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 March 31, 2002
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
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(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
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(Address of Principal Executive Offices) (Zip Code)
(905) 479-1810
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(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 March 31, 2002, SMTC Corporation had 23,190,370 shares of common stock,
par value $0.01 per share, and one share of special voting stock, par value
$0.01 per share, outstanding. As of March 31, 2002, SMTC Corporation's
subsidiary, SMTC Manufacturing Corporation of Canada, had 5,499,409 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 December 31, 2001
and March 31, 2002 (unaudited) 3
Consolidated Statements of Operations for the three months ended
March 31, 2002 and April 1, 2001 (unaudited) 4
Consolidated Statement of Changes in Shareholders' Equity for the
three months ended March 31, 2002 (unaudited) 5
Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and April 1, 2001 (unaudited) 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 34
PART II Other Information
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 35
Signatures 36
-2-
SMTC CORPORATION
Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars)
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2002 2001
- -------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash and short-term investments $ 1,746 $ 12,103
Accounts receivable 77,343 81,374
Inventories (note 2) 90,805 80,900
Prepaid expenses 4,684 4,782
Income taxes recoverable - 997
Deferred income taxes 632 632
- -------------------------------------------------------------------------------------------------------------------
175,210 180,788
Capital assets 57,278 60,416
Goodwill 55,560 55,560
Other assets 11,364 11,538
Deferred income taxes 33,762 33,118
- -------------------------------------------------------------------------------------------------------------------
$ 333,174 $ 341,420
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 61,751 $ 56,487
Accrued liabilities 45,832 36,276
Current portion of long-term debt (note 3) 13,750 12,500
Current portion of capital lease obligations 214 198
- -------------------------------------------------------------------------------------------------------------------
121,547 105,461
Long-term debt (note 3) 98,702 110,297
Capital lease obligations 338 406
Deferred income taxes 595 595
Shareholders' equity:
Capital stock 68,496 68,496
Loans receivable (13) (13)
Additional paid-in-capital 161,172 161,666
Warrants 494 -
Deficit (118,157) (105,488)
- -------------------------------------------------------------------------------------------------------------------
111,992 124,661
- -------------------------------------------------------------------------------------------------------------------
$ 333,174 $ 341,420
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
-3-
SMTC CORPORATION
Consolidated Statements of Operations
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
Three months ended
--------------------------------
March 31, April 1,
2002 2001
- -----------------------------------------------------------------------------------------------------------------------
(restated)
Revenue $ 138,909 $ 197,812
Cost of sales (including restructuring
charges) (note 7) 132,161 195,652
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 6,748 2,160
Selling, general and
administrative expenses 7,090 9,425
Amortization 455 2,352
Restructuring charges (note 7) - 15,559
- -----------------------------------------------------------------------------------------------------------------------
Operating loss (797) (25,176)
Interest 2,315 2,892
- -----------------------------------------------------------------------------------------------------------------------
Loss before income taxes and discontinued operations (3,112) (28,068)
Income tax recovery (640) (9,267)
- -----------------------------------------------------------------------------------------------------------------------
Loss before discontinued operations (2,472) (18,801)
Loss from discontinued operations (note 8) (10,197) (1,211)
- -----------------------------------------------------------------------------------------------------------------------
Net loss $ (12,669) $ (20,012)
- -----------------------------------------------------------------------------------------------------------------------
Loss per share:
Basic loss per share before
discontinued operations $ (0.09) $ (0.67)
Loss from discontinued operations per share (0.35) (0.04)
- -----------------------------------------------------------------------------------------------------------------------
Basic loss per share $ (0.44) $ (0.71)
- -----------------------------------------------------------------------------------------------------------------------
Diluted loss per share $ (0.44) $ (0.71)
- -----------------------------------------------------------------------------------------------------------------------
Weighted average number of common
shares used in the calculations
of loss per share:
Basic 28,689,779 28,362,053
Diluted 28,689,779 28,362,053
- -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
-4-
SMTC CORPORATION
Consolidated Statement of Changes in Shareholders' Equity
(Expressed in thousands of U.S. dollars)
Three months ended March 31, 2002
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
Additional
Capital paid-in Loans Shareholders'
stock Warrants capital receivable Deficit equity
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 68,496 $ - $ 161,666 $ (13) $(105,488) $ 124,661
Warrants issued - 494 (494) - - -
Net loss for the period - - - - (12,669) (12,669)
- -----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 $ 68,496 $ 494 $ 161,172 $ (13) $(118,157) $ 111,992
- -----------------------------------------------------------------------------------------------------------------------
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
----------------------------
March 31, April 1,
2002 2001
- --------------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net loss $ (12,669) $ (20,012)
Items not involving cash:
Amortization 455 2,352
Depreciation 3,053 2,896
Deferred income tax benefit (644) (9,579)
Impairment of assets 1,129 5,023
Change in non-cash operating working capital:
Accounts receivable 4,031 20,078
Inventories (9,905) 33,730
Prepaid expenses 98 (1,196)
Accounts payable, accrued liabilities and
income taxes recoverable 15,817 (44,565)
---------------------------------------------------------------------------
1,365 (11,273)
Financing:
Increase in long-term debt - 18,482
Decrease in long-term debt (10,345) -
Principal payments on capital leases (52) (204)
Proceeds from issuance of common stock - 313
Repayment of loans receivable - 14
Debt issuance costs (281) -
---------------------------------------------------------------------------
(10,678) 18,605
Investments:
Purchase of capital assets (1,044) (8,330)
---------------------------------------------------------------------------
(1,044) (8,330)
- --------------------------------------------------------------------------------
Decrease in cash and cash equivalents (10,357) (998)
Cash and cash equivalents, beginning of period 12,103 2,698
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,746 $ 1,700
- --------------------------------------------------------------------------------
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
---------------------------
March 31, April 1,
2002 2001
- --------------------------------------------------------------------------------
Supplemental disclosures:
Cash paid during the period:
Income taxes $ 601 $ 3,601
Interest 2,166 2,826
- --------------------------------------------------------------------------------
Cash and cash equivalents is defined as cash and short-term investments.
See accompanying notes to consolidated financial statements.
-7-
SMTC CORPORATION
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three months ended March 31, 2002 and April 1, 2001
(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 March 31,
2002, the unaudited consolidated statements of operations for the three
month periods ended March 31, 2002 and April 1, 2001, the unaudited
consolidated statement of changes in shareholders' equity for the three
month period ended March 31, 2002, and the unaudited consolidated
statements of cash flows for the three month periods ended March 31, 2002
and April 1, 2001 have been prepared on substantially the same basis as
the annual consolidated financial statements, except as described below.
Management believes the consolidated 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 month period
ended March 31, 2002 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, 2001.
The unaudited interim consolidated financial statements are based upon
accounting principles consistent with those described in the December 31,
2001 audited financial statements except as follows:
In July 2001, the FASB issued Statement No. 141, "Business Combinations"
("Statement 141"), and Statement No. 142, "Goodwill and Other Intangible
Assets" ("Statement 142"). Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated
after June 30, 2001, as well as all purchase method business combinations
completed after June 30, 2001. Statement 141 also specifies criteria
intangible assets acquired in a purchase method business combination must
meet to be recognized and reported apart from goodwill. Statement 142
requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement
142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with Statement
121. Upon adoption of Statements 141 and 142 in their entirety on January
1, 2002, the Company determined that there are no intangible assets
relating to previous acquisitions that need to be reclassified and
accounted for apart from goodwill under the provisions of those
Statements.
-8-
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three months ended March 31, 2002 and April 1, 2001
(Unaudited)
- --------------------------------------------------------------------------------
1. Basis of presentation (continued):
In connection with the transitional goodwill impairment evaluation,
Statement 142 requires the Company to perform an assessment of whether
there is an indication that goodwill is impaired as of January 1, 2002.
