Filed pursuant to Rule 424(b)(3) and Rule 424(c)
Registration No. 333-33208
PROSPECTUS SUPPLEMENT NO. 2
4,375,000 Shares
SMTC CORPORATION
Common Stock
This prospectus supplement amends the prospectus dated April 4, 2001
related to common stock that may be issued in exchange for exchangeable shares
of SMTC Manufacturing Corporation of Canada to include information related to
the financial condition and the results of operations for SMTC Corporation as of
and for the quarter ended July 1, 2001.
This prospectus supplement should be read in conjunction with the
prospectus dated April 4, 2001 and Prospectus Supplement No. 1 dated May 16,
2001, which are to be delivered with this prospectus supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
August 15, 2001
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 1, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM________ TO_________
COMMISSION FILE NUMBER 0-31051
SMTC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 98-0197680
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
635 HOOD ROAD
MARKHAM, ONTARIO, CANADA L3R 4N6
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(905) 479-1810
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether SMTC Corporation: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes |X| No |_|.
As of July 1, 2001, SMTC Corporation had 22,318,820 shares of common stock, par
value $0.01 per share, and one share of special voting stock, par value $0.01
per share, outstanding. As of July 1, 2001, SMTC Corporation's subsidiary, SMTC
Manufacturing Corporation of Canada, had 6,370,959 exchangeable shares
outstanding, each of which is exchangeable into one share of common stock of
SMTC Corporation.
SMTC Corporation
Form 10-Q
Table of Contents
Page No.
--------
PART I Financial Information 3
Item 1. Financial Statements 3
Consolidated Balance Sheets as of July 1, 2001
and December 31, 2000 3
Consolidated Statements of Earnings (Loss) for the three
months ended and the six months ended July 1, 2001 and
July 2, 2000 4
Consolidated Statement of Changes in Shareholders' Equity
for the six months ended July 1, 2001 5
Consolidated Statements of Cash Flows for the three months
ended and the six months ended July 1, 2001 and July 2, 2000 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 36
PART II Other Information 38
Item 4. Submission of Matters to a Vote of Security Holders 38
Item 5. Other Information 38
Item 6. Exhibits and Reports on Form 8-K 38
Signatures 39
2
SMTC CORPORATION
Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars)
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
==========================================================================================
July 1, December 31,
2001 2000
------------------------------------------------------------------------------------------
(unaudited)
Assets
Current assets:
Cash and short-term investments $ 1,556 $ 2,698
Accounts receivable 111,606 194,749
Inventories (note 2) 126,397 191,821
Prepaid expenses 6,427 5,233
Deferred income taxes 1,062 1,044
------------------------------------------------------------------------------------------
247,048 395,545
Capital assets 62,687 58,564
Goodwill 75,927 80,149
Other assets 11,487 9,859
Deferred income taxes 18,246 3,359
------------------------------------------------------------------------------------------
$ 415,395 $ 547,476
==========================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 71,652 $ 141,574
Accrued liabilities 39,454 51,695
Income taxes payable 4,611 5,458
Current portion of long-term debt 10,000 7,500
Current portion of capital lease obligations 198 995
------------------------------------------------------------------------------------------
125,915 207,222
Long-term debt (note 3) 91,825 108,305
Capital lease obligations 507 1,242
Deferred income taxes 2,221 2,221
Shareholders' equity:
Capital stock 77,431 77,427
Warrants -- 367
Loans receivable (13) (27)
Additional paid-in-capital 152,072 151,396
Deficit (34,563) (677)
------------------------------------------------------------------------------------------
194,927 228,486
------------------------------------------------------------------------------------------
$ 415,395 $ 547,476
==========================================================================================
See accompanying notes to consolidated financial statements.
3
SMTC CORPORATION
Consolidated Statements of Earnings (Loss)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
(Unaudited)
========================================================================================================
Three months ended Six months ended
--------------------- ---------------------
July 1, July 2, July 1, July 2,
2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------
Revenue $ 151,875 $ 167,136 $ 352,790 $ 291,469
Cost of sales (including restructuring
charges of $9,044 for the three
months ended July 1, 2001 and
$15,944 for the six months ended
July 1, 2001, 2000 - nil) (note 8) 156,019 153,391 355,420 266,518
--------------------------------------------------------------------------------------------------------
Gross profit (loss) (4,144) 13,745 (2,630) 24,951
Selling, general and
administrative expenses 8,251 7,265 18,046 14,944
Amortization 2,353 1,230 4,705 2,502
Restructuring charge (note 8) -- -- 15,754 --
--------------------------------------------------------------------------------------------------------
Operating income (loss) (14,748) 5,250 (41,135) 7,505
Interest 2,561 4,115 5,453 7,904
--------------------------------------------------------------------------------------------------------
Earnings (loss) before inncome taxes (17,309) 1,135 (46,588) (399)
Income tax expense (recovery) (3,435) 1,016 (12,702) 925
--------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (13,874) $ 119 $ (33,886) $ (1,324)
========================================================================================================
Loss per share:
Basic $ (0.48) $ (0.53) $ (1.19) $ (1.69)
Diluted $ (0.48) $ (0.53) $ (1.19) $ (1.69)
========================================================================================================
Weighted average number of common
shares used in the calculations
of loss per share:
Basic 28,689,779 2,422,927 28,525,916 2,422,927
Diluted 28,689,779 2,422,927 28,525,916 2,422,927
========================================================================================================
See accompanying notes to consolidated financial statements.
4
SMTC CORPORATION
Consolidated Statement of Changes in Shareholders' Equity
(Expressed in thousands of U.S. dollars)
Six months ended July 1, 2001
(Unaudited)
========================================================================================================
Additional
Capital paid-in Loans Shareholders'
stock Warrants capital receivable Deficit equity
--------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 77,427 $ 367 $ 151,396 $ (27) $ (677) $ 228,486
Warrants exercised 4 (367) 363 -- -- --
Options exercised -- -- 313 -- -- 313
Repayment of loans receivable -- -- -- 14 -- 14
Loss for the period -- -- -- -- (33,886) (33,886)
--------------------------------------------------------------------------------------------------------
Balance, July 1, 2001 $ 77,431 $ -- $ 152,072 $ (13) $ (34,563) $ 194,927
========================================================================================================
See accompanying notes to consolidated financial statements.
5
SMTC CORPORATION
Consolidated Statements of Cash Flows
(Expressed in thousands of U.S. dollars)
(Unaudited)
====================================================================================================
Three months ended Six months ended
-------------------- --------------------
July 1, July 2, July 1, July 2,
2001 2000 2001 2000
----------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net earnings (loss) $(13,874) $ 119 $(33,886) $ (1,324)
Items not involving cash:
Amortization 2,353 1,230 4,705 2,502
Depreciation 2,900 2,365 5,796 4,840
Deferred income tax provision (benefit) (5,326) 253 (14,905) 478
Loss on disposition of capital assets -- -- -- (44)
Impairment of assets -- -- 5,023 --
Change in non-cash operating working capital:
Accounts receivable 63,065 (39,889) 83,143 (48,943)
Inventories 31,694 (36,673) 65,424 (61,387)
Prepaid expenses (740) 224 (1,936) (1,470)
Accounts payable, accrued liabilities and
income taxes payable (36,599) 67,201 (81,164) 74,595
----------------------------------------------------------------------------------------------------
43,473 (5,170) 32,200 (30,753)
Financing:
Increase in long-term debt -- -- -- 30,554
Decrease in long-term debt (32,462) (921) (13,980) --
Principal payments on capital leases (49) (303) (253) (721)
Proceeds from warrants -- 2,500 -- 2,500
Issuance of subordinated notes -- 5,200 -- 5,200
Loans to shareholders (note 7) (5,236) -- (5,236) --
Proceeds from issuance of common stock -- -- 313 --
Repayment of loans receivable -- -- 14 --
----------------------------------------------------------------------------------------------------
(37,747) 6,476 (19,142) 37,533
Investments:
Purchase of capital assets (5,870) (4,664) (14,200) (7,154)
Proceeds from sale of capital assets -- -- -- 44
----------------------------------------------------------------------------------------------------
(5,870) (4,664) (14,200) (7,110)
----------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (144) (3,358) (1,142) (330)
Cash and cash equivalents, beginning of period 1,700 5,111 2,698 2,083
====================================================================================================
Cash and cash equivalents, end of period $ 1,556 $ 1,753 $ 1,556 $ 1,753
====================================================================================================
See accompanying notes to consolidated financial statements.
6
SMTC CORPORATION
Consolidated Statements of Cash Flows (continued)
(Expressed in thousands of U.S. dollars)
(Unaudited)
=============================================================================================
Three months ended Six months ended
------------------ ----------------
July 1, July 2, July 1, July 2,
2001 2000 2001 2000
---------------------------------------------------------------------------------------------
Supplemental disclosures:
Cash paid during the period:
Income taxes $ -- $6,765 $3,502 $1,602
Interest 2,418 3,976 5,244 7,895
Non-cash investing and financing activities:
Cash released from escrow 3,125 -- 3,125 --
Acquisition of equipment under
capital lease -- 248 -- 541
Value of warrants issued in excess of
proceeds received -- 1,098 -- 1,098
=============================================================================================
Cash and cash equivalents is defined as cash and short-term investments.
See accompanying notes to consolidated financial statements.
7
SMTC CORPORATION
Consolidated Notes to Financial Statements
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended July 1, 2001 and July 2, 2000
(Unaudited)
================================================================================
1. Basis of presentation:
The Company's accounting principles are in accordance with accounting
principles generally accepted in the United States.
The accompanying unaudited consolidated balance sheet as at July 1, 2001,
the unaudited consolidated statements of earnings (loss) for the three and
six month periods ended July 1, 2001 and July 2, 2000, the unaudited
consolidated statement of changes in shareholders' equity for the six
month period ended July 1, 2001, and the unaudited consolidated statements
of cash flows for the three and six month periods ended July 1, 2001 and
July 2, 2000 have been prepared on substantially the same basis as the
annual consolidated financial statements. Management believes the
financial statements reflect all adjustments, consisting only of normal
recurring accruals, which are, in the opinion of management, necessary for
a fair presentation of the Company's financial position, operating results
and cash flows for the periods presented. The results of operations for
the three and six month periods ended July 1, 2001 are not necessarily
indicative of results to be expected for the entire year. These unaudited
interim consolidated financial statements should be read in conjunction
with the annual consolidated financial statements and notes thereto for
the year ended December 31, 2000.
2. Inventories:
==========================================================================
July 1, December 31,
2001 2000
--------------------------------------------------------------------------
Raw materials $ 88,021 $107,767
Work in process 22,233 56,521
Finished goods 14,556 25,493
Other 1,587 2,040
--------------------------------------------------------------------------
$126,397 $191,821
==========================================================================
8
SMTC CORPORATION
Consolidated Notes to Financial Statements
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended July 1, 2001 and July 2, 2000
(Unaudited)
================================================================================
3. Long-term debt:
The Company's credit agreement contains certain financial covenants. The
Company complied with all required covenants as at July 1, 2001 and
accordingly the related debt is classified as long-term. However, it is
unlikely the Company will earn sufficient EBITDA (earnings before interest
expense, income taxes, depreciation and amortization) during the third
quarter to satisfy the requirements of the credit agreement. If the
Company fails to meet the covenants, the lenders will have the right to
demand repayment of the debt or to modify the existing credit agreement.
The Company has notified the lenders of the possible future violation and
is in the process of discussing the circumstances under which the lenders
would be willing to waive or modify the financial covenants included in
the credit agreement.
4. Loss per share:
The following table sets forth the calculation of basic and diluted loss
per common share:
========================================================================================
Three months ended Six months ended
---------------------------- ----------------------------
July 1, July 2, July 1, July 2,
2001 2000 2001 2000
----------------------------------------------------------------------------------------
Numerator:
Net earnings (loss) $ (13,874) $ 119 $ (33,886) $ (1,324)
Less Class L preferred
entitlement -- (1,408) -- (2,774)
----------------------------------------------------------------------------------------
Loss available to
common shareholders $ (13,874) $ (1,289) $ (33,886) $ (4,098)
========================================================================================
Denominator:
Weighted-average shares
Basic 28,689,779 2,422,927 28,525,916 2,422,927
Diluted 28,689,779 2,422,927 28,525,916 2,422,927
========================================================================================
Loss per share:
Basic $ (0.48) $ (0.53) $ (1.19) $ (1.69)
Diluted $ (0.48) $ (0.53) $ (1.19) $ (1.69)
========================================================================================
For the three and six month periods ended July 1, 2001 and July 2, 2000
options and warrants to purchase common stock were outstanding during
those periods but were not included in the computation of diluted loss per
share because their effect would be anti-dilutive on the loss per share
for the period.
9
SMTC CORPORATION
Consolidated Notes to Financial Statements
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended July 1, 2001 and July 2, 2000
(Unaudited)
================================================================================
5. Income taxes:
The Company's effective tax rate differs from the statutory rate primarily
due to non-deductible goodwill amortization and operating losses not tax
effected in certain jurisdictions.
