 1,618
Long-term debt (note 9)................... 24,063 128,942 159,417
Deferred income taxes..................... 600 2,733 2,444
Shareholders' equity (deficiency):
Capital stock issued and outstanding as
at December 31,1999 and
April 2, 2000 (note 10):
1,946,404 Common shares............... 6 -- --
2,447,782 Class A shares.............. -- 3 3
154,168 Class L shares................ -- -- --
113,408 Class N shares................ -- -- --
Treasury stock.......................... (21,938) -- --
Warrants (note 10)...................... 367 367 367
Loans receivable (note 10).............. -- (60) (60)
Additional paid-in-capital.............. 13,269 11,804 11,804
Deficit................................. (2,172) (4,315) (5,758)
-------- -------- --------
(10,468) 7,799 6,356
Commitments and contingencies (notes 15
and 16)..................................
Subsequent events (note 22)...............
United States and Canadian accounting
policy differences (note 23).............
-------- -------- --------
$ 44,245 $228,105 $265,117
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<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, Three months ended
------------------------------ -----------------------
March 31, April 2,
1997 1998 1999 1999 2000
--------- --------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................. $ 59,031 $ 89,687 $ 257,962 $ 23,268 $ 124,333
Cost of sales........... 53,603 82,528 236,331 21,566 113,127
--------- --------- --------- --------- ---------
Gross profit............ 5,428 7,159 21,631 1,702 11,206
Selling, general and
administrative
expenses............... 2,769 3,144 12,615 715 7,548
Management fees (note
13).................... -- 136 717 55 131
Amortization............ -- 151 1,990 65 1,272
Leveraged
recapitalization
expenses (note 2(a))... -- 2,219 -- -- --
--------- --------- --------- --------- ---------
Operating income........ 2,659 1,509 6,309 867 2,255
Interest (note 9)....... 673 2,030 7,066 795 3,789
--------- --------- --------- --------- ---------
Earnings (loss) before
income taxes........... 1,986 (521) (757) 72 (1,534)
Income taxes:
Current............... 34 15 442 1 (316)
Deferred (recovery)... 708 (208) (335) 26 225
--------- --------- --------- --------- ---------
742 (193) 107 27 (91)
--------- --------- --------- --------- ---------
Earnings (loss) before
extraordinary loss..... 1,244 (328) (864) 45 (1,443)
Extraordinary loss (net
of tax recovery of
$811) (note 17)........ -- -- (1,279) -- --
--------- --------- --------- --------- ---------
Net earnings (loss)..... $ 1,244 $ (328) $ (2,143) $ 45 $ (1,443)
========= ========= ========= ========= =========
Earnings (loss) per
Class A share (note
20):
Earnings (loss) before
extraordinary loss... $ 1,244 $ (328) $ (864) $ 45 $ (1,443)
Less preferred share
dividends............ -- (609) -- --
Less Class L preferred
entitlement.......... -- (2,185) -- (1,366)
--------- --------- --------- --------- ---------
Earnings (loss) before
extraordinary loss
attributable to Class
A shareholders....... 1,244 (937) (3,049) 45 (2,809)
Extraordinary loss.... -- -- (1,279) -- --
--------- --------- --------- --------- ---------
Earnings (loss)
attributable to Class
A shareholders....... $ 1,244 $ (937) $ (4,328) $ 45 $ (2,809)
========= ========= ========= ========= =========
Earnings (loss) per
Class A share before
extraordinary loss... $ 0.40 $ (0.44) $ (1.89) $ 0.03 $ (1.16)
Extraordinary loss per
Class A share........ -- -- (0.79) -- --
--------- --------- --------- --------- ---------
$ 0.40 $ (0.44) $ (2.68) $ 0.03 $ (1.16)
========= ========= ========= ========= =========
Diluted earnings (loss)
per common share....... $ 0.40 $ (0.44) $ (2.68) $ 0.03 $ (1.16)
========= ========= ========= ========= =========
Weighted average number
of shares outstanding:
Basic................. 3,122,921 2,147,130 1,617,356 1,393,971 2,414,642
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<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
Loss for the three
months................. -- -- -- -- -- (1,443) (1,443)
--- ---- -------- ------- ---- ------- --------
Balance April 2, 2000... $ 3 $367 $ -- $11,804 $(60) $(5,758) $ 6,356
=== ==== ======== ======= ==== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<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, Three months ended
--------------------------- -----------------------
March 31, April 2,
1997 1998 1999 1999 2000
------- -------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash provided by (used
in):
Operations:
Net earnings (loss)..... $ 1,244 $ (328) $ (2,143) $ 45 $ (1,443)
Items not involving
cash:
Amortization.......... -- 151 1,990 65 1,272
Depreciation.......... 2,194 2,869 6,452 895 2,475
Deferred income tax
provision (benefit).. 708 (208) (335) 26 225
Loss (gain) on
disposition of
capital assets....... 118 (6) 160 -- (44)
Loss on early
extinguishment of
debt................. -- -- 1,279 -- --
Change in non-cash
operating working
capital:
Accounts receivable... (4,534) (9,895) 4,441 7,583 (9,054)
Inventory............. (5,822) (1,170) (15,217) 2,721 (24,714)
Prepaid expenses and
other................ 158 105 (1,705) (100) (1,694)
Accounts payable and
accrued liabilities.. 5,493 4,709 (1,487) (5,209) 7,394
------- -------- -------- ------ --------
(441) (3,773) (6,565) 6,026 (25,583)
Financing:
Increase in bank
indebtedness........... 2,261 1,212 -- -- --
Repayment of bank
indebtedness........... -- -- (6,559) (4,605) --
Increase (decrease) in
restricted cash........ 400 (250) -- -- --
Increase in long-term
debt................... -- -- 130,942 -- 31,475
Repayment of long-term
debt................... -- -- (69,261) (81) --
Principal payments on
notes payable.......... (265) (175) -- -- --
Principal payments on
capital leases......... (1,235) (1,319) (1,571) (418) (418)
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 (5,104) 31,057
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) (62) (2,490)
Proceeds from sale of
capital assets......... 55 30 8 -- 44
Cash in escrow.......... -- -- (5,735) -- --
Other................... 49 -- 62 -- --
------- -------- -------- ------ --------
(365) (475) (41,414) (62) (2,446)
------- -------- -------- ------ --------
Increase in cash and cash
equivalents.............. 355 65 1,597 860 3,028
Cash and cash equivalents,
beginning of year........ 66 421 486 486 2,083
------- -------- -------- ------ --------
Cash and cash equivalents,
end of year.............. $ 421 $ 486 $ 2,083 $1,346 $ 5,111
======= ======== ======== ====== ========
</TABLE>
Supplemental cash flow disclosures (note 14)
See accompanying notes to consolidated financial statements.
F-29
<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-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)
(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. The earnings process is complete upon shipment of
products and provision of services.
(e) Cash and short-term investments:
Cash and short-term investments include cash on hand and deposits with
banks with original maturities of less than three months.
F-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)
(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-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)
(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-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)
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.
(p) Unaudited Financial Information
The unaudited interim financial statements furnished herein reflect all
adjustments, consisting only of normal recurring accruals, which are, in
the opinion of management, necessary to present fairly the financial
position of the Company as of April 2, 2000 and the results of operations
and cash flows for the three months ended March 31, 1999 and April 2, 2000.
The unaudited interim financial statements should be read in conjunction
with the annual financial statements and notes thereto included herein.
Results for the three months ended April 2, 2000 are not necessarily
indicative of results to be achieved for the year ending December 31, 2000.
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
amortized over the remaining term of the supply contract with Zenith 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.
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)
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>
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) (2,611)
Basic loss per share before extraordinary loss........... (0.26) (3.43)
</TABLE>
The pro forma results do not give effect to any contingent payments that
may be made in connection with the acquisition of Cableproducts and Radio.
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>
December 31,
--------------- April 2,
1998 1999 2000
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Raw materials....................................... $ 6,036 $35,371 $54,588
Work in process..................................... 5,900 17,124 23,815
Finished goods...................................... 298 8,578 7,184
Other............................................... 251 607 807
------- ------- -------
$12,485 $61,680 $86,394
======= ======= =======
</TABLE>
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)
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>
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 (note 3(b))........... 250 5,985
Deferred lease costs, net of accumulated amortization of $30.. -- 1,430
Other......................................................... 94 32
------ --------
$1,489 $ 11,145
====== ========
</TABLE>
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)
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.
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>
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)
(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%).
(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;
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)
(ii) 100,000 Series A preferred shares, convertible, $0.001 par value
per share, mandatorily redeemable for $11.48 per share;
(iii) 100,000 Series B preferred shares--$0.001 par value per share;
mandatorily redeemable for $11.48 per share; and
(iv) 250,000 Series C preferred shares, convertible, $0.001 par value
per share, mandatorily redeemable for $11.25 per share.
As a result of the business combination, described in note 2(a), HTM
Holdings, Inc. became a wholly owned subsidiary of SMTC Corporation on July
30, 1999. The authorized share capital of SMTC Corporation at December 31,
1999 consists of:
(i) 11,720,000 Class A-1 voting common shares, par value $0.001 per
share:
Holders are entitled to one vote per share and to share in dividends
pro rata subject to any preferential rights of the Class L shares.
(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).
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.
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)
(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 --
========== ========
The 4,215,641 common shares repurchased are held in treasury stock.
<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.
F-40
<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)
SMTC Corporation from July 30, 1999 to December 31, 1999:
As a result of the application of reverse acquisition accounting to
the business combination with HTM Holdings, Inc., the number of
outstanding shares of the continuing consolidated entity consists of
the number of outstanding shares of SMTC Corporation outstanding at
July 30, 1999.
<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 acquisition (ii)......... 1,393,971 154,168 -- --
Options exercised (iii)........... 33,140 -- -- --
--------- ------- ------- -------
Balance, December 31, 1999........ 2,447,782 154,168 113,408 113,408
========= ======= ======= =======
<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.
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.
F-41
<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)
(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.
(e) Stock options:
1993 HTM Holdings Equity Plan:
In connection with the leveraged recapitalization in 1998, the stock
option plan adopted by HTM Holdings, Inc. in 1993 (the "1993 Plan") was
cancelled. HTM Holdings, Inc. permitted its employees to exercise all
outstanding options prior to the cancellation of the 1993 Plan by executing
notes payable for the exercise price. The shares issued to the exercising
employees were reacquired in connection with the leveraged recapitalization
and both the shares issued and the notes payable were retired, resulting in
a $2,108 non-recurring charge.
The weighted average grant date fair value of options granted during
1998 was $3.46 (1997 - $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 $0.95 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
F-42
<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)
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.
The weighted average grant date fair value of options granted during
1999 was $17.13 per share.
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>
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 $--
</TABLE>
F-43
<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 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".
<TABLE>
<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>
Basic earnings (loss) per share before extraordinary
loss:
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>
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
==== ===== =====
</TABLE>
F-44
<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 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:
<TABLE>
<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>
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 1,429
---- ------
855 2,704
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 the subsidiaries may only be used against
taxable income generated by that subsidiary. In assessing the realization
of deferred tax assets, management considers whether it is more likely than
not that some portion or all of its deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income by the appropriate subsidiaries
during those periods when the temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
change of
F-45
<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)
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
the credit spread of 3.00% to 3.50% 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.
(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>
F-46
<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)
14.Cash flows:
Cash paid for interest and income taxes:
<TABLE>
<CAPTION>
Three months ended
------------------
March 31, April 2,
1997 1998 1999 1999 2000
---- ------ ------ --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest.................................. $300 $1,627 $6,767 $456 $3,919
Income taxes.............................. 34 15 1,460 -- 837
</TABLE>
Non-cash financing and investing activities:
<TABLE>
<CAPTION>
Three months ended
------------------
March 31, April 2,
1997 1998 1999 1999 2000
------- ------ ------- --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Acquisition of equipment under
capital leases..................... $ 401 $2,673 $ -- -- $293
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>
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
F-47
<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)
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.
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). Intersegment adjustments reflect intersegment
sales that are generally recorded at prices that approximate arm's-length
transactions. Information about the operating segments is as follows:
<TABLE>
<CAPTION>
Three months ended
April 2, 2000
Year ended December 31, 1999 (unaudited)
------------------------------- ------------------------------
Net Net
Total Intersegment external Total Intersegment external
revenue revenue revenue revenue revenue revenue
--------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
United States........... $ 223,006 $(1,419) $221,587 $106,796 $ (674) $106,122
Canada.................. 21,675 (2,676) 18,999 13,038 (985) 12,053
Europe.................. 9,507 (1,995) 7,512 4,727 (1,476) 3,251
Mexico.................. 9,864 -- 9,864 2,921 (14) 2,907
--------- ------- -------- -------- ------- --------
$ 264,052 $(6,090) $257,962 $127,482 $(3,149) $124,333
========= ======= ======== ======== ======= ========
EBITA:
United States......... $ 6,917 $ 3,576
Canada................ 2,107 728
Europe................ (222) (494)
Mexico................ (503) (284)
-------- --------
8,299 3,527
Interest................ 7,066 3,789
Amortization............ 1,990 1,272
-------- --------
Loss before income
taxes.................. $ (757) $ (1,534)
======== ========
Capital expenditures:
United States......... $ 2,713 $ 1,264
Canada................ 840 665
Europe................ 30 178
Mexico................ 547 676
-------- --------
$ 4,130 $ 2,783
======== ========
</TABLE>
Prior to July 30, 1999, the Company operated in one geographic segment--
the United States.
F-48
<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 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.
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>
Year ended December 31, Three months ended
---------------------------- ------------------
March 31, April 2,
1997 1998 1999 1999 2000
------- ------- ------------ --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Geographic revenue:
United States.............. $58,799 $84,668 $225,772 $21,934 $110,881
Canada..................... -- -- 8,983 -- 3,304
Europe..................... 232 5,019 19,965 1,125 7,795
Asia....................... -- -- 3,242 209 2,353
------- ------- -------- ------- --------
$59,031 $89,687 $257,962 $23,268 $124,333
======= ======= ======== ======= ========
<CAPTION>
December 31, March 31, April 2,
1999 1999 2000
------------ --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Long-lived assets:
United States.............................. $ 40,304 $ 7,568 $ 44,234
Canada..................................... 25,585 -- 25,415
Europe..................................... 735 -- 837
Mexico..................................... 9,179 -- 15,498
-------- ------- --------
$ 75,803 $ 7,568 $ 85,984
======== ======= ========
</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-49
<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>
Year ended December 31, Three months ended
--------------------------------- ---------------------
March 31, April 2,
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Earnings (loss) before
extraordinary loss..... $ 1,244 $ (328) $ (864) $ 45 $ (1,443)
Less preferred share
dividends.............. -- (609) -- -- --
Less Class L preferred
entitlement............ -- -- (2,185) -- (1,366)
---------- ---------- ---------- ---------- ----------
Earnings (loss) before
extraordinary loss
available to Class A
shareholders........... $ 1,244 $ (937) $ (3,049) $ 45 $ (2,809)
========== ========== ========== ========== ==========
Weighted average
shares--basic.......... 3,122,921 2,147,130 1,617,356 1,393,971 2,422,927
========== ========== ========== ========== ==========
Net earnings (loss) per
share--basic........... $ 0.40 $ (0.44) $ (1.89) $ 0.03 $ (1.16)
========== ========== ========== ========== ==========
</TABLE>
For purposes of calculating the basic number of weighted average shares
outstanding, the Class A restricted shares have been excluded. Under
reverse takeover accounting, the number of shares outstanding prior to July
30, 1999 is deemed to be the number of shares of SMTC Corporation issued to
the shareholders of HTM Holdings, Inc., appropriately adjusted to take into
account the effect of any change in the number of HTM Holdings, Inc. shares
outstanding in that period.
During fiscal 1999 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-50
<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 $111,762 will be used by the Company to
reduce its indebtedness under the senior credit facility and the
subordinated notes issued in May, 2000 (note 22(d)). The Company will
record an after-tax charge on repayment of the indebtedness and
subordinated notes amounting to approximately $3,000 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 approximately 3.5 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) assuming a closing date
for the offering of June 30, 2000 and an initial public offering price of
$13.00 per share:
<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............. -- -- -- 1,971,785 11,824,173
Amount................... $11,689 $ -- $ -- $ -- $ 118
</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>
Year ended Three months ended
December 31, April 2,
1999 2000
------------ ------------------
(unaudited)
<S> <C> <C>
Pro forma net loss per share............... $ (0.08) $ (0.11)
Pro forma weighted average shares
outstanding............................... 11,054,205 13,092,116
</TABLE>
F-51
<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)
(c) Pending acquisition of Pensar Corporation:
In May 2000 the Company entered into an agreement to acquire Pensar
Corporation, an electronics manufacturing services company specializing in
design services and located in Wisconsin, United States. The Company expects to
consummate the acquisition on the closing date of the initial public offering.
The total purchase price including transaction costs is expected to be
approximately $31,900. The purchase consideration consists of $17,000 cash and
the balance in common shares of the Company.
(d) Long-term debt and capital transactions:
In May 2000 the Company's lenders increased the revolving credit
facility from $60,000 to $67,500. The Company issued senior subordinated
notes to certain shareholders for proceeds of $5,000. The notes bear
interest at 15% per annum and mature in 2010. The Company also issued
41,667 warrants to certain shareholders for proceeds of $2,500. The
warrants have a term of 10 years and are exercisable from November 2000.
Each warrant is convertible into 9 Class A-1 common shares and 1 Class L
common share. The exercise price for each warrant is equal to the Class L
preference amount less $42.
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.
F-52
<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)
(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-53
<PAGE>
AUDITORS' REPORT
To the Directors of SMTC Corporation (formerly The Surface Mount Technology
Centre Inc.) ("Surface Mount")
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-54
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.) ("SURFACE MOUNT")
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-55
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.) ("SURFACE MOUNT")
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-56
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.) ("SURFACE MOUNT")
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-57
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.) ("SURFACE MOUNT")
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.") 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-58
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.) ("SURFACE MOUNT")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars except for 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-59
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.) ("SURFACE MOUNT")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars except for 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-60
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.) ("SURFACE MOUNT")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars except for 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-61
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.) ("SURFACE MOUNT")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars except for 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%; and
(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.
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-62
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.) ("SURFACE MOUNT")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars except for 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-63
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.) ("SURFACE MOUNT")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars except for 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-64
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.) ("SURFACE MOUNT")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars except for 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-65
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.) ("SURFACE MOUNT")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars except for 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-66
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.) ("SURFACE MOUNT")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars except for 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-67
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.) ("SURFACE MOUNT")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars except for 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-68
<PAGE>
SMTC CORPORATION
(FORMERLY THE SURFACE MOUNT TECHNOLOGY CENTRE INC.) ("SURFACE MOUNT")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in thousands of U.S. dollars except for 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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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 amount due from the
Trust was distributed to the former majority stockholders. The due from related
party was unsecured with no interest.
F-76
<PAGE>
W.F. WOOD, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(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) Inventories
<TABLE>
<CAPTION>
December 31, December 31, September 3,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Raw material.......................... $1,642,463 $1,360,722 $1,556,381
Work in process....................... 1,228,417 1,524,611 1,994,284
Finished goods........................ 140,122 86,214 39,571
---------- ---------- ----------
$3,011,002 $2,971,547 $3,590,236
========== ========== ==========
</TABLE>
(4) 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.
(5) 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-77
<PAGE>
W.F. WOOD, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(6) 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.
(7) 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 --
(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) 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>
F-78
<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>
(8) 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-79
<PAGE>
W.F. WOOD, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(9) 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.
(10) 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.
(11) 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-80
<PAGE>
W.F. WOOD, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(12) 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.
(13) Additional paid-in capital
The existing shareholders of the Company funded the bonuses paid to
management and employees and certain professional fees (notes 12 and 8(c)) and
paid off certain bank debt by contributing cash of $2,821,393 to the Company.
(14) 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-81
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Pensar Corporation:
We have audited the accompanying balance sheets of Pensar Corporation as of
December 31, 1998 and 1999, and the related statements of income, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1999. 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 Pensar Corporation as of
December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1999 in
conformity with United States generally accepted accounting principles.
KPMG LLP
Milwaukee, Wisconsin
May 9, 2000
F-82
<PAGE>
PENSAR CORPORATION
BALANCE SHEETS
December 31, 1998, 1999 and March 31, 2000
<TABLE>
<CAPTION>
December 31,
------------------------ March 31,
1998 1999 2000
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash.................................. $ 427,285 $ 511,740 $ 26,519
Trade accounts receivable, net of
allowance for doubtful receivables of
$20,000 in 1998 and 1999............. 7,506,530 9,780,860 8,334,521
Inventories........................... 2,473,339 5,273,489 6,785,942
Prepaid expenses...................... 65,960 200,994 245,777
----------- ----------- -----------
Total current assets.............. 10,473,114 15,767,083 15,392,759
----------- ----------- -----------
Property, plant and equipment, net...... 3,436,303 4,720,574 4,858,638
Other assets............................ 456,085 511,048 562,052
----------- ----------- -----------
$14,365,502 $20,998,705 $20,813,449
=========== =========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Lines of credit....................... $ 1,500,000 $ 4,215,000 $ 3,000,000
Current installments of long-term
debt................................. 290,000 331,631 334,873
Accounts payable...................... 2,810,627 5,138,413 4,995,547
Accrued liabilities................... 1,239,201 1,292,407 1,644,600
Stockholders' distributions payable... 560,000 138,666 --
----------- ----------- -----------
Total current liabilities......... 6,399,828 11,116,117 9,975,020
Long-term debt, less current
installments........................... 830,000 1,080,867 1,039,705
----------- ----------- -----------
Total liabilities................. 7,229,828 12,196,984 11,014,725
----------- ----------- -----------
Stockholders' equity:
Common stock, $1 par value:
Voting; 10,000 shares authorized,
1,000 shares issued and
outstanding........................ 1,000 1,000 1,000
Nonvoting; 40,000 shares authorized,
no shares issued................... -- -- --
Additional paid-in capital.......... 1,209,423 1,209,423 1,209,423
Retained earnings................... 6,564,314 8,046,298 9,003,301
Notes receivable from officers and
stockholders....................... (639,063) (455,000) (415,000)
----------- ----------- -----------
Total stockholders' equity........ 7,135,674 8,801,721 9,798,724
----------- ----------- -----------
$14,365,502 $20,998,705 $20,813,449
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-83
<PAGE>
PENSAR CORPORATION
STATEMENTS OF INCOME
Years ended December 31, 1997, 1998, 1999 and
quarters ended March 31, 1999 and 2000
<TABLE>
<CAPTION>
Year ended December 31, Quarter ended March 31,
----------------------------------- -----------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Manufacturing......... $49,863,694 $48,919,471 $50,018,206 $10,338,738 $15,441,633
Engineering services.. 1,167,940 1,978,051 2,977,675 444,740 841,160
----------- ----------- ----------- ----------- -----------
Total revenue....... 51,031,634 50,897,522 52,995,881 10,783,478 16,282,793
Cost of goods sold or
services provided...... 41,858,905 41,867,805 43,858,748 9,315,431 13,734,594
----------- ----------- ----------- ----------- -----------
Gross profit........ 9,172,729 9,029,717 9,137,133 1,468,047 2,548,199
Operating expenses:
Executive bonus
compensation......... 642,037 528,764 497,692 17,253 114,213
Professional fees
related to sale
transaction.......... -- -- 75,000 -- --
Other selling, general
and administrative... 4,482,527 4,408,246 4,532,716 955,041 1,358,979
----------- ----------- ----------- ----------- -----------
Total selling,
general
administrative
expenses........... 5,124,564 4,937,010 5,105,408 972,294 1,473,192
----------- ----------- ----------- ----------- -----------
Operating income........ 4,048,165 4,092,707 4,031,725 495,753 1,075,007
Other expense:
Interest expense...... 387,891 216,985 267,697 38,518 103,335
----------- ----------- ----------- ----------- -----------
Net income.............. $ 3,660,274 $ 3,875,722 $ 3,764,028 $ 457,235 $ 971,672
=========== =========== =========== =========== ===========
Basic net income per
common share........... $ 3,812.79 $ 3,875.72 $ 3,764.03 $ 457.24 $ 971.67
=========== =========== =========== =========== ===========
Weighted average shares
of common stock
outstanding............ 960 1,000 1,000 1,000 1,000
=========== =========== =========== =========== ===========
Diluted net income per
common share........... $ 3,734.97 $ 3,875.72 $ 3,764.03 $ 457.24 $ 971.67
=========== =========== =========== =========== ===========
Weighted average shares
of common stock
outstanding............ 980 1,000 1,000 1,000 1,000
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-84
<PAGE>
PENSAR CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1998 and 1999 and
quarter ended March 31, 2000
<TABLE>
<CAPTION>
Notes
Additional receivable from Total
Voting Nonvoting paid-in Retained officers and stockholders'
Shares common common capital earnings stockholders equity
------ ------ --------- ---------- ---------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 960 $ 960 -- 809,463 4,116,635 (416,000) 4,511,058
Net income.............. -- -- -- -- 3,660,274 -- 3,660,274
Distributions........... -- -- -- -- (2,256,121) -- (2,256,121)
Collections of notes
receivable............. -- -- -- -- -- 69,600 69,600
----- ------ --- --------- ---------- -------- ----------
Balance at December 31,
1997................... 960 960 -- 809,463 5,520,788 (346,400) 5,984,811
Issuance of voting
common stock........... 40 40 -- 399,960 -- (400,000) --
Net income.............. -- -- -- -- 3,875,722 -- 3,875,722
Distributions........... -- -- -- -- (2,832,196) -- (2,832,196)
Collections of notes
receivable............. -- -- -- -- -- 107,337 107,337
----- ------ --- --------- ---------- -------- ----------
Balance at December 31,
1998................... 1,000 1,000 -- 1,209,423 6,564,314 (639,063) 7,135,674
Net income.............. -- -- -- -- 3,764,028 -- 3,764,028
Distributions........... -- -- -- -- (2,282,044) -- (2,282,044)
Collections of notes
receivable............. -- -- -- -- -- 184,063 184,063
----- ------ --- --------- ---------- -------- ----------
Balance at December 31,
1999................... 1,000 $1,000 -- 1,209,423 8,046,298 (455,000) 8,801,721
Net income.............. -- -- -- -- 971,672 971,672
Distributions........... -- -- -- -- (14,669) (14,669)
Collections of notes
receivable............. -- -- -- -- 40,000 40,000
----- ------ --- --------- ---------- -------- ----------
Balance at March 31,
2000................... 1,000 $1,000 -- 1,209,423 9,003,301 (415,000) 9,798,724
===== ====== === ========= ========== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-85
<PAGE>
PENSAR CORPORATION
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1998, 1999 and
quarters ended March 31, 1999 and 2000
<TABLE>
<CAPTION>
Year ended December 31, Quarter ended March 31,
-------------------------------------- ------------------------
1997 1998 1999 1999 2000
------------ ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $ 3,660,274 3,875,722 3,764,028 457,235 971,672
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation........... 623,057 631,904 752,457 159,906 223,625
Amortization of debt
issuance costs........ 15,684 15,680 26,729 6,684 2,814
Loss (gain) on sale of
property, plant and
equipment............. -- (2,913) 4,004 -- --
Increase in cash
surrender value of
life insurance........ (72,040) (78,119) (83,766) (21,600) (53,818)
Changes in assets and
liabilities:
Accounts receivable... (1,416,342) 419,131 (2,274,330) 1,688,706 1,667,963
Inventories........... 675,672 136,718 (2,800,150) (1,233,684) (1,734,077)
Prepaid expenses...... 194 (17,837) (135,034) (69,435) (44,783)
Accounts payable...... (331,939) (541,775) 2,327,786 759,492 (142,866)
Accrued liabilities... 441,783 (16,695) 53,206 117,267 352,193
------------ ----------- ----------- ---------- ----------
Net cash provided by
operating
activities.......... 3,596,343 4,421,816 1,634,930 1,864,571 1,242,723
------------ ----------- ----------- ---------- ----------
Cash flows from
investing activities:
Purchase of property,
plant and equipment... (321,365) (691,407) (2,054,857) (344,349) (361,689)
Proceeds from sale of
property, plant and
equipment............. -- 3,325 14,125 -- --
(Increase) decrease in
debt service trust
funds................. (3) (8) 2,074 2,074 --
------------ ----------- ----------- ---------- ----------
Net cash used for
investing
activities.......... (321,368) (688,090) (2,038,658) (342,275) (361,689)
------------ ----------- ----------- ---------- ----------
Cash flows from
financing activities:
Proceeds from lines of
credit................ 30,385,000 18,625,000 26,050,000 4,875,000 5,135,000
Payments on lines of
credit................ (31,450,000) (18,325,000) (23,335,000) (6,225,000) (6,350,000)
Repayment of
stockholders' notes
payable............... -- (300,000) -- -- --
Proceeds from issuance
of long-term debt..... -- -- 500,000 -- --
Repayments of long-term
debt.................. (442,250) (928,865) (207,502) -- (37,920)
Distributions to
stockholders.......... (1,402,121) (3,126,196) (2,703,378) (659,444) (153,335)
Proceeds from
collection of notes
receivable from
officers and
stockholders.......... 91,700 107,337 184,063 80,170 40,000
------------ ----------- ----------- ---------- ----------
Net cash provided by
(used for) financing
activities.......... (2,817,671) (3,947,724) 488,183 (1,929,274) (1,366,255)
------------ ----------- ----------- ---------- ----------
Increase (decrease)
in cash............. 457,304 (213,998) 84,455 (406,978) (485,221)
Cash:
Beginning of period.... 183,979 641,283 427,285 427,285 511,740
------------ ----------- ----------- ---------- ----------
End of period.......... $ 641,283 427,285 511,740 20,307 26,519
============ =========== =========== ========== ==========
Supplemental cash flow
information-- Cash paid
for interest........... $ 372,467 213,917 227,749 -- --
============ =========== =========== ========== ==========
Non-cash investing and
financing activities--
Receipt of notes
receivable for issuance
of common stock........ $ -- 400,000 -- -- --
============ =========== =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-86
<PAGE>
PENSAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(1)Nature of Business
Pensar Corporation (the Company), based in Appleton, Wisconsin, designs
and assembles custom made electronic products, most of which include
printed circuit boards, for domestic manufacturers. The Company also
provides engineering services relating to board design and microchip
programming. The Company's raw materials are readily available, and the
Company is not dependent on a single supplier or a limited number of
suppliers.
The Company's accounting principles are in accordance with accounting
principles generally accepted in the United States, and, except as outlined
in note 15, are, in all material respects, in accordance with accounting
principles generally accepted in Canada.
(2)Summary of Significant Accounting Policies
(a) 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.
(b) Revenue Recognition
Revenue from the sale of products is recognized when goods are shipped
to customers. Revenue from the provision of engineering services is
recognized as services are provided.
(c) Inventories
Inventories are valued on a first-in, first-out basis at the lower of
cost or replacement value for raw materials and at the lower of cost or net
realizable value for work in process and finished goods.
(d) Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated
predominantly on a straight-line basis over their estimated useful lives as
follows:
<TABLE>
----------------------------------------------------------------------------
<S> <C>
Building........................................................ 40 years
Building improvements........................................... 5 years
Machinery and equipment......................................... 5-10 years
Office furniture and equipment.................................. 7 years
Computer hardware and software.................................. 3-5 years
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
(e) Other Assets
Costs incurred relating to the issuance of debt are deferred and
amortized to interest expense over the term of the related debt.
(f) Income Taxes
The Company has elected to be taxed as an S corporation under the
provisions of the Internal Revenue Code and Wisconsin state statutes. Under
those provisions, the Company does not pay Federal or Wisconsin corporate
income taxes on its taxable income. Rather, the stockholders are
individually liable
F-87
<PAGE>
PENSAR CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999
for Federal and Wisconsin income taxes on their respective shares of the
Company's taxable income. The Company makes periodic distributions to its
stockholders to enable them to pay the personal income taxes related to
their respective shares of the Company's taxable income.
(g) Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable
intangibles for impairment 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 permanently 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. Assets
to be disposed of are reported at the lower of the carrying value or the
fair value less costs to sell.
(h) Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
This Statement establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as
other hedging activities. The Statement requires all derivatives to be
recognized either as assets or liabilities and measured at fair value. In
1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities Deferral of the Effective Date of SFAS 133, which
defers the effective date of SFAS No. 133. The Company will be required to
implement SFAS No. 133 for its fiscal year ended December 31, 2001. It is
anticipated that SFAS No. 133 will not have a significant impact on the
Company's financial position, results of operations or cash flows since it
does not maintain any derivative financial instruments.
(i) Advertising
Advertising costs are charged to operations as selling expense when
incurred. Advertising expense for the years ended December 31, 1997, 1998
and 1999 was approximately $21,700, $21,200 and $34,100, respectively.
(j) Research and Development
The Company expenses all research and development costs as incurred. For
the years ending December 31, 1997, 1998 and 1999, research and development
costs included in the respective statements of income were not significant
to the Company's operations.
(k) Earnings Per Share
Basic net income per common share is computed by dividing net income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Basic net income per common share does
not consider common stock equivalents. Diluted net income per common share
reflects the dilution that would occur if convertible debt securities and
stock options were exercised or converted into common shares or resulted in
the issuance of common shares that then shared in the net income of the
entity. The computation of diluted net income per common share uses the "if
converted" and "treasury stock" methods to reflect dilution. The difference
between basic net income per common
F-88
<PAGE>
PENSAR CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999
share and diluted net income per common share in 1997 relates to the
outstanding stock options discussed in note 12.
(l) Unaudited Financial Information
The unaudited interim financial statements furnished herein reflect all
adjustments which are, in the opinion of management, necessary to present
fairly the financial position of the Company as of March 31, 2000 and the
results of its operations and its cash flows for the three months ended
March 31, 1999 and 2000. The unaudited interim financial statements should
be read in conjunction with the annual financial statements and notes
thereto included herein.
(3)Inventories
Inventories as of December 31, 1998 and 1999 and March 31, 2000 are
summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------- March 31,
1998 1999 2000
---------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Raw materials.................................. $1,646,169 2,865,416 $4,206,041
Work in process................................ 806,766 2,406,257 2,508,329
Finished goods................................. 20,404 1,816 71,572
---------- --------- ----------
Total inventories............................ $2,473,339 5,273,489 $6,785,942
========== ========= ==========
</TABLE>
(4)Property, Plant and Equipment
Property, plant and equipment at December 31, 1998 and 1999 are
summarized as follows:
<TABLE>
<CAPTION>
1998
---------------------------------
Accumulated Net book
Cost depreciation value
---------- ------------ ---------
<S> <C> <C> <C>
Land.................................... $ 162,847 -- 162,847
Building and building improvements...... 2,497,237 418,633 2,078,604
Machinery and equipment................. 4,032,582 3,261,890 770,692
Office furniture and equipment.......... 190,846 139,749 51,097
Computer hardware and software.......... 1,188,601 815,538 373,063
---------- --------- ---------
$8,072,113 4,635,810 3,436,303
========== ========= =========
<CAPTION>
1999
---------------------------------
Accumulated Net book
Cost depreciation value
---------- ------------ ---------
<S> <C> <C> <C>
Land.................................... $ 162,847 -- 162,847
Building and building improvements...... 2,596,407 495,301 2,101,106
Machinery and equipment................. 5,529,471 3,676,185 1,853,286
Office furniture and equipment.......... 318,068 160,244 157,824
Computer hardware and software.......... 1,389,469 943,958 445,511
---------- --------- ---------
$9,996,262 5,275,688 4,720,574
========== ========= =========
</TABLE>
F-89
<PAGE>
PENSAR CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999
(5)Other Assets
Other assets at December 31, 1998 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
1998 1999
-------- -------
<S> <C> <C>
Cash surrender value of life insurance.................... $396,559 480,325
Deferred financing costs, net............................. 57,452 30,723
Debt service trust funds.................................. 2,074 --
-------- -------
$456,085 511,048
======== =======
</TABLE>
(6)Accrued Liabilities
Accrued liabilities at December 31, 1998 and 1999 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1999
---------- ---------
<S> <C> <C>
Salaries and wages, payroll taxes and related
withholdings...................................... $ 402,571 574,595
Vacation........................................... 429,889 480,381
Health and dental benefits......................... 133,806 144,000
Warranty costs..................................... 90,000 --
Property taxes..................................... 68,691 64,392
Customer rebates................................... 63,000 9,436
Other.............................................. 51,244 19,603
---------- ---------
$1,239,201 1,292,407
========== =========
</TABLE>
(7)Lines of Credit
The lines of credit balance at December 31, 1998 and 1999 is summarized
as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ---------
<S> <C> <C>
Bank line of credit, $3,800,000 maximum available,
interest at the prime rate minus 0.75% (7.75% at
December 31, 1999) on the principal balance
outstanding of $1,900,000 or less and prime rate
minus 1.00% (7.50% at December 31, 1999) on the
principal balance outstanding in excess of
$1,900,000, due July 31, 2000.................... $1,500,000 3,800,000
Bank line of credit, $500,000 maximum available,
interest at the prime rate minus 0.75% (7.75% at
December 31, 1999), due December 20, 2001........ -- 415,000
---------- ---------
$1,500,000 4,215,000
========== =========
</TABLE>
At December 31, 1998 and 1999, the Company also has available a $400,000
line of credit with interest at prime minus 0.75% (7.75% at December 31,
1999). The line of credit is available through July 2000. At December 31,
1998 and 1999, there were no outstanding borrowings on this line of credit.
The weighted average interest rates for the lines of credit outstanding
during 1998 and 1999 were 7.85% and 7.35% respectively.
The Company pays a commitment fee on the unused portion of its lines of
credit at an annual rate of 0.25%.
F-90
<PAGE>
PENSAR CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999
The line of credit agreements contain various restrictive covenants
including maintaining certain working capital and net worth requirements
and prohibition against change in control of the Company. At December 31,
1999, the Company was in compliance with or has obtained waivers for
covenants with which it was not in compliance. It is management's intent to
pay off the $415,000 line of credit within the next year, and accordingly,
it is presented as a current liability.
(8)Long-term Debt
Long-term debt at December 31, 1998 and 1999 is summarized as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
1993 City of Appleton, Wisconsin Industrial
Development Revenue Bonds, due December 2003,
variable interest rate adjusted weekly (5.6% at
December 31, 1999), interest payments due
monthly.......................................... $ 600,000 $ 600,000
1994 City of Appleton, Wisconsin Industrial
Development Revenue Bonds, due August 2001,
variable interest rate adjusted weekly (5.6% at
December 31, 1999), interest payments due
monthly, with mandatory sinking fund payments of
$175,000 due each August......................... 520,000 350,000
Note payable to a financial institution, with
interest at 7.9%, principal and interest payments
of $15,660 due monthly through September 2002.... -- 462,498
---------- ----------
Total long-term debt............................ 1,120,000 1,412,498
Less current installments......................... 290,000 331,631
---------- ----------
Long-term debt, less current installments....... $ 830,000 $1,080,867
========== ==========
</TABLE>
The 1993 City of Appleton, Wisconsin Industrial Development Revenue
Bonds are secured by an irrevocable bond letter of credit in the amount of
$607,398. The letter of credit expires on December 15, 2003 and is secured
by the assets of the Company.
The 1994 City of Appleton, Wisconsin Industrial Development Revenue
Bonds are secured by an irrevocable bond letter of credit in the amount of
$354,375. The letter of credit expires on August 15, 2001 and is secured by
the assets of the Company.
The Industrial Development Revenue Bonds contain various restrictive
covenants including maintaining certain working capital and net worth
requirements and prohibition against change in control of the Company. At
December 31, 1999, the Company was in compliance with or has obtained
waivers for covenants with which it was not in compliance.
Aggregate long-term debt principal payments and mandatory sinking fund
payments due within the next five years and thereafter follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000.......................................................... $ 331,631
2001.......................................................... 344,674
2002.......................................................... 136,193
2003.......................................................... 600,000
----------
$1,412,498
==========
</TABLE>
F-91
<PAGE>
PENSAR CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999
(9)Leases
The Company leases certain manufacturing equipment and vehicles under
noncancellable operating leases with initial or remaining terms in excess of
one year.
Future minimum rental payments required under these operating leases for
the next five years and thereafter follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000.......................................................... $ 708,657
2001.......................................................... 426,172
2002.......................................................... 327,461
2003.......................................................... 211,876
2004.......................................................... 211,876
Thereafter.................................................. 12,397
----------
$1,898,439
==========
</TABLE>
Rent expense, including executory costs, under all operating leases for
the years ended December 31, 1997, 1998 and 1999 amounted to $322,568,
$416,133 and $463,378, respectively.
(10)Employee Benefit Plans
Substantially all employees participate in a discretionary bonus program
in which cash payments are made to participants based on a guideline of net
income in excess of a minimum return on total stockholders' equity at the
beginning of the year. Bonus expense amounted to $1,658,620, $1,575,823 and
$1,422,469 for the years ended December 31, 1997, 1998 and 1999,
respectively.
The Company maintains a 401(k) profit sharing plan. Virtually all
employees are eligible to participate in the plan. During 1997 and 1998,
employees could elect to contribute up to 20% of their compensation to the
plan and during 1999, employees could elect to contribute up to 25% of
their compensation to the plan. The Company's contribution to the plan is
determined annually by the Board of Directors. There were no Company
contributions for the years ended December 31, 1997, 1998 and 1999.
On September 1, 1998, the Company entered into a Phantom Stock Agreement
with an officer of the Company. Under the agreement, the officer received
50 phantom share units. Upon separation from service, the officer will
receive his vested portion of the difference between the ending certificate
of agreed value of the shares over the beginning certificate of agreed
value of the shares. The agreed value is established at the discretion of
the Board of Directors. The officer was immediately 40% vested and will
vest an additional 15% per year on January 1, 2000 through January 1, 2003.
At December 31, 1998 and 1999, the certificate of agreed value of the
phantom shares was the same as the beginning certificate of agreed value,
and thus the Company has not recorded a liability for this agreement.
(11)Stock and Related Party Transactions
In the event of the death of a stockholder, the deceased stockholder's
estate has the option to require the Company to purchase all stock owned by
the estate. The Company is the beneficiary on life insurance policies of
the major shareholders that would help cover the Company's obligation to
purchase stock from a deceased stockholder's estate. The Company has the
right of first refusal on all other transfers of common stock. Also, upon
termination of employment, certain stockholders are required to sell and
the Company is obligated to buy all of their shares of stock.
F-92
<PAGE>
PENSAR CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999
During 1994 and 1998, certain officers purchased common stock partially
financed with notes payable to the Company. The notes, with interest at
6.25%, are collateralized by the stock. Interest is payable quarterly and
principal is due annually in minimum amounts of $84,000 through 2004 and
then $32,000 through 2008. During 1997, 1998 and 1999, the Company received
$69,600, $107,337 and $184,063, respectively, in principal repayments and
recorded approximately $26,000, $41,000 and $33,200, respectively, of
interest income in connection with these notes.
The Company recorded approximately $20,388 of interest expense for the
year ended December 31, 1998, in connection with certain notes payable to
the stockholders. The notes payable to the stockholders were paid in full
by the Company during 1998.
(12)Stock Options
In 1994, the Company awarded an employee stockholder options to purchase
40 shares of voting common stock at $10,000 per share, the estimated fair
market value of the common stock. The employee vested in 10 shares of the
options each January 1 from 1995 through 1998. The options were exercised
on January 1, 1998 with the issuance to the Company of a $400,000 note, as
discussed in note 11.
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees; as permitted by Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Under APB Opinion No. 25, compensation expense is recorded on
the date of grant only if the current market price of the underlying stock
exceeds the exercise price of the stock option.
The table below sets out the pro forma amounts of net income and net
income per common share that would have resulted if the Company had
accounted for its employee stock plans under the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Net income:
As reported.................................................. $3,660,274
Pro forma.................................................... 3,638,363
==========
Basic net income per common share:
As reported.................................................. 3,812.79
Pro forma.................................................... $ 3,712.62
==========
</TABLE>
For purposes of computing pro forma net income, the fair value of each
optional 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 was a risk-free interest rate of 6.3%, no dividend yield and
an expected life of 4 years.
(13)Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
(i) The carrying amounts of cash, trade accounts receivable, accounts
payable, accrued liabilities and stockholders' distribution payable
approximate fair values due to the short-term nature of these
instruments.
F-93
<PAGE>
PENSAR CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999
(ii) The carrying amounts of the bank lines of credit approximate fair
values due to the current interest rates approximating interest
rates currently available to the Company for bank lines of credit
with similar terms and availability.
(iii) The fair value of long-term debt, including the current portion,
is based on interest rates currently available to the Company for
debt with similar terms and maturities. The fair value of long-
term debt at December 31, 1998 and 1999 approximates book value.
(14)Segment Information
The Company's principal operating segments are identified by the types
of products and services from which revenues are derived and are consistent
with the reporting structure of the Company's internal organization.
The Company has two reportable segments: printed circuit boards and
engineering services. The printed circuit boards segment includes the
manufacture of surface mount, through-hole and mixed technology custom
printed circuit boards for industrial uses. The engineering services
segment includes various engineering services such as custom design,
product research and development, prototyping and testing.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based on gross profit, which excludes operating expenses and
other income and expenses. The Company's reportable segments are strategic
business units that offer different products and services. They are managed
separately due to the difference in the products and services offered by
each segment.
F-94
<PAGE>
PENSAR CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999
The following is a summary of financial information concerning each of
the Company's reportable segments:
<TABLE>
<CAPTION>
Printed
circuit Engineering Total
December 31, 1997 boards services Segments Corporate Total
----------------- ----------- ------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Total revenue........... $49,863,694 1,167,940 51,031,634 -- 51,031,634
Depreciation and
amortization........... 357,387 38,372 395,759 242,982 638,741
Gross profit (loss)..... 9,351,413 (178,684) 10,093,536 -- 9,172,729
Total assets............ 10,957,829 328,742 11,286,571 3,709,403 14,995,974
Capital expenditures.... 88,180 68,496 156,676 164,689 321,365
<CAPTION>
Printed
circuit Engineering Total
December 31, 1998 boards services Segments Corporate Total
----------------- ----------- ------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Total revenue........... $48,919,471 1,978,051 50,897,522 -- 50,897,522
Depreciation and
amortization........... 362,400 63,600 426,000 221,584 647,584
Gross profit............ 8,912,281 117,436 9,029,717 -- 9,029,717
Total assets............ 10,486,696 464,438 10,951,134 3,414,368 14,365,502
Capital expenditures.... 445,562 107,478 553,040 138,367 691,407
<CAPTION>
Printed
circuit Engineering Total
December 31, 1999 boards services Segments Corporate Total
----------------- ----------- ------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Total revenue........... $50,018,206 2,977,675 52,995,881 -- 52,995,881
Depreciation and
amortization........... 461,492 107,942 569,434 209,752 779,186
Gross profit............ 8,564,217 572,916 9,137,133 -- 9,137,133
Total assets............ 16,296,672 1,039,411 17,336,083 3,662,622 20,998,705
Capital expenditures.... 1,673,837 201,282 1,875,119 179,738 2,054,857
<CAPTION>
Printed
March 31, 1999 circuit Engineering Total
(unaudited) boards services Segments Corporate Total
-------------- ----------- ------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Total revenue........... $10,338,738 444,740 10,783,478 -- 10,783,478
Depreciation and
amortization........... 89,250 26,406 115,656 50,934 166,590
Gross profit (loss)..... 1,621,789 (153,742) 1,468,047 -- 1,468,047
Total assets............ 10,099,444 516,102 10,615,546 3,154,676 13,770,222
Capital expenditures.... 211,223 27,417 238,640 105,709 344,349
<CAPTION>
Printed
March 31, 2000 circuit Engineering Total
(unaudited) boards services Segments Corporate Total
-------------- ----------- ------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Total revenue........... $15,441,633 841,160 16,282,793 -- 16,282,793
Depreciation and
amortization........... 139,520 38,955 178,475 47,964 226,439
Gross profit............ 2,472,738 75,461 2,548,199 -- 2,548,199
Total assets............ 16,540,858 962,605 17,503,463 3,309,986 20,813,449
Capital expenditures.... 175,880 78,739 254,619 107,070 361,689
<CAPTION>
Reconciliation of
segment December December 31, December 31, March 31, March 31,
data to net income: 31, 1997 1998 1999 1999 2000
------------------- ----------- ------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Gross profit............ $ 9,172,729 9,029,717 9,137,133 1,468,047 2,548,199
Selling, general
administrative
expenses............... 5,124,564 4,937,010 5,105,408 972,294 1,473,192
----------- --------- ---------- --------- ----------
Operating income........ 4,048,165 4,092,707 4,031,725 495,753 1,075,007
Interest expense........ 387,891 216,985 267,697 38,518 103,335
----------- --------- ---------- --------- ----------
Net income.............. $ 3,660,274 3,875,722 3,764,028 457,235 971,672
=========== ========= ========== ========= ==========
</TABLE>
F-95
<PAGE>
PENSAR CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999
At December 31, 1997, 1998 and 1999 segment assets represent the
segments' respective share of trade accounts receivable, inventories and
net property plant and equipment. All other assets are considered corporate
assets.
All of the Company's long-lived assets are located within the United
States. Further, all of the Company's shipments of goods or engineering
services are provided to domestic manufacturers.
During 1997, a significant portion of the Company's net sales were
generated from two customers, accounting for approximately 41% and 23% of
the Company's total net sales. During 1998, a significant portion of the
Company's net sales were generated from two customers, with each generating
approximately 26% of the Company's net sales and comprising approximately
$1,251,000 and $1,477,000 of total trade accounts receivable, respectively
at December 31, 1998. During 1999, a significant portion of the Company's
net sales were generated from two customers, which comprised approximately
24% and 11%, of the Company's net sales, respectively and comprising
approximately $1,404,000 and $1,305,000 of total trade accounts receivable,
respectively at December 31, 1999.
(15)United States and Canadian Accounting Principle Differences
The 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 and relate to the calculation of diluted
net income per common share.
Under Canadian GAAP, fully diluted net income per common share is
calculated by assuming that all of 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, fully diluted net income
per common share is calculated by assuming that the proceeds were used to
acquire common shares of the Company at the average market price. Diluted
net income per common share under Canadian GAAP is $3,681.61 in 1997.
(16)Subsequent Event
Subsequent to December 31, 1999, the Company's shareholders signed a
memorandum of understanding to sell all of its outstanding common stock to
SMTC Corporation. In 2000, 100% of the Company's outstanding common stock
will be sold to SMTC Corporation.
F-96
<PAGE>
BACK COVER ART
Description of back cover art. Photograph of some of SMTC's products.
<PAGE>
9,625,000 Shares
SMTC Corporation
Common Stock
-------------
PROSPECTUS
, 2000
-------------
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 Surface Mount 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 Surface Mount, including certain members of
management of Surface Mount and other investors and pre-combination
stockholders of HTM, including affiliates of Bain Capital, Inc., affiliates
of Celerity Partners, L.L.C., certain members of management of HTM and
other investors, in exchange for pre-combination securities of Surface
Mount, pre-combination securities of HTM and an aggregate of approximately
$16.7 million.
(2) On July 30, 1999, pursuant to an employee stock option plan, SMTC
issued an aggregate of 33,140.2 options to purchase its Class A common
stock and 3,855.9 options to purchase its Class L common stock. The options
to purchase Class A common stock were fully vested when granted, and were
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.
(4) On May 18, 2000, we issued warrants to purchase 41,666.67 shares of
Class L common stock and 375,000.03 shares of Class A common stock, subject
to adjustment provisions in the warrants and sold notes in the aggregate
amount of $5 million. The issuance of the notes and warrants was exempt
from registration under the Securities Act because the purchasers of the
notes and warrants included only foreign persons, qualified institutional
buyers and three large institutional accredited investors.
All 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* Form of Stockholders Agreement dated as of May , 2000.
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 of
10.2# 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.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
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, Toronto, Canada.
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).
23.6 Consent of KPMG LLP, Milwaukee, Wisconsin.
24.1# Power of attorney pursuant to which amendments to this registration
statement may be filed.
27.1 SMTC Corporation Amended Financial Data Schedule.
</TABLE>
- --------
# Previously filed.
* 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.
Schedule II--Valuation and Qualifying Accounts
The schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission (other than the schedule
listed above) 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.
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.
II-3
<PAGE>
(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.
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 Pre-Effective Amendment to the 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 day of
May, 2000.
SMTC Corporation
/s/ Paul Walker
By: _________________________________
Name: Paul Walker
Title: President
* * * *
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 May , 2000
______________________________________ Officer (Principal
Paul Walker Executive Officer) and
Director
/s/ Richard Smith Vice President, Finance & May , 2000
______________________________________ Administration (Principal
Richard Smith Financial and Accounting
Officer)
/s/ * Executive Vice President, May , 2000
______________________________________ Business Development and
Edward Johnson Director
/s/ * Vice President and General May , 2000
______________________________________ Manager, San Jose and
Gary Walker Director
/s/ * Director May , 2000
______________________________________
David Dominik
/s/ * Director May , 2000
______________________________________
Prescott Ashe
/s/ * Director May , 2000
______________________________________
Stephen Adamson
/s/ * Director May , 2000
______________________________________
Mark Benham
/s/ * Director May , 2000
______________________________________
Michael Griffiths
/s/ * Director May , 2000
______________________________________
Anthony Sigel
</TABLE>
*See Power of Attorney executed by each such officer and/or director on the
Registration Statement on Form S-1 previously filed with the SEC on March 24,
2000, appointing Paul Walker and Richard Smith, and each of them singly, as
true and lawful attorney-in-fact and agent with full power to sign this and any
and all amendments (including post-effective amendements) to this Registration
Statement.
II-5
<PAGE>
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors and Shareholders
of SMTC Corporation (formerly Hi-Tech Manufacturing, Inc., subsequently HTM
Holdings, Inc.):
Our audits of the financial statements referred to in our report dated March
22, 2000 appearing in this Registration Statement on Form S-1 also included an
audit of the financial statement schedule included in this Registration
Statement. In our opinion, this financial statement schedule presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Broomfield, Colorado
May 19, 2000
S-1
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of SMTC Corporation (formerly HTM Holdings, Inc.):
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements as of and for the year
ended December 31, 1998, of SMTC Corporation (a Delaware corporation, formerly
HTM Holdings, Inc.) and its subsidiary included in this registration statement
and have issued our report thereon dated March 10, 1999. Our audit was made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The Schedule II--Valuation and Qualifying Accounts is the responsibility
of the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the 1998 financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ Arthur Andersen LLP
Denver, Colorado
March 10, 1999
S-2
<PAGE>
The Board of Directors
SMTC Corporation:
The audit referred to in the form of our report dated February 18, 2000
included the related financial statement schedules of SMTC Corporation
(formerly HTM Holdings, Inc.) for the year ended December 31, 1999 included in
the registration statement. The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based on our audit. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
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/ KMPG LLP
Toronto, Canada
May 23, 2000
S-3
<PAGE>
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Expressed in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Years ended
December 31,
---------------------
1997 1998 1999
----- ----- -------
<S> <C> <C> <C>
Reserves for Inventory
Balance, beginning of year.............................. $(778) $(354) $ (521)
Charge to expense ...................................... (120) (255) (915)
Written off............................................. 544 88 560
Added through acquisition............................... -- -- (952)
----- ----- -------
Balance, end of year.................................. $(354) $(521) $(1,828)
===== ===== =======
<CAPTION>
Years ended
December 31,
---------------------
1997 1998 1999
----- ----- -------
<S> <C> <C> <C>
Reserves for Accounts Receivable
Balance, beginning of year.............................. $(203) $(180) $ (195)
Charge to expense ...................................... (120) (120) (120)
Written off............................................. 143 105 50
Added through acquisition............................... -- -- (249)
----- ----- -------
Balance, end of year.................................. $(180) $(195) $ (514)
===== ===== =======
</TABLE>
S-4
<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* Form of Stockholders Agreement dated as of May , 2000.
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 of
10.2# 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, Toronto, Canada.
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).
23.6 Consent of KPMG LLP, Milwaukee, Wisconsin.
24.1# Power of attorney pursuant to which amendments to this registration
statement may be filed.
27.1 SMTC Corporation Amended Financial Data Schedule.
</TABLE>
- --------
# Previously filed.
* 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 10.11.1
REVISED LEASE AGREEMENT
-----------------------
THIS REVISED LEASE AGREEMENT (the "Lease") made and entered into this 14th
day of January, 1994, is by and between HTM BUILDING INVESTORS, LLC, a Colorado
limited liability company, hereinafter referred to as "LANDLORD" and HI-TECH
MANUFACTURING, INC., a Colorado corporation, hereinafter referred to as
"TENANT";
WITNESSETH
In consideration of the covenants, terms, conditions, agreements and
payments as hereinafter set forth, the parties hereto covenant and agree as
follows:
1. LEASED PREMISES
Landlord hereby leases unto Tenant portions of a certain building (as
identified below) with approximately 80,696 square feet of total space and those
related improvements, buildings, parking areas and facilities (the "leased
premises") located at 12520 Grant Avenue, Thornton, Colorado as more
particularly described as Lot 1B, Block 8, Subdivision of Lot 1, Block 8,
Washington Square Subdivision Amended, Adams County Colorado.
Portion of the building leased during the period January 1994 through
December 1994: Approximately the 40,000 square feet of the building consisting
of the west one-half of the manufacturing floor. The portion of the building
not leased to the Tenant is the office space and the east one-half of the
manufacturing floor. During 1994, it is understood that the Landlord may lease
the office space and the east one-half of the manufacturing floor to an
additional tenant for a period not to exceed two years.
Portion of the building leased during the period January 1995 through April
2003: The entire building if not otherwise leased by the Landlord during 1994.
To the extent that the building is leased by the Landlord to an additional
tenant (for a term not to exceed two years), Tenant will be provided a rent
credit equal to the net monthly proceeds realized by the Landlord from the
additional tenant.
2. TERM
A. Initial Term
The term of this Lease shall commence at 12:00 noon on the 14th day of
January, 1994, and unless terminated or extended as herein provided for shall
end at 12:00 noon on the 14th day of April, 1999.
B. Possession
<PAGE>
Tenant acknowledges that Landlord is giving possession of the leased
premises to Tenant, in its "as is" condition, on the initial commencement date
for purposes of beginning demolition and construction of tenant improvements to
be performed by Tenant and that the leased premises is not now ready for
occupancy by Tenant for its intended use. Landlord shall not be subject to any
liability for, the validity of this Lease shall not be impaired nor shall the
Lease terminate or be extended, nor shall the rent be abated because of the
current condition of the leased premises.
3. RENT/DEPOSIT
A. Initial Basic Rent (See Exhibit A)
In consideration for Landlord's covenants and agreements contained
herein, Tenant hereby covenants and agrees to pay to Landlord at the address of
Landlord as set forth herein a basic monthly rent as set forth on Exhibit A
attached hereto and by this reference incorporated herein, payable without
deduction, set off, demand, or notice in advance on the first day of each
calendar month.
B. Receipt
Landlord acknowledges receipt of the sum of Fifty-two Thousand Four
Hundred Eighty-eight and No/100 U.S. Dollars ($52,488.00) paid by Tenant upon
the execution hereof being in payment of the security deposit of $40,000 plus
first month's rent.
C. Proration of Rent for Partial Months
If the lease term begins on other than the first day of a month, rent
from such date until the first day of the next succeeding calendar month shall
be prorated on the basis of the actual number of days in such calendar month and
shall be payable in advance. If the lease term terminates on other than the
last day of the calendar month, rent from the first day of such calendar month
until such termination date shall be prorated on the basis of the actual number
of days in such month and shall be payable in advance.
D. Partial Payments of Rent
No payment by Tenant or receipt by Landlord of an amount less than the
basic monthly rental provided for herein shall be deemed to be other than on
account of the earliest rent then due, nor shall any endorsement or statement on
any check or any letter accompanying any check or payment of rent be deemed an
accord and satisfaction, and Landlord may accept such check or other payment
without prejudice to Landlord's right to recover the balance of all rent then
due, and/or to pursue any or all other remedies provided for in this Lease, in
law, and/or in equity including, but not limited to, eviction of Tenant.
-2-
<PAGE>
E. Security/Damage Deposit
Tenant has deposited the sum of Forth Thousand and No/100 U.S. Dollars
($40,000) with the Landlord, the receipt of which is hereby acknowledged (except
that if such payment is made by check this receipt is subject to collection) as
security for the complete and faithful performance by Tenant of each and every
item, covenant, and condition of this Lease including, but not limited to,
payment of rent and care of leased premises as set forth in Paragraph 8 hereof.
In the event that Tenant defaults in any terms, agreements, covenants, and
conditions of this Lease, Landlord, at its sole discretion, may use, apply or
retain the whole or any part of the security/damage deposit for payment of any
damage to the leased premises or the building on the leased premises or other
losses, cost, or rent in default or for any other sum which Landlord expends or
incurs by reason of Tenant's breach or default of this Lease. Notice shall be
given to Tenant of the possible use of the security deposit for repairs. Tenant
shall have a reasonable amount of time to respond as to such use of the funds.
Landlord, at Landlord's sole discretion, may commingle all or any portion of the
security/damage deposit with Landlord's other funds and may use and/or deposit
any portion or all of the security/damage deposit in an interest bearing or non-
interest bearing account. The security/damage deposit is not, and shall not be
deemed or construed to be, an advance payment or partial payment of rent or any
other cost due from Tenant pursuant to this Lease. After each application or
retention of all or any part of the security/damage deposit by Landlord and upon
Landlord's oral or written demand to Tenant, Tenant shall pay to Landlord the
amount of the security/damage deposit so applied or retained so that the total
amount of the security/damage deposit during the term of this Lease or any
renewal thereof shall be equal to its original amount, and in the event that
Tenant fails to pay the amount requested by Landlord within five (5) days after
Landlord's request, Tenant shall be in default of this Lease. Landlord will
identify and specify any problems and communicate, in writing, to Tenant within
30 days after lease termination. The security/damage deposit, less any amounts
used, applied or retained under the terms of this Lease will be mailed to Tenant
within sixty (60) days after the later of the following to occur: (a) the
termination of this Lease; or (b) after delivery to Landlord of the entire
possession of the leased premises defined in Paragraph 5 hereof. In the event
that Tenant occupies the leased premises for less than the initial term as set
forth in Paragraph 2(A) hereof, the security/damage deposit shall be retained by
Landlord and shall not be returned to Tenant.
4. TAXES/ASSESSMENTS/UTILITIES
This Lease is a triple net lease to the Landlord, and as such, during the
term hereof (as extended), Tenant shall have the following obligations:
A. Taxes and Assessments.
Tenant shall pay and be solely responsible for all real estate taxes
assessed against the improvements of which the leased premises are part. For
purposes of this Lease, the term "real estate taxes" shall refer to all general
and special real estate taxes, all special assessments,
-3-
<PAGE>
mall assessments, if any, and all other taxes, fees, rates, charges, levies or
assessments levied upon or assessed against the real property or the
improvements on the leased premises by any governmental, quasi-governmental, or
private authority or any tax or assessment specifically imposed in lieu of such
taxes, fees, rates, charges, levies or assessments, but excluding any income,
profit, or business tax charged or levied against Landlord. Should real estate
taxes assessed against the improvements on the leased premises increase due to
the construction of improvements by, or for the benefit of, the Tenant, Tenant
shall pay as additional rent all of such increase in taxes which is attributable
to the value of the Tenant improvements. Reasonable expenses, including
attorneys' fees incurred by Landlord in contesting or in determining whether or
not to contest the levying, imposition, or amount of any such real estate taxes
or in obtaining or attempting to obtain reduction of any real estate taxes,
shall be added to and included in the amount of any such real estate taxes.
Landlord shall have no obligation to contest, object to or litigate the levying
or imposition of any real estate taxes and may settle, compromise, consent to,
waive or otherwise determine in Landlord's discretion any real estate taxes
without consent or approval of Tenant.
B. Personal Property Taxes.
Tenant shall be responsible and pay for any and all taxes and/or
assessments levied and/or assessed against any furniture, fixtures, equipment
and items of a similar nature installed and/or located in or about the leased
premises by Tenant.
C. Utilities
Tenant shall be responsible for obtaining in its name and shall
promptly pay as and when the same become due and payable, all charges for heat,
gas, water, sewer, electric services and any other utility service used or
consumed in the improvements on the leased premises. No interruption,
malfunction or failure in the supply of any utility to the leased premises or
the improvements on the leased premises shall constitute an actual or
constructive eviction or a breach of Landlord of any of its obligations
hereunder, or render Landlord liable for damages or entitle Tenant to be
relieved from any of Tenant's obligations hereunder, including the obligation to
pay rent or grant Tenant any right of set off or recoupment. Upon termination
of this Lease or abandonment of the leases premise, Tenant shall terminate,
cancel or transfer to another party as directed by Landlord any and all
utilities including water, sewer, gas, heat, electric services, telephone
services, and any other utility service used or consumed which are the
responsibility of or listed with the utilities service companies in the name of
Tenant and Tenant hereby irrevocably appoints and constitutes Landlord as its
agent and attorney in fact to effect such cancellation, termination, transfer or
assignment of such utility services if Landlord in its sole discretion elects to
do so.
D. Estimate
-4-
<PAGE>
Landlord shall estimate annual real estate taxes relating to leased
premises and compute as additional rent based upon the estimated taxes, which is
payable monthly in equal installments, in advance on the first day of each month
during the term hereof. Landlord shall readjust the additional rent annually
based upon the actual taxes for the preceding period and shall apply any excess
paid by Tenant as an estimate to Tenant's obligations to pay such additional
rent in the next period. If the total amounts paid by Tenant as additional rent
are insufficient to pay the actual real estate taxes for such period, Tenant
shall pay the deficient amount within ten (10) days after Landlord notifies
Tenant of the amount of deficiency due from Tenant, and such amount shall be
considered additional rent under the terms hereof. In the event the first and
last years of this lease are not calendar years, the liability of Tenant for
real estate taxes under the terms of this Paragraph 4 shall be prorated with
Tenant being liable for those number of days during which this Lease was in
effect.
E. Reimbursement
If Tenant fails to make any payments hereunder and Landlord elects to
pay such amounts, Tenant shall be obligated to reimburse Landlord immediately
for such amounts without notice, together with interest thereon as a rate of 18%
per anum and such amount shall be deemed additional rent hereunder. Nothing
contained herein shall require Landlord to make such payments on behalf of
Tenant.
5. HOLDING OVER
In the event that Tenant shall not immediately surrender possession of the
leased premises at the termination of this Lease, Tenant shall become a tenant
from month to month only if rent is paid to and accepted by Landlord in advance
at the rate of 110% of the rental payable hereunder just prior to the
termination of this Lease. Unless and until Landlord accepts such rental from
Tenant, Landlord shall be entitled to retake or recover possession of the leased
premises as provided in case of default on the part of Tenant and Tenant shall
be liable to Landlord for any loss or damage it may sustain by reason of
Tenant's failure to surrender possession of the leased premises immediately upon
expiration of the term of this Lease, or, if applicable, the last properly
exercised extended term hereof as provided in Paragraph 29. No holding over by
Tenant shall operate to renew or extend this Lease, other than as provided in
Paragraph 29, without the written consent of Landlord to such renewal or
extension having been first obtained. If Tenant shall fail to surrender
possession of the leased premises immediately upon such term expiration, Tenant
hereby agrees that all obligations, including those for rent, of Tenant and all
rights of Landlord applicable during the term of this Lease shall be equally
applicable during such period of subsequent occupancy whether or not the month
to month tenancy shall have been created as aforesaid. For purposes of this
Lease, Tenant shall be deemed to have not surrendered possession of the leased
premises if Tenant has failed to cancel, terminate, assign, or transfer any of
the utility services as provided in Paragraph 4 hereof, and if any utility
service company fails or refuses to accept the power of attorney of Landlord set
forth in Paragraph 4, or if Tenant exercises or refuses to release any other
control or authority over, or with regard to, the leased
-5-
<PAGE>
premises regardless of whether or not Tenant is in physical possession of the
leased premises including, but not limited to, failure to return keys, failure
to remove personal property from the leased premises, or failure to cancel
telephone service to the leased premises or to the improvements on the leased
premises.
6. MODIFICATIONS OR EXTENSIONS
No modification, amendment or extension of this Lease shall be binding
unless in writing, signed by the parties hereto and endorsed hereon or attached
hereto.
7. SIGNS/CONSTRUCTION -- LANDLORD'S APPROVAL-TENANT'S RESPONSIBILITY
A. Signs
Tenant shall not erect any sign in, on or near the leased premises or
the improvements on the leased premises regardless of size or value without the
prior written consent of Landlord, and all such signs approved by the Landlord
pursuant hereto shall strictly conform to Landlord's requirements and
specifications for the sign and placement and attachment thereof.
B. Construction - Tenant's Responsibility
During the term of this Lease, and subject to the provision of
Paragraph 7(C) hereof, Tenant may, at Tenant's expense, erect inside partitions,
add to existing electric power service, add telephone outlets, add light
fixtures, install additional heating and/or air conditioning, or make such other
changes or alterations to the lease premises as Tenant may desire. At the end
of this Lease, all such fixtures, equipment, additions and/or alterations
(except machinery and equipment related to Tenant's business operations and
other trade fixtures installed by Tenant) shall be and shall remain the property
of Landlord; provided, however, Landlord shall have the option to require Tenant
to remove any or all such fixtures, including machinery and equipment related to
Tenant's business operations and other trade fixtures, equipment, additions
and/or alterations and restore the leased remises to the condition existing
immediately prior to such change and/or installation, normal wear and tear
except, all at Tenant's costs and expense. All such work shall conform to all
applicable governmental requirements and shall be done in a good and workmanlike
manner and shall consist of new materials unless agreed to otherwise by
Landlord. Any and all repairs, changes and/or modifications to the leased
premises shall be the responsibility of and at the cost of Tenant.
C. Construction -- Landlord's Approval
Tenant shall not make any improvement, addition, deletion change,
construction or alteration to the interior or exterior of the leased premises or
the improvements, the cost of which is in excess of Two Thousand Five Hundred
and No/100 Dollars ($2,500.00) without the written approval of Landlord being
obtained by Tenant prior to the commencement of such work.
-6-
<PAGE>
D. Roof
Prior to the cutting of any holes in the roof and/or any exterior
surfaces and prior to any work being performed and/or any equipment being
installed on the roof or exterior of the building or leased premises by Tenant,
Tenant shall obtain the written approval of Landlord. Any repairs required as a
result of work by Tenant shall be the responsibility of Tenant, and all costs
thereof shall be paid by Tenant.
E. Security/Bond for Work
As a condition to the granting of any approval required pursuant
hereto, Landlord shall have the right to require Tenant to furnish a bond or
other security acceptable to Landlord sufficient in the opinion of Landlord to
assure completion of any payment for all such work to be so performed.
F. No Approval or Security for Work - Landlord's Remedies
Landlord's right or option to inspect the leased premises or the
improvements on the leased premises or to provide management or on-site
supervision of the leased premises or the improvements or any actual such
inspection, management or on-site supervision shall not be a waiver of
Landlord's right to withhold written approval of any work to be done by Tenant
as provided in this Paragraph 7 or of Landlord's right to require Tenant to
furnish a bond or other security pursuant to Paragraph 7(E). Landlord's right
to withhold or deny such written approval of Tenant's proposed or actual
improvement, addition, deletion, change, construction or alteration and to
require and receive from Tenant a bond or other security as provided in
paragraph 7(E) shall be waived only if Landlord specifically and in writing,
signed by Landlord, waives either or both such rights under this Paragraph 7.
In the event that Tenant commences any improvement, addition, deletion, change,
construction or alteration as provided in paragraph 7 without the written
approval of Landlord prior to the commencement of such work, and/or fails to
furnish a bond or other security acceptable to Landlord pursuant to Paragraph
7(E). Landlord shall be entitled to exercise any of its remedies as provided in
this Lease for default by Tenant as well as any remedies available to Landlord
in law or in equity including injunctive relief and eviction of Tenant.
8. CARE OF LEASED PREMISES - RESPONSIBILITY
During the term of this Lease, Tenant agrees to keep and maintain the
interior of the leased premises in good clean condition and repair at Tenant's
cost and expense. Tenant further agrees to return the leased premises at the
end of the term to Landlord in as good condition as when received. Tenant
further agrees to be responsible for any repairs and/or maintenance required for
any part of the improvements on the leased premises and its fixtures and
equipment where such repair and/or maintenance is necessitated by actions,
inactions and/or activities
-7-
<PAGE>
conducted on the leased premises by Tenant and/or Tenant's licensees, invitees,
employees, contractors, servants and/or legal representatives.
9. COMMON AREA AND EXTERIOR MAINTENANCE
Tenant shall maintain or shall obtain the services of a third party to
maintain the roof and exterior of the building, the exterior grounds and all
common areas of the improvements on the leased premises, including without
limitation, parking lots, green areas, sidewalks, entrances, and corridors, in
good repair and condition. Tenant shall be responsible for and pay all such
costs associated with such maintenance, including without limitation, the cost
and expenses incurred for maintenance; repairs, utilities; janitorial services;
building security; snow removal, lawn mowing, gardening, watering, shrub care
and replacement, and removal of trash, rubbish, garbage and other refuse,
maintenance and repairs; the cost of personnel to implement such services, to
direct parking and to police the areas; roof and building structure maintenance
and repair costs.
10. GOVERNING LAWS AND CARE OF GROUNDS - TENANT
Tenant shall abide by and conform to all present and future laws and
ordinances of any governmental or quasi-governmental authority having
jurisdiction over the leased premises. Tenant shall not allow any accumulation
of trash or debris on the leased premises or within any portion of the
improvements on the leased premises. All receiving and delivery of goods and
merchandise and all removal of garbage and refuse shall be made only by way of
the rear and/or other service door provided therefore. In the event the leased
premises shall have no such door, then these matters shall be handled in a
manner satisfactory to Landlord. No storage of any material outside of the
leased premises shall be allowed unless first approved by Landlord in writing,
and then in only such areas as are designated by Landlord. Tenant shall not
commit or suffer any unlawful act or waste on the leased premises nor shall
Tenant permit any nuisance to be maintained in the leased premises or permit any
disorderly conduct, common noise or other activity having a tendency to annoy or
disturb any occupant of any part of the improvements on the leased premises
and/or any occupants of any adjoining or neighborhood property.
11. LIABILITY FOR OVERLOAD
Tenant shall be liable for the cost of any damage to the leased premises
caused by Tenant, the improvements on the leased premises, or the sidewalks and
pavements adjoining the same resulting from the movement of heavy articles.
Tenant shall not unduly load or unload the floors of any part of the leased
premises or the improvements on the leased premises.
12. GLASS AND DOOR RESPONSIBILITY
All glass and doors on the leased premises shall be the responsibility of
the Tenant. Any replacement or repair shall be promptly completed by and at the
expense of the Tenant.
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<PAGE>
13. RULES AND REGULATIONS
Landlord reserves the right to adopt and promulgate reasonable rules and
regulations applicable to the leased premises and the land and improvements on
the leased premises from time to time to amend or supplement said rules or
regulations. Notice of such rules and regulations and amendments and
supplements thereto shall be given to Tenant, and Tenant agrees to comply with
and observe such rules and regulations and amendments and supplements thereto.
14. USE OF PREMISES
Tenant shall use the leased premises for office, manufacturing and
warehouse purposes which shall include the sale and offering for sale of all of
the goods, wares and merchandise and the performance of such services as are
usually incidental to such business but Tenant shall refrain from the sale of
merchandise and performance of services not usually incidental to such
businesses. Tenant may operate other business at the leased premises only with
Landlord's prior written approval, which approval shall not be unreasonably
withheld. Tenant shall keep the business being conducted on the leased premises
open for business during normal business hours of all business days applicable
to such business. Nothing in this lease shall be construed as granting Tenant
an exclusive right to the sale or furnishing of any particular merchandise or
service. Tenant shall continuously and uninterruptedly during the term of this
Lease occupy and use the leased premises for the purposes hereinabove specified
unless prevented from so doing by causes beyond Tenant's control. No auction,
fire or bankruptcy sales may be conducted in the leased premises or on the
improvements or on real property on the leased premises without the prior
written approval of Landlord, which approval shall not be unreasonably withheld.
Tenant shall not carry any stock of goods or do anything in or about the leased
premises which will, in any way, void or make voidable or tend to increase the
rates for any insurance on the leased premises and/or the improvements on the
leased premises and/or the real property on which said improvements are located.
Tenant agrees to pay, as additional rent, an amount equal to any increase in the
insurance premiums that may be charged during the term of this Lease for the
amount of the insurance carried by Landlord on the total improvements on the
leased premises when such increase results from activities carried on by Tenant
on the leased premises or the improvements or real property on the leased
premises, whether or not Landlord has consented to the same.
15. INSURANCE - RESPONSIBILITY OF TENANT
A. Insurance
Tenant shall procure, pay for and maintain comprehensive public
liability insurance providing coverage from any loss or damage occasioned by an
accident or casualty, about or adjacent to the leased premises which policy
shall be written on an "Occurrence Basis" with limits of not less than
$2,000,000 liability coverage and $2,000,000 property damage coverage. In
addition thereto, Tenant shall maintain all risk insurance on its personal
property
-9-
<PAGE>
located on the leased premises and covering all of Tenant's leasehold
improvements, fixtures and alterations, in an amount not less than 100% of the
full replacement cost and shall maintain business interruption insurance or rent
insurance in an amount sufficient to fund Tenant's rental obligations under this
Lease. Certificates of such insurance listing Landlord as an additional insured
shall be delivered by Tenant to Landlord immediately after commencement of this
Lease and at any and all times requested by Landlord and shall provide that said
coverage shall not be changed, modified, reduced or canceled without thirty (30)
days prior written notice thereof being given to Landlord.
B. Landlord Coverage
The Landlord shall have and maintain in effect at all times, fire,
extended coverage and vandalism and malicious mischief, and general liability
insurance in such amounts as shall be determined appropriate by Landlord on the
leased premises. Within thirty (30) days after notification of the amount of
the premium for such insurance, Tenant shall pay to Landlord, as additional rent
due under the terms hereof, the amount of such premium. If necessary, the
amount due pursuant to this Paragraph 15 shall be prorated on the basis of the
ratio of the portion of the term of this Lease within the term of the policy for
which the premium charge has been made to the total term of the policy for which
the premium charge has been made.
C. Estimate
Landlord shall estimate annual insurance relating to leased premises
and compute as additional rent based upon the estimated annual insurance. The
additional rent is payable in equal monthly installments, in advance, on the
first day of each month during the term hereof. Landlord shall readjust the
additional rent annually based upon the actual cost for the preceding period and
shall apply any excess paid by the Tenant as an estimate to Tenant's obligations
to pay such additional rent in the next period. If the total amounts paid by
the Tenant as additional rent are insufficient to pay the actual costs for such
period, Tenant shall pay the deficiency amount within ten (10) days after
Landlord notifies Tenant of the amount of deficiency due from Tenant and such
amount shall be considered additional rent under the terms hereof.
16. REGULATIONS ON USE - TENANT'S RESPONSIBILITY
It shall be Tenant's sole and exclusive responsibility to meet all fire
regulations of any governmental unit having jurisdiction over the leased
premises as such regulations affect Tenant's operations, all at Tenant's sole
cost and expense. Tenant further agrees not to install any electrical equipment
that overloads any electrical paneling, circuitry or wiring and further agrees
to comply with the requirements of the insurance underwriter and any
governmental authorities having jurisdiction thereof.
17. DAMAGE TO LEASED PREMISES/IMPROVEMENTS
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In the event of any damage to the leased premises or the improvements on
the leased premises, including the equipment in the improvements or in the event
of malfunction or other failure of such equipment, Tenant agrees to give
Landlord notice of such damages, malfunction or failure as soon as possible
after receiving notice of such damage, malfunction or failure. In the event the
leased premises and/or the improvements on the leased premises shall be totally
destroyed by fire or other casualty or so badly damaged that, in the opinion of
the Landlord, it is not feasible to repair or rebuild same, Landlord shall have
the option and right to terminate this Lease upon written notice to Tenant. If
the leased premises shall be partially damaged by fire or other casualty, except
if caused by Tenant's negligence or misconduct, and said leased premises are not
rendered untenantable for Tenant's purposes thereby, as determined by Landlord,
an appropriate reduction (determined by Landlord) of the rent shall be allowed
for the unoccupied portion of the leased premises until repair thereof shall be
substantially completed. If Tenant disagrees with Landlord's conclusions on
tenantability or the amount of reduction of rent, the parties shall submit such
disputed determinations for binding decision by a mutually acceptable real
estate professional. If the leased premises are rendered untenantable thereby,
except if caused by Tenant's negligence or misconduct, Tenant may, at its
election, terminate this Lease by written notice to Landlord within fifteen (15)
days after the day of the damage. If Tenant elects not to terminate the Lease
and the damage was not caused by Tenant's negligence or misconduct, the rent
shall abate in proportion to the loss of use of the leased premises by Tenant
during such untenantability. If the damage was caused by Tenant's negligence or
misconduct, Tenant shall remain liable for the full rent and other charges and
obligations hereunder, unless Landlord determines repair or reconstruction is
not feasible and Landlord exercises its above option to terminate this Lease.
18. INSPECTION OF AND RIGHT OF ENTRY TO LEASED PREMISES
A. Tenant has inspected the leased premises and accepts the same in the
condition that exists as of the date hereof. No representation or warranty
express or implied has been made by or on behalf of Landlord as to the condition
of the leased premises or as to the use that may be made of same.
B. Landlord and/or Landlord's agents and employees shall have the right
to enter the leased premises at all times during regular business hours and at
all times during emergencies, to examine the leased premises, to make such
repairs, alterations, improvements or additions as Landlord may deem necessary
or desirable, and Landlord shall be allowed to take all materials into and upon
said leased premises that may be required therefore without the same
constituting an eviction of Tenant in whole or in part, and the rent reserved
shall in no way abate while such repairs, alterations, improvements or additions
are being made, and Landlord shall not be liable to Tenant for reason of loss or
interruption of business of Tenant or otherwise. In the event of forcible entry
into the leased premises by Landlord or Landlord's agents, employees, invitees
or licensees as a result of any emergency, Tenant shall pay all costs or damages
and agrees to indemnify and hold harmless Landlord for any liability, costs or
damages including attorneys' fees as a result of such emergency forcible entry.
Landlord reserves the right, at any time during
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the term thereof, to exhibit the leased premises to any prospective purchaser of
the improvements on the leased premises and/or to place upon the leased
premises, and/or the improvements on the leased premises, a notice or sign
indicating the property is for sale or mortgage financing or posting notices of
nonresponsibility under any mechanic's lien law, and during the six (6) months
prior to the expiration of the term of this Lease or any renewal thereof,
Landlord may exhibit the leased premises to prospective tenants and may place
upon the leased premises and/or the improvements notices indicating the lead
premises are for lease.
19. DEFAULT - REMEDIES OF LANDLORD
A. Default/Repossession or Reletting
If the Tenant shall default in the payment of rent (basic or
additional) or, if after 30 days written notice of default, Tenant shall remain
in default in the keeping of any of the terms, covenants, or conditions of this
Lease to be kept and/or performed by Tenant, Landlord may immediately, or at any
time thereafter declare this Lease terminated and reenter the leased premises,
remove all persons and property therefrom, without being liable to indictment,
detainer, and repossess and enjoy the leased premises, together with all
additions thereto or alterations and improvements thereof. Landlord may, at its
option, elect to treat this Lease as still in effect and relet the leased
premises or any part thereof for the account of Tenant. The Landlord shall
receive and collect the rents therefor and apply the same first to the payment
of such expenses as Landlord may have incurred in recovering possession and for
putting the same in good order and condition for rerental, and expense and
commissions and charges paid by Landlord in reletting the leased premises. Any
such reletting may be for the remainder of the term of this Lease or for a
longer or shorter period. Whether or not the leased premises or any part
thereof be relet, Tenant shall pay the Landlord the rent and all other charges
required to be paid by Tenant up to the time of the expiration of this Lease or
of such recovered possession, as the case may be, and thereafter, Tenant, if
required by Landlord, shall pay to Landlord until the end of the term of this
Lease, the equivalent of the amount of all rent reserved herein and all other
charges required to be paid by Tenant, less the net amount received by Landlord
for such reletting, if any. In the event of any default by Tenant, and
regardless of whether the leased premises shall be relet or possessed by
Landlord, any fixtures, additions, furniture, and the like then on the leased
premises may be retained by Landlord.
B. Tenant - Bankruptcy or Insolvency
In the event an assignment of Tenant's business or property shall be
made for the benefit of creditors, or if the Tenant's leasehold interest under
the terms of this Lease shall be levied upon by execution or seized by virtue of
any writ of any court of law, or, if application be made for the appointment of
a receiver for the business or property of Tenant, or, if a petition in
bankruptcy shall be filed by or against Tenant, then and in any such case at
Landlord's option with or without notice, Landlord may terminate this Lease and
immediately retake possession of
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the leased premises without the same working any forfeiture of the obligations
of Tenant hereunder.
C. Abandonment - Tenant's Property
In the event Tenant is in default under the terms hereof, and by the
sole determination of Landlord, has abandoned the leased premises, Landlord
shall have the right to remove all the Tenant's property from the leased
premises and dispose of said property in such manner as determined best by
Landlord, all at the cost and expense of Tenant and without liability of
Landlord for the actions so taken.
D. Personal Property Lien
Tenant hereby grants to landlord a lien on and security interest in
all of Tenant's personal property and fixtures (and proceeds thereof) now or
hereinafter located in the leased premises or the improvements on the leased
premises for the payment of all rentals, charges and expenses due or to become
due pursuant hereto, except for those items leased by Tenant from third parties.
Said lien shall attach to such property only in the event of Tenant's default,
and said lien shall continue unless the default is cured with 30 days following
default. Tenant hereby specifically waives any and all exemptions to such lien
allowable by law. Upon default of Tenant in the payment of any rental expenses
or other charge due under the terms hereof, Landlord may take possession of any
or all of the said personal property and fixtures either to its own use or for
the purpose of selling said property at a public or private sale, and out of the
money derived from such sale Landlord shall pay the amount due Landlord for the
said rent expenses and charges and all costs growing out of the enforcement of
this lien, including reasonable attorneys' fees, paying the surplus, if any, to
Tenant. If the property or any portion thereof is offered for sale, Landlord
may become the purchaser of the property.
E. Remedies Non-inclusive
In addition to any remedy granted to Landlord by the terms hereof,
Landlord shall have available any and all rights and remedies available by
statute, in law or in equity. No remedy herein or otherwise conferred upon or
reserved to Landlord shall be considered inclusive of any other remedy but shall
be cumulative and shall be in addition to every other remedy given hereunder
whether now or hereafter existing at law or in equity or by statute. Further,
all or any powers and remedies given by this Lease to Landlord may be exercised
from time to time and as often as occasion may arise or as may be deemed
expedient by Landlord.
F. Landlord's Delay or Omission
No delay or omission of Landlord to exercise any right or power
arising from any breach or default shall impair any such right or power or shall
be considered to be a waiver of any such breach or default or acquiescence
thereof. The acceptance of rental or any part thereof
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by Landlord shall not be deemed to be a waiver of any breach or default of any
of the covenants herein contained or of any of the rights of Landlord to any
remedies herein given.
G. Landlord's Liability
Notwithstanding anything to the contrary contained herein, Landlord's
liability under this Lease for any cause, including without limitation,
Landlord's own negligence or willful default, shall be limited to Landlord's
interest in the improvements on the leased premises.
20. LEGAL PROCEEDINGS - RESPONSIBILITY
In the event of any proceeding at law or in equity wherein Landlord,
without being in default as to its covenants under the terms hereof, shall be
made a party to any litigation by reason of Tenant's interest in the leased
premises or, in the event Landlord shall be required to commence any legal
proceedings relating to the leased premises and/or Tenant's occupancy thereof
and/or Tenant's relation thereto and/or to enforce Tenant's agreements and
covenants herein, Landlord shall be allowed and Tenant shall be liable for and
shall pay all costs and expenses incurred by Landlord, including reasonable
attorneys' fees and such costs and expenses shall be additional rent.
21. HOLD HARMLESS BY TENANT
Tenant hereby indemnifies and holds Landlord harmless from and against any
and all liability, claims, losses, damages, expenses, costs, judgments and/or
demands arising from the conduct of Tenant on the leased premises and/or on
account of any operation, action or inaction by Tenant and/or from any breach or
default on the part of Tenant or any act of negligence of Tenant, its agents,
contractors, servants, employees, licensees or invitees; or any accident, injury
or death to any person or damage to any property in or about the leased
premises.
22. ASSIGNMENT, SUBLETTING OR LEASEHOLD MORTGAGE
Tenant shall not assign the Lease or pledge or mortgage the leasehold
interest granted herein. Tenant shall not sublet the leased premises without
the Landlord's prior review of the proposed sublease and written consent. If
this Lease is assigned, or if the leased premises or any part thereof is sublet,
or occupied by anyone other than the Tenant, the Landlord may, after default by
the Tenant, collect rent from the assignee, subtenant, or occupant and apply the
net amount collected against all rent herein reserved. No such assignment,
subletting, occupancy, or collection shall be deemed a waiver of this covenant,
or the acceptance of the assignee, subtenant, or occupant as tenant, or a
release of Tenant from further performance by the Tenant of the covenants in
this Lease. The consent by the Landlord to an assignment or subletting shall
not be construed to relieve the Tenant or subsequent assignee or sublessee from
obtaining the consent in writing of the Landlord to any further assignment or
subletting.
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23. SALE OF TENANT'S BUSINESS
In the event that Tenant sells its business or completes an initial public
offering of its stock, Tenant shall notify Landlord of such sale or offering no
less than thirty (30) days and no more than one hundred twenty (120) days before
the scheduled closing date (or offering date). Within thirty (30) days after
receipt of such notification, Landlord and the proposed purchaser of Tenant's
business (or Tenant in the case of a public offering) hereinafter Buyer, shall
enter into and execute a new lease for the remainder, after the actual closing
date, of the then current term of this Lease, which new lease shall contain the
same terms, conditions, and agreements as contained in this Lease provided that,
at Landlord's sole discretion, the then current basic monthly rental shall be
increased to the then current fair market rental rate for similar property and
provided further that Buyer shall have an option to extend the term of the new
lease only for such additional terms as remain for potential exercise by Tenant
pursuant to Paragraph 29 hereof. All other terms and conditions of this Lease
shall be agreed to by Buyer in the new lease. In the event such new lease is
entered into and executed by Landlord and Buyer within thirty (30) days after
receipt of notification of sale or offering by Landlord from Tenant as set forth
hereinabove, this Lease shall terminate on the date of closing of the sale of
Tenant's business to Buyer or the successful completion of the public offering.
In the event that such new lease is not entered into and executed by Landlord
and Buyer within the said thirty (30) days after receipt of notice of sale or
offering by Landlord or in the event that the sale of Tenant's business to Buyer
does not close (or the public offering is not completed), this Lease shall not
terminate but shall continue in full force and effect and the new lease shall be
unenforceable. Any new lease entered into pursuant to this Paragraph 23 shall
be contingent upon the closing of the sale from Tenant to Buyer (or the
completion of the public offering).
24. WARRANTY OF TITLE
Landlord covenants it has good right to lease the leased premises in the
manner described herein and that Tenant shall peaceably and quietly occupy and
enjoy the leased premises during the term of the Lease. If such enjoyment is
not provided, Tenant shall have right to cancel this lease with 30 days prior
written notice.
25. GOVERNMENTAL ACQUISITION OF PROPERTY
The parties agree that Landlord shall have complete freedom of negotiation
and settlement of all matters pertaining to the acquisition of the real property
and improvements thereon on the leased premises, it being understood and agreed
that any financial settlement respecting land or improvements thereon or
portions thereof or rights therein to be taken whether resulting from
negotiation and agreement or condemnation proceedings, shall be the exclusive
property of Landlord, there being no sharing whatsoever between Landlord and
Tenant of any sum received and Tenant hereby waives any and all claim thereto.
After the taking of the property, Landlord shall attempt to provide the same
amount of square feet of land area and usable building space for Tenant's
operations in the immediate vicinity of the
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leased premises and in the event Landlord cannot so do, this Lease shall
terminate automatically, but Tenant shall not receive payment of any form of
compensation. The taking of real property, improvements thereon, portions
thereof, or rights therein as noted herein shall not be considered as a breach
or default of this Lease by Landlord, nor give rise to any claims by Tenant for
damages or compensation from Landlord.
26. CHANGES AND ADDITIONS TO IMPROVEMENTS - LANDLORD
Landlord reserves the right at any time to make alterations or additions to
the improvements on the leased premises and/or to build additions or other
structures unto, or adjoining, said improvements. Landlord also reserves the
right to construct other buildings and/or improvements in the immediate area of
the improvements in which the leased premises are located and to make
alterations or additions thereto, all as Landlord shall determine. Easements for
light and air are not included in the leasing of the leased premises to Tenant.
Landlord further reserves the exclusive right to the roof of the improvements on
the leased premises except as provided for in this Lease. Landlord also
reserves the right at any time to relocate, vary and/or adjust the configuration
or layout of any of the improvements, access parking areas or other common areas
relating to and/or including the land and/or improvements on the leased
premises, provided, however, that all such changes shall be in compliance with
the minimum requirements, or with the approval of, governmental authorities
having jurisdiction over the property.
27. SUBORDINATION
The Tenant agrees that its lease rights will be subordinate to those of any
lending institutions making any loan upon the real property on the leased
premises. Although not necessary to effect such subordination, Tenant further
agrees to sign all documents reflecting this subordination when and if requested
by the Landlord and to deliver all such documents with Tenant's signature to
Landlord with ten (10) calendar days after Landlord requests Tenant to sign such
documents. Tenant hereby appoints Landlord as its attorney-in-fact,
irrevocably, to execute and deliver any such instrument on Tenant's behalf.
28. ESTOPPEL CERTIFICATE
Tenant shall, and agrees to, execute, acknowledge and deliver to Landlord,
at any time within ten (10) calendar days after request by Landlord, a statement
in writing certifying, if such be the case, that this Lease is unmodified and in
full force and effect (or if there have been modifications, that the same is in
full force and effect as modified), the date of commencement of this Lease, the
dates on which rent has paid, and such other information as landlord shall
request. It is acknowledged by Tenant that any such statement is intended to be
delivered by Landlord to and to be relied upon by purchasers, prospective
purchasers, mortgagees, prospective mortgagees, beneficiaries and prospective
beneficiaries under deeds of trust, or assignees thereof.
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29. OPTION TO RENEW
Upon full and complete performance of all terms, covenants and conditions
of this Lease by Tenant and payment of all rental and other amounts due under
the terms hereof, Tenant shall be given the option to renew this Lease for two
separate and successive additional terms of 5 years each. In the event Tenant
desires to exercise said option, Tenant shall give written notice of such fact
to Landlord not less than ninety (90) days nor more than one hundred twenty
(120) days prior to the expiration of the then current term of this Lease, as
extended. In the event of such exercise, this Lease shall be deemed to be
extended for the additional period; provided, however, the Tenant is currently
not in default hereunder and Landlord shall have the right to increase the basic
monthly rental as provided in this Lease for the extended term based on the
monthly rent for the last month hereunder before the extension period as
increased by the Consumer Price Index of the Bureau of Labor Statistics of the
Department of Labor for All Urban Consumers (1990=100) for the Denver
Metropolitan Area for each month during the extended term. Landlord shall
further have the right to make any further adjustments and/or assessment of
charges against Tenant as herein provided for. In the event of exercise of said
option, any funds retained by Landlord as herein provided for shall be continued
to be so held subject to the same terms and conditions.
30. ATTORNMENT
In the event of a foreclosure or voluntary or involuntary sale or
conveyance of the improvements the leased premises such sale or conveyance shall
operate to release Landlord from any future liability upon any of the covenants
or conditions, express or implied, herein contained in favor of Tenant, and in
such event, Tenant agrees to look solely to the responsibility of the successor
in interest to Landlord in and to this Lease. Subject to the provisions of
Paragraph 27, the Lease shall not be affected by any such foreclosure, sale or
conveyance and Tenant agrees to attorn to the purchaser, assignee or successor
in interest of Landlord.
31. MECHANICS LIENS - REMOVAL OF TENANT
The Landlord shall not be liable for any labor or materials furnished or to
be furnished to the Tenant upon credit, and no mechanics or other lien for any
such labor or materials shall attach to or affect the reversion or other estate
or interest of the Landlord in and to the leased premises or to the Tenant's
leasehold estate or to the improvements on the leased premises. Whenever any
mechanics lien shall have been filed against the leased premises or the
improvements on the leased premises, based upon any act or interest of the
Tenant or of anyone claiming through the Tenant, or if any security agreement
shall have been filed for or affecting any materials, machinery, or fixtures
used in the construction, repair or operation thereof or annexed thereto by the
Tenant, the Tenant shall immediately take such action by bonding, deposit or
payment as will remove the lien or security agreement. If the Tenant has not
removed the lien within thirty (30) days after notice by Landlord to the Tenant,
the Landlord may pay the amount of such mechanics lien or security agreement or
discharge the same by deposit, and the amount
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so paid or deposited, with interest thereon, shall be deemed additional rent
reserved under this Lease, and shall be payable forthwith with interest at the
rate of eighteen percent (18%) per annum from the date of such advance, and
shall be subject to the same remedies to the benefit of Landlord as in the case
of default in the payment of rent herein provided.
32. ENVIRONMENTAL MATTERS
A. Definitions
(1) "Hazardous Material" means any substance:
(a) which is or becomes defined as a "hazardous material," "hazardous
waste," "hazardous substance," "regulated substance," pollutant or contaminant
under any federal, state or local statute, regulation, rule, order, or ordinance
or amendments thereto; or
(b) the presence of which on the leased premises causes or threatens
to cause a nuisance upon the leased premises or to adjacent properties or poses
or threatens to pose a hazard to the health or safety of persons on or about the
leased premises or requires investigation or remediation under any federal,
state or local statute, regulation, rule, order, or ordinance or amendments
thereto.
(2) "Environmental Requirements" means all applicable present and
future statutes, regulations, rules, ordinances, codes, licenses, permits,
orders, approvals, plans, authorization, concessions, franchises, and similar
items, of all governmental agencies, departments, commissions, boards, bureaus,
or instrumentalities, of the United States, states and political subdivisions
thereof and all applicable judicial, administrative, and regulatory decrees,
judgments, and orders relating to the protection of human health or the
environment.
(3) "Environmental Damages" means all claims, judgments, injuries,
damages (including without limitation damages for diminution in the value of
the leased premises and adjoining property and for the loss of business from the
leased premises and adjoining property), losses, penalties, fines, liabilities
(including strict liability), encumbrances, liens, costs and expenses of
investigation and defense of any claim, and of any good faith settlement of
judgment, or whatever kind or nature, contingent or otherwise, matured or
unmatured, foreseeable or unforseeable, including without limitation, reasonable
attorneys' fees and disbursements and consultants' fees, any of which are
incurred at any time as a result of the existence of "Hazardous Material" upon,
about, beneath the leased premises or migrating or threatening to migrate to or
from the leased premises or the existence of a violation of "Environmental
Requirements" pertaining to the leased premises.
B. Obligation to Indemnify, Defend and Hold Harmless
(1) Tenant, its successors and assigns, agree to indemnify, defend,
reimburse and hold harmless the following persons from and against any and all
"Environmental Damages"
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arising from activities of Tenant or its employees, agents, or invitees which
(a) result in the presence of "Hazardous Materials" upon, about or beneath the
leased premises or migrating to or from the leased premises; or (b) result in
the violation of any "Environmental Requirements" pertaining to the leased
premises and the activities thereon:
(a) Landlord;
(b) any other person who acquires a portion of the leased premises
in any manner, including but not limited to through purchase, at a foreclosure
sale or otherwise through the exercise of the rights and remedies of Landlord
under this Lease; and
(c) the members, managers, directors, officers, shareholders,
employees, partners, agents, contractors, subcontractors, experts, licensees,
affiliates, lessees, mortgagees, trustees, heirs, devisees, successors, assigns
and invitees of such persons.
(2) This obligation shall include, but not be limited to, the burden
and expense of defending all claims, suits and administrative proceedings (with
counsel reasonably approved by the indemnified parties), and conducting all
negotiations of any description, and paying and discharging, when and as the
same become due, any and all judgments, penalties or other sums due against such
indemnified persons. Tenant, at its sole expense, may employ additional counsel
of its choice to associate with counsel representing Landlord.
(3) The obligations of Tenant in this section shall survive the
expiration or termination of this Lease.
C. Notification
If Tenant shall become aware of or receive notice or other
communication concerning any actual, alleged, suspected or threatened violation
of "Environmental Requirements," or liability of Tenant for "Environmental
Damages" in connection with the leased premises or past or present activities of
any person thereon, or that any representation set forth in this Agreement is
not or is no longer accurate, then Tenant shall deliver to Landlord, within ten
days of the receipt of such notice, or communication or correcting information
by Tenant, a written description of such information or condition, together with
copies of any documents evidencing same.
D. Negative Covenants
(1) Except in strict compliance with all Environmental Requirements,
Tenant shall not cause, permit or suffer any "Hazardous Material" to be brought
upon, treated, kept stored, disposed of, discharged, released, produced,
manufactured, generated, refined or used upon, about or beneath the leased
premises or any portion thereof by Tenant, its agents,
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employees, contractors, tenants or invitees, or any other person without prior
written consent of Landlord.
(2) Tenant shall not cause, permit or suffer the existence or the
commission by Tenant, its agents, employees, contractors, or invitees, or by any
other person of a violation of any "Environmental Requirements" upon, about or
beneath the leased premises or any portion thereof.
E. Right to Inspect
Landlord shall have the right in its sole and absolute discretion, but
not the duty, to enter and conduct an inspection of the leased premises at any
reasonably time (following reasonable notice where feasible) to determine
whether Tenant is complying with the terms of this Lease, including but not
limited to the compliance of the leased premises and the activities thereon with
"Environmental Requirements" and the existence of "Environmental Damages".
Tenant hereby grants to Landlord the right to enter the leased premises and to
perform such tests on the leased premises as are reasonably necessary in the
opinion of Landlord to conduct such reviews and investigations. Landlord shall
use reasonable efforts to minimize interference with the business of Tenant but
Landlord shall not be liable for any interference caused thereby. Tenant shall
provide to Landlord copies of all manifests, permits, reports, test results, and
analyses submitted to any environmental agency within ten (10) days of
submittal.
F. Right to Remediate
Should Tenant fail to perform or observe any of its obligations or
agreements pertaining to "Hazardous Materials" or "Environmental Requirements,"
then Landlord shall have the right, but not the duty, without limitation, upon
any of the rights of Landlord pursuant to this Lease, to enter the leased
premises personally or through its agents, consultants or contractors and
perform the same. Tenant agrees to indemnify Landlord for the costs thereof and
liabilities therefrom as set forth in section A above.
33. INTEREST ON PAST DUE OBLIGATIONS
Any amount due to Landlord not paid when due shall bear interest at one and
one-half percent (1.5%) per month from due date until paid. Payment of such
interest shall not excuse or cure any default by Tenant under this Lease.
34. LATE CHARGE
The Landlord shall have the right to collect from Tenant, in addition to
any amounts due under Paragraph 33 above, a monthly collection service charge
for any payment due to Landlord hereunder which is delinquent ten (10) days or
longer, said charge being One Hundred Twenty
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Five and No/100 dollars ($125.00) or three percent (3%) of said payments,
whichever sum shall be greater.
35. MEMORANDUM OF LEASE - RECORDING
The parties hereto agree that either this Lease or any memorandum hereof
may be recorded only by and in the sole discretion of Landlord.
36. NOTICE PROCEDURE
All notices, demands and requests which may or are required to be given by
either party to the other shall be in writing and such that are to be given to
Tenant shall be deemed to have been properly served if delivered personally to
Tenant or an employee of Tenant or sent to Tenant by United States registered or
certified mail, return receipt requested, properly sealed, stamped and addressed
to Tenant at the leased premises, or at such other place as Tenant may from time
to time designate in a written notice to Landlord; and, such as are to be given
to Landlord shall be deemed to have been properly given if personally delivered
to Landlord or if sent to Landlord, by United States registered or certified
mail, return receipt requested, properly sealed, stamped and addressed to
Landlord at HTM Building Investors, LLC, 410 South Sunset, Suite 100, Longmont,
Colorado 80501 or at such other place as Landlord may from time to time
designate in a written notice to Tenant. Any notice given by mailing shall be
effective as of the date of mailing.
37. CONTROLLING LAW
All the terms, conditions, and agreements of this Lease shall be construed
and governed by the laws of the State of Colorado. Any dispute between the
parties hereto arising out of the relationship as Landlord and Tenant pursuant
to this Lease shall be resolved pursuant to the laws of the State of Colorado
and any litigation regarding such disputes shall be instituted and pursued in
Denver, Colorado and in no other jurisdiction.
38. BINDING UPON SUCCESSORS - DUPLICATE EXECUTION
The delivery of this completed lease form to Tenant shall not be deemed an
offer to lease to Tenant unless this Lease is signed by Landlord. Once this
Lease is signed by both Tenant and Landlord, the covenants and agreements herein
contained shall bind and inure to the benefit of Landlord and Tenant and their
respective successors. This Lease shall be signed by the parties in duplicate,
each of which shall be a complete and effective original Lease. Tenant hereby
acknowledges receipt of one of these duplicate original Leases.
39. PARTIAL INVALIDITY
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If any term, covenant or condition of this Lease or the application thereof
to any person or circumstances shall, to any extent, be invalid or
unenforceable, the remainder of this Lease or the application of such term,
covenant or condition to persons and circumstances other than those to be
affected by such invalidity or unenforceability and each and every other term,
covenant and condition of this Lease shall be valid and shall be enforced to the
fullest extent permitted by law. It is also the intention of the parties to this
Lease that in lieu of each clause and provision of this Lease that is illegal,
invalid, or unenforceable, there be added as part of this Lease a clause or
provision as may be possible in order to make that clause legal, valid and
enforceable.
40. MISCELLANEOUS
All marginal notations and paragraph headings are for purposes of reference
and shall not affect the true meaning and intent of the terms hereof.
Throughout this Lease, wherever the words "Landlord" and "Tenant" are used, they
shall include the apply to the singular, plural persons, both male and female,
companies, partnerships and corporations and in reading said Lease, the
necessary grammatical changes required to make the provisions hereof mean and
apply as aforesaid shall be made in the same manner as though original included
in said lease.
IN WITNESS WHEREOF, the parties have executed this Lease in duplicate as of
the date hereof.
LANDLORD:
HTM BUILDING INVESTORS, LLC, a Colorado
limited liability company
By: /s/ David C. Puchi
______________________________________
David C. Puchi,
Manager
TENANT:
HI-TECH MANUFACTURING, INC., a Colorado
corporation
By: /s/ Edward Johnson
______________________________________
Edward Johnson,
President
-22-
<PAGE>
EXHIBIT A
- ---------
Basic Monthly Rent
------------------
1. Jan-94 12,488
2. Feb-94 12,488
3. Mar-94 12,488
4. Apr-94 12,488
5. May-94 12,488
6. Jun-94 12,488
7. Jul-94 12,488
8. Aug-94 12,488
9. Sep-94 12,488
10. Oct-94 12,488
11. Nov-94 12,488
12. Dec-94 12,488
13. Jan-95 19,238
14. Feb-95 19,238
15. Mar-95 19,238
16. Apr-95 19,238
17. May-95 19,238
18. Jun-95 19,238
19. Jul-95 19,238
20. Aug-95 19,238
21. Sep-95 19,238
22. Oct-95 19,238
23. Nov-95 19,238
24. Dec-95 19,238
25. Jan-96 27,000
26. Feb-96 27,000
27. Mar-96 27,000
28. Apr-96 27,000
29. May-96 27,000
30. Jun-96 27,000
31. Jul-96 27,000
32. Aug-96 27,000
33. Sep-96 27,000
34. Oct-96 27,000
35. Nov-96 27,000
36. Dec-96 27,000
37. Jan-97 27,000
38. Feb-97 27,000
39. Mar-97 27,000
40. Apr-97 27,000
41. May-97 27,000
42. Jun-97 27,000
43. Jul-97 27,000
44. Aug-97 27,000
45. Sep-97 27,000
46. Oct-97 27,000
47. Nov-97 27,000
48. Dec-97 27,000
49. Jan-98 27,000
50. Feb-98 27,000
51. Mar-98 27,000
52. Apr-98 27,000
53. May-98 27,000
54. Jun-98 27,000
55. Jul-98 27,000
56. Aug-98 27,000
57. Sep-98 27,000
58. Oct-98 27,000
59. Nov-98 27,000
60. Dec-98 27,000
61. Jan-99 27,000
62. Feb-99 27,000
63. Mar-99 27,000
<PAGE>
EXHIBIT 10.11.2
First Amendment to Lease (replacement of Exhibit A only)
Exhibit A
Date Adjusted Basic
Monthly Rent
- ------------------------------
1. Jan-94 12,488
2. Feb-94 12,488
3. Mar-94 12,488
4. Apr-94 12,488
5. May-94 12,488
6. Jun-94 12,488
7. Jul-94 12,488
8. Aug-94 12,488
9. Sep-94 12,488
10. Oct-94 12,488
11. Nov-94 12,488
12. Dec-94 12,488
13. Jan-95 19,238
14. Feb-95 19,238
15. Mar-95 19,238
16. Apr-95 19,238
17. May-95 19,238
18. Jun-95 19,238
19. Jul-95 19,238
20. Aug-95 19,238
21. Sep-95 19,238
22. Oct-95 19,238
23. Nov-95 19,238
24. Dec-95 19,238
25. Jan-96 27,000
26. Feb-96 27,000
27. Mar-96 27,000
28. Apr-96 27,000
29. May-96 27,000
30. Jun-96 27,000
31. Jul-96 27,000
32. Aug-96 27,000
33. Sep-96 27,000
34. Oct-96 27,000
35. Nov-96 27,000
36. Dec-96 27,000
37. Jan-97 38,000
38. Feb-97 38,000
39. Mar-97 38,000
40. Apr-97 38,000
41. May-97 38,000
42. Jun-97 38,000
43. Jul-97 38,000
44. Aug-97 38,000
45. Sep-97 38,000
46. Oct-97 38,000
47. Nov-97 38,000
48. Dec-97 38,000
49. Jan-98 44,650
50. Feb-98 44,650
51. Mar-98 44,650
52. Apr-98 44,650
53. May-98 44,650
54. Jun-98 44,650
55. Jul-98 44,650
56. Aug-98 44,650
57. Sep-98 44,650
58. Oct-98 44,650
59. Nov-98 44,650
60. Dec-98 44,650
61. Jan-99 44,650
62. Feb-99 44,650
63. Mar-99 44,650
<PAGE>
EXHIBIT 10.11.3
LEASE AMENDMENT
(12520 Grant Drive)
This Lease Amendment, dated as of July 1, 1999, is by and between 12520 Grant
Drive, LLC, a Colorado limited liability company ("Landlord") and Hi-Tech
Manufacturing, Inc. ("Tenant").
RECITALS
A. Landlord's predecessor, HTM Building Investors, LLC, and Tenant entered
into the Revised Lease Agreement, dated January 14, 1994, as amended on April 1,
1998 (the "Lease").
B. Landlord and Tenant desire to modify the Lease as set forth below.
AGREEMENT
Now, therefore, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto agree as follows:
1. The term of the Lease shall be extended to July 1, 2004.
2. The Base Rent payable monthly under the Lease shall be: $44,650.00 from
July 1, 1999 to June 30, 2001; $46,436.00 from July 1, 2001 to June 30,
2002; $48,293.00 from July 1, 2002 to June 30, 2003; and $50,225.00 from
July 1, 2003 to June 30, 2004.
3. In Section 8 of the Lease, the second sentence shall be amended to read,
"Tenant further agrees to return the leased premises at the end of the term
to Landlord in as good condition as when received, normal wear and tear
excepted."
4. Section 23 of the Lease is deleted.
5. Landlord agrees to resurface the parking lot that is part of the leased
premises. Immediately upon the completion of the parking lot resurfacing,
to Landlord's satisfaction, Tenant agrees to reimburse Landlord $30,000 for
the cost of such work.
Except as modified herein all of the terms and conditions of the Lease shall
remain unchanged and in full force and effect.
<PAGE>
Dated as of the date first set forth above.
Landlord
12520 Grant Drive, LLC
By:/s/ James F. Holmes
----------------------------
Name: James F. Holmes
Title: Manager
Tenant
Hi-Tech Manufacturing, Inc.
By:/s/ James Laurion
------------------------------
Name: James Laurion
Title: VP Finance
-2-
<PAGE>
EXHIBIT 23.1
The Board of Directors
SMTC Corporation:
The audit referred to in the form of our report dated February 18, 2000
included the related financial statement schedules of SMTC Corporation
(formerly HTM Holdings, Inc.) for the year ended December 31, 1999 included in
the registration statement. The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based on our audit. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
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/ KMPG LLP
Toronto, Canada
May 23, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
May 19, 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
reports dated March 22, 2000, relating to the financial statements and financial
statement schedule, which appear in such Registration Statement. We also consent
to the reference to us under the heading "Experts" and "Selected Financial Data"
in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Broomfield, Colorado
May 19, 2000
<PAGE>
EXHIBIT 23.4
[LETTERHEAD OF CANBY MALONEY]
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
May 19, 2000
<PAGE>
EXHIBIT 23.6
The Board of Directors
SMTC Corporation
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Milwaukee, Wisconsin
May 23, 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> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999 DEC-31-2000
<PERIOD-START> JAN-01-1998 JAN-01-1999 JAN-01-2000
<PERIOD-END> DEC-31-1998 DEC-31-1999 APR-02-2000
<CASH> 486 2,083 5,111
<SECURITIES> 0 0 0
<RECEIVABLES> 21,780 71,597 80,651
<ALLOWANCES> (195) (514) (497)
<INVENTORY> 12,485 61,680 86,394
<CURRENT-ASSETS> 35,685 140,534 178,541
<PP&E> 7,071 35,003 35,311
<DEPRECIATION> (9,479) (15,749) (18,224)
<TOTAL-ASSETS> 44,245 228,105 265,117
<CURRENT-LIABILITIES> 27,631 87,094 95,282
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 6 3 3
<OTHER-SE> (10,474) 7,796 6,353
<TOTAL-LIABILITY-AND-EQUITY> 44,245 228,105 265,117
<SALES> 89,687 257,962 124,333
<TOTAL-REVENUES> 89,687 257,962 124,333
<CGS> 82,528 236,331 113,127
<TOTAL-COSTS> 85,672 248,946 120,675
<OTHER-EXPENSES> 2,506 2,707 1,403
<LOSS-PROVISION> 15 70 17
<INTEREST-EXPENSE> 2,030 7,066 3,789
<INCOME-PRETAX> (521) (757) (1,534)
<INCOME-TAX> (193) 107 (91)
<INCOME-CONTINUING> (328) (864) (1,443)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 (1,279) 0
<CHANGES> 0 0 0
<NET-INCOME> (328) (2,143) (1,443)
<EPS-BASIC> (0.44) (2.68) (1.16)
<EPS-DILUTED> (0.44) (2.68) (1.16)
</TABLE>