To accomplish this, the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill to those
reporting units as of January 1, 2002. The Company has until June 30,
2002 to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the
reporting unit's goodwill may be impaired and the Company must perform
the second step of the transitional impairment test. In the second step,
the Company must compare the implied fair value of the reporting unit's
goodwill, determined by allocating the reporting unit's fair value to all
of its assets (recognized and unrecognized) and liabilities in a manner
similar to a purchase price allocation in accordance with Statement 141,
to its carrying amount, both of which would be measured as of January 1,
2002. This second step is required to be completed as soon as possible,
but no later than December 31, 2002. Any transitional impairment loss
will be recognized as the cumulative effect of a change in accounting
principle in the Company's statements of operations.
Because of the extensive effort needed to comply with adopting Statement
142, the Company has not estimated the impact of this Statement on its
financial statements, beyond discontinuing goodwill amortization and
assessing the classification of intangibles. The change to a methodology
that assesses fair value by reporting unit could result in an impairment
charge.
Effective January 1, 2002, the Company had unamortized goodwill of
$55,560, which is no longer being amortized. This change in accounting
policy is not applied retroactively and the amounts presented for prior
periods have not been restated for this change. The impact of this change
is as follows:
-----------------------------------------------------------------------------------------
Three months ended
------------------
March 31, April 1,
2002 2001
-----------------------------------------------------------------------------------------
Net loss $ (12,669) $ (20,012)
Add back goodwill amortization, net of tax - 1,692
-----------------------------------------------------------------------------------------
Net loss before goodwill amortization (12,669) (18,320)
-----------------------------------------------------------------------------------------
Basic and diluted loss per share:
Net loss $ (0.44) $ (0.71)
Net loss before goodwill amortization $ (0.44) $ (0.65)
-----------------------------------------------------------------------------------------
-9-
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three months ended March 31, 2002 and April 1, 2001
(Unaudited)
- --------------------------------------------------------------------------------
1. Basis of presentation (continued):
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("Statement 144"), which
supersedes both Statement 121 and the accounting and reporting provisions
of APB Opinion No. 30, "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" ("Opinion
30"), for the disposal of a segment of a business (as previously defined
in that Opinion). Statement 144 retains the fundamental provisions in
Statement 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be disposed of by
sale. Statement 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment
of a business). The Company adopted Statement 144 for the quarter ending
March 31, 2002 and presented the closure of its Cork facility and the
related charges as discontinued operations.
In August 2001, the FASB issued Statement No. 143 "Accounting for Asset
Retirement Obligations" which requires that the fair value of an asset
retirement obligation be recorded as a liability, at fair value, in the
period in which the Company incurs the obligation. The Statement is
effective for fiscal 2003 and the Company expects no material effect as a
result of this Statement.
2. Inventories:
-------------------------------------------------------------------------
March 31, December 31,
2002 2001
-------------------------------------------------------------------------
Raw materials $ 48,129 $ 38,289
Work in process 27,561 24,984
Finished goods 13,805 16,230
Other 1,310 1,397
-------------------------------------------------------------------------
$ 90,805 $ 80,900
-------------------------------------------------------------------------
-10-
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three months ended March 31, 2002 and April 1, 2001
(Unaudited)
- --------------------------------------------------------------------------------
3. Long-term debt:
The Company has incurred recent operating losses, which resulted in
its non-compliance with certain financial covenants contained in its
current credit agreement as at September 30, 2001. On November 19,
2001, the Company and its lending group signed a definitive term
sheet for an agreement under which certain terms of the current
credit facility would be revised and the non-compliance as at
September 30, 2001 would be waived. The final amended agreement was
signed on February 11, 2002 and is consistent with the terms and
conditions in the term sheet. The revised terms establish amended
financial and other covenants covering the period up to December 31,
2002, based on the Company's current business plan. During this time
period, the facility bears interest at the U.S. base rate plus 2.5%.
The Company was in compliance with the amended financial covenants at
March 31, 2002. Continued compliance with the amended financial
covenants through December 31, 2002 is dependent on the Company
achieving the forecasts inherent in its current business plan. The
Company believes the forecasts are based on reasonable assumptions
and are achievable however, the forecasts are dependent on a number
of factors some of which are outside the control of the Company.
These include, but are not limited to, general economic conditions
and specifically the strength of the electronics industry and the
related demand for the products and services by the Company's
customers. In the event of non-compliance, the Company's lenders have
the ability to demand repayment of the outstanding amounts under the
amended credit facility.
Prior to taking steps to place the subsidiary that operates the Cork
facility in voluntary liquidation (note 8), the Company and its
lending group executed an amendment to the credit facility to waive
the default that would have been caused by this action and amend the
agreement to permit such facility closure.
The Company's activity levels have exceeded the plan that served as
the basis for the Company's amended financial covenants. The Company
and its lending group agreed in April 2002 to further amend the
credit agreement to increase the Company's permitted loan balances to
correspond to its higher working capital needs.
-11-
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three months ended March 31, 2002 and April 1, 2001
(Unaudited)
- --------------------------------------------------------------------------------
4. Loss per share:
The following table sets forth the calculation of basic and diluted loss
per common share:
------------------------------------------------------------------------------------------------------
Three months ended
-----------------------------
March 31, April 1,
2002 2001
------------------------------------------------------------------------------------------------------
Numerator:
------------------------------------------------------------------------------------------------------
Net loss before discontinued operations $ (2,472) $ (18,801)
Net loss (12,669) (20,012)
------------------------------------------------------------------------------------------------------
Denominator:
Weighted-average shares -
basic 28,689,779 28,362,053
Effect of dilutive securities:
Employee stock options - -
Warrants - -
------------------------------------------------------------------------------------------------------
Weighted-average shares -
diluted 28,689,779 28,362,053
------------------------------------------------------------------------------------------------------
Loss per share:
Basic and diluted, before discontinued operations $ (0.09) $ (0.67)
Basic and diluted $ (0.44) $ (0.71)
------------------------------------------------------------------------------------------------------
Options and warrants to purchase common stock were outstanding during the
three month periods ended March 31, 2002 and April 1, 2001 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 periods.
-12-
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three months ended March 31, 2002 and April 1, 2001
(Unaudited)
- --------------------------------------------------------------------------------
5. Income taxes:
The Company's effective tax rate differs from the statutory rate
primarily due to 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 eight facilities in the United States,
Canada, Europe and Mexico. The Company monitors the performance of its
geographic operating segments based on EBITA (earnings before interest,
taxes and amortization) before restructuring charges and discontinued
operations. Discontinued operations in the first quarter of 2002 relates
to the Cork, Ireland facility (note 8), which was previously included in
the results of the European segment. 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 March 31, 2002 Three months ended April 1, 2001
------------------------------------------- -----------------------------------------
Net Net
Total Intersegment external Total Intersegment external
revenue revenue revenue revenue revenue revenue
-----------------------------------------------------------------------------------------------------------
United States $ 123,312 $ (5,399) $ 117,913 $ 158,475 $ (7,416) $ 151,059
Canada 19,059 (2,054) 17,005 26,941 (887) 26,054
Europe 1,381 (235) 1,146 4,694 - 4,694
Mexico 52,310 (49,465) 2,845 24,469 (8,464) 16,005
-----------------------------------------------------------------------------------------------------------
$ 196,062 $ (57,153) $ 138,909 $ 214,579 $ (16,767) $ 197,812
-----------------------------------------------------------------------------------------------------------
EBITA (before discontinued operations and restructuring charges):
United States $ (1,565) $ 1,432
Canada (472) 580
Europe (207) 815
Mexico 1,902 (3,192)
-----------------------------------------------------------------------------------------------------------
(342) (365)
Interest 2,315 2,892
Amortization 455 2,352
-----------------------------------------------------------------------------------------------------------
Earnings before income taxes, restructuring
charges and discontinued operations $ (3,112) $ (5,609)
Capital expenditures:
United States $ 721 $ 4,629
Canada 74 756
Europe 24 23
Mexico 225 2,922
-----------------------------------------------------------------------------------------------------------
$ 1,044 $ 8,330
-----------------------------------------------------------------------------------------------------------
-13-
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three months ended March 31, 2002 and April 1, 2001
(Unaudited)
- --------------------------------------------------------------------------------
6. Segmented information (continued):
The following enterprise-wide information is provided. Geographic revenue
information reflects the destination of the product shipped. Long-lived
assets information is based on the principal location of the asset.
-----------------------------------------------------------------------
Three months ended
---------------------
March 31, April 1,
2002 2001
-----------------------------------------------------------------------
Geographic revenue:
United States $ 113,811 $ 172,115
Canada 9,312 14,046
Europe 8,307 8,957
Asia 5,341 2,668
Mexico 2,138 26
-----------------------------------------------------------------------
$ 138,909 $ 197,812
-----------------------------------------------------------------------
-----------------------------------------------------------------------
March 31, December 31,
2002 2001
-----------------------------------------------------------------------
Long-lived assets:
United States $ 72,213 $ 73,269
Canada 21,201 21,832
Europe 721 1,998
Mexico 18,703 18,877
-----------------------------------------------------------------------
$ 112,838 $ 115,976
-----------------------------------------------------------------------
-14-
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three months ended March 31, 2002 and April 1, 2001
(Unaudited)
- --------------------------------------------------------------------------------
7. Restructuring charges:
During fiscal year 2001, in response to excess capacity caused by the
slowing technology end market, the Company commenced a restructuring
program aimed at reducing its cost structure. Accordingly, the Company
recorded restructuring charges of $22,459 during the first quarter of
2001 consisting of the costs associated with existing or re-sizing
facilities.
The following table details the components of the restructuring charge
recorded in the first quarter of 2001:
-----------------------------------------------------------------
Three months ended
April 1,
2001
-----------------------------------------------------------------
Inventory write-downs included in
cost of sales $ 6,900
Lease and other contract obligations 5,178
Severance 2,331
Asset impairment 5,023
Other facility exit costs 3,027
-----------------------------------------------------------------
15,559
-----------------------------------------------------------------
$ 22,459
-----------------------------------------------------------------
The following table details the related amounts included in accrued
liabilities as at March 31, 2002:
-------------------------------------------------------------------------
Accrual at Accrual at
December 31, Cash March 31,
2001 payments 2002
-------------------------------------------------------------------------
Lease and other contract obligations $ 6,164 (1,459) $ 4,705
Severance 625 (494) 131
Other facility exit costs 773 (118) 655
-------------------------------------------------------------------------
$ 7,562 (2,071) $ 5,491
-------------------------------------------------------------------------
-15-
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three months ended March 31, 2002 and April 1, 2001
(Unaudited)
- --------------------------------------------------------------------------------
8. Discontinued Operations:
In February, 2002 the main customer of the Cork, Ireland facility was
placed into administration as part of a financial restructuring. As a
result, on March 19, 2002, the Company announced that it was closing the
Cork, Ireland facility and that it was taking steps to place the
subsidiary that operates that facility in voluntary administration.
During the first quarter of 2002, the Company recorded a charge of $9,717
related to the closure of the facility. The Company placed the subsidiary
in voluntary administration by the end of the first quarter.
The following amounts are included in the loss from discontinued
operations:
--------------------------------------------------------------------------------------------
Three months ended
-----------------------------------
March 31, April 1,
2002 2001
--------------------------------------------------------------------------------------------
Revenue $ 5,035 $ 3,103
--------------------------------------------------------------------------------------------
Loss from discontinued operations:
Operating loss before restructuring charges $ 480 $ 1,016
Restructuring charges - 195
Cost of closing the facility 9,717 -
--------------------------------------------------------------------------------------------
Loss from discontinued operations $ 10,197 $ 1,211
--------------------------------------------------------------------------------------------
Included in the cost of closing the facility of $9,717 are the write-off
of the net assets of $6,717 (comprised of capital assets of $1,129 and
net working capital of $5,588) and other costs associated with exiting
the facility of $3,000. Included in the other costs is severance of
$1,350 related to the termination of all employees. The severance amount
was unpaid at the end of the first quarter.
9. Comparative figures:
Certain 2001 comparative figures have been restated to separately
disclose the results of discontinued operations of the Cork, Ireland
facility.
-16-
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated financial statements and our selected consolidated financial
data have been prepared in accordance with United States GAAP.
Consolidated Statement of Operations Data:
(in millions, except per share amounts)
------------------------------------------
Three months ended
--------------------- --------------------
March 31, 2002 April 1, 2001
--------------------- --------------------
Revenue $ 138.9 $ 197.8
Cost of sales (including restructuring charges of
Snil for the three months ended March 31, 2002
and $6.9 million for the three months ended
April 1, 2001)(a) 132.2 195.6
--------------------- --------------------
Gross profit 6.7 2.2
Selling, general and administrative expenses 7.1 9.5
Amortization 0.4 2.3
Restructuring charges (a) - 15.6
--------------------- --------------------
Operating loss (0.8) (25.2)
Interest 2.3 2.9
--------------------- --------------------
Loss before income taxes and discontinued (3.1) (28.1)
operations
Income tax recovery (0.6) (9.3)
--------------------- --------------------
Loss before discontinued operations (2.5) (18.8)
Loss from discontinued operations (b) (10.2) (1.2)
--------------------- --------------------
Net loss $ (12.7) $ (20.0)
===================== ====================
Net loss per common share:
Basic before discontinued operations $ (0.09) $ (0.67)
Loss from discontinued operations (0.35) (0.04)
--------------------- --------------------
Basic $ (0.44) $ (0.71)
Diluted $ (0.44) $ (0.71)
===================== ====================
Weighted average number of shares outstanding:
Basic
Diluted 28.7 28.4
28.7 28.4
===================== ====================
(a) During fiscal year 2001, in response to excess capacity caused by the
slowing technology end market, the Company commenced a restructuring
program aimed at reducing its cost structure. Accordingly, the Company
recorded restructuring charges of $22.5 million for the three months
ended April 1, 2001, consisting of the costs associated with exiting or
re-sizing facilities. Refer to note 7 to our consolidated financial
statements.
(b) In February, 2002 the main customer of the Cork, Ireland facility was
placed into administration as part of a financial restructuring. As a
result, on March 19, 2002, the Company announced that it was closing the
Cork, Ireland facility and that it was taking steps to place the
subsidiary that operates that facility in voluntary administration. Refer
to note 8 to our consolidated financial statements.
-17-
Consolidated Adjusted Net Earnings (Loss):
(in millions, except per share amounts)
---------------------------------------
Three months ended
---------------------------------------
March 31, 2002 April 1, 2001
------------------- -------------------
Net loss $ (12.7) $ (20.0)
Adjustments:
Discontinued operations 10.2 1.2
Amortization of goodwill - 2.1
Restructuring and other charges - 22.5
Income tax effect - (7.7)
------------------- -------------------
Adjusted net loss $ (2.5) $ (1.9)
=================== ===================
Adjusted net loss per common share:
Basic
Diluted $ (0.09) $ (0.07)
$ (0.09) $ (0.07)
=================== ===================
Weighted average number of shares outstanding:
Basic
Diluted 28.7 28.4
28.7 28.4
=================== ===================
The Company has provided information on adjusted net earnings to supplement its
GAAP financial information. Adjusted net earnings do not have any standardized
meaning prescribed by GAAP and are no necessarily comparable to similar measures
presented by other issuers. The Company believes that adjustet net earnings is a
meaningful measure of operating performance due to the history of acquisitions
and recend restructurings. Adjusted net earnings exclude the effects of
discontinued operations, amortization ot intangible assets and goodwill,
restructuring and other charges (most significantly the write-down of goodwill,
the cost associated with closing facilities, inventory and accounts receivable
exposures anf severance costs) and income tax adjustments. Adjusted net earnings
are not a measure of operatind performance or profitability under U.S. GAAP or
Canadian GAAP and should not be considered in isolation og as a substitute for
net earnings prepared in accordance with U.S. GAAP or Canadian GAAP.
Consolidated Balance Sheet Data:
(in millions)
------------------- ----------------------
March 31, 2002 December 31, 2001
------------------- ----------------------
Cash $ 1.7 $ 12.1
Working capital 53.7 75.3
Total assets 333.2 341.4
Total debt, including current maturities 112.5 122.8
Shareholders' equity 112.0 124.7
-18-
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
We provide advanced electronics manufacturing services, or EMS, to
electronics industry original equipment manufacturers, or OEMs, worldwide. Our
full range of value-added services include product design, procurement,
prototyping, advanced cable and harness interconnect, high-precision enclosures,
printed circuit board assembly, test, final system build, comprehensive supply
chain management, packaging, global distribution and after sales support.
During fiscal year 2001, in response to excess capacity caused by the
slowing technology end market, we commenced a restructuring program aimed at
reducing our cost structure. Actions taken by management to improve capacity
utilization included closing our Denver, Colorado assembly facility and our
Haverhill, Massachusetts interconnect facility, re-sizing our Mexico and Ireland
facilities and addressing our excess equipment. Accordingly, we recorded
restructuring charges of $67.6 million pre-tax (consisting of a write-down of
goodwill and other intangible assets and the costs associated with exiting or
re-sizing facilities) and other charges of $27.3 million pre-tax (consisting of
accounts receivable, inventory and asset impairment charges).
As a result of restructuring actions and market conditions we incurred
a significant operating loss during 2001, which resulted in our non-compliance
with certain financial covenants contained in our credit agreement as at
September 30, 2001. On November 19, 2001, we and our lending group signed a
definitive term sheet for an agreement under which certain terms of the current
credit facility would be revised and the non-compliance as at September 30, 2001
would be waived. In February 2002, we and our lending group executed an
amendment to our credit facility, substantially consistent with the term sheet,
to waive the September 30, 2001 defaults and to revise the covenant tests to be
consistent with both current revenues and the forecast for 2002. (See Liquidity
and Capital Resources).
In addition, in February, 2002 the main customer of our Cork, Ireland
facility was placed into administration as part of a financial restructuring. As
a result, on March 19, 2002, we announced that we were closing our Cork, Ireland
facility and that we were taking steps to place the subsidiary that operates
that facility in voluntary administration. During the first quarter of 2002, we
recorded a charge of $9.7 million related to the closure of the facility.
Prior to taking steps to place the subsidiary that operates the Cork
facility in voluntary liquidation, we and our lending group executed an
amendment to our credit facility to waive the default that would have been
caused by this action and amend the agreement to permit such facility closure.
The Company's activity levels have exceeded the plan that served as the
basis for the Company's amended financial covenants. The Company and its lending
group agreed in April 2002 to further amend the credit agreement to increase the
Company's permitted loan balances to correspond to its higher working capital
needs.
Corporate History
SMTC Corporation, or SMTC, is the result of the July 1999 combination
of the former SMTC Corporation, or Surface Mount, and HTM Holdings, Inc., or
HTM. Upon completion of the combination and concurrent recapitalization, the
former stockholders of HTM held approximately 58.0% of the outstanding shares of
SMTC. We have accounted for the combination under the purchase method of
accounting as a reverse acquisition of Surface Mount by HTM. Because HTM
acquired Surface Mount for accounting purposes, HTM's assets and liabilities are
included in our consolidated financial statements at their historical cost and
the comparative figures for the periods prior to the combination reflect the
results of operations of HTM. The results of operations of Surface Mount are
included in our consolidated financial statements from the date of the
combination. Surface Mount was established in Toronto, Ontario in 1985. HTM was
established in Denver, Colorado in 1990. SMTC was established in Delaware in
1998.
-19-
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 (which
we have subsequently closed);
o Zenith Electronics' facility in Chihuahua, Mexico, which
expanded our cost-effective manufacturing capabilities, in
July 1999;
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;
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 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.
-20-
Pre Initial Public Offering
o In May 2000, we issued senior subordinated notes to certain
shareholders for proceeds of $5.0 million, which were repaid
with the proceeds of our initial public offering;
o On May 18, 2000, we issued 41,667 warrants for $2.5 million
cash consideration in connection with the May 2000 issue of
$5.0 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.
Results of Operations
We currently provide turnkey manufacturing services to the majority of
our customers. Turnkey manufacturing services typically result in higher revenue
and higher gross profits but lower gross profit margins when compared to
consignment services.
Our contractual arrangements with our key customers generally provide
a framework for our overall relationship with our customer. Revenue is
recognized upon shipment to the customer as performance has occurred, all
customer specified acceptance criteria have been tested and met, and the
earnings process is considered complete. Actual production volumes are based on
purchase orders for the delivery of products. These orders typically do not
commit to firm production schedules for more than 30 to 90 days in advance. In
order to minimize inventory risk, we generally order materials and components
only to the extent necessary to satisfy existing customer forecasts or purchase
orders. Fluctuations in material costs are typically passed through to
customers. We may agree, upon request from our customers, to temporarily delay
shipments, which causes a corresponding delay in our revenue recognition.
Ultimately, however, our customers are generally responsible for all goods
manufactured on their behalf.
Our fiscal year end is December 31. The consolidated financial
statements of SMTC, are prepared in accordance with United States GAAP.
The following table sets forth certain operating data expressed as a
percentage of revenue for the periods ended:
-------------------------------------
Three months ended
-------------------------------------
March 31, 2002 April 1, 2001
------------------ ------------------
Revenue 100.0% 100.0%
Cost of sales (including restructuring charges of
$nil for the three months ended March 31, 2002
and $6.9 million for the three months ended
April 1, 2001) 95.1 98.9
------------------ ------------------
Gross profit 4.9 1.1
Selling, general and administrative expenses 5.1 4.8
Amortization 0.4 1.2
Restructuring charges - 7.8
------------------ ------------------
Operating loss (0.6) (12.7)
Interest 1.6 1.5
------------------ ------------------
Loss before income taxes and discontinued (2.2) (14.2)
operations
Income tax recovery (0.4) (4.7)
------------------ ------------------
Loss before discontinued operations (1.8) (9.5)
Loss from discontinued operations (7.3) (0.6)
------------------ ------------------
Net loss (9.1)% (10.1)%
================== ==================
-21-
Quarter ended March 31, 2002 compared to the quarter ended April 1, 2001
Revenue
Revenue decreased $58.9 million, or 29.8%, from $197.8 million in the
first quarter of 2001 to $138.9 million in the first quarter of 2002. The
decrease in revenue is due to the effects of the general decline in the
technology market. During the first quarter of 2002, we recorded approximately
$10.0 million of sales of raw materials inventory to customers, which carried no
margin, compared to $11.6 million of such sales for the same period in 2001.
Revenue from IBM of $36.4 million and Alcatel of $19.8 million for the
first quarter of 2002 was 26.2% and 14.2%, respectively, of total revenue for
the period. Revenue from IBM of $30.5 million, Dell of $22.4 million and Alcatel
of $20.1 million for the first quarter of 2001 was 15.4%, 11.3% and 10.2%,
respectively, of total revenue for the period. No other customers represented
more than 10% of revenue in either period.
In the first quarter of 2002, 62.9% of our revenue was generated from
operations in the United States, 26.7% from Mexico, 9.7% from Canada and 0.7%
from Europe. In the first quarter of 2001, 73.8% of our revenue was generated
from operations in the United States, 11.4% from Mexico, 12.6% from Canada, and
2.2% from Europe. We expect to continue to increase the portion of revenue
attributable to our Chihuahua facility, with the transfer of certain production
from other facilities and with the addition of new business and increased volume
from our current business.
Gross Profit
Gross profit increased $4.5 million from $2.2 million, or 1.1% of
revenue, for the three months ended April 1, 2001 to $6.7 million, or 4.9% of
revenue, for the three months ended March 31, 2002. The improvement in the gross
profit is due to the $6.9 million portion of our restructuring charge related to
a write-down of inventory in connection with the closure of our Denver facility,
recorded during the first quarter of 2001. Excluding the $6.9 million
restructuring charge recorded in the first quarter of 2001, the gross profit was
$9.1 million or 4.6% of revenue. The Company writes down estimated obsolete or
excess inventory for the difference between the cost of inventory and estimated
market value based upon customer forecasts and the ability to sell back
inventory to customers or suppliers. If these assumptions change, additional
write-downs may be required.
Selling, General & Administrative Expenses
Selling, general and administrative expenses decreased $2.4 million
from $9.5 million for the first quarter of 2001 to $7.1 million for the first
quarter of 2002. This decrease is due to the closure of our Denver and Haverhill
facilities and our continued focus on reducing selling, general and
administrative expenses.
The Company determines the allowance for doubtful accounts for
estimated credit losses based on the financial condition of its customers,
concentration of credit risk and industry conditions.
As a percentage of revenue, selling, general and administrative
expenses increased from 4.8% for the first quarter of 2001 to 5.1% for the first
quarter of 2002 due to the lower sales base in the first quarter of 2002.
Amortization
Amortization of intangible assets of $0.4 million for the first quarter
of 2002 included the amortization of $0.3 million of deferred finance costs
related to the establishment of our senior credit facility in July 2000 and
subsequent amendments, and $0.1 million of deferred equipment lease costs. The
costs associated with our amended and restated senior credit facility are being
amortized over the remaining term of the debt.
Amortization of intangible assets of $2.3 million for the first 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
-22-
acquisition of Qualtron. Amortization of intangible assets for the first quarter
of 2001 also included the amortization of $0.1 million of deferred finance costs
related to the establishment of our senior credit facility in July 2000 and
subsequent amendments, and $0.1 million of deferred equipment lease costs.
Recent accounting pronouncements have changed the way we account for
goodwill by requiring us to no longer amortize goodwill. (See Recent Accounting
Pronouncements).
Restructuring Charges
During fiscal year 2001, in response to excess capacity caused by the
slowing technology end market, the Company commenced a restructuring program
aimed at reducing its cost structure. Accordingly, the Company recorded
restructuring charges of $22.5 million during the first quarter of 2001
consisting of the costs associated with existing or re-sizing facilities. There
were no restructuring charges in the first quarter of 2002.
The following table details the components of the restructuring charge
recorded in the first quarter of 2001:
----------------------------------------------------------------------
Three months ended
April 1,
(in millions) 2001
----------------------------------------------------------------------
Inventory write-downs included in
cost of sales $ 6.9
Lease and other contract obligations 5.2
Severance 2.4
Asset impairment 5.0
Other facility exit costs 3.0
----------------------------------------------------------------------
15.6
----------------------------------------------------------------------
$ 22.5
----------------------------------------------------------------------
The write-down of inventory of $6.9 million is associated with the
closure of the assembly facility in Denver.
Lease and other contractual obligations of $5.2 million include the
costs associated with decommissioning, exiting and subletting the Denver
facility and the costs of exiting equipment and facility leases at various other
locations.
Severance costs of $2.4 million are associated with the closure of the
Denver assembly facility and the re-sizing of the Mexican facilities. The
severance costs relate to all 429 employees at the Denver facility and 847 plant
and operational employees at the Mexico facility.
Asset impairment charges of $5.0 million reflect the write-down of
certain long-lived assets, primarily at the Denver location, that became
impaired as a result of the rationalization of facilities. The asset impairment
was determined based on undiscounted projected future net cash flows relating to
the assets resulting in a write-down to estimated salvage values.
-23-
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
during fiscal year 2002. The restructuring charges are based on certain
estimates and assumptions using the best available information at the time and
are subject to change.
Interest Expense
Interest expense decreased $0.6 million from $2.9 million for the first
quarter of 2001 to $2.3 million for the first quarter of 2002 due to lower
average debt outstanding during the first quarter of 2002 combined with lower
interest rates. Lower working capital requirements during the first quarter of
2002 resulted in lower average debt outstanding. Interest expense for the first
quarter of 2001 included a charge of $0.5 million related to the change in the
fair value of interest rates swaps in place at that time, offset by $0.6 million
of interest capitalized on construction in progress. The weighted average
interest rates with respect to the debt for the first quarter of 2001 and 2002
were 8.7% and 7.2%, respectively.
Income Tax Expense
For the first quarter ended March 31, 2002 an income tax recovery of
$0.6 million was recorded on a pre-tax loss before discontinued operations of
$3.1 million resulting in an effective tax recovery rate of 19.4%, as losses in
certain jurisdictions were not tax effected due to the uncertainty of our
ability to utilize such losses.
For the first quarter ended April 1, 2001, an income tax recovery of
$9.3 million on a pre-tax loss before discontinued operations of $28.1 million,
resulting in an effective tax rate of 33.1% as losses in certain jurisdictions
were not tax effected due to the uncertainty of our ability to utilize such
losses. We also are unable to deduct $1.0 million of goodwill amortization.
At December 31, 2001, the Company had total net operating loss
carryforwards of approximately $105.0 million of which $3.0 million and $88.0
million will begin to expire in 2013 and 2022, respectively. In assessing the
realization of deferred tax assets, management considers whether it is more
likely than not that some portion or all of its deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income. Management considers the scheduled reversal
of deferred tax liabilities, change of control limitations, projected future
taxable income and tax planning strategies in making this assessment. Based upon
consideration of these factors, management believes the recorded valuation
allowance related to the loss carryforwards is appropriate. However, in the
event that actual results differ from estimates or management adjusts these
estimates in future periods, the Company may need to establish an additional
valuation allowance, which could materially impact its financial position and
results of operations.
Discontinued Operations
In February, 2002 the main customer of our Cork, Ireland facility was placed
into administration as part of a financial restructuring. As a result, on March
19, 2002, we announced that we were closing our Cork, Ireland facility and that
we were taking steps to place the subsidiary that operates that facility in
voluntary administration. During the first quarter of 2002, we recorded a charge
of $9.7 million related to the closure of the facility. The Company placed the
subsidiary in voluntary administration by the end of the first quarter.
-24-
The following amounts are included in the loss from discontinued operations:
-----------------------------------------------------------------------------------
Three months ended
March 31, April 1,
2002 2001
(in millions)
-----------------------------------------------------------------------------------
Revenue $ 5.0 $ 3.1
-----------------------------------------------------------------------------------
Loss from discontinued operations:
Operating loss before restructuring charges $ 0.5 $ 1.0
Restructuring charges - 0.2
Cost of closing the facility 9.7 -
-----------------------------------------------------------------------------------
Loss from discontinued operations $ 10.2 $ 1.2
-----------------------------------------------------------------------------------
Included in the cost of closing the facility of $9.7 million are the write-off
of the net assets of $6.7 million (comprised of capital assets of $1.1 million
and net working capital of $5.6 million) and other costs associated with exiting
the facility of $3.0 million. Included in the other costs is severance of $1.3
million related to the termination of all employees. The severance amount was
unpaid at the end of the fiscal quarter.
Liquidity and Capital Resources
Our principal sources of liquidity are cash provided from operations
and borrowings under our senior credit facility. In the past, we have also
relied on our access to the capital markets. Our principal uses of cash have
been to finance mergers and acquisitions, to meet debt service requirements and
to finance capital expenditures and working capital requirements. We anticipate
our principal uses of cash in the future will be to meet debt service
requirements and to finance capital expenditures and working capital
requirements.
Three months ended March 31, 2002 Liquidity: Net cash provided by operating
activities for the first quarter of 2002 was $1.4 million. Lower levels of
activity and our continued focus on improving our balance sheet metrics led to
reduced working capital usage. Our net cash cycle improved from 83 days for the
first quarter of 2001 to 47 days for the fourth quarter of 2001 to 39 days for
the first quarter of 2002. Accounts receivable days sales outstanding improved
from 79 days in the first quarter of 2001 to 56 days in the fourth quarter of
2001 to 50 days in the first quarter of 2002.
Net cash used by financing activities for the quarter ended March 31,
2002 was $10.7 million due to the repayment of long-term debt of $10.3 million,
the repayment of capital leases of $0.1 million and the costs associated with
the amendment to our credit agreement of $0.3 million.
Net cash used in investing activities for the quarter ended March 31,
2002 was $1.0 million due to the purchase of capital assets.
Three months ended April 1, 2001 Liquidity: Net cash used for operating
activities for the three months ended April 1, 2001 was $11.3 million. The
growth of both existing and new customers during fiscal year 2000 led to our
increased working capital needs.
-25-
Net cash provided by financing activities for the three months ended
April 1, 2001 was $18.6 million due to an increase in long-term debt of
$18.5 million and the proceeds from issuance of capital stock on the exercise of
options of $0.3 million, which was offset by repayment of capital leases of
$0.2 million.
Net cash used in investing activities for the three months ended
April 1, 2001 was $8.3 million due to the purchase of capital assets.
Capital Resources
As a result of restructuring actions and market conditions we incurred
a significant operating loss during 2001, which resulted in our non-compliance
with certain financial covenants contained in our credit agreement as at
September 30, 2001. On November 19, 2001, we and our lending group signed a
definitive term sheet for an agreement under which certain terms of the current
credit facility would be revised and the non-compliance as at September 30, 2001
would be waived. In February 2002, we and our lending group executed an
amendment to our credit facility, substantially consistent with the term sheet,
to waive the September 30, 2001 defaults and to revise the covenant tests to be
consistent with both current revenues and the forecast for 2002.
The amended financial covenants included in the revised credit facility
include monthly and quarterly minimum cumulative consolidated EBITDA (earnings
before interest, taxes, depreciation and amortization) targets, a maximum daily
and monthly revolving credit loan balance based on accounts receivable and
inventory levels and maximum quarterly capital expenditures. The Company's
activity levels have exceeded the plan that served as the basis for these
amended financial covenants. Accordingly, the Company and its lending group
agreed in April 2002 to further amend the credit agreement to increase the
Company's permitted loan balances to correspond to its higher working capital
needs. The Company was in compliance with the amended financial covenants at
December 31, 2001, and at month's end on January 27, 2002 and February 24, 2002,
March 31, 2002 and April 30, 2002. Continued compliance with the amended
financial covenants through December 31, 2002, the end of the amendment period,
is dependent on the Company achieving its forecasts inherent in our current
business plan. The Company believes the forecasts are based on reasonable
assumptions and are achievable, however, the forecasts are dependent on a number
of factors, some of which are outside the control of the Company. These include,
but are not limited to, general economic conditions and specifically the
strength of the electronics industry and the related demand for products and
services by the Company's customers.
During the amendment period, the facility bears interest at the U.S.
base rate as defined in the credit agreement plus 2.5%. As at March 31, 2002, we
had borrowed $112.5 million under this facility.
In connection with the amendments, the Company agreed to issue to the
lenders warrants to purchase common stock of the Company at an exercise price
equal to the fair market value (defined as average of the last reported sales
price of the common stock of the company for twenty consecutive trading days
commencing 22 trading days before the date in question) at the date of the grant
for 1.5% of the total outstanding shares on February 11, 2002 and 0.5% of the
total outstanding shares on April 30, 2002. If an event of default occurs during
the period from the effective amendment date to December 31, 2002, and has been
continuing for more than 30 days, the lenders will receive warrants to purchase
an additional 1% of the total outstanding shares at an exercise price equal to
the fair market value (as defined above) at the date of grant. If all amounts
outstanding under the credit agreement are repaid in full on or before March 31,
2003, all warrants received by the lenders, other than the warrants received on
February 11, 2002 and April 30, 2002, shall be returned to the Company. The
warrants will not be tradable separate from the related debt until the later of
December 31, 2002 or nine months after the issuance of the warrants being
transferred. After the debt under the credit agreement has been paid in full,
the Company may repurchase the warrants or warrant shares at a price that values
the warrant shares at three times the exercise price.
The Company also paid amendment fees of $1.5 million comprised of
$0.7 million representing 0.5% of the lender's commitments under the revolving
credit facilities and term loans outstanding at February 11, 2002 and other
amendment related fees of $0.8 million. The Company may be required to pay
default fees if it violates certain
-26-
covenants after the effective date of the February 2002 amendment. The amendment
fees and the fair value of the warrants in connection with amending the
agreement have been accounted for as deferred financing fees.
In March 2002, we and our lenders executed an amendment to our credit
facility to waive the default that would have been caused by placing the
subsidiary that operates the Cork, Ireland facility in voluntary liquidation. We
paid $0.1 million in amendment fees in connection with such amendment.
In connection with the April 30, 2002 amendment, we paid approximately
$0.1 million in amendment fees.
Our management believes that cash generated from operations, available
cash and amounts available under our senior credit facility will be adequate to
meet our debt service requirements, capital expenditures and working capital
needs at our current level of operations and organic growth, although no
assurance can be given in this regard, particularly with respect to amounts
available under our credit facility, as discussed above. There can be no
assurance that our business will generate sufficient cash flow from operations
or that future borrowings will be available to enable us to service our
indebtedness. Our future operating performance and ability to service or
refinance indebtedness will be subject to future economic conditions and to
financial, business and other factors, certain of which are beyond our control.
Recently Issued Accounting Standards
In July 2001, the FASB issued Statement No. 141, "Business
Combinations" ("Statement 141"), and Statement No. 142, "Goodwill and Other
Intangible Assets" ("Statement 142"). Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001, as well as all purchase method business combinations completed after
June 30, 2001. Statement 141 also specifies criteria intangible assets acquired
in a purchase method business combination must meet to be recognized and
reported apart from goodwill. Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with Statement 121. Upon adoption of Statements 141 and 142 in their
entirety on January 1, 2002, the Company determined that there are no intangible
assets relating to previous acquisitions that need to be reclassified and
accounted for apart from goodwill under the provisions of those Statements.
In connection with the transitional goodwill impairment evaluation,
Statement 142 requires the Company to perform an assessment of whether there is
an indication that goodwill is impaired as of January 1, 2002. To accomplish
this, the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill to those reporting units as of January 1, 2002. The
Company has until June 30, 2002 to determine the fair value of each reporting
unit and compare it to the reporting unit's carrying amount. To the extent a
reporting unit's carrying amount exceeds its fair value, an indication exists
that the reporting unit's goodwill may be impaired and the Company must perform
the second step of the transitional impairment test. In the second step, the
Company must compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of its assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with Statement 141, to its carrying amount, both
of which would be measured as of January 1, 2002. This second step is required
to be completed as soon as possible, but no later than December 31, 2002. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Company's statements of operations.
Because of the extensive effort needed to comply with adopting
Statement 142, the Company has not estimated the impact of this Statement on its
financial statements, beyond discontinuing goodwill amortization and assessing
the classification of intangibles. The change to a methodology that assesses
fair value by reporting unit could result in an impairment charge.
-27-
Effective January 1, 2002, the Company had unamortized goodwill of
$55.6 million, which is no longer being amortized. This change in accounting
policy is not applied retroactively and the amounts presented for prior periods
have not been restated for this change. The impact of this change is as follows:
-----------------------------------------------------------------------
Three months ended
----------------------------
March 31, April 1,
(in millions, except per share amounts) 2002 2001
-----------------------------------------------------------------------
Net loss $ (12.7) $ (20.0)
Add back goodwill amortization, net of tax - 1.7
-----------------------------------------------------------------------
Net loss before goodwill amortization (12.7) (18.3)
-----------------------------------------------------------------------
Basic and diluted loss per share:
Net loss $ (0.44) $ (0.71)
Net loss before goodwill amortization $ (0.44) $ (0.65)
-----------------------------------------------------------------------
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("Statement 144"), which supersedes
both Statement 121 and the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("Opinion 30"), for the disposal of a segment
of a business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale. Statement 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). The Company adopted Statement 144 for the quarter ending March 31,
2002 and presented the closure of its Cork facility and the related charges as
discontinued operations.
In August 2001, the FASB issued Statement No. 143 "Accounting for Asset
Retirement Obligations" which requires that the fair value of an asset
retirement obligation be recorded as a liability, at fair value, in the period
in which the Company incurs the obligation. The Statement is effective for
fiscal 2003 and the Company expects no material effect as a result of this
Statement.
FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Form 10-Q
are forward-looking in nature. The discussion of such matters and subject areas
is qualified by the inherent risks and uncertainties surrounding future
expectations generally; these expectations may differ materially from SMTC's
actual future experience involving any one or more of such matters and subject
areas. SMTC cautions readers that all statements other than statements of
historical facts included in this quarterly 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 implement our business plan and maintain covenant
compliance under our credit agreement; (4) the loss or retirement of key members
of management; (5) increases in SMTC's cost of borrowings or lack of
availability of additional debt or equity capital on terms considered reasonable
by management; (6) adverse state, federal or foreign legislation or regulation
or adverse determinations by regulators; (7) changes in general economic
conditions in the markets in which SMTC may compete and fluctuations in demand
in the electronics industry; (8) the inability to manage inventory levels
efficiently in light of changes in market conditions; and (9) the inability to
sustain historical margins as the industry develops. SMTC has attempted to
identify certain of the factors that it currently believes may cause actual
future experiences to differ from SMTC's current expectations regarding the
relevant matter or subject area. In addition to the items specifically discussed
in
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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
We are exposed to general economic conditions, which could have a material
adverse impact on our business, operating results and financial condition.
As a result of recent unfavorable economic conditions and reduced
capital spending, our sales have declined from 2001 to 2002. In particular,
sales to OEMs in the telecommunications and networking industries worldwide were
impacted during the second half of 2001. If economic conditions worsen, we may
experience a material adverse impact on our business, operating results and
financial condition.
A majority of our revenue comes from a small number of customers; if we lose any
of our largest customers, our revenue could decline significantly.
Our two largest customers during the first quarter of 2002 were IBM and
Alcatel, which represented approximately 26.2% and 14.2%, respectively, of our
total revenue for that period. Our top ten largest customers (including IBM and
Alcatel) collectively represented approximately 76% of our total revenue during
the first quarter of 2002. 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;
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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 have been required to increase staffing, purchase materials and
incur other expenses to meet the anticipated demand of our customers. Sometimes
anticipated orders from certain customers have failed to materialize, and
sometimes delivery schedules have been deferred as a result of changes in a
customer's business needs. Any material delay, cancellation or reduction of
orders from our largest customers could cause our revenue to decline
significantly. In addition, as many of our costs and operating expenses are
relatively fixed, a reduction in customer demand can decrease our gross margins
and adversely affect our business, financial condition and results of
operations. On other occasions, customers have required rapid and unexpected
increases in production, which have placed burdens on our manufacturing
capacity.
Any of these factors or a combination of these factors could have a
material adverse effect on our business, financial condition and results of
operations.
We are dependent upon the electronics industry, which produces technologically
advanced products with short life cycles.
Substantially all of our customers are in the electronics industry,
which is characterized by intense competition, short product life-cycles and
significant fluctuations in product demand. In addition, the electronics
industry is generally subject to rapid technological change and product
obsolescence. If our customers are unable to create products that keep pace with
the changing technological environment, their products could become obsolete and
the demand for our services could significantly decline. Our success is largely
dependent on the success achieved by our customers in developing and marketing
their products. Furthermore, this industry is subject to economic cycles and has
in the past experienced downturns. A continued recession or a downturn in the
electronics industry would likely have a material adverse effect on our
business, financial condition and results of operations.
Shortage or price fluctuation in component parts specified by our customers
could delay product shipment and affect our profitability.
A substantial portion of our revenue is derived from "turnkey"
manufacturing. In turnkey manufacturing, we provide both the materials and the
manufacturing services. If we fail to manage our inventory effectively, we may
bear the risk of fluctuations in materials costs, scrap and excess inventory,
all of which can have a material adverse effect on our business, financial
condition and results of operations. We are required to forecast our future
inventory needs based upon the anticipated demands of our customers.
Inaccuracies in making these forecasts or estimates could result in a shortage
or an excess of materials. In addition, delays, cancellations or reductions of
orders by our customers could result in an excess of materials. A shortage of
materials could lengthen production schedules and
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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 and significant retrenchment in a short
period of time.
Since 1995, we have completed seven acquisitions. Acquisitions may
involve numerous risks, including difficulty in integrating operations,
technologies, systems, and products and services of acquired companies;
diversion of management's attention and disruption of operations; increased
expenses and working capital requirements; entering markets in which we have
limited or no prior experience and where competitors in such markets have
stronger market positions; and the potential loss of key employees and customers
of acquired companies. In addition, acquisitions may involve financial risks,
such as the potential liabilities of the acquired businesses, the dilutive
effect of the issuance of additional equity securities, the incurrence of
additional debt, the financial impact of transaction expenses and the
amortization of goodwill and other intangible assets involved in any
transactions that are accounted for using the purchase method of accounting, and
possible adverse tax and accounting effects.
In 2001 we implemented a restructuring plan that called for significant
retrenchment. We closed our Denver and Haverhill facilities and resized
operations in Mexico and Ireland in an effort to reduce our cost structure. In
February, 2002 the main customer of our Cork, Ireland facility was placed into
administration as part of a financial restructuring. As a result, on March 19,
2002, we announced that we were closing our Cork, Ireland facility and that we
were taking steps to place the subsidiary that operates that facility in
voluntary administration. Retrenchment has caused, and is expected to continue
to cause, strain on our infrastructure, including our managerial, technical and
other resources. We may experience inefficiencies as we integrate operations
from closed facilities to currently operating facilities and may experience
delays in meeting the needs of transferred customers. In addition, we are
reducing the geographic dispersion of our operations which may make it harder
for us to compete and may cause us to lose customers. The loss of customers
could have a material adverse effect on our business, financial condition and
results of operations.
We have a limited history of owning and operating our acquired
businesses on a consolidated basis. There can be no assurance that we will be
able to meet performance expectations or successfully integrate our acquired
businesses on a timely basis without disrupting the quality and reliability of
service to our customers or diverting management resources. Our rapid growth and
subsequent retrenchment has placed and will continue to place a significant
strain on management, on our financial resources, and on our information,
operating and financial systems. If we are unable to manage effectively, it may
have a material adverse effect on our business, financial condition and results
of operations.
If we are unable to respond to rapidly changing technology and process
development, we may not be able to compete effectively.
The market for our products and services is characterized by rapidly
changing technology and continuing process development. The future success of
our business will depend in large part upon our ability to maintain and enhance
our technological capabilities, to develop and market products and services that
meet changing customer
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needs, and to successfully anticipate or respond to technological changes on a
cost-effective and timely basis. In addition, the EMS industry could in the
future encounter competition from new or revised technologies that render
existing technology less competitive or obsolete or that reduce the demand for
our services. There can be no assurance that we will effectively respond to the
technological requirements of the changing market. To the extent we determine
that new technologies and equipment are required to remain competitive, the
development, acquisition and implementation of such technologies and equipment
may require us to make significant capital investments. There can be no
assurance that capital will be available for these purposes in the future or
that investments in new technologies will result in commercially viable
technological processes.
Our business will suffer if we are unable to attract and retain key personnel
and skilled employees.
We depend on the services of our key senior executives, including Paul
Walker, Philip Woodard, Gary Walker and Derrick D'Andrade. Our business also
depends on our ability to continue to recruit, train and retain skilled
employees, particularly executive management, engineering and sales personnel.
Recruiting personnel in our industry is highly competitive. In addition, our
ability to successfully implement our business plan depends in part on our
ability to retain key management and existing employees. There can be no
assurance that we will be able to retain our executive officers and key
personnel or attract qualified management in the future. In connection with our
restructuring, we significantly reduced our workforce. If we receive a
significant volume of new orders, we may have difficulty recruiting skilled
workers back into our workforce to respond to such orders and accordingly may
experience delays that could adversely effect our ability to meet customers'
delivery schedules.
Risks particular to our international operations could adversely affect our
overall results.
Our success will depend, among other things, on successful expansion
into new foreign markets in order to offer our customers lower cost production
options. Entry into new foreign markets may require considerable management time
as well as start-up expenses for market development, hiring and establishing
office facilities before any significant revenue is generated. As a result,
operations in a new foreign market may operate at low profit margins or may be
unprofitable.
Revenue generated outside of the United States and Canada was
approximately 11.3% in 2001. 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;
o trade restrictions; and
o dependence on key customers.
We are subject to a variety of environmental laws, which expose us to potential
financial liability.
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Our operations are regulated under a number of federal, state,
provincial, local and foreign environmental and safety laws and regulations,
which govern, among other things, the discharge of hazardous materials into the
air and water as well as the handling, storage and disposal of such materials.
Compliance with these environmental laws is a major consideration for us because
we use metals and other hazardous materials in our manufacturing processes. We
may be liable under environmental laws for the cost of cleaning up properties we
own or operate if they are or become contaminated by the release of hazardous
materials, regardless of whether we caused such release. In addition we, along
with any other person who arranges for the disposal of our wastes, may be liable
for costs associated with an investigation and remediation of sites at which we
have arranged for the disposal of hazardous wastes, if such sites become
contaminated, even if we fully comply with applicable environmental laws. In the
event of a contamination or violation of environmental laws, we could be held
liable for damages including fines, penalties and the costs of remedial actions
and could also be subject to revocation of our discharge permits. Any such
revocations could require us to cease or limit production at one or more of our
facilities, thereby having a material adverse effect on our operations.
Environmental laws could also become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with any
violation, which could have a material adverse effect on our business, financial
condition and results of operations.
RISKS RELATED TO OUR CAPITAL STRUCTURE
Our indebtedness could adversely affect our financial health and severely limit
our ability to plan for or respond to changes in our business.
At March 31, 2002, we had $112.5 million of indebtedness under our
senior credit facility. 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 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.
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The terms of our current credit agreement restrict, among other things,
our ability to incur additional indebtedness, complete acquisitions, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, merge, consolidate or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets. We are also required to maintain specified
financial ratios and satisfy certain monthly and quarterly financial condition
tests, which further restrict our ability to operate as we choose. As at
September 30, 2001, we were in violation of financial covenants contained in our
credit agreement. Such violation was waived and the credit agreement was amended
to provide financial covenants consistent with our current revenues and our
forecast for 2002. As a result of our non-compliance, customers may lose
confidence in us and reduce or eliminate their orders with us, which may have a
material adverse effect on our business, financial condition and results of
operations.
Substantially all of our assets and those of our subsidiaries are
pledged as security under our senior credit facility.
Investment funds affiliated with Bain Capital, LLC, investment funds affiliated
with Celerity Partners, Inc., Kilmer Electronics Group Limited and certain
members of management have significant influence over our business, and could
delay, deter or prevent a change of control or other business combination.
Investment funds affiliated with Bain Capital, LLC, investment funds
affiliated with Celerity Partners, Inc., Kilmer Electronics Group Limited and
certain members of management held approximately 13.4%, 12.1%, 7.1% and 16.7%,
respectively, of our outstanding shares as of March 15, 2002. In addition, two
of the nine directors who serve on our board are representatives of the Bain
funds, two are representatives of the Celerity funds, one is a representative of
Kilmer Electronics Group Limited and two are members of management. By virtue of
such stock ownership and board representation, the Bain funds, the Celerity
funds, Kilmer Electronics Group Limited and certain members of management have a
significant influence over all matters submitted to our stockholders, including
the election of our directors, and exercise significant control over our
business policies and affairs. Such concentration of voting power could have the
effect of delaying, deterring or preventing a change of control or other
business combination that might otherwise be beneficial to our stockholders.
Provisions in our charter documents and state law may make it harder for others
to obtain control of us even though some stockholders might consider such a
development favorable.
Provisions in our charter, by-laws and certain provisions under
Delaware law may have the effect of delaying or preventing a change of control
or changes in our management that stockholders consider favorable or beneficial.
If a change of control or change in management is delayed or prevented, the
market price of our shares could suffer.
Item 3: Quantitative and Qualitative Disclosure about Market Risk
Interest Rate Risk
Our senior credit facility bears interest at a floating rate. The
weighted average interest rate on our senior credit facility for the quarter
ended March 31, 2002 was 7.2%. Our debt of $112.5 million bore interest at 7.3%
on March 31, 2002 based on the U.S. base rate. If the U.S. base rate increased
by 10% our interest rate would have risen to 7.7% and our interest expense would
have increased by approximately $0.1 million for the first quarter of 2002.
Foreign Currency Exchange Risk
Most of our sales and purchases are denominated in U.S. dollars, and as a result
we have relatively little exposure to foreign currency exchange risk with
respect to sales made.
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PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company announced in a press release on March 28, 2002 that the Board of
Directors had appointed Khalil Barsoum to the Board to fill the vacancy created
by the resignation of Anthony Sigel from the Board.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits: None.
-------------------
(b) Reports on Form 8-K: None.
--------------------
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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/ Frank Burke
--------------------------------
Name: Frank Burke
Title: Chief Financial Officer
Date: May 15, 2002
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