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 June 30, 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
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 98-0197680
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
635 HOOD ROAD
MARKHAM, ONTARIO, CANADA L3R 4N6
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(905) 479-1810
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether SMTC Corporation: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ].
As of June 30, 2002, SMTC Corporation had 23,196,443 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 June 30, 2002, SMTC Corporation's subsidiary, SMTC
Manufacturing Corporation of Canada, had 5,493,336 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
Item 1. Financial Statements 3
Consolidated Balance Sheets as of December 31, 2001
and June 30, 2002 (unaudited) 3
Consolidated Statements of Operations for the three
and six months ended June 30, 2002 and July 1, 2001 (unaudited) 4
Consolidated Statement of Changes in Shareholders' Equity for the
six months ended June 30, 2002 (unaudited) 5
Consolidated Statements of Cash Flows for the three and six months ended
June 30, 2002 and July 1, 2001 (unaudited) 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 41
PART II Other Information
Item 4. Submission of Matters to a Vote of Security Holders 42
Item 5. Other Information 42
Item 6. Exhibits and Reports on Form 8-K 42
Signatures 43
2
SMTC CORPORATION
Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars)
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
==============================================================================
June 30, December 31,
2002 2001
- ------------------------------------------------------------------------------
(unaudited)
Assets
Current assets:
Cash and short-term investments $ 749 $ 12,103
Accounts receivable 80,984 81,374
Inventories (note 2) 81,245 80,900
Prepaid expenses 5,371 4,782
Income taxes recoverable 521 997
Deferred income taxes 632 632
- ------------------------------------------------------------------------------
169,502 180,788
Capital assets 55,486 60,416
Goodwill 55,560 55,560
Other assets 12,513 11,538
Deferred income taxes 34,330 33,118
- ------------------------------------------------------------------------------
$ 327,391 $ 341,420
==============================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 62,216 $ 56,487
Accrued liabilities 39,866 36,276
Current portion of long-term debt (note 3) 15,000 12,500
Current portion of capital lease obligations 214 198
- ------------------------------------------------------------------------------
117,296 105,461
Long-term debt (note 3) 99,036 110,297
Capital lease obligations 285 406
Deferred income taxes 595 595
Shareholders' equity:
Capital stock 68,496 68,496
Loans receivable (13) (13)
Additional paid-in-capital 161,007 161,666
Warrants 659 --
Deficit (119,970) (105,488)
- ------------------------------------------------------------------------------
110,179 124,661
- ------------------------------------------------------------------------------
$ 327,391 $ 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 Six months ended
----------------------------- --------------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------
(restated, note 8) (restated, note 8)
Revenue $ 161,589 $ 149,928 $ 300,498 $ 347,740
Cost of sales (including restructuring
charges) (note 7) 154,584 153,551 286,745 349,203
- -----------------------------------------------------------------------------------------------------------------
Gross profit (loss) 7,005 (3,623) 13,753 (1,463)
Selling, general and
administrative expenses 6,218 7,906 13,308 17,331
Amortization 601 2,353 1,056 4,705
Restructuring charges (note 7) -- -- -- 15,559
- -----------------------------------------------------------------------------------------------------------------
Operating income (loss) 186 (13,882) (611) (39,058)
Interest 2,389 2,561 4,704 5,453
- -----------------------------------------------------------------------------------------------------------------
Loss before income taxes and
discontinued operations (2,203) (16,443) (5,315) (44,511)
Income tax recovery (390) (3,435) (1,030) (12,702)
- -----------------------------------------------------------------------------------------------------------------
Loss before discontinued operations (1,813) (13,008) (4,285) (31,809)
Loss from discontinued operations (note 8) -- (866) (10,197) (2,077)
- -----------------------------------------------------------------------------------------------------------------
Net loss (1,813) $ (13,874) $ (14,482) $ (33,886)
=================================================================================================================
Loss per share:
Basic loss per share before
discontinued operations $ (0.06) $ (0.45) $ (0.15) $ (1.12)
Loss from discontinued
operations per share -- (0.03) (0.35) (0.07)
- -----------------------------------------------------------------------------------------------------------------
Basic loss per share $ (0.06) $ (0.48) $ (0.50) $ (1.19)
=================================================================================================================
Diluted loss per share $ (0.06) $ (0.48) $ (0.50) $ (1.19)
=================================================================================================================
Weighted average number of common
shares used in the calculations of
loss per share:
Basic 28,689,779 28,689,779 28,689,779 28,525,916
Diluted 28,689,779 28,689,779 28,689,779 28,525,916
=================================================================================================================
See accompanying notes to consolidated financial statements.