6. 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 ten facilities in the United States,
Canada, Europe and Mexico. The Company monitors the performance of its
geographic operating segments based on EBITA (earnings before interest,
taxes and amortization) before restructuring charges. Prior to 2001, the
Company had not incurred any restructuring charges. 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:
=================================================================================================================
Three months ended July 1, 2001 Six months ended July 1, 2001
----------------------------------- -----------------------------------
Net Net
Total Intersegment external Total Intersegment external
revenue revenue revenue revenue revenue revenue
-----------------------------------------------------------------------------------------------------------------
United States $ 155,417 $ (30,998) $ 124,419 $ 313,892 $ (38,414) $ 275,478
Canada 15,739 (633) 15,106 42,680 (1,520) 41,160
Europe 7,199 (951) 6,248 14,996 (951) 14,045
Mexico 24,119 (18,017) 6,102 48,588 (26,481) 22,107
-----------------------------------------------------------------------------------------------------------------
$ 202,474 $ (50,599) $ 151,875 $ 420,156 $ (67,366) $ 352,790
=================================================================================================================
EBITA (before restructuring charges):
United States $ 255 $ 1,687
Canada (368) 212
Europe (365) (566)
Mexico (2,873) (6,065)
-------------------------------------------------------------------------------------------------------------
(3,351) (4,732)
Interest 2,561 5,453
Amortization 2,353 4,705
-----------------------------------------------------------------------------------------------------------------
Loss before income taxes
and restructuring charges (8,265) (14,890)
Restructuring charges 9,044 31,698
-----------------------------------------------------------------------------------------------------------------
Loss before income taxes $ (17,309) $ (46,588)
=================================================================================================================
Capital expenditures:
United States $ 3,592 $ 8,221
Canada 809 1,565
Europe 220 243
Mexico 1,249 4,171
-----------------------------------------------------------------------------------------------------------------
$ 5,870 $ 14,200
=================================================================================================================
10
SMTC CORPORATION
Consolidated Notes to Financial Statements
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended July 1, 2001 and July 2, 2000
(Unaudited)
================================================================================
6. Segmented information (continued):
===============================================================================================================
Three months ended July 2, 2000 Six months ended July 2, 2000
----------------------------------- -----------------------------------
Net Net
Total Intersegment external Total Intersegment external
revenue revenue revenue revenue revenue revenue
---------------------------------------------------------------------------------------------------------------
United States $ 133,224 $ (2,895) $ 130,329 $ 240,020 $ (3,569) $ 236,451
Canada 16,967 (1,437) 15,530 30,005 (2,422) 27,583
Europe 4,638 (685) 3,953 9,365 (2,161) 7,204
Mexico 18,549 (1,225) 17,324 21,470 (1,239) 20,231
---------------------------------------------------------------------------------------------------------------
$ 173,378 $ (6,242) $ 167,136 $ 300,860 $ (9,391) $ 291,469
===============================================================================================================
EBITA:
United States $ 5,500 $ 9,077
Canada 1,500 2,228
Europe (728) (1,222)
Mexico 208 (76)
-----------------------------------------------------------------------------------------------------------
6,480 10,007
Interest 4,115 7,904
Amortization 1,230 2,502
---------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes $ 1,135 $ (399)
===============================================================================================================
Capital expenditures:
United States $ 2,701 $ 3,965
Canada 192 857
Europe 41 219
Mexico 1,978 2,654
---------------------------------------------------------------------------------------------------------------
$ 4,912 $ 7,695
===============================================================================================================
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.
======================================================================
Three months ended Six months ended
-------------------- --------------------
July 1, July 2, July 1, July 2,
2001 2000 2001 2000
----------------------------------------------------------------------
Geographic revenue:
United States $128,602 $147,703 $300,743 $258,584
Canada 9,698 5,190 23,744 8,494
Europe 10,620 10,655 22,680 18,450
Asia 2,955 3,588 5,623 5,941
----------------------------------------------------------------------
$151,875 $167,136 $352,790 $291,469
======================================================================
11
SMTC CORPORATION
Consolidated Notes to Financial Statements
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended July 1, 2001 and July 2, 2000
(Unaudited)
================================================================================
6. Segmented information (continued):
=======================================================================
July 1, December 31,
2001 2000
-----------------------------------------------------------------------
Long-lived assets:
United States $ 77,234 $ 79,136
Canada 23,824 24,540
Europe 19,305 20,410
Mexico 18,251 14,627
-----------------------------------------------------------------------
$138,614 $138,713
-----------------------------------------------------------------------
7. Loans to shareholders:
Pursuant to agreements in connection with the share reorganization and the
acquisition of Pensar Corporation, the Company loaned $5,236 to certain
shareholders. The loans are non-interest bearing and are secured by a
first priority security interest over all of the shares of capital stock
of the Company held by the shareholders, and will be repayable at such
time and to the extent that the shareholders receive after-tax proceeds in
respect of such shares. The amounts are included in other assets.
12
SMTC CORPORATION
Consolidated Notes to Financial Statements
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended July 1, 2001 and July 2, 2000
(Unaudited)
================================================================================
8. Restructuring charge:
During the first quarter, in response to the slowing technology end
market, the Company announced that, along with its work force reduction
initiatives, it would close its assembly facility in Denver, Colorado. As
a result, the Company recorded a restructuring charge of $22,654 pre-tax
during the first quarter and $9,044 pre-tax during the second quarter. The
following tables detail the components of the restructuring charges, and
the related amounts included in accrued liabilities:
Restructuring charges:
===========================================================================================
Three months Three months Six months
ended ended ended
April 1, 2001 July 1, 2001 July 1, 2001
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Inventory reserves included in cost of sales $ 6,900 $ 9,044 $15,944
-------------------------------------------------------------------------------------------
Lease and other contract obligations 5,178 -- 5,178
Severance 2,526 -- 2,526
Asset impairment 5,023 -- 5,023
Other 3,027 -- 3,027
-------------------------------------------------------------------------------------------
15,754 -- 15,754
-------------------------------------------------------------------------------------------
$22,654 $ 9,044 $31,698
-------------------------------------------------------------------------------------------
Amounts included in accrued liabilities:
=======================================================================================
Restructuring Payments for Restructuring
reserve three months reserve
as at ended as at
April 1, 2001 July 1, 2001 July 1, 2001
---------------------------------------------------------------------------------------
Lease and other contract obligations $5,127 $ 362 $4,765
Severance 1,678 1,437 241
Other 2,827 861 1,966
---------------------------------------------------------------------------------------
$9,632 $2,660 $6,972
---------------------------------------------------------------------------------------
13
SMTC CORPORATION
Consolidated Notes to Financial Statements
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended July 1, 2001 and July 2, 2000
(Unaudited)
================================================================================
8. Restructuring charge (continued):
The closure of the assembly facility in Denver involves the severance of
employees, the disposition of assets and the decommissioning, exiting and
subletting of the facility. The severance costs related to Denver include
all 429 employees. The severance costs also include 847 plant and
operational employees at our Mexico facility and 45 plant and operational
employees at our Cork, Ireland facility. Of the total severance costs,
$848 was paid out during the first quarter.
The asset impairment reflects the write-down of certain long lived assets
primarily at the Denver location that became impaired as a result of the
rationalization of facilities. The asset impairment was determined based
on undiscounted projected future net cash flows relating to the assets
resulting in a write-down to estimated salvage values.
Other facility exit costs include personnel costs and other fees directly
related to exit activities at the Denver location.
The major components of the restructuring are estimated to be complete by
early fiscal year 2002.
9. Implementation of Recently Issued Accounting Standards:
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. The Company implemented SFAS No. 133
for the first quarter of 2001. As a result of implementing SFAS No. 133,
the Company has recorded the interest rate swaps in the balance sheet at
fair value and recorded a $410 charge to earnings representing the change
in fair value of the swaps for the six month period. The fair value of the
interest rate swaps at the date of implementation of SFAS No. 133 was not
significant.
14
SMTC CORPORATION
Consolidated Notes to Financial Statements
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended July 1, 2001 and July 2, 2000
(Unaudited)
================================================================================
9. Implementation of Recently Issued Accounting Standards (continued):
In July 2001 the FASB issued SFAS No. 141 and SFAS No. 142. The new
standards mandate the purchase method of accounting for business
combinations and require that goodwill no longer be amortized but instead
be tested for impairment at least annually. Upon adoption of the standards
beginning January 1, 2002, the Company will discontinue amortization of
goodwill and test for impairment using the new standards. Effective July
1, 2001 and for the remainder of the fiscal year, goodwill acquired in
business combinations completed after June 30, 2001, will not be amortized
and impairment testing will be based on existing standards. The Company is
currently determining the impact of the new standards. It is likely that
the elimination of the amortization of goodwill will have a material
impact on the Company's financial statements.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated financial statements of SMTC are prepared in accordance with
United States GAAP, which conforms in all material respects to Canadian GAAP.
Consolidated Statement of Operations Data (excluding $9.0 million of pre-tax
restructuring charges for the three months ended July 1, 2001 and $31.7 million
of pre-tax restructuring charges for the six months ended July 1, 2001):
(in millions, except share and per share amounts)
Three months ended Six months ended
July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000
--------------------------------------------------------------------------------------------------------
Revenue $ 151.9 $ 167.1 $ 352.8 $ 291.4
Cost of sales 147.0 153.4 339.5 266.6
----------------------------------------------------------------
Gross profit 4.9 13.7 13.3 24.8
Selling, general and administrative
expenses 8.2 7.2 18.0 14.9
Amortization 2.4 1.3 4.7 2.5
----------------------------------------------------------------
Operating income (loss) (5.7) 5.2 (9.4) 7.4
Interest 2.6 4.1 5.5 7.8
----------------------------------------------------------------
Earnings (loss) before income taxes (8.3) 1.1 (14.9) (0.4)
Income tax expense (recovery) (1.6) 1.0 (3.6) 0.9
----------------------------------------------------------------
Net earnings (loss) $ (6.7) $ 0.1 $ (11.3) $ (1.3)
================================================================
Net loss per common share:
Basic $ (0.23) $ (0.53) $ (0.39) $ (1.69)
Diluted $ (0.23) $ (0.53) $ (0.39) $ (1.69)
================================================================
Weighted average number of shares
outstanding:
Basic 28,689,779 2,422,927 28,525,916 2,422,927
Diluted 28,689,779 2,422,927 28,525,916 2,422,927
================================================================
16
Consolidated Statement of Operations Data (including $9.0 million of pre-tax
restructuring charges for the three months ended July 1, 2001 and $31.7 million
of pre-tax restructuring charges for the six months ended July 1, 2001):
(in millions, except share and per share amounts)
Three Months Ended Six months ended
July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000
------------------------------------------------------------------------------------------------------------
Revenue $ 151.9 $ 167.1 $ 352.8 $ 291.4
Cost of sales (including restructuring
charges of $9.0 million for the three
months ended July 1, 2001 and
$15.9 million for the six months
ended July 1, 2001) 156.0 153.4 355.4 266.6
----------------------------------------------------------------
Gross profit (4.1) 13.7 (2.6) 24.8
Selling, general and administrative
expenses 8.2 7.2 18.0 14.9
Amortization 2.4 1.3 4.7 2.5
Restructuring charge -- -- 15.8 --
----------------------------------------------------------------
Operating income (loss) (14.7) 5.2 (41.1) 7.4
Interest 2.6 4.1 5.5 7.8
----------------------------------------------------------------
Earnings (loss) before income taxes (17.3) 1.1 (46.6) (0.4)
Income tax expense (recovery) (3.4) 1.0 (12.7) 0.9
----------------------------------------------------------------
Net earnings (loss) $ (13.9) $ 0.1 $ (33.9) $ (1.3)
================================================================
Net loss per common share:
Basic $ (0.48) $ (0.53) $ (1.19) $ (1.69)
Diluted $ (0.48) $ (0.53) $ (1.19) $ (1.69)
================================================================
Weighted average number of shares
outstanding:
Basic 28,689,779 2,422,927 28,525,916 2,422,927
Diluted 28,689,779 2,422,927 28,525,916 2,422,927
================================================================
17
Other Financial Data - Consolidated Adjusted Net Earnings (Loss):
(in millions, except share and per share amounts)
Three months ended Six Months Ended
July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000
-----------------------------------------------------------------------------------------------------
Net earnings (loss) $ (13.9) $ 0.1 $ (33.9) $ (1.3)
Adjustments:
Amortization of goodwill 2.1 1.0 4.2 2.0
Restructuring charge 9.0 -- 31.7 --
Income tax effect (2.2) (0.1) (9.9) (0.3)
-----------------------------------------------------------------
Adjusted earnings (loss) $ (5.0) $ 1.0 $ (7.9) $ (0.4)
Adjusted loss per common share:
Basic $ (0.17) $ (0.18) $ (0.28) $ (1.00)
Diluted $ (0.17) $ (0.18) $ (0.28) $ (1.00)
=================================================================
Weighted average number of
shares outstanding:
Basic 28,689,779 2,422,927 28,525,916 2,422,927
Diluted 28,689,779 2,422,927 28,525,916 2,422,927
=================================================================
As a result of the combination of Surface Mount and HTM and a number of
subsequent acquisitions, we use consolidated adjusted net earnings (loss) as a
measure of our operating performance. Consolidated adjusted net earnings (loss)
is consolidated net earnings (loss) adjusted for acquisition related charges
such as the amortization of goodwill, restructuring charges and the related
income tax effect of these adjustments. Consolidated adjusted net earnings
(loss) is not a measure of performance under United States GAAP or Canadian
GAAP. Consolidated adjusted net earnings (loss) should not be considered in
isolation or as a substitute for net earnings prepared in accordance with United
States GAAP or Canadian GAAP or as an alternative measure of operating
performance or profitability.
Consolidated Balance Sheet Data:
(in millions)
As at As at
July 1, December 31,
2001 2000
--------------------------------------------------------------------------------
Cash and short-term investments $ 1.6 $ 2.7
Working capital 121.1 188.3
Total assets 415.4 547.5
Total debt, including current maturities 102.5 118.0
Shareholders' equity 194.9 228.5
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading provider of advanced electronics manufacturing services, or
EMS, to electronics industry original equipment manufacturers, or OEM's,
worldwide. Our full range of value-added services include product design,
procurement, prototyping, advanced cable and harness interconnect,
high-precision enclosures, printed circuit board assembly, test, final system
build, comprehensive supply chain management, packaging, global distribution and
after sales support.
SMTC Corporation, or SMTC, is the result of the July 1999 combination of the
former SMTC Corporation, or Surface Mount, and HTM Holdings, Inc., or HTM. Upon
completion of the combination and concurrent recapitalization, the former
stockholders of HTM held approximately 58.0% of the outstanding shares of SMTC.
We have accounted for the combination under the purchase method of accounting as
a reverse acquisition of Surface Mount by HTM. Because HTM acquired Surface
Mount for accounting purposes, HTM's assets and liabilities are included in our
consolidated financial statements at their historical cost. The results of
operations of Surface Mount are included in our consolidated financial
statements from the date of the combination. Surface Mount was established in
Toronto, Ontario in 1985. HTM was established in Denver, Colorado in 1990. SMTC
was established in Delaware in 1998.
Our revenue has grown from approximately $59.0 million in 1997 to pro forma
revenue of $842.6 million in 2000 through both internal growth and strategic
acquisitions. The July 1999 combination of Surface Mount and HTM provided us
with increased customer relationships. Collectively, since 1995 we have
completed the following seven acquisitions:
o Radian Electronics' operations, which enabled our expansion into
Austin, Texas, and established our relationship with Dell, in 1996;
o 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;
o Ogden International Europe's operations in Cork, Ireland, which
expanded our global presence into Europe, in 1998;
o Zenith Electronics' facility in Chihuahua, Mexico, which expanded
our cost-effective manufacturing capabilities;
o W.F. Wood, based outside Boston, Massachusetts, which provided us
with a manufacturing presence in the Northeastern United States,
expanded our value-added services to include high precision
enclosures capabilities, and added EMC and Sycamore Networks as
customers, in September 1999;
19
o Pensar Corporation, located in Appleton, Wisconsin, which provided
us with a wide range of electronics and design manufacturing
services, on July 27, 2000 and concurrent with the closing of the
initial public offering; and
o Qualtron Teoranta, with sites in both Donegal, Ireland and
Haverhill, Massachusetts, which allowed us to expand our ability to
provide customers with a broad range of services focusing on fiber
optic connector assemblies and volume cable assemblies, on November
22, 2000.
In addition, we completed the following financing activities in 2000:
Initial Public Offering
o On July 27, 2000, we completed an initial public offering of our
common stock in the United States and the exchangeable shares of our
subsidiary, SMTC Manufacturing Corporation of Canada, in Canada,
raising net proceeds (not including proceeds from the sale of shares
upon the exercise of the underwriters' over-allotment option) of
$157.1 million;
o Concurrent with the effectiveness of the initial public offering, we
completed a share capital reorganization;
o In connection with the initial public offering, we entered into an
amended and restated credit agreement with our lenders, which
provided for an initial term loan of $50.0 million and revolving
credit loans, swing line loans and letters of credit up to $100.0
million;
o On July 27, 2000, we paid a fee of $1.8 million to terminate a
management agreement under which we paid quarterly fees of
approximately $0.2 million; and
o On August 18, 2000, we sold additional shares of common stock upon
exercise of the underwriters' over-allotment option, raising net
proceeds of $24.6 million.
Pre Initial Public Offering
o In May 2000, we issued senior subordinated notes to certain
shareholders for proceeds of $5.2 million, which were repaid with
the proceeds of our initial public offering;
o On May 18, 2000, we issued 41,667 warrants for $2.5 million cash
consideration in connection with the May 2000 issue of $5.2 million
in senior subordinated notes; and
o On July 3, 2000, we issued demand notes in the aggregate principal
amount of $9.9 million, which were repaid with the proceeds of our
initial public offering.
20
Due to the continued economic downturn in the technology sectors, we expect that
we will be unable in the near term to maintain the historic growth we have
achieved to date.
During the first quarter of 2001, in response to the slowing technology end
market, we announced that we would close our Denver, Colorado facility, leaving
in place a sales and marketing presence to service the Rocky Mountain region.
During the second quarter of 2001, production at the Denver facility, one of the
last remaining sites not recently refurbished, was migrated to SMTC facilities
closer to customer locations, and to our recently retrofitted and expanded,
lower cost Chihuahua facility. In connection with the closure of the Denver
facility, and other cost realignment initiatives, we recorded a restructuring
charge of $22.7 million pre-tax for the three months ended April 1, 2001 and
$9.0 million pre-tax for the three months ended July 1, 2001, consisting
primarily of an inventory write-down, an asset impairment charge, lease and
other contractual charges and employee severance and other facility exit costs.
The major components of the restructuring are estimated to be complete by early
fiscal year 2002.
Consistent with our past practices and normal course of business, we engage from
time to time in discussions with respect to potential acquisitions that enable
us to expand our geographic reach, add manufacturing capacity and diversify into
new markets. 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.
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.
We used approximately $143.7 million of the proceeds from our initial public
offering to reduce indebtedness under our credit facility. On July 27, 2000, we
entered into an amended and restated credit facility with our lenders, which
provided for an initial term loan of $50.0 million and revolving credit loans,
swing line loans and letters of credit up to $100.0 million. As at July 1, 2001,
we had borrowed $101.8 million under this facility. We intend to continue to
borrow under our credit facility to finance working capital growth and any cash
portion of future acquisitions.
We currently provide turnkey manufacturing services to the majority of our
customers. In 2000, 98.8% of our pro forma revenue was from turnkey
manufacturing services compared to 97.1 % in 1999. From July 1999 to March 2000,
under the terms of a production agreement with Zenith, we manufactured products
for Zenith on a consignment basis. In a consignment arrangement, we provide
manufacturing services only, while the customer purchases the materials and
components necessary for production. In April 2000, we began to purchase
materials for Zenith, and as a result, our relationship with Zenith evolved into
a turnkey manufacturing relationship. Turnkey manufacturing services typically
result in higher revenue and higher gross profits but lower gross profit margins
when compared to consignment services.
With our turnkey manufacturing customers, we generally operate under contracts
that provide a general framework for our business relationship. Our actual
production volumes are based on purchase orders under which our customers do not
commit to firm production schedules more than 30 to 90 days in advance. In order
to minimize customers' inventory risk, we generally order materials and
components
21
only to the extent necessary to satisfy existing customer forecasts or purchase
orders. Fluctuations in material costs are typically passed through to
customers. We may agree, upon request from our customers, to temporarily delay
shipments, which causes a corresponding delay in our revenue recognition.
Ultimately, however, our customers are generally responsible for all goods
manufactured on their behalf.
We service our customers through a total of ten facilities located in the United
States, Canada, Europe and Mexico. In the second quarter of 2001, approximately
76.8% of our revenue was generated from operations in the United States,
approximately 7.8% from Canada, approximately 3.5% from Europe and approximately
11.9% from Mexico. We expect to continue to increase revenue from our Chihuahua
facility, with the transfer of certain production from other facilities and with
the addition of new business and increased volume from our current business.
Our fiscal year end is December 31. The consolidated financial statements of
SMTC are prepared in accordance with United States GAAP, which conforms in all
material respects to Canadian GAAP.
22
SMTC Corporation
Results of Operations
The following table sets forth certain operating data expressed as a percentage
of revenue for the periods indicated:
(Excluding $9.0 million of pre-tax restructuring charges for the three months
ended July 1, 2001 and $31.7 million of pre-tax restructuring charges for the
six months ended July 1, 2001):
Three months ended Six months ended
July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000
-----------------------------------------------------------------------------------------
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales 96.8 91.8 96.2 91.4
------------------------------------------------------
Gross profit 3.2 8.2 3.8 8.6
Selling, general and administrative
expenses 5.4 4.3 5.1 5.1
Amortization 1.6 0.7 1.3 0.9
------------------------------------------------------
Operating income (loss) (3.8) 3.2 (2.6) 2.6
Interest 1.7 2.5 1.6 2.7
------------------------------------------------------
Earnings (loss) before income taxes (5.5) 0.7 (4.2) (0.1)
Income tax expense (recovery) (1.1) 0.6 (1.0) 0.3
------------------------------------------------------
Net earnings (loss) (4.4)% 0.1% (3.2)% (0.4)%
======================================================
(Including $9.0 million of pre-tax restructuring charges for the three months
ended July 1, 2001 and $31.7 million of pre-tax restructuring charges for the
six months ended July 1, 2001):
Three months ended Six months ended
July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000
---------------------------------------------------------------------------------------------
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales (including restructuring
charges of $9.0 million for the three
months ended July 1, 2001 and
$15.9 million for the six months
ended July 1, 2001) 102.7 91.8 100.7 91.4
------------------------------------------------------
Gross profit (loss) (2.7) 8.2 (0.7) 8.6
Selling, general and administrative
expenses 5.4 4.3 5.1 5.1
Amortization 1.6 0.7 1.3 0.9
Restructuring charge -- -- 4.5 --
------------------------------------------------------
Operating income (loss) (9.7) 3.2 (11.6) 2.6
Interest 1.7 2.5 1.6 2.7
------------------------------------------------------
Earnings (loss) before income taxes (11.4) 0.7 (13.2) (0.1)
Income tax expense (recovery) (2.2) 0.6 (3.6) 0.3
------------------------------------------------------
Net earnings (loss) (9.2)% 0.1% (9.6)% (0.4)%
======================================================
Quarter ended July 1, 2001 compared to the quarter ended July 2, 2000
Revenue
Revenue decreased $15.2 million, or 9.1%, from $167.1 million in the second
quarter of 2000 to $151.9 million in the second quarter of 2001. The decrease in
revenue is due to the impact of the technology market slowdown across the
customer base. We recorded approximately $11.1 million of sales of raw
23
materials inventory to customers, which carry no margin, during the second
quarter of 2001, compared to $16.3 million in the second quarter of 2000.
Revenue from IBM of $22.1 million and Dell of $15.9 million for the second
quarter of 2001 was 14.5% and 10.5% respectively, of total revenue. In the
second quarter of 2000, revenue from Dell of $32.7 million represented 19.6% of
total revenue. The 2000 revenue from Dell consisted of approximately $6.0
million of revenue derived from personal computer based products and $26.7
million of revenue derived from networking based products, whereas the 2001
revenue from Dell consisted entirely of revenue derived from networking based
products. No other customers represented more than 10% of revenue.
In the second quarter of 2001, 76.8% of our revenue was generated from
operations in the United States, 7.8% from Canada, 11.9% from Mexico and 3.5%
from Europe. In the second quarter of 2000, 76.8% of our revenue was generated
from operations in the United States, 9.8% from Canada, 2.7% from Europe and
10.7% from Mexico.
Gross Profit
Gross profit, excluding a $9.0 million restructuring charge related to a
write-down of inventory in connection with the closure of our Denver facility,
decreased $8.8 million from $13.7 million in the second quarter of 2000 to $4.9
million in the second quarter of 2001. Our gross profit margin, excluding the
restructuring charge, decreased from 8.2% in the second quarter of 2000 to 3.2%
in the second quarter of 2001.
The decline in the gross profit and gross margin was due to an under-absorption
of the fixed production overheads put in place to support the rapid sales
increase experienced during the later half of 2000.
Gross profit including $9.0 million of the total restructuring charge was a loss
of $4.1 million in the second quarter of 2001.
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased $1.0 million from $7.2
million in the second quarter of 2000 to $8.2 million in the second quarter of
2001 due to the acquisitions of Pensar and Qualtron. As a percentage of revenue,
selling, general and administrative expenses increased from 4.3% in the second
quarter of 2000 to 5.4% in the second quarter of 2001 due to the under-
absorption of fixed selling, general and administrative expenses as a result of
the general technology market slowdown.
Amortization
Amortization of intangible assets of $2.4 million in the second quarter of 2001
included 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, $0.7 million related to the acquisition of Pensar and $0.4 million
related to the acquisition of Qualtron. Amortization of intangible assets in the
second quarter of 2001 also included the amortization of $0.2 million of
deferred finance costs related to the establishment of our senior credit
facility in July 2000 and $0.1 million of deferred equipment lease costs.
24
Amortization of $1.3 million in the second quarter of 2000 included 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,
$0.2 million of deferred finance costs related to the establishment of our
senior credit facility in July 1999 and $0.1 million of deferred equipment lease
costs.
Restructuring Charge
In response to the economic slowdown, we announced during the first quarter of
2001 that along with other cost realignment initiatives, we would close our
assembly facility located in Denver, Colorado. As such a restructuring charge of
$22.7 million pre-tax was recorded during the first quarter, consisting of an
inventory write-down of $6.9 million, lease and other contractual obligations of
$5.2 million, severance costs of $2.5 million, asset impairment charges of $5.0
million and other facility exit charges of $3.1 million. An additional $9.0
million pre-tax charge was recorded during the second quarter relating to a
further inventory write-down at our now closed Denver facility.
The cash component of the restructuring charge accrued for at the end of the
first quarter of $9.6 million was drawn down by $2.7 million during the second
quarter, consisting of $0.4 million in lease and other contract obligation
payments, $1.4 million in severance payments and $0.9 million in other payments.
We believe the restructuring accrual remaining of $7.0 million at July 1, 2001
will be sufficient to satisfy the remaining obligations associated with the
restructuring charge.
The major components of the restructuring are estimated to be complete by early
fiscal year 2002.
Interest Expense
Interest expense decreased $1.5 million from $4.1 million in the second quarter
of 2000 to $2.6 million in the second quarter of 2001. The weighted average
interest rates with respect to the debt for the second quarter of 2000 and the
second quarter of 2001 were 9.6% and 8.5%, respectively.
Income Tax Expense
In the second quarter of 2001 an income tax recovery of $3.4 million was
recorded on a pre-tax loss of $17.3 million resulting in an effective tax
recovery rate of 19.7%, as losses in certain jurisdictions were not tax effected
due to the uncertainty of our ability to utilize such losses and we are unable
to deduct $1.0 million of goodwill related to the combination of Surface Mount
and HTM and the acquisition of Qualtron.
In the second quarter of 2000, an income tax expense of $1.0 million was
recorded on a pre-tax income of $1.1 resulting in an effective income tax rate
of 89.5%, as we were not able to claim a recovery on losses of $0.7 million
incurred by our Irish subsidiary or deduct $0.6 million of goodwill expense
related to the combination of Surface Mount and HTM.
Six months ended July 1, 2001 compared to six months ended July 2, 2000
Revenue
25
Revenue increased $61.4 million, or 21.1%, from $291.4 million for the six month
period ended July 2, 2000 to $352.9 million for the six month period ended July
1, 2001. The increase in revenue is due to the acquisitions of Pensar and
Qualtron and the transition of our Chihuahua facility from consignment to
turnkey, both of which were offset by a reduction in organic revenue due to the
impact of the technology market slowdown. Pensar and Qualtron contributed $49.8
million and $15.6 million, respectively, to the increase in revenue. Revenue at
our Chihuahua facility increased $27.1 million from $21.5 million for the six
months ended July 2, 2000 to $48.6 million for the six months ended July 1,
2001. We recorded approximately $22.6 million of sales of raw materials
inventory to customers, which carry no margin, during the first six months of
2001, compared to $20.5 million during the first six months of 2000.
Revenue from IBM of $52.6 million and Dell of $38.4 million for the six month
period ended July 1, 2001 was 14.9% and 10.9%, respectively, of total revenue
for the period. Revenue from Dell for the six months ended July 2, 2000 was
$65.3 million, or 22.4% of total revenue for the period. The decline in the
revenue from Dell is due to the elimination of revenue earned from PC based
products, which contributed $18.3 million to revenue for the six months ended
July 2, 2000, and the general decline in the technology market conditions. No
other customers represented more than 10% of revenue.
For the six month period ended July 1, 2001, 74.7% of our revenue was generated
from operations in the United States, 10.2% from Canada, 3.6% from Europe and
11.5% from Mexico. During the six month period ended July 2, 2000, 79.8% of our
revenue was generated from operations in the United States, 10.0% from Canada,
3.1% from Europe and 7.1% from Mexico.
Gross Profit
Gross profit, excluding the $15.9 million portion of our restructuring charge
that related to a write-down of inventory in connection with the closure of our
Denver facility, decreased $11.5 million from $24.8 million for the six months
ended July 2, 2000 to $13.3 million for the six months ended July 1, 2001. Our
gross profit margin, excluding the restructuring charge, decreased from 8.6% in
the first six months of 2000 to 3.8% in the first six months of 2001.
The decline in the gross profit was due to the lower sales base and an
under-absorption of the fixed production overheads. The gross margin decreased
due to lower utilization of fixed costs and a change in revenue mix to include a
lower proportion of consignment sales.
Gross profit for the first six months of 2001, including the $15.9 million
restructuring charge, was a loss of $2.6 million.
26
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased $3.1 million from $14.9
million for the six months ended July 2, 2000 to $18.0 million for the six
months ended July 1, 2001 due to the acquisitions of Pensar and Qualtron.
Selling, general and administrative expenses were 5.1% of revenue for each of
the six months ended July 2, 2000 and July 1, 2001.
Amortization
Amortization of intangible assets of $4.7 million in the first six months of
2001 included the amortization of $1.2 million of goodwill related to the
combination of Surface Mount and HTM, $0.8 million of goodwill related to the
acquisition of W.F. Wood, $1.4 million related to the acquisition of Pensar and
$0.8 million related to the acquisition of Qualtron. Amortization of intangible
assets in the first six months of 2001 also included the amortization of $0.3
million of deferred finance costs related to the establishment of our senior
credit facility in July 2000 and $0.2 million of deferred equipment lease costs.
Amortization of $2.5 million in the first six months of 2000 included the
amortization of $1.2 million of goodwill related to the combination of Surface
Mount and HTM, $0.8 million of goodwill related to the acquisition of W.F. Wood,
$0.4 million of deferred finance costs related to the establishment of our
senior credit facility in July 1999 and $0.1 million of deferred equipment lease
costs.
Restructuring Charge
In response to the economic slowdown, we announced during the first quarter of
2001 that along with other cost realignment initiatives, we would close our
assembly facility located in Denver, Colorado. As such a restructuring charge of
$31.7 million pre-tax was recorded, consisting of an inventory write-down of
$15.9 million, lease and other contractual obligations of $5.2 million,
severance costs of $2.5 million, asset impairment charges of $5.0 million and
other facility exit charges of $3.1 million. Of the total restructuring charge,
$28.1 million relates to the closure of our Denver facility. The closure of the
assembly facility in Denver involves the severance of employees, the disposition
of assets and the decommissioning, exiting and subletting of the facility. The
severance costs related to Denver include all 429 employees. The severance costs
also include 847 plant and operational employees at our Mexico facility and 45
plant and operational employees at our Cork, Ireland facility. Of the total
severance costs, $0.8 million was paid during the first quarter of 2001. The
asset impairment reflects the write-down of certain long lived assets primarily
at the Denver location that became impaired as a result of the rationalization
of facilities. The asset impairment was determined based on undiscounted
projected future net cash flows relating to the assets resulting in a write-down
to estimated salvage values. Other facility exit costs include personnel costs
and other fees directly related to exit activities at the Denver location.
The non-cash component of the write-down is $20.9 million. We recorded an income
tax recovery of $9.1 million related to the restructuring charge at an effective
rate of 28.7%.
The cash component of the restructuring charge accrued for at the end of the
first quarter of $9.6 million was drawn down by $2.7 million during the second
quarter, consisting of $0.4 million in lease and other contract obligation
payments, $1.4 million in severance payments and $0.9 million in other payments.
We believe the
27
restructuring accrual remaining of $7.0 million at July 1, 2001 will be
sufficient to satisfy the remaining obligations associated with the
restructuring charge.
The major components of the restructuring are estimated to be complete by early
fiscal year 2002.
Interest Expense
Interest expense decreased $2.3 million from $7.8 million for the six months
ended July 2, 2000 to $5.5 million for the six months ended July 1, 2001 due to
a reduction of debt as a result of the initial public offering . The weighted
average interest rates with respect to the debt for the six months ended July 2,
2000 and the six months ended July 1, 2001 were 9.8% and 8.3%, respectively.
Income Tax Expense
For the six month period ended July 1, 2001 an income tax recovery of $12.7
million was recorded on a pre-tax loss of $46.6 million resulting in an
effective tax recovery rate of 27.3%, as losses in certain jurisdictions were
not tax effected due to the uncertainty of our ability to utilize such losses
and we are unable to deduct $2.0 million of goodwill related to the combination
of Surface Mount and HTM and the acquisition of Qualtron.
For the six month period ended July 2, 2000, we recorded an income tax expense
of $0.9 million on a loss of $0.4 million as we were not able to claim a
recovery on losses of $1.2 million incurred by our Irish subsidiary or deduct
$1.2 million of goodwill expense related to the combination of Surface Mount and
HTM.
Liquidity and Capital Resources
Our principal sources of liquidity are cash provided from operations and from
borrowings under our senior credit facility and our access to the capital
markets. Our principal uses of cash have been to finance mergers and
acquisitions, to meet debt service requirements and to finance capital
expenditures and working capital requirements. We anticipate that these will
continue to be our principal uses of cash in the future.
Net cash used for operating activities for the six month period ended July 2,
2000 was $30.8 million compared to net cash generated from operating activities
of $32.2 million for the six month period ended July 1, 2001. The continued
focus on improving our accounts receivable and inventory levels during the
period led to the reduced use of working capital.
Net cash provided by financing activities for the six month period ended July 2,
2000 was $37.5 million due to the net increase of borrowings of $30.5 million,
and proceeds received from the issue of warrants and subordinated notes of $2.5
million and $5.2 million, respectively, which was offset by capital lease
payments of $0.7 million. Net cash used in financing activities for the six
month period ended July 1, 2001 was $19.1 million due to the repayment in
long-term debt and capital leases of $14.0 million and $0.2
28
million, respectively, and the loans issued to shareholders of $5.2 million,
both of which were offset by the proceeds from issuance of capital stock on the
exercise of options of $0.3 million. As at July 1, 2001, we had borrowed $101.8
million under our credit facility. We intend to continue to borrow under our
credit facility to finance working capital needs and any cash portion of future
acquisitions.
Net cash used in investing activities for the six months ended July 2, 2000 and
July 1, 2001 was $7.1 million and $14.2 million, respectively, due to the net
purchase of capital assets. We expect our capital expenditures for the balance
of the year to be between $3.0 and $4.0 million.
The Company's credit agreement contains certain financial covenants. The Company
complied with all required covenants as at July 1, 2001 and accordingly the
related debt is classified as long-term. However, it is unlikely the Company
will earn sufficient EBITDA (earnings before interest expense, income taxes,
depreciation and amortization) during the third quarter to satisfy the
requirements of the credit agreement. If the Company fails to meet the
covenants, the lenders will have the right to demand repayment of the debt or to
modify the existing credit agreement. The Company has notified the lenders of
the possible future violation and is in the process of discussing the
circumstances under which the lenders would be willing to waive or modify the
financial covenants included in the credit agreement.
Our management believes that cash generated from operations, available cash and
amounts available under our senior credit facility will be adequate to meet our
debt service requirements, capital expenditures and working capital needs at our
current level of operations and organic growth, although no assurance can be
given in this regard, particularly with respect to amounts available under our
credit facility, as discussed above. If we experience strong growth or pursue
acquisitions, we will likely require additional capital. There can be no
assurance that our business will generate sufficient cash flow from operations
or that future borrowings will be available to enable us to service our
indebtedness. Our future operating performance and ability to service or
refinance indebtedness will be subject to future economic conditions and to
financial, business and other factors, certain of which are beyond our control.
RECENTLY ISSUED ACCOUNTING STANDARDS
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
have implemented SFAS No. 133 for the first quarter of 2001. As a result of
implementing SFAS No. 133, we have recorded the interest rate swaps in our
balance sheet at fair value and recorded a charge to earnings representing the
change in fair value of the swaps for the period.
In July 2001 the FASB issued SFAS No. 141 and SFAS No. 142. The new standards
mandate the purchase method of accounting for business combinations and require
that goodwill no longer be amortized but instead be tested for impairment at
least annually. Upon adoption of the standards
29
beginning January 1, 2002, the Company will discontinue amortization for
goodwill and test for impairment using the new standards. Effective July 1, 2001
and for the remainder of the fiscal year, goodwill acquired in business
combinations completed after June 30, 2001, will not be amortized and impairment
testing will be based on existing standards. The Company is currently
determining the impact of the new standards. It is likely that the elimination
of the amortization on goodwill will have a material impact on the Company's
financial statements.
FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Form 10-Q are
forward-looking in nature. The discussion of such matters and subject areas is
qualified by the inherent risks and uncertainties surrounding future
expectations generally; these expectations may differ materially from SMTC's
actual future experience involving any one or more of such matters and subject
areas. SMTC cautions readers that all statements other than statements of
historical facts included in this report on Form 10-Q regarding SMTC's financial
position and business strategy may constitute forward-looking statements. All of
these forward-looking statements are based upon estimates and assumptions made
by SMTC's management, which although believed to be reasonable, are inherently
uncertain. Therefore, undue reliance should not be placed on such estimates and
statements. No assurance can be given that any of such estimates or statements
will be realized, and it is likely that actual results will differ materially
from those contemplated by such forward-looking statements. Factors that may
cause such differences include: (1) increased competition; (2) increased costs;
(3) the inability to consummate business acquisitions on attractive terms; (4)
the loss or retirement of key members of management; (5) increases in SMTC's
cost of borrowings or lack of availability of additional debt or equity capital
on terms considered reasonable by management; (6) credit agreement covenant
violations; (7) adverse state, federal or foreign legislation or regulation or
adverse determinations by regulators; (8) changes in general economic conditions
in the markets in which SMTC may compete and fluctuations in demand in the
electronics industry; (9) the inability to manage inventory levels efficiently
in light of changes in market conditions; and (10) the inability to sustain
historical margins as the industry develops. SMTC has attempted to identify
certain of the factors that it currently believes may cause actual future
experiences to differ from SMTC's current expectations regarding the relevant
matter or subject area. In addition to the items specifically discussed in the
foregoing, SMTC's business and results of operations are subject to the risks
and uncertainties described under the heading "Factors That May Affect Future
Results" below. The operations and results of SMTC's business may also be
subject to the effect of other risks and uncertainties. Such risks and
uncertainties include, but are not limited to, items described from time to time
in SMTC's reports filed with the Securities and Exchange Commission.
FACTORS THAT MAY AFFECT FUTURE RESULTS
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
A majority of our revenue comes from a small number of customers; if we lose any
of our largest customers, our revenue could decline significantly.
Our largest customer in the six months ended July 1, 2001 was IBM, which
represented approximately 14.9% of our total revenue for such period. Our next
five largest customers collectively represented an
30
additional 34.8% of our total revenue in the first six months of 2001. We expect
to continue to depend upon a relatively small number of customers for a
significant percentage of our revenue. In addition to having a limited number of
customers, we manufacture a limited number of products for each of our
customers. If we lose any of our largest customers or any product line
manufactured for one of our largest customers, we could experience a significant
reduction in our revenue. Also, the insolvency of one or more of our largest
customers or the inability of one or more of our largest customers to pay for
its orders could decrease revenue. As many of our costs and operating expenses
are relatively fixed, a reduction in net revenue can decrease our profit margins
and adversely affect our business, financial condition and results of
operations.
Our industry is very competitive and we may not be successful if we fail to
compete effectively.
The electronics manufacturing services (EMS) industry is highly competitive. We
compete against numerous domestic and foreign EMS providers including Celestica
Inc., Flextronics International Ltd., Jabil Circuit, Inc., SCI Systems, Inc. and
Solectron Corporation. In addition, we may in the future encounter competition
from other large electronics manufacturers that are selling, or may begin to
sell, electronics manufacturing services. Many of our competitors have
international operations, and some may have substantially greater manufacturing,
financial research and development and marketing resources and lower cost
structures than we do. We also face competition from the manufacturing
operations of current and potential customers, which are continually evaluating
the merits of manufacturing products internally versus the advantages of using
external manufacturers.
We may experience variability in our operating results, which could negatively
impact the price of our shares.
Our annual and quarterly results have fluctuated in the past. The reasons for
these fluctuations may similarly affect us in the future. Historically, our
calendar fourth quarter revenue has been highest and our calendar first quarter
revenue has been lowest. Prospective investors should not rely on results of
operations in any past period to indicate what our results will be for any
future period. Our operating results may fluctuate in the future as a result of
many factors, including:
o variations in the timing and volume of customer orders relative to
our manufacturing capacity;
o variations in the timing of shipments of products to customers;
o introduction and market acceptance of our customers' new products;
o changes in demand for our customers' existing products;
o the accuracy of our customers' forecasts of future production
requirements;
o effectiveness in managing our manufacturing processes and inventory
levels;
o changes in competitive and economic conditions generally or in our
customers' markets;
o changes in the cost or availability of components or skilled labor;
and
o 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
31
have been required to increase staffing, purchase materials and incur other
expenses to meet the anticipated demand of our customers. Sometimes anticipated
orders from certain customers have failed to materialize, and sometimes delivery
schedules have been deferred as a result of changes in a customer's business
needs. Any material delay, cancellation or reduction of orders from our largest
customers could cause our revenue to decline significantly. In addition, as many
of our costs and operating expenses are relatively fixed, a reduction in
customer demand can decrease our gross margins and adversely affect our
business, financial condition and results of operations. On other occasions,
customers have required rapid and unexpected increases in production, which have
placed burdens on our manufacturing capacity. Any of these factors or a
combination of these factors could have a material adverse effect on our
business, financial condition and results of operations.
We are dependent upon the electronics industry, which produces technologically
advanced products with short life cycles.
Substantially all of our customers are in the electronics industry, which is
characterized by intense competition, short product life-cycles and significant
fluctuations in product demand. In addition, the electronics industry is
generally subject to rapid technological change and product obsolescence. If our
customers are unable to create products that keep pace with the changing
technological environment, their products could become obsolete and the demand
for our services could significantly decline. Our success is largely dependent
on the success achieved by our customers in developing and marketing their
products. Furthermore, this industry is subject to economic cycles and has in
the past experienced downturns. The downturn in the electronics industry that
began in the first quarter of 2001 has adversely affected us. A future recession
or a downturn in the electronics industry would also likely have a material
adverse effect on our business, financial condition and results of operations.
Shortage or price fluctuation in component parts specified by our customers
could delay product shipment and affect our profitability.
A substantial portion of our revenue is derived from "turnkey" manufacturing. In
turnkey manufacturing, we provide both the materials and the manufacturing
services. If we fail to manage our inventory effectively, we may bear the risk
of fluctuations in materials costs, scrap and excess inventory, all of which can
have a material adverse effect on our business, financial condition and results
of operations. We are required to forecast our future inventory needs based upon
the anticipated demands of our customers. Inaccuracies in making these forecasts
or estimates could result in a shortage or an excess of materials. In addition,
delays, cancellations or reductions of orders by our customers could result in
an excess of materials. A shortage of materials could lengthen production
schedules and increase costs. An excess of materials may increase the costs of
maintaining inventory and may increase the risk of inventory obsolescence, both
of which may increase expenses and decrease profit margins and operating income.
Many of the products we manufacture require one or more components that we order
from sole-source suppliers. Supply shortages for a particular component can
delay productions of all products using that component or cause cost increases
in the services we provide. In addition, in the past, some of the materials we
use, such as memory and logic devices, have been subject to industry-wide
shortages. As a result, suppliers have been forced to allocate available
quantities among their customers and we have not been able to obtain all of the
materials desired. Our inability to obtain these needed materials could slow
production or assembly, delay shipments to our customers, increase costs and
reduce operating income. Also, we may bear the risk of periodic component price
increases. Accordingly, some component price increases could increase costs and
reduce operating income. Also we rely on a variety of common carriers for
materials transportation, and we route materials through various world ports. A
work stoppage, strike or shutdown of a major port or airport could result in
manufacturing and shipping delays or expediting charges, which could have a
material adverse effect on our business, financial condition and results of
operations.
We have experienced significant growth in a short period of time and may have
trouble integrating acquired businesses and managing our expansion.
Since 1995, we have completed eight acquisitions. Acquisitions may involve
numerous risks, including
32
difficulty in integrating operations, technologies, systems, and products and
services of acquired companies; diversion of management's attention and
disruption of operations; increased expenses and working capital requirements;
entering markets in which we have limited or no prior experience and where
competitors in such markets have stronger market positions; and the potential
loss of key employees and customers of acquired companies. In addition,
acquisitions may involve financial risks, such as the potential liabilities of
the acquired businesses, the dilutive effect of the issuance of additional
equity securities, the incurrence of additional debt, the financial impact of
transaction expenses and the amortization of goodwill and other intangible
assets involved in any transactions that are accounted for using the purchase
method of accounting, and possible adverse tax and accounting effects. We have a
limited history of owning and operating our acquired businesses on a
consolidated basis. There can be no assurance that we will be able to meet
performance expectations or successfully integrate our acquired businesses on a
timely basis without disrupting the quality and reliability of service to our
customers or diverting management resources. Our rapid growth has placed and
will continue to place a significant strain on management, on our financial
resources, and on our information, operating and financial systems. If we are
unable to manage this growth effectively, it may have a material adverse effect
on our business, financial condition and results of operations.
Our acquisition strategy may not succeed.
As part of our business strategy, we expect to continue to grow by pursuing
acquisitions of other companies, assets or product lines that complement or
expand our existing business. Competition for attractive companies in our
industry is substantial. We cannot assure you that we will be able to identify
suitable acquisition candidates or finance and complete transactions that we
select. Our failure to execute our acquisition strategy may have a material
adverse effect on our business, financial condition and results of operations.
Also, if we are not able to successfully complete acquisitions, we may not be
able to compete with larger EMS providers who are able to provide a total
customer solution.
If we do not effectively manage the expansion of our operations, our business
may be harmed.
We have grown rapidly in recent periods, and this growth may be difficult to
sustain. Internal growth and further expansion of services may require us to
expand our existing operations and relationships. We plan to expand our design
and development services and our manufacturing capacity by expanding our
facilities and by adding new equipment. Expansion has caused, and is expected to
continue to cause, strain on our infrastructure, including our managerial,
technical, financial and other resources. Our ability to manage future growth
effectively will require us to attract, train, motivate and manage new employees
successfully, to integrate new employees into our operations and to continue to
improve our operational and information systems. We may experience
inefficiencies as we integrate new operations and manage geographically
dispersed operations. We may incur cost overruns. We may encounter construction
delays, equipment delays or shortages, labor shortages and disputes, and
production start-up problems that could adversely affect our growth and our
ability to meet customers' delivery schedules. We may not be able to obtain
funds for this expansion on acceptable terms or at all. In addition, we expect
to incur new fixed operating expenses associated with our expansion efforts,
including increases in depreciation expense and rental expense. If our revenue
does not increase sufficiently to offset these expenses, our business, financial
condition and results of operations would be materially adversely affected.
If we are unable to respond to rapidly changing technology and process
development, we may not be able to compete effectively.
The market for our products and services is characterized by rapidly changing
technology and continuing process development. The future success of our
business will depend in large part upon our ability to maintain and enhance our
technological capabilities, to develop and market products and services that
meet changing customer needs, and to successfully anticipate or respond to
technological changes on a cost-effective and timely basis. In addition, the EMS
industry could in the future encounter competition from new or revised
technologies that render existing technology less competitive or obsolete or
that reduce the demand for our services. There can be no assurance that we will
effectively respond to the
33
technological requirements of the changing market. To the extent we determine
that new technologies and equipment are required to remain competitive, the
development, acquisition and implementation of such technologies and equipment
may require us to make significant capital investments. There can be no
assurance that capital will be available for these purposes in the future or
that investments in new technologies will result in commercially viable
technological processes.
Our business will suffer if we are unable to attract and retain key personnel
and skilled employees.
We depend on the services of our key senior executives, including Paul Walker,
Philip Woodard, Gary Walker and Derrick D'Andrade. Our business also depends on
our ability to continue to recruit, train and retain skilled employees,
particularly executive management, engineering and sales personnel. Recruiting
personnel in our industry is highly competitive. In addition, our ability to
successfully integrate acquired companies depends in part on our ability to
retain key management and existing employees at the time of the acquisition.
There can be no assurance that we will be able to retain our executive officers
and key personnel or attract qualified management in the future.
In the first half of 2001, we responded to the downturn in the electronics
industry by reducing our workforce from 6,173 at December 31, 2000 to 2,818 at
July 1, 2001. If demand for our products and services grows, we may find it
difficult to expand our workforce to meet that demand.
Risks particular to our international operations could adversely affect our
overall results.
Our success will depend, among other things, on successful expansion into new
foreign markets in order to offer our customers lower cost production options.
Entry into new foreign markets may require considerable management time as well
as start-up expenses for market development, hiring and establishing office
facilities before any significant revenue is generated. As a result, operations
in a new foreign market may operate at low profit margins or may be
unprofitable. Pro forma revenue generated outside of the United States and
Canada was approximately 11% in 2000. International operations are subject to
inherent risks, including:
o fluctuations in the value of currencies and high levels of
inflation;
o longer payment cycles and greater difficulty in collecting amounts
receivable;
o unexpected changes in and the burdens and costs of compliance with a
variety of foreign laws;
o political and economic instability;
o increases in duties and taxation;
o inability to utilize net operating losses incurred by our foreign
operations to reduce our U.S. and Canadian income taxes;
o imposition of restrictions on currency conversion or the transfer of
funds; and
o 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
34
these environmental laws is a major consideration for us because we use metals
and other hazardous materials in our manufacturing processes. We may be liable
under environmental laws for the cost of cleaning up properties we own or
operate if they are or become contaminated by the release of hazardous
materials, regardless of whether we caused such release. In addition we, along
with any other person who arranges for the disposal of our wastes, may be liable
for costs associated with an investigation and remediation of sites at which we
have arranged for the disposal of hazardous wastes, if such sites become
contaminated, even if we fully comply with applicable environmental laws. In the
event of a contamination or violation of environmental laws, we could be held
liable for damages including fines, penalties and the costs of remedial actions
and could also be subject to revocation of our discharge permits. Any such
revocations could require us to cease or limit production at one or more of our
facilities, thereby having a material adverse effect on our operations.
Environmental laws could also become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with any
violation, which could have a material adverse effect on our business, financial
condition and results of operations.
RISKS RELATED TO OUR CAPITAL STRUCTURE
Our future indebtedness could adversely affect our financial health and severely
limit our ability to plan for or respond to changes in our business.
At July 1, 2001 we had $101.8 million of indebtedness under our senior credit
facility. We may incur additional indebtedness from time to time to finance
acquisitions or capital expenditures or for other purposes. This debt could have
adverse consequences for our business, including:
o We will be more vulnerable to adverse general economic conditions;
o 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;
o We may have difficulty obtaining additional financing in the future
for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes;
o We may have limited flexibility in planning for, or reacting to,
changes in our business and industry;
o We could be limited by financial and other restrictive covenants in
our credit arrangements in our borrowing of additional funds; and
o We may fail to comply with the covenants under which we borrowed our
indebtedness, which could result in an event of default. If an event
of default occurs and is not cured or waived, it could result in all
amounts outstanding, together with accrued interest, becoming
immediately due and payable. If we were unable to repay such
amounts, the lenders could proceed against any collateral granted to
them to secure that indebtedness.
There can be no assurance that our leverage and such restrictions will not
materially adversely affect our ability to finance our future operations or
capital needs or to engage in other business activities. In addition, our
ability to pay principal and interest on our indebtedness to meet our financial
and restrictive covenants and to satisfy our other debt obligations will depend
upon our future operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, certain of which
are beyond our control, as well as the availability of revolving credit
borrowings under our senior credit facility or successor facilities.
The terms of our credit agreement impose significant restrictions on our ability
to operate.
The terms of our current credit agreement restrict, among other things, our
ability to incur additional indebtedness, pay dividends or make certain other
restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, merge, consolidate or sell, assign, transfer,
lease, convey or
35
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. The
Company complied with all required covenants as at July 1, 2001 and accordingly
the related debt is classified as long-term. However, it is unlikely the Company
will earn sufficient EBITDA (earnings before interest expense, income taxes,
depreciation and amortization) during the third quarter to satisfy the
requirements of the credit agreement. If the Company fails to meet the
covenants, the lenders will have the right to demand repayment of the debt or to
modify the existing credit agreement. The Company has notified the lenders of
the possible future violation and is in the process of discussing the
circumstances under which the lenders would be willing to waive or modify the
financial covenants included in the credit agreement. There can be no assurance
that those discussions will be successful.
Substantially all of our assets and those of our subsidiaries are pledged as
security under our senior credit facility.
Investment funds affiliated with Bain Capital, Inc., investment funds affiliated
with Celerity Partners, Inc., Kilmer Electronics Group Limited and certain
members of management have significant influence over our business, and could
delay, deter or prevent a change of control or other business combination.
Investment funds affiliated with Bain Capital, Inc., investment funds affiliated
with Celerity Partners, Inc., Kilmer Electronics Group Limited and certain
members of management held approximately 13.4%, 12.1%, 7.1% and 13.2%,
respectively, of our outstanding shares as of June 30, 2001. In addition, three
of the nine directors who serve on our board are, or were, representatives of
the Bain funds, two are representatives of the Celerity funds, two are
representatives of Kilmer Electronics Group Limited and two are members of
management. By virtue of such stock ownership and board representation, the Bain
funds, the Celerity funds, Kilmer Electronics Group Limited and certain members
of management have a significant influence over all matters submitted to our
stockholders, including the election of our directors, and exercise significant
control over our business policies and affairs. Such concentration of voting
power could have the effect of delaying, deterring or preventing a change of
control or other business combination that might otherwise be beneficial to our
stockholders.
Provisions in our charter documents and state law may make it harder for others
to obtain control of us even though some stockholders might consider such a
development favorable.
Provisions in our charter, by-laws and certain provisions under Delaware law may
have the effect of delaying or preventing a change of control or changes in our
management that stockholders consider favorable or beneficial. If a change of
control or change in management is delayed or prevented, the market price of our
shares could suffer.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our senior credit facility bears interest at a floating rate. The weighted
average interest rate on our senior credit facility for the quarter ended July
1, 2001 was 8.6%. We reduce our exposure to interest rate risks through swap
agreements. We have entered into swap agreements to hedge $65.0 million of our
outstanding debt. Under the terms of our current swap agreement expiring on
September 22, 2001, the maximum annual rate we would pay on approximately $65.0
million of our debt is 8.7%, as of July 1, 2001. The remainder of our debt of
$36.8 million bore interest at 6.3% on July 1, 2001 based on the Eurodollar base
rate. If the Eurodollar base rate increased by 10% to 6.9%, our interest expense
on the unhedged portion of our debt would increase by approximately $0.2 million
and the fair value of our interest rate swap would increase by approximately
$0.4 million for the balance of 2001.
Foreign Currency Exchange Risk
36
Most of our sales and purchases are denominated in U.S. dollars, and as a result
we have relatively little exposure to foreign currency exchange risk with
respect to sales made. As a result of our Qualtron acquisition, we have assumed
forward exchange contracts to sell U.S. dollars for Irish punts. The aggregate
principal amount of the contracts was $1.3 million at July 1, 2001 and was
valued at the closing dollar exchange rate of $1.08 for financial statement
purposes. These contracts matured at various dates through July 31, 2001. If the
U.S. dollar strengthened by 10% against the Irish punt, we would experience an
exchange loss of approximately $0.1 million in 2001.
37
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its annual meeting on May 9, 2001.
(c) Results of annual meeting votes:
----------------------------------------------------------------------------------------
Proposal For Against Withheld Abstentions Broker Non-
Votes
----------------------------------------------------------------------------------------
To elect as director David 16,333,194 8,650
Dominik to hold office until
2004 and in accordance with the
by-laws of the Company
----------------------------------------------------------------------------------------
To elect as director Gary Walker 16,330,962 10,882
to hold office until 2004 and in
accordance with the by-laws of
the Company
----------------------------------------------------------------------------------------
To elect as director Paul Walker 15,917,762 424,082
to hold office until 2004 and in
accordance with the by-laws of
the Company
----------------------------------------------------------------------------------------
To ratify the appointment of 16,335,272 2,590 3,982 0
KPMG LLP as independent auditors
of the Company for the fiscal
year ending December 31, 2001
----------------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
On July 27, 2001, David Dominik resigned from our Board of Directors and from
the Audit Committee of the Board. The Board accepted his resignation and
appointed Blair Hendrix to fill the vacancy created by Mr. Dominik's resignation
from each of the Board and the Audit Committee and to serve for the remainder of
Mr. Dominik's term, which expires at the annual meeting of stockholders in 2004.
On August 14, 2001, Prescott Ashe informed the Company that he was resigning as
a member of the Board of Directors of the Company, effective as of that same
date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10.1 Real Property Lease dated as of November 24, 2000 between Udaras Na
Gaeltachta and Qualtron Teoranta.
10.2 First Amendment to Real Estate Sale Agreement dated July 31, 2001
between Flextronics International USA, Inc. and SMTC Manufacturing
Corporation of Texas.
10.3 First Amendment to Real Property Lease dated July 31, 2001 between
Flextronics International USA, Inc. and SMTC Manufacturing
Corporation of Texas.
(b) Reports on Form 8-K: None.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, SMTC
Corporation has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
SMTC CORPORATION
By: /s/ Paul Walker
------------------------------------
Name: Paul Walker
Title: President and CEO
By: /s/ Richard Smith
------------------------------------
Name: Richard Smith
Title: Chief Financial Officer
Date: August 15, 2001
39
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.1 Real Property Lease dated as of November 24, 2000 between Udaras Na
Gaeltachta and Qualtron Teoranta.
10.2 First Amendment to Real Estate Sale Agreement dated July 31, 2001
between Flextronics International USA, Inc. and SMTC Manufacturing
Corporation of Texas.
10.3 First Amendment to Real Property Lease dated July 31, 2001 between
Flextronics International USA, Inc. and SMTC Manufacturing
Corporation of Texas.
40
Exhibit 10.1
THIS LEASE made the 24th day of November Two Thousand BETWEEN UDARAS NA
GAELTACHTA having its Principal Office in the State at Na Forbacha in the County
of Galway, Statutory Body (hereinafter called "the Lessor" which expression
shall where the context so admits include its successors and assigns) of the One
part AND QUALTRON TEORANTA having its Registered Office at Unit 10 Eastat
Tionsclaioch na Doiri Beaga in the County of Donegal a Limited Liability Company
(hereinafter called "the Lessee" which expression shall where the context so
admits include its successors and permitted assigns) of the Other part.
In these presents and in the schedules hereto (save where the context otherwise
requires or implies) the following words and expressions shall have the meanings
assigned to them hereunder:
"the Lessor's Industrial Estate" means the hereditaments and premises described
in the First Schedule hereto.
"the demised premises" means the premises hereby demised and more particularly
described in clause 1 hereof.
"Common Parts" mean those parts of the Lessor's Industrial Estate not for the
time being demised to nor in the exclusive occupation of any Lessee or Licensee
of the Lessor nor for the time being intended or (as the case may be) designed
for letting as such the use/or benefit of which is common to the Lessee and
others authorised by the Lessor and shall include (but not by way of exception)
the structure, exterior and structural walls floors and ceilings foundations
structural supports and columns roof window frames lifts machinery and (save
where the same shall have been for the time being demised by the Lessor) the
entrance doors gates foyers landings staircases hallways corridors toilets car
parks, estate roads, grassed areas and other common facility areas within the
curtilage of the Lessor's Industrial Estate.
"conduits" mean gutters gullies pipes drains sewers watercourses channels ducts
flues mains wires cables and other conducting media.
"Utilities" mean water water-tanks soils effluent and waste of all kinds gas
electricity telephone fire fighting equipment and other services including any
plant machinery apparatus and equipment to operate or required for the
utilities.
"systems" mean the fire prevention and fire detection system the burglar alarm
and security system.
WITNESSETH as follows:
1. In consideration of the rents, covenants and conditions hereinafter
reserved and contained and on the part of the Lessee to be paid observed
and performed, the Lessor hereby demises unto the Lessee ALL THAT AND
THOSE the lands with the factory premises
containing 2663 square metres or thereabouts situate thereon and
comprising part of Folio 40947 County Donegal being more particularly
described on the map attached hereto and surrounded by a red verge line.
TOGETHER WITH:
(1) The Lessor's fixtures therein or thereon (all which said land
buildings and fixtures are hereinafter collectively called the
"demised premises") and;
(2) full and free right of access (in common with the Lessor and other
persons having the like right) at all times and for all purposes
connected with the demised premises but not for any other purpose
along and over the area shown coloured yellow on the said map.
EXCEPTING AND RESERVING unto the Lessor and the person or persons for the time
being occupying any other part or parts of the Lessor's Industrial Estate of
which the demised premises are a portion:
(1) The free and uninterrupted passage and running of water soil and
effluent drainage gas water and electricity steam telephone or any
other services or supplies from the other buildings and lands of the
Lessor and its tenants adjoining or near to the demised premises
through the sewers drains watercourses conduits pipes and cables
which now are or may hereafter during the term hereby granted be in
or over under or upon the demised premises.
(2) At any time hereafter or from time to time full right and liberty to
execute works services and building upon or to alter or rebuild any
of the erections services and buildings erected on its adjoining and
neighbouring lands and to use its adjoining and neighboring lands
and buildings, works, services and erections as it may think fit
notwithstanding that the access of light and air to the demised
premises may be interfered with.
TO HOLD the same unto the Lessee for the term of 21 years commencing on
the 1st day of August 2000 YIELDING AND PAYING therefor and thereout
during each of the first 5 years plus one day of the said term the yearly
rent of (pound)68,785 and thereafter during each of the successive periods
of 5 years of which the first shall begin on the 2nd day of August 2005 a
yearly rent equal to (a) the yearly rent payable hereunder during the
preceding period or (b) such revised yearly rent as may from time to time
be ascertained in accordance with the provisions in that behalf contained
in the Second Schedule hereto (whichever shall be the greater).
The said rents in all cases are to be paid without any deductions in
advance by equal quarterly installments by way of Bankers Standing Order
on the 1st day of January, 1st day of April, 1st day of July, and on the
1st day of October, in every year during the term hereby granted.
-2-
2. The Lessee hereby covenants with the Lessor as follows:
(1) To pay the said yearly rents at the times and in manner aforesaid
clear of all deductions.
(2) To bear pay and discharge all rates (including any water rate for
the time being imposed by the Lessor) taxes assessments duties
charges and impositions whatsoever which now are or during the said
term shall be charged assessed or imposed upon the demised premises
or any part thereof or upon the owner or occupier in respect thereof
except the Lessors liability for Income Tax and to indemnify the
Lessor against all actions suites claims and demands whatsoever made
in respect thereof.
(3) To repair and keep in good and substantial repair and condition
using suitable materials of good quality the whole of the demised
premises and every part thereof and the Lessors fixtures therein and
such parts of the drains pipes wires and sanitary apparatus serving
the demised premises as are situate within same and from time to
time as required and in any event in every fifth year of the term
and in the last year thereof to paint and colour all the outside and
inside parts of the demised premises as are actually painted and
coloured and all additions thereto in proper and workmanlike manner
and with suitable materials of their several kinds.
(4) To keep such parts of the land forming part of the demised premises
as are from time to time undeveloped and the grass and any trees
shrubs and hedges in proper and neat order and condition and any
ditches streams culverts and watercourses properly cleared and
cleaned and in particular not to deposit or permit to be deposited
any rubbish or refuse nor without the prior consent in writing of
the Lessor (and then only on such parts of the said land and subject
to such conditions as the Lessor may stipulate or impose) to store
stack or lay out any material used for the purpose of manufacture or
otherwise on any part of the said land.
(5) To bear with the owners or occupiers of each other unit in the said
Industrial Estate the cost and expense of all necessary maintenance,
repair and up-keep (and operating cost where applicable) of access
roads, footpaths, common parts, drainage and water services and
public lighting in the same proportion as the gross area of the
buildings erected on the demised premises bears to:
a) where the Lessor's Industrial Estate is fully completed the
total gross areas of all the industrial units in the estate
and
b) In the case of a non completed or part completed estate the
total gross areas of all the completed units in the estate and
where roads and services have been provided to un-developed
areas of the estate, the gross area of buildings in the course
of erection and proposed buildings fronting onto such services
until such time as same are taken in charge by the Local
Authority.
-3-
(6) At all times during the term to observe and comply in all respects
with the requirements of any enactment (which expression shall for
the purpose of this covenant include every existing or future
statute and every existing or future directive of the Commission of
the European Communities as well as any regulation order or bye-law
made under or in pursuance of any statute or of any said EU
Directive so far as the same may relate to or affect the demised
premises or any part thereof or the user thereof or the use or
employment therein of any chattel or substance) and to execute all
works and provide and maintain all arrangements which by or under
any enactment or by any Government Department or other authority or
by the Court are or may be directed or required to be executed
provided or maintained in respect of the demised premises or any
improvements thereto or in respect of any user thereof or in respect
of any chattel or substance at any time therein AND WITHOUT
PREJUDICE to the generality of the foregoing not to do or omit or
permit to be done or omitted anything on or in connection with the
Demised Premises the doing or omission of which shall be a
contravention of the Planning Acts, Factories Acts, Public Health
Acts, Water Pollution Acts, Air Pollution Acts, Safety, Health and
Welfare at Work Act, 1989, Dangerous Substances Act, 1972 Fire
Services Act 1981, Building Control Act 1990 or of any notices
orders licences consents permissions and conditions (if any) served
made granted or imposed thereunder or under any enactment repealed
thereby and not to do or suffer to be done or omitted in or about
the demised premises any act or thing in respect of which the Lessor
may under any enactment have imposed upon it or become liable to pay
any penalty damages compensation costs and charges or expenses and
to indemnify (as well after the expiration of the said term by
effluxion of time or otherwise as during its continuance) and keep
indemnified the Lessor against all actions, proceedings, damages,
penalties, costs, charges, claims, and demands, made against, or
suffered, or incurred, by the Lessor, arising directly or
indirectly, out of such acts and omissions, or any of them, and
against the costs of any application for the Planning Permission and
the works and things done in pursuance thereof.
(7) To perform and observe all the obligations which the Lessor in
respect of being the owner or Lessor of the said demised premises
may be liable to perform or observe during the said term by virtue
of any Act or Acts of the Oireachtais or of any direction or
requirements of any public or local authority.
(8) To permit the Lessor or it duly authorised agents to enter the
demised premises for the purpose of inspecting and noting the
readings on any meter or other measuring devices installed in the
demised premises by the Lessor and upon giving previous notice in
writing at all reasonable and convenient times to enter the demised
premises and examine the state of repair and condition thereof and
to check and take inventories of the Lessor's Fixtures fittings and
equipment therein and that the Lessee will repair and make good all
defects decays and wants of repair of which notice in writing shall
be given by the Lessor to the Lessee and for which the Lessee may be
liable hereunder within two calendar months after the giving of such
notice provided that in case of default by the Lessee the Lessor
-4-
may make good such defects decays and wants of repair and the cost
of the same shall be repayable by the Lessee to the Lessor on
demand.
(9) Not to make any alterations or additions to the demised premises or
erect any new buildings thereon without the prior written consent of
the Lessor and the approval of the Lessor to the plans and
specifications thereof and if such consent and approval is given to
make such alterations or additions in conformity with such plans and
specifications and to the approval of the Lessor and upon such terms
as the Lessor may consider reasonable.
(10) To use the demised premises for the purpose of the manufacture of
telecommunications equipment and components and light electronic
assemblies and not to use the demised premises or suffer or permit
same to be used for any other purpose whatsoever except with the
previous consent in writing of the Lessor which consent shall not be
unreasonably withheld so however that the Lessor's consent shall not
be treated or construed as being unreasonably withheld if it is
withheld on any of the grounds following, that is to say:
a) that the trade or business to be carried on is not one which
the Lessor considers to be quiet and inoffensive;
b) that the trade or business to be carried on is considered by
the Lessor to be one which would be in conflict with the
Lessor's interpretation of good estate management;
c) that the giving of its consent would result in a change of
user constituting development within the provisions of any
Planning Act order plan regulation permission consent or
direction at the time being in force or any change of use
which although not constituting development would prevent
reversion to the present use of the demised premises.
(11) Not to use the demised premises or suffer or permit the same to be
used for any offensive noisy or dangerous trade business manufacture
or occupation or for any purpose or in any manner which may be a
nuisance to the Lessor or the owners or occupiers of neighbouring or
adjacent premises provided that the carrying on in a proper manner
and in such a way as to cause as little nuisance to the Lessor or
the owners or occupiers of neighbouring or adjacent premises as is
reasonably possible of the trade or business as is hereinbefore in
sub-paragraph (10) of this clause provided for, shall not be deemed
to be a breach of this covenant.
(12) Not to exhibit on the outer wall or roof of the demised premises or
of any building or structure thereon any sign signboard or hanging
sign fascia advertisement placard or lettering except such as may
previously have been approved in writing by the Lessor such approval
not to be unreasonably withheld.
-5-
(13)
a) To take such measures as may be necessary to ensure that any
effluent discharged into the drains or sewers which belong to
or are used for the demised premises in common with other
premises will not be corrosive or in any way harmful to the
said drains or sewers or cause any obstruction or deposit
therein and to obtain such licenses authorisations and
consents as may be required by law for the discharge of such
effluents;
b) not to discharge or allow to be discharged any solid matter
from the demised premises into the drains or sewers as
aforesaid nor to discharge or allow to be discharged therein
any fluid of a poisonous or noxious nature or of a kind
calculated to or that does in fact destroy sicken or injure
the fish or contaminate or pollute the water of any stream or
river and not to do or omit or allow or suffer to be done or
omitted any act or thing whereby any land or the waters of any
stream or river may be polluted or the composition thereof so
changed as to render the Lessor liable to any action or
proceedings by any person whomsoever;
c) without prejudice to the generality of the foregoing to
discharge only domestic sewage/effluent into the drains and
sewers serving the demised premises.
(14) To permit the Lessor and all persons authorised by it and their
respective surveyors agents and workmen at all reasonable and
convenient times in the daytime to enter on the demised premises or
any part thereof for the purpose of repairing, rebuilding, carrying
out structural alterations and building works of every description
to or on any adjoining buildings or lands as occasion shall require
and for the purpose of making repairing maintaining cleansing
lighting and keeping in order and good condition all ways roads
sewers drains pipes gutters watercourses ditches culverts fences
hedges or other conveniences which shall belong to or be used for
the demised premises in common with other premises and also for the
purpose of laying down maintaining repairing and testing drainage
gas and water pipes and electric wires or cables or for other
similar purposes the Lessor or such persons as aforesaid making such
entry doing as little damage as may be and making good any damage
occasioned thereby to the demised premises.
(15) Not to assign underlet or grant any licence in respect of the
demised premises or any part thereof nor part with or share the
possession hereof or of any part thereof.
(16) To effect and maintain at all times throughout this demise through
the agency of Gaelarachas Teoranta, Insurance Brokers, Na Forbacha,
Gaillimh provided Gaelarachas' rates are competitive or
alternatively through the Agency of a reputable insurance broker:
-6-
a) insurance of the demised premises throughout the tenancy in
the joint names of the Lessor and the Lessee against loss or
damage by fire flood explosion storm tempest and other risks
and special perils normally insured under a policy or policies
of insurance on property of the same nature as the demised
premises in a sum equal to the full reinstatement value
thereof from time to time and which reinstatement value shall
be determined by the lessor throughout the said term together
with architect's and surveyor's fees and two year's rent and
to make all payments necessary for the above purposes within
seven days after the same shall respectively become due and to
produce to the Lessor or its agent on demand the policy or
policies of such insurance and the receipt for each such
payment and to cause all monies received by virtue of any such
insurance (other than monies received in respect of loss of
rent) to be forthwith laid out in rebuilding and reinstating
the demised premises or any part thereof in respect of which
such monies shall have become payable or have been received in
accordance with the original plans elevations and details
thereof with such variations (if any) as may be agreed by the
Lessor or may be necessary having regard to the then existing
statutory provisions bye-laws and regulations affecting the
same and any necessary planning approval (which it shall be
the Lessee's obligation to obtain) and to the satisfaction in
all respect of the surveyor for the time being of the Lessor
and to make up any deficiency out of its own monies PROVIDED
ALWAYS that if the Lessee shall at any time fail to keep the
demised premises insured as aforesaid the Lessor may do all
things necessary to effect and maintain such insurance and any
monies expended by it for that purpose shall be repayable by
the Lessee on demand and be recoverable forthwith by action;
b) Public Liability Insurance cover for an amount satisfactory to
the Lessor but for not less than IR(pound)1 million;
c) Employers Liability Insurance.
(17) To be responsible for, and to keep the Lessor fully indemnified
against all damage, damages, losses, costs, expenses, actions,
demands, proceedings, claims and liabilities made against or
suffered or incurred by the Lessor arising directly or indirectly
out of:
a) any act, or omission, of the Lessee or any persons at the
demised premises expressly or impliedly with the Lessee's
authority;
b) any breach or non observance by the Lessee of the covenants
conditions or other provisions of this Lease.
(18) To make adequate arrangements for the frequent removal from the
demised premises of all trade refuse.
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(19) Not to cause or permit to be caused any emission from the demised
premises of an excessive amount of smoke or fumes or any discharge
of any other nature which may in the reasonable opinion of the
Lessor cause any risk or hazard or nuisance or annoyance to the
Lessor and/or the owners or occupiers of any adjoining premises or
which would be contrary to any statutory provision for the time
being in force and regulating such emissions or discharges.
(20) To yield up the demised premises with the fixtures (except Lessee's
fixtures) and additions thereto at the determination of the said
term in good and tenantable repair fair wear and tear accepted in
accordance with the Lessee's covenants herein contained.
(21) To pay the Stamp Duty payable in respect of this Lease and the
Counterpart thereof and all other charges and taxes for which the
Lessee is legally liable including those arising under the
provisions of the Value Added Tax Act 1972 and all acts amending or
extending the same.
(22) To complete and sign a Bankers Standing Order forthwith on the
signing of this Lease.
3. In the event that the Lessor shall have installed or at any time install
or cause to installed an Effluent Treatment Plan (or additional or
alternative plant) (hereinafter called "the Plant") or provide an Effluent
Treatment Service (hereinafter called "the Treatment Service") for the
treatment of effluent being discharged from the demised premises or from
the demised premises in common with other premises, for the avoidance of
doubt, it is hereby acknowledged by the parties that the Plan and
Treatment Service are for the treatment of domestic sewage/effluent only
and are not for the treatment of trade effluent.
4. The Lessor covenants with the Lessee that the Lessee paying the rents
hereinbefore reserved and performing and observing the several covenants
conditions and agreements herein contained and on its part to be performed
and observed may peaceably hold and enjoy the demised premises during the
term hereby granted without any interruption or disturbance from the
Lessor or any person or persons lawfully claiming under or in trust for
the Lessor PROVIDED ALWAYS and it is hereby agreed and declared that if
the rents hereinbefore reserved or any part thereof shall at any time be
in arrear and unpaid for twenty one days after the same shall become due
(whether legally demanded or not) or if the Lessee shall at any time fail
or neglect to perform or observe any of the covenants or agreements herein
contained and on the Lessee's part to be performed and observed or if the
Lessee for the time being shall become bankrupt or being a company shall
enter into liquidation whether compulsory or voluntary (other than for the
purpose of reconstruction or amalgamation) or if the Lessee for the time
being shall enter into any agreement or composition for the benefit of the
Lessee's creditors or if a Receiver shall be appointed over any or all of
the assets of the company or if an Examiner of the Affairs of the Company
shall be appointed or if the Lessee shall fail or cease to carry on the
business of the manufacture of telecommunications equipment and components
and light electronic assemblies or any other manufacturing business for
which the prior written consent of the Lessor has been obtained in the
demised premises or other such business
-8-
of the Lessor may have approved then and in any such case it shall be
lawful for the Lessor or any person or persons duly authorised by the
Lessor in that behalf to re-enter into and upon the demised premises or
any part thereof in the name of the whole and thereupon this demise shall
absolutely determine but without prejudice to any right of action or
remedy of the Lessor in respect of any antecedent breach by the Lessee of
any of the covenants or agreements herein contained.
5. If at such time as the Lessee has vacated the demised premises after the
determination of the term hereby granted either by effluxion of time or
otherwise any property of the Lessee remaining in or on the demised
premises and which the Lessee shall have failed to remove the same within
seven days after being requested in writing by the Lessor so to do then
and in such case the Lessor (without being obliged so to do and in any
event without prejudice to such other rights as the Lessor may have in
that behalf) may as agent of the Lessee (and the Lessor is hereby
appointed by the Lessee to act as such agent and in its capacity as such
agent to act as the Lessor in its absolute discretion shall think fit)
sell such property and shall then hold the proceeds of sales after
deducting the costs and expenses of removal storage (including loss of or
reduction in rent received by the Lessor on account of such property
remaining by way of storage pending sale in the demised premises) and sale
reasonably and properly incurred or suffered by it to the order of the
Lessee PROVIDED however that if any monies payable by the Lessee to the
Lessor under this Agreement shall be unpaid the Lessor may apply such
proceeds of sale (after deducting any costs of storage and/or sale
reasonably incurred by the Lessor) in or towards the discharge or partial
discharge (as the case may be) of such monies PROVIDED FURTHER THAT the
Lessee shall indemnify the Lessor against any liability incurred by the
Lessor to any third party whose property shall have been sold by the
Lessor in the bona fide mistaken belief (which shall be presumed unless
the contrary is proved) that such property belonged to the Lessee and was
liable to be dealt with as such pursuant to this clause.
6. The Lessee shall have the option of surrendering this Lease on the
30/10/2006, 30/10/2011 or on the 30/10/2016 on giving the Lessor at least
six months notice in writing of its intention to vacate the demised
premises. In the event of the Lessee serving such a notice the Lessor
shall accept vacant possession of the demised premises from the Lessee on
the date therein specified whereupon this Lease shall be at an end but
without prejudice to the right of the Lessor to proceed on foot of any
antecedent breach of covenant.
7. Any notice under this Lease shall be in writing and may be served on the
person on whom it is to be served either personally or by leaving it for
him at the demised premises or (if the Lessee be a Limited Company) by
leaving it at its registered office or in either case by ordinary prepaid
post and in the case of notice to be served on the Lessor it may be served
in like manner at the Lessor's Head Office at Na Forbacha in the County of
Galway.
8. The Lessor hereby consents to the registration of this Lease as a burden
on the property comprised in Folio 40947 of the Register County Donegal
and to the use of the Land Certificate of such folio for such
registration.
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9. It is hereby certified for the purpose of the stamping of this instrument
that this is an instrument to which the provisions of Section 112 of the
Finance Act 1990 do not apply by reason of the fact that there is an
existing building on the land.
FIRST SCHEDULE
ALL THAT AND THOSE the Lessor's Industrial Estate situate at Gweedore in the
County of Donegal which said Industrial Estate is more particularly delineated
on the map attached hereto, and surrounded by a green verge line.
SECOND SCHEDULE
1. The revised rent referred to in the within Lease in respect of any of the
periods therein mentioned may be agreed at any time between the Lessor and
the Lessee or (in the absence of agreement) be determined not earlier than
the date of commencement of such period (the "review date") by an
independent valuer (being a member of the Irish Auctioneers and Valuer's
Institute or of the Society of Chartered Surveyors in the Republic of
Ireland or of such body of professional Valuers or Surveyors as shall for
the time being have undertaken in Ireland the functions in the activity of
property valuation currently performed by said Institute or Society) such
independent valuer to be nominated (in the absence of agreement between
the parties) upon the application (made not more than two calendar months
before or at any time after the review date) of the Lessor (or, if the
Lessor fails to make such application, within twenty-eight days of being
requested in writing so to do by the Lessee then on the application of the
Lessee) by either the President of the Incorporated Law Society of Ireland
or the President of the Irish Auctioneers and Valuers Institute or the
Chairman of the Society of Chartered Surveyors in the Republic of Ireland
at the discretion of the party entitled to make the application
AND
the revised rent so to be determined by the independent valuer shall be
such as in his opinion represents at the review date the full open market
yearly rent for the demised premises let as a whole without fine or
premium:
(1) ON THE BASIS of a letting with vacant possession thereof by a
willing Lessor to a willing Lessee for a term (commencing on the
review date) equal to the greater of fifteen years or the residue
then unexpired of the term granted by the within-written lease and
subject to the provisions therein set forth (other than as to the
amount of the initial rent thereby reserved but including such of
said provisions as pertain to the review of rent).
(2) ON THE ASSUMPTIONS that:
a) at and until the review date all the covenants on the part of
the Lessee and the conditions contained in the within lease
have been fully performed and observed
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b) in the event of the demised premises having been damaged or
destroyed and not having been fully repaired reinstated or
rebuilt (as the case may be) such damage or destruction had
not occurred
AND
(3) HAVING REGARD to other open market rental values current at the
review date insofar as the independent valuer may deem same to be
pertinent to the determination
(4) BUT DISREGARDING any effect on letting value of:
a) the fact that the Lessee is or has been in occupation of the
demised premises or any part thereof
b) the goodwill which shall have attached to the demised premises
by reason of the business carried on thereat
c) any works executed by and at the expense of the Lessee in, on,
to or in respect of the demised premises other than required
works PROVIDED that in the interpretation of this
sub-paragraph (c):
the expression "the Lessee" shall extend to include the Lessee
or any predecessor in title of the Lessee or any party
lawfully occupying the demised premises or any part thereof
under the Lessee
AND
the expression "required works" shall mean works executed by
the Lessee in pursuance of an obligation imposed on the Lessee
(i) by the within lease or by any lease of which the within is
renewal OR (ii) by an agreement for the granting of the within
lease or of any lease of which the within is a renewal or by
virtue of any licence or deed of variation relating to the
demised premises.
(5) AND PROVIDED FURTHER that in no circumstances shall the rent payable
hereunder following such review be less than the rent payable by the
Lessee immediately prior to the review date.
2. In the event of the President or Chairman or other office endowed with the
functions of the President or Chairman of such Society or Institute as
shall be relevant for the purposes of paragraph 1 of this Schedule being
unable or unwilling to make the nomination therein mentioned the same may
be made by the next senior officer of that Society or Institute who shall
be so able and willing.
3. An independent valuer in relation to any matter so to be determined by him
shall:
(1) give notice of his nomination to the Lessor and the Lessee;
-11-
(2) be entitled to enter the demised premises as often as he may
reasonably require for the purpose of inspection and examination;
(3) afford to each of the parties concerned a reasonable opportunity of
stating (whether in writing or otherwise as may be decided by him
and within such time as he may stipulate in that behalf) reasons in
support of such contentions as each party may wish to make relative
to the matter or matters under consideration;
(4) act as an expert and not as an arbitrator and so that his
determination or determinations shall be final and conclusive
between the parties;
(5) be entitled to seek and pay for advice on any matter which he
reasonably considers pertinent to the reference or to his
determination thereof;
(6) be empowered to fix his reasonable fees in relation to any such
reference and determination and matters incidental thereto which
said fees and any reasonable expenses incurred by the independent
valuer in or about the said reference and determination shall be
shared equally between the Lessor and the Lessee;
(7) give notice in writing on his determination to the Lessor and the
Lessee within such time as may be stipulated by the terms of his
appointment or in the event of there being no such stipulation
within six calendar months of the acceptance by him of the
nomination to act in the matter PROVIDED ALWAYS that the independent
valuer may defer the giving of such notice until such time as his
fees and expenses as aforesaid shall have been discharged.
4. Either party shall be at liberty to pay the entire of the fees and
expenses as aforesaid of the independent valuer in which event the party
so paying shall be entitled to be reimbursed by and to recover from the
other on demand any proportion so paid on behalf of such other.
5. If an independent valuer in relation to any matter for determination by
him shall fail to conclude such determination and give notice thereof
within such time as may be relevant or if he shall relinquish his
appointment or die or if it shall become apparent that for any reason he
shall be unable or shall have become unfit or unsuited (whether because of
bias or otherwise) to complete the duties of his nomination a substitute
may be nominated in his place and in relation to any such nomination the
procedures hereinbefore set forth shall be deemed to apply as though the
substitution were a nomination de novo which said procedures may be
repeated as many times as may be necessary.
6. If the revised rent in respect of any period ("the current period") shall
have been ascertained on or before the review date referable thereto rent
shall continue to be payable up to the gale day next succeeding the
ascertainment of the revised rent at the rate payable during the preceding
period AND on such gale day the Lessee shall pay to the Lessor the
appropriate installment of the revised rent together with any shortfall
between (i) the aggregate of rents (including such instalment if payable
in arrear) actually paid for any part of the current period and (ii) rent
at the rate of the revised rent attributable to the interval between the
review date and such gale day and together also
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with interest on said shortfall such interest to be computed on a day to
day basis and to be assessed at such a rate as shall be equivalent to the
yield (at issue and before deduction of tax if any) on the security of the
Government last issued before the commencement of the current period
(allowance having been made in the calculation of the said yield for any
profit or loss which may occur on the redemption of the security). For the
purposes of this paragraph the revised rent shall be deemed to have been
ascertained on the date when the same shall have been agreed between the
parties or as the case may be on the date of the notification to the
Lessee of the determination of the independent valuer.
7. If there should be in force at the commencement or during the currency of
any particular relevant period any Statute or Order (directly or
indirectly) prohibiting or restricting an increase of rent in respect of
the demised premises the provision of this schedule and of the within
lease may nevertheless be invoked or reinvoked to determine the rent which
would but for the said prohibition or restriction be payable during such
relevant period but (if appropriate) the further implementation thereof
shall be suspended in effect for such period as may be required by law.
8. When and so often as the revised rent shall have been ascertained pursuant
to the provisions herein set forth memoranda recording the same shall
thereupon be signed by or on behalf of the Lessor and the Lessee and shall
be annexed to the within lease and its counterpart and the parties shall
bear their own costs in relation to the preparation and completion of such
memoranda.
-13-
IN WITNESS whereof the parties hereto have caused their respective seals to be
affixed hereto the day and year first herein written.
[SEAL APPEARS HERE.]
PRESENT when the seal of
UDARAS NA GAELTACHTA
was affixed hereto:
/s/ signature appears here CATHAOIRLEACH
---------------------------------------------
/s/ signature appears here RUNAI
---------------------------------------------
PRESENT when the seal of
QUALTRON TEORANTA
was affixed hereto:
/s/ Patrick Dunne DIRECTOR
---------------------------
/s/ Cillian Feiritear DIRECTOR/SECRETARY
---------------------------
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[SITE MAP APPEARS HERE.]
-15-
[FLOOR PLAN APPEARS HERE.]
[LEGEND APPEARS HERE.]
-16-
Dated the day of 2000
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UDARAS NA GAELTACHTA
First part
QUALTRON TEORANTA
Second part
L E A S E
Udaras na Gaeltachta,
Na Forbacha,
Gaillimh
Tag: DB/2704
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Exhibit 10.2
FIRST AMENDMENT TO REAL ESTATE SALE AGREEMENT
This First Amendment to Real Estate Sale Agreement ("First Amendment") is
made and entered into effective as of the 31st day of July, 2001, by and between
Flextronics International USA, Inc., a California corporation ("Seller"), and
SMTC Manufacturing Corporation of Texas, a Texas corporation ("Purchaser"), in
light of the following recitals, to wit:
R E C I T A L S:
Seller and Purchaser heretofore entered into that certain Real Estate Sale
Agreement (the "Contract") dated February 23, 2001, providing for sale by Seller
and purchase by Purchaser of the land (together with all improvements situated
thereon) described as follows:
Lots 1, 2 and 3, of ROLM BUSINESS PARK, a subdivision of Travis
County, Texas, according to the map or plat recorded in Volume 89,
Pages 263-265, of the Plat Records of Travis County, Texas.
Seller and Purchaser now desire to amend the Contract in certain respects.
All defined terms used in this First Amendment shall have the same meaning
ascribed in the Contract unless otherwise set forth herein.
NOW, THEREFORE, for and in consideration of the premises and of the mutual
agreements set forth herein, Seller and Purchaser hereby agree as follows:
1. Closing Date. The Closing Date of the transaction contemplated by the
Contract (as defined in Section 4.1 of the Contract) is hereby extended to a
date not later than August 31, 2001. The closing of the sale and purchase of the
Project as provided in the Contract shall be consummated at a Closing to be held
at the office of the Title Company on August 31, 2001, or on such earlier date
specified by Purchaser to Seller in writing on not less than five (5) business
days advance notice to Seller.
2. Earnest Money. By execution of this First Amendment, Seller
acknowledges that Title Company holds Five Hundred Thousand and No/100's Dollars
($500,000.00) as Earnest Money.
Seller and Purchaser ratify and confirm the Contract as amended by this
First Amendment.
Executed on the dates indicated below to be effective as of the date first
written above.
Flextronics International USA, Inc.,
a California corporation
By: /s/Mike Carney
----------------------------------
Name: Mike Carney
Title: General Manager
Date: 7/31/01
SMTC Manufacturing Corporation of Texas,
a Texas corporation
By: /s/Richard N. Winter
----------------------------------
Richard N. Winter
Director of Finance
Date: 7/31/01
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Exhibit 10.3
FIRST AMENDMENT TO LEASE
This First Amendment to Lease ("First Amendment") is made and entered into
effective as of the 31st day of July, 2001, by and between Flextronics
International USA, Inc., a California corporation ("Landlord"), and SMTC
Manufacturing Corporation of Texas, a Texas corporation ("Tenant"), in light of
the following recitals, to wit:
R E C I T A L S:
Landlord and Tenant heretofore entered into that certain Lease dated
February 23, 2001, covering premises hereinafter described (including the
improvements situated thereon);
Lots 1, 2 and 3, of ROLM BUSINESS PARK, a subdivision of Travis
County, Texas, according to the map or plat recorded in Volume 89,
Pages 263-265, of the Plat Records of Travis County, Texas.
Landlord and Tenant now desire to amend the Lease in certain respects. All
defined terms used in this First Amendment shall have the same meaning ascribed
in the Lease unless otherwise set forth herein.
NOW, THEREFORE, for and in consideration of the premises and of the mutual
agreements set forth herein, Landlord and Tenant hereby agree as follows:
1. The Termination Date (as defined in the Lease) is hereby extended to
August 31, 2001.
2. During the period from August 1, 2001, through the Termination Date, as
extended, Tenant shall pay rent to Landlord in an amount equal to $130,000.00
per month during the extension period, which shall be prorated on a daily basis
in the event that the Termination Date does not occur on the last day of the
month.
Landlord and Tenant ratify and confirm the Lease as amended by this First
Amendment.
Executed on the dates indicated below to be effective as of the date first
written above.
Flextronics International USA, Inc.,
a California corporation
By: /s/Mike Carney
----------------------------------
Name: Mike Carney
Title: General Manager
Date: 7/31/01
SMTC Manufacturing Corporation of Texas,
a Texas corporation
By: /s/Richard N. Winter
----------------------------------
Richard N. Winter
Director of Finance
Date: 7/31/01
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