4
SMTC CORPORATION
Consolidated Statement of Changes in Shareholders' Equity
(Expressed in thousands of U.S. dollars)
Six months ended June 30, 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 -- 659 (659) -- -- --
Net loss for the period -- -- -- -- (14,482) (14,482)
- -----------------------------------------------------------------------------------------------------
Balance, June 30, 2002 $68,496 $659 $161,007 $(13) $(119,970) $110,179
=====================================================================================================
See accompanying notes to consolidated financial statements.
5
SMTC CORPORATION
Consolidated Statement of Cash Flows
(Expressed in thousands of U.S. dollars)
(Unaudited)
==============================================================================================
Three months ended Six months ended
------------------- -------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net loss $(1,813) $(13,874) $(14,482) $(33,886)
Items not involving cash:
Amortization 601 2,353 1,056 4,705
Depreciation 2,982 2,900 6,035 5,796
Deferred income tax benefit (568) (5,326) (1,212) (14,905)
Gain on disposition of assets (25) -- (25) --
Impairment of assets -- -- 1,129 5,023
Change in non-cash operating working capital:
Accounts receivable (3,641) 63,065 390 83,143
Inventories 9,560 31,694 (345) 65,424
Prepaid expenses (687) (740) (589) (1,936)
Accounts payable, accrued liabilities and
income taxes recoverable (6,022) (36,599) 9,795 (81,164)
- ----------------------------------------------------------------------------------------------
387 43,473 1,752 32,200
Financing:
Increase (decrease) in long-term debt 1,584 (32,462) (8,761) (13,980)
Principal payments on capital leases (53) (49) (105) (253)
Loans to shareholders -- (5,236) -- (5,236)
Proceeds from issuance of common stock -- -- -- 313
Repayment of loans receivable -- -- -- 14
Debt issuance costs (1,750) -- (2,031) --
- ----------------------------------------------------------------------------------------------
(219) (37,747) (10,897) (19,142)
Investments:
Purchase of capital assets (1,266) (5,870) (2,310) (14,200)
Proceeds from sale of capital assets 101 -- 101 --
- ----------------------------------------------------------------------------------------------
(1,165) (5,870) (2,209) (14,200)
- ----------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (997) (144) (11,354) (1,142)
Cash and cash equivalents, beginning of period 1,746 1,700 12,103 2,698
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 749 $ 1,556 $ 749 $ 1,556
- ----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
SMTC CORPORATION
Consolidated Statement of Cash Flows (continued)
(Expressed in thousands of U.S. dollars)
(Unaudited)
============================================================================================
Three months ended Six months ended
------------------ ------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------
Supplemental disclosures:
Cash paid during the period:
Income taxes $ 699 $ -- $1,300 $3,502
Interest 2,199 2,418 4,365 5,244
Non-cash investing activities:
Cash released from escrow -- 3,125 -- 3,125
Non-cash financing activities:
Issuance of warrants 165 -- 659 --
- ---------------------------------------------------------------------------------------------
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 and six months ended June 30, 2002 and July 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 June 30, 2002,
the unaudited consolidated statements of operations for the three and six
month periods ended June 30, 2002 and July 1, 2001, the unaudited
consolidated statement of changes in shareholders' equity for the six month
period ended June 30, 2002, and the unaudited consolidated statements of
cash flows for the three and six month periods ended June 30, 2002 and July
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 and six month periods ended June 30,
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. 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 and six months ended June 30, 2002 and July 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 was required to 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 identified its reporting units
to be consistent with its business units as defined in note 6, with the
exception of the Boston, Massachusetts facility. This facility is not
economically similar to the other US facilities and as a result, is a
separate reporting unit. The Company has determined the fair value of each
reporting unit and compared it to the reporting unit's carrying amount. The
first step of the transitional goodwill impairment test has been completed
and the Company has determined that there will be a goodwill impairment
charge relating to the Canadian, US and Boston reporting units, which could
be material, requiring the Company to 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.
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 Six months ended
------------------- -------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
---------------------------------------------------------------------------------
Net loss $(1,813) $(13,874) $(14,482) $(33,886)
Add back goodwill amortization,
net of tax -- 1,692 -- 3,384
---------------------------------------------------------------------------------
Net loss before goodwill amortization $(1,813) $(12,182) $(14,482) $(30,502)
=================================================================================
Basic and diluted loss per share:
Net loss $ (0.06) $ (0.48) $ (0.50) $ (1.19)
Net loss before goodwill
amortization $ (0.06) $ (0.42) $ (0.50) $ (1.07)
=================================================================================
9
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended June 30, 2002 and July 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.
In April 2002, the FASB issued Statement No. 145, "Recission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and
Technical Corrections" ("Statement 145"), which provides for the recission
of several previously issued accounting standards, new accounting guidance
for the accounting for certain lease modifications and various technical
corrections that are not substantive in nature to existing pronouncements.
In addition, gains and losses from extinguishment of debt will not longer
be classified as an extraordinary item. The Statement will be effective for
fiscal 2003, with early adoption of the provisions related to the
classification of gains and losses on extinguishment of debt encouraged.
Upon adoption, enterprises must reclassify prior period items that do not
meet the extraordinary item classification criteria in APB 30. The Company
plans to adopt the provisions of Statement 145 in fiscal 2003 and expects
no material effect as a result of this Statement except for the
reclassification of prior period extraordinary items to ordinary income. In
fiscal 1999 and 2000, $1,247 and $2,678 respectively, was booked as an
extraordinary loss. These amounts will be reclassified to ordinary income.
10
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended June 30, 2002 and July 1, 2001
(Unaudited)
- --------------------------------------------------------------------------------
1. Basis of presentation (continued):
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("Statement 146"). Statement
146 addresses financial accounting and reporting for costs associated with
exit or disposal activities, and is effective for exit or disposal
activities initiated after December 31, 2002 with early application
encouraged. Statement 146 nullifies Emerging Issues Task Force Issue No.
94-3 ("EITF 94-3") "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in Restructuring)". The principal difference between Statement 146
and EITF 94-3 relates to the recognition of a liability for a cost
associated with an exit or disposal activity. FAS 146 requires that the
cost associated with an exit or disposal activity be recognized when the
liability is incurred, whereas under EITF 94-3 the liability was recognized
at the date of an entity's commitment to an exit plan. The Company is
currently assessing the impact of this Statement.
2. Inventories:
==========================================================================
June 30, December 31,
2002 2001
--------------------------------------------------------------------------
Raw materials $46,282 $38,289
Work in process 20,279 24,984
Finished goods 13,399 16,230
Other 1,285 1,397
--------------------------------------------------------------------------
$81,245 $80,900
==========================================================================
3. Long-term debt:
The Company incurred operating losses, which resulted in its non-compliance
with certain financial covenants contained in its 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 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%.
11
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended June 30, 2002 and July 1, 2001
(Unaudited)
- --------------------------------------------------------------------------------
3. Long-term debt (continued):
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.
The Company was in compliance with the amended financial covenants at June
30, 2002 and accordingly the related debt is classified as long-term. The
Company expects to continue to be in compliance with the amended financial
covenants through December 31, 2002 based 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.
Effective January 1, 2003, the Company reverts back to the original credit
agreement and at that time it is unlikely the Company will earn sufficient
EBITDA (earnings before interest expense, income taxes, depreciation and
amortization), using a twelve month trailing formula, to satisfy the
requirements of that agreement. In the event of non-compliance, the
Company's lenders have the ability to demand repayment of the outstanding
amounts under the credit facility. The Company intends to seek an
additional amendment to ensure continued compliance with its credit
agreement.
12
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended June 30, 2002 and July 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 Six months ended
------------------------- -------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
-----------------------------------------------------------------------------------------
Numerator:
Net loss before
discontinued operations $ (1,813) $ (13,008) $ (4,285) $ (31,809)
Net loss (1,813) (13,874) (14,482) (33,886)
=========================================================================================
Denominator:
Weighted-average shares -
basic 28,689,779 28,689,779 28,689,779 28,525,916
Effect of dilutive securities:
Employee stock options -- -- -- --
Warrants -- -- -- --
-----------------------------------------------------------------------------------------
Weighted-average shares -
diluted 28,689,779 28,689,779 28,689,779 28,525,916
=========================================================================================
Loss per share:
Basic and diluted, before
discontinued operations $ (0.06) $ (0.45) $ (0.15) $ (1.12)
Basic and diluted $ (0.06) $ (0.48) $ (0.50) $ (1.19)
=========================================================================================
Options and warrants to purchase common stock were outstanding during the
three and six month periods ended June 30, 2002 and July 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.
13
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended June 30, 2002 and July 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 June 30, 2002 Six months ended June 30, 2002
---------------------------------- ----------------------------------
Net Net
Total Intersegment external Total Intersegment external
revenue revenue revenue revenue revenue revenue
-------------------------------------------------------------------------------------------
United States $142,588 $ (7,915) $134,673 $265,900 $ (13,314) $252,586
Canada 29,341 (3,893) 25,448 48,400 (5,947) 42,453
Europe 1,579 (266) 1,313 2,960 (501) 2,459
Mexico 42,164 (42,009) 155 94,474 (91,474) 3,000
-------------------------------------------------------------------------------------------
$215,672 $(54,083) $161,589 $411,734 $(111,236) $300,498
===========================================================================================
EBITA (before discontinued operations and restructuring charges):
United States $ (847) $ (2,412)
Canada 992 520
Europe (199) (406)
Mexico 841 2,743
-------------------------------------------------------------------------------------------
787 445
Interest 2,389 4,704
Amortization 601 1,056
-------------------------------------------------------------------------------------------
Loss before income taxes,
and discontinued operations $ (2,203) $ (5,315)
===========================================================================================
Capital expenditures:
United States $ 689 $ 1,410
Canada 469 543
Europe 2 26
Mexico 106 331
-------------------------------------------------------------------------------------------
$ 1,266 $ 2,310
===========================================================================================
14
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended June 30, 2002 and July 1, 2001
(Unaudited)
- --------------------------------------------------------------------------------
6. Segmented information (continued):
===========================================================================================
Three months ended July 1, 2001 Six months ended July 1, 2001
---------------------------------- ----------------------------------
Net Net
Total Intersegment external Total Intersegment external
revenue revenue revenue revenue revenue revenue
-------------------------------------------------------------------------------------------
United States $155,417 $(30,998) $124,419 $313,892 $(38,414) $275,478
Canada 15,739 (633) 15,106 42,680 (1,520) 41,160
Europe 5,252 (951) 4,301 9,946 (951) 8,995
Mexico 24,119 (18,017) 6,102 48,588 (26,481) 22,107
-------------------------------------------------------------------------------------------
$200,527 $(50,599) $149,928 $415,106 $(67,366) $347,740
===========================================================================================
EBITA (before discontinued operations and restructuring charges):
United States $ 255 $ 1,687
Canada (368) 212
Europe 501 1,316
Mexico (2,873) (6,065)
-------------------------------------------------------------------------------------------
(2,485) (2,850)
Interest 2,561 5,453
Amortization 2,353 4,705
Restructuring charges 9,044 31,503
-------------------------------------------------------------------------------------------
Loss before income taxes
and discontinued operations $(16,443) $(44,551)
===========================================================================================
Capital expenditures:
United States $ 3,592 $ 8,221
Canada 809 1,565
Europe 220 243
Mexico 1,249 4,171
-------------------------------------------------------------------------------------------
$ 5,870 $ 14,200
===========================================================================================
15
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended June 30, 2002 and July 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 Six months ended
------------------- -------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
---------------------------------------------------------------
Geographic revenue:
United States $120,806 $128,522 $234,617 $300,637
Canada 11,189 9,698 20,501 23,744
Europe 16,952 8,673 25,259 17,630
Asia 8,769 2,955 14,110 5,623
Mexico 3,873 80 6,011 106
---------------------------------------------------------------
$161,589 $149,928 $300,498 $347,740
===============================================================
June 30, December 31,
2002 2001
-------------------------------------------------------------------
Long-lived assets:
United States $ 71,223 $ 73,269
Canada 20,879 21,832
Europe 549 1,998
Mexico 18,395 18,877
-------------------------------------------------------------------
$111,046 $115,976
===================================================================
16
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended June 30, 2002 and July 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 $31,503 during the six months ended July
1, 2001 consisting of the costs associated with exiting or re-sizing
facilities.
The following table details the components of the restructuring charge
recorded in the first six months of 2001:
======================================================================
Three months Six months ended
ended July 1,
July 1, 2001 2001
----------------------------------------------------------------------
Inventory write-downs included in
cost of sales $9,044 $15,944
Lease and other contract obligations -- 5,178
Severance -- 2,331
Asset impairment -- 5,023
Other facility exit costs -- 3,027
----------------------------------------------------------------------
-- 15,559
----------------------------------------------------------------------
$9,044 $31,503
======================================================================
The following table details the related amounts included in accrued
liabilities as at June 30, 2002:
=========================================================================
Accrual at Accrual at
March 31, Cash June 30,
2002 payments 2002
-------------------------------------------------------------------------
Lease and other contract obligations $4,705 (808) $3,897
Severance 131 (41) 90
Other facility exit costs 655 (34) 621
-------------------------------------------------------------------------
$5,491 (883) $4,608
=========================================================================
17
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended June 30, 2002 and July 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 Six months ended
------------------ ------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
---------------------------------------------------------------------------
Revenue $-- $1,947 $5,035 $5,050
===========================================================================
============================================================================
Three months ended Six months ended
------------------ ------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
----------------------------------------------------------------------------
Loss from discontinued operations:
Operating loss before
restructuring charges $-- $866 $ 480 $1,882
Restructuring charges -- -- -- 195
Cost of closing the facility -- -- 9,717 --
----------------------------------------------------------------------------
Loss from discontinued operations $-- $866 $10,197 $2,077
============================================================================
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.
18
SMTC CORPORATION
Notes to Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three and six months ended June 30, 2002 and July 1, 2001
(Unaudited)
- --------------------------------------------------------------------------------
8. Discontinued Operations (continued):
The following table details the related amounts included in accrued
liabilities as at June 30, 2002:
=========================================================================
Accrual at Accrual at
March 31, Cash June 30,
2002 payments 2002
-------------------------------------------------------------------------
Lease and other contract obligations $ 323 -- $ 323
Severance 1,350 (1,055) 295
Other facility exit costs 1,327 (121) 1,206
-------------------------------------------------------------------------
$3,000 (1,176) $1,824
=========================================================================
9. Comparative figures:
Certain 2001 comparative figures have been restated to separately disclose
the results of discontinued operations of the Cork, Ireland facility.
19
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)
(Unaudited)
---------------------------------------
Three months ended Six months ended
---------------------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
---------------------------------------
Revenue $161.6 $149.9 $300.5 $347.7
Cost of sales (including restructuring
charges of $nil for the three and six
months ended June 30, 2002 and $9.0
million and $15.9 million for the
three and six months ended July 1,
2001)(a) 154.6 153.5 286.8 349.1
---------------------------------------
Gross profit (loss) 7.0 (3.6) 13.7 (1.4)
Selling, general and administrative
expenses 6.2 7.9 13.3 17.4
Amortization 0.6 2.4 1.0 4.7
Restructuring charges (a) -- -- -- 15.6
---------------------------------------
Operating income (loss) 0.2 (13.9) (0.6) (39.1)
Interest 2.4 2.5 4.7 5.4
---------------------------------------
Loss before income taxes and (2.2) (16.4) (5.3) (44.5)
discontinued operations
Income tax recovery (0.4) (3.4) (1.0) (12.7)
---------------------------------------
Loss before discontinued operations (1.8) (13.0) (4.3) (31.8)
Loss from discontinued operations (b) -- (0.9) (10.2) (2.1)
---------------------------------------
Net loss $ (1.8) $(13.9) $(14.5) $(33.9)
=======================================
Net loss per common share:
Basic before discontinued operations $(0.06) $(0.45) $(0.15) $(1.12)
Loss from discontinued operations -- (0.03) (0.35) (0.07)
---------------------------------------
Basic $(0.06) $(0.48) $(0.50) $(1.19)
Diluted $(0.06) $(0.48) $(0.50) $(1.19)
=======================================
Weighted average number of shares
outstanding:
Basic 28.7 28.7 28.7 28.5
Diluted 28.7 28.7 28.7 28.5
=======================================
(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 and $9.0 million for the three months ended July 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
20
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.
Consolidated Adjusted Net Earnings (Loss):
(in millions, except per share amounts)
(Unaudited)
-----------------------------------------------------------
Three months ended Six months ended
-----------------------------------------------------------
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
-----------------------------------------------------------
Net loss $ (1.8) $(13.9) $(14.5) $(33.9)
Adjustments:
Discontinued operations -- 0.9 10.2 2.1
Amortization of goodwill -- 2.1 -- 4.2
Restructuring and other charges -- 9.0 -- 31.5
Income tax effect -- (2.2) -- (9.9)
-----------------------------------------------------------
Adjusted net loss $ (1.8) $ (4.1) $ (4.3) $ (6.0)
===========================================================
Adjusted net loss per common share:
Basic $(0.06) $(0.14) $(0.15) $(0.21)
Diluted $(0.06) $(0.14) $(0.15) $(0.21)
===========================================================
Weighted average number of shares outstanding:
Basic 28.7 28.7 28.7 28.5
Diluted 28.7 28.7 28.7 28.5
===========================================================
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 adjusted net earnings is a
meaningful measure of operating performance due to the history of acquisitions
and recent restructurings. Adjusted net earnings exclude the effects of
discontinued operations, amortization of 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 and severance costs) and income tax adjustments. Adjusted net earnings
are not a measure of operating performance or profitability under U.S. GAAP or
Canadian GAAP and should not be considered in isolation or as a substitute for
net earnings prepared in accordance with U.S. GAAP or Canadian GAAP.
Consolidated Balance Sheet Data:
(in millions)
---------------------------------
June 30, 2002
(Unaudited) December 31, 2001
---------------------------------
Cash $ 0.8 $ 12.1
Working capital 52.2 75.3
Total assets 327.4 341.4
Total debt, including current maturities 114.0 122.8
Shareholders' equity 110.2 124.7
21
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, primarily in the
networking, industrial and communications market segments. We service our
customers through eight manufacturing and technology centers strategically
located in key technology corridors in the United States, Canada, Europe and the
cost-effective location of Mexico. Our full range of value-added supply chain
services include product design, procurement, prototyping, 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.
We have customer relationships with industry leading OEMs such as IBM
and Alcatel. We developed these relationships by capitalizing on the continuing
trend of OEMs to outsource manufacturing services to consolidate their supply
base and to form long-term strategic partnerships with selected high quality EMS
providers. We work closely with our customers and are highly responsive to them
throughout the design, manufacturing and distribution process, providing
services that allow them to focus on their core competencies of sales, marketing
and research and development. We seek to grow our business through the addition
of new, high quality customers and the expansion of our relationships with
existing customers.
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 is the result of the July 1999 combination of the
former SMTC Corporation, or Surface Mount, and HTM Holdings, Inc., or HTM.
Surface Mount was established in Toronto, Ontario in 1985. HTM was established
in Denver, Colorado in 1990. SMTC was established in Delaware in 1998. Combining
22
Surface Mount and HTM provided us with increased strategic and operational scale
and greater geographic breadth. After the combination, we purchased Zenith
Electronics' facility in Chihuahua, Mexico, which expanded our cost-effective
manufacturing capabilities in an important geographic region. In September 1999,
we established a manufacturing presence in the Northeastern United States and
expanded our value-added services to include high precision enclosure
capabilities by acquiring Boston, Massachusetts based W.F. Wood. In July 2000,
we acquired Pensar Corporation, an EMS company specializing in design
engineering and headquartered in Appleton, Wisconsin. In November 2000, we
acquired Qualtron Teoranta, a provider of specialized cable and harness
interconnect assemblies, based in Donegal, Ireland and with a subsidiary in
Haverhill, Massachusetts.
On July 27, 2000, we consummated an initial public offering of
6,625,000 shares of our common stock and 4,375,000 exchangeable shares of our
subsidiary SMTC Manufacturing Corporation of Canada, or SMTC Canada. Each
exchangeable share of SMTC Canada is exchangeable at the option of the holder at
any time into one share of our common stock, subject to compliance with
applicable securities laws.
On August 18, 2000, we sold an additional 1,650,000 shares of common
stock upon exercise of the underwriters' over-allotment option.
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.
23
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:
(Unaudited)
-----------------------------------------------------------
Three months ended Six months ended
-----------------------------------------------------------
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
-----------------------------------------------------------
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales (including
restructuring charges of $nil for the
three and six months ended June 30,
2002 and $9.0 million and $15.9
million for the three and six months
ended July 1, 2001) 95.7 102.4 95.4 100.4
-----------------------------------------------------------
Gross profit (loss) 4.3 (2.4) 4.6 (0.4)
Selling, general and administrative
expenses 3.8 5.3 4.5 5.0
Amortization 0.4 1.6 0.3 1.3
Restructuring charges -- -- -- 4.5
-----------------------------------------------------------
Operating income (loss) 0.1 (9.3) (0.2) (11.2)
Interest 1.5 1.6 1.6 1.6
-----------------------------------------------------------
Loss before income taxes and
discontinued operations (1.4) (10.9) (1.8) (12.8)
Income tax recovery (0.3) (2.2) (0.4) (3.7)
-----------------------------------------------------------
Loss before discontinued operations (1.1) (8.7) (1.4) (9.1)
Loss from discontinued operations -- (0.6) (3.4) (0.6)
-----------------------------------------------------------
Net loss (1.1)% (9.3)% (4.8)% (9.7)%
===========================================================
Quarter ended June 30, 2002 compared to the quarter ended July 1, 2001
Revenue
Revenue increased $11.7 million, or 7.8%, from $149.9 million in the
second quarter of 2001 to $161.6 million in the second quarter of 2002 as the
Company began production on new program wins. During the second quarter of 2002,
we recorded approximately $8.0 million of sales of raw materials inventory to
customers, which carried no margin, compared to $10.4 million of such sales for
the same period in 2001.
Revenue from Dell of $40.2 million, IBM of $26.1 million and Alcatel
of $16.2 million for the second quarter of 2002 was 24.9%, 16.2% and 10.0%,
respectively, of total revenue for the period. Revenue from Dell of $15.9
million and IBM of $22.1 million for the second quarter of 2001 was 10.6% and
14.7%, respectively, of total revenue for the period. No other customers
represented more than 10% of revenue in either period. During the second quarter
of 2002, the Company informed Dell of its intention to terminate its supply
agreement with Dell, and to end production over the next quarter. The Company's
decision was taken after a review of the Company's return on capital
requirements indicated that the customer's programs were not generating
sufficient returns and, at the same time, were utilizing a disproportionate
amount of working capital. The Company expects lower revenues in the third
quarter of 2002, as the Company exits Dell, which is expected to be offset by
reduced expense levels and reduced working capital usage.
In the second quarter of 2002, 66.1% of our revenue was generated from
operations in the United States, 19.6% from Mexico, 13.6% from Canada and 0.7%
from Europe. In the second quarter of 2001, 77.5% of our revenue was generated
from operations in the United States, 12.0% from Mexico, 7.8% from Canada, and
24
2.7% 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 $10.6 million from a loss of $3.6 million for the second
quarter of 2001 to $7.0 million, or 4.3% of revenue, for the second quarter of
2002. The improvement in the gross profit is due to the higher sales base,
better utilization of the fixed and variable costs and to a $9.0 million
restructuring charge related to a write-down of inventory in connection with the
closure of our Denver facility, recorded during the second quarter of 2001.
Excluding the $9.0 million restructuring charge recorded in the second quarter
of 2001, the gross profit was $5.4 million or 3.6% of revenue. The Company
writes down estimated obsolete or excess inventory for the difference between
the cost of inventory and estimated market value based on customer forecasts and
the ability to sell back inventory to customers or suppliers. If actual market
conditions or our customers' product demands are less favorable than those
projected, additional provisions may be required.
Selling, General & Administrative Expenses
Selling, general and administrative expenses decreased $1.7 million
from $7.9 million for the second quarter of 2001 to $6.2 million for the second
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.
As a percentage of revenue, selling, general and administrative
expenses decreased from 5.3% for the second quarter of 2001 to 3.8% for the
second quarter of 2002 due to the higher sales base earned in the second quarter
of 2002 and the effects realized from the continued focus on reducing selling,
general and administrative expenses.
Amortization
Amortization of intangible assets of $0.6 million for the second
quarter of 2002 included the amortization of $0.5 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 $2.4 million for the second
quarter of 2001 included the amortization of $0.6 million of goodwill related to
the combination of Surface Mount and HTM, $0.4 million of goodwill related to
the acquisition of W.F. Wood, $0.7 million related to the acquisition of Pensar
and $0.4 million related to the acquisition of Qualtron. Amortization of
intangible assets for the second quarter of 2001 also included the amortization
of $0.2 million of deferred finance costs related to the establishment of our
senior credit facility in July 2000 and 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 $9.0 million during the second quarter of 2001
consisting of the write-down of inventory associated with the closure of the
assembly facility in Denver. There were no restructuring charges in the second
quarter of 2002.
25
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 $0.1 million from $2.5 million for the
second quarter of 2001 to $2.4 million for the second quarter of 2002. The
weighted average interest rates with respect to the debt for the second quarter
of 2001 and 2002 were 8.5% and 7.2%, respectively.
Income Tax Expense
For the second quarter of 2002, an income tax recovery of $0.4 million
was recorded on a pre-tax loss before discontinued operations of $2.2 million
resulting in an effective tax recovery rate of 18.2%, as losses in certain
jurisdictions were not tax effected due to the uncertainty of our ability to
utilize such losses.
For the second quarter of 2001, an income tax recovery of $3.4 million
on a pre-tax loss before discontinued operations of $16.4 million, resulting in
an effective tax rate of 20.7% 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.
Severance of $1.5 million and other facility exit costs of $0.1 million were
paid out during the second quarter of 2002.
Included in the loss from discontinued operations for the three months
ended July 1, 2001 is revenue of $1.9 million.
Six months ended June 30, 2002 compared to the six months ended July 1, 2001
Revenue
Revenue decreased $47.2 million, or 13.6%, from $347.7 million for the
six months ended July 1, 2001 to $300.5 million for the six months ended June
30, 2002. The decrease in revenue is due primarily to the effects of the general
decline in the technology market. During the first six months of 2002, we
recorded approximately $17.9 million of sales of raw materials inventory to
customers, which carried no margin, compared to $22.0 million of such sales for
the same period in 2001.
26
Revenue from IBM of $62.5 million, Dell of $52.3 million and Alcatel
of $36.0 million for the first six months of 2002 was 20.8%, 17.4% and 12.0%,
respectively, of total revenue for the period. Revenue from IBM of $52.6 million
and Dell of $38.3 million for the first six months of 2001 was 15.1% and 11.0%,
respectively, of total revenue for the period. No other customers represented
more than 10% of revenue in either period. During the second quarter of 2002,
the Company informed Dell of its intention to terminate its supply agreement
with Dell, and to end production over the next quarter. The Company's decision
was taken after a review of the Company's return on capital requirements
indicated that the customer's programs were not generating sufficient returns
and, at the same time, were utilizing a disproportionate amount of working
capital. The Company expects lower revenues in the third quarter of 2002, as the
Company exits Dell, which is expected to be offset by reduced expense levels and
reduced working capital usage.
In the first six months of 2002, 64.6% of our revenue was generated
from operations in the United States, 23.0% from Mexico, 11.7% from Canada and
0.7% from Europe. In the first six months of 2001, 75.6% of our revenue was
generated from operations in the United States, 11.7% from Mexico, 10.3% from
Canada, and 2.4% 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 $15.1 million from a loss of $1.4 million for the six
months ended July 1, 2001 to $13.7 million, or 4.6% of revenue, for the six
months ended June 30, 2002. The improvement in the gross profit is due to the
$15.9 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 six months of 2001. Excluding the $15.9 million restructuring charge
recorded in the first six months of 2001, the gross profit was $14.5 million or
4.2% of revenue. The Company writes down estimated obsolete or excess inventory
for the difference between the cost of inventory and estimated market value
based on customer forecasts and the ability to sell back inventory to customers
or suppliers. If actual market conditions or our customers' product demands are
less favorable than those projected, additional provisions may be required.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $4.1 million
from $17.4 million for the six months ended July 1, 2001 to $13.3 million for
the six months ended June 30, 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.
As a percentage of revenue, selling, general and administrative
expenses decreased from 5.0% for the first six months of 2001 to 4.5% for the
first six months of 2002 due to our continued focus on reducing selling, general
and administrative expenses.
Amortization
Amortization of intangible assets of $1.0 million for the first six
months of 2002 included the amortization of $0.8 million of deferred finance
costs related to the establishment of our senior credit facility in July 2000
and subsequent amendments, and $0.2 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 $4.7 million for the first six
months of 2001 included the amortization of $1.2 million of goodwill related to
the combination of Surface Mount and HTM, $0.8 million of goodwill related to
the acquisition of W.F. Wood, $1.4 million related to the acquisition of Pensar
and $0.8 million related to the acquisition of Qualtron. Amortization of
intangible assets for the first six months of 2001 also included the
amortization of $0.3 million of deferred finance costs related to the
establishment of our senior credit facility in July 2000 and subsequent
amendments, and $0.2 million of deferred equipment lease costs.
27
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 $31.5 million during the first six months of 2001
consisting of the costs associated with exiting or re-sizing facilities. There
were no restructuring charges in the first six months of 2002.
The following table details the components of the restructuring charge
recorded in the first six months of 2001:
=======================================================
Six months ended
July 1,
(in millions) 2001
- -------------------------------------------------------
Inventory write-downs included in
cost of sales $15.9
Lease and other contract obligations 5.2
Severance 2.4
Asset impairment 5.0
Other facility exit costs 3.0
- -------------------------------------------------------
15.6
- -------------------------------------------------------
$31.5
=======================================================
The write-down of inventory of $15.9 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.
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
28
Interest expense decreased $0.7 million from $5.4 million for the six
months ended July 1, 2001 to $4.7 million for the six months ended June 30, 2002
due to lower average debt outstanding during the first two quarters of 2002
combined with lower interest rates. The weighted average interest rates with
respect to the debt for the first six months of 2001 and 2002 were 8.3% and
7.2%, respectively.
Income Tax Expense
For the six months ended June 30, 2002, an income tax recovery of $1.0
million was recorded on a pre-tax loss before discontinued operations of $5.3
million resulting in an effective tax recovery rate of 18.9%, as losses in
certain jurisdictions were not tax effected due to the uncertainty of our
ability to utilize such losses.
For the six months ended July 1, 2001, an income tax recovery of $12.7
million on a pre-tax loss before discontinued operations of $44.5 million,
resulting in an effective tax rate of 28.5% 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 $2.0 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.
The following amounts are included in the loss from discontinued operations:
===================================================================
Six months ended
June 30, July 1,
2002 2001
(in millions)
- -------------------------------------------------------------------
Revenue $ 5.0 $5.1
- -------------------------------------------------------------------
Loss from discontinued operations:
Operating loss before restructuring charges $ 0.5 $1.9
Restructuring charges -- 0.2
Cost of closing the facility 9.7 --
- -------------------------------------------------------------------
Loss from discontinued operations $10.2 $2.1
===================================================================
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
29
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.
Severance of $1.1 million and other facility exit costs of $0.1 million were
paid out during the second quarter of 2002.
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.
During the second quarter of 2002, the Company informed Dell of its
intention to terminate its supply agreement with Dell, and to end production
over the next quarter. The Company's decision was taken after a review of the
Company's return on capital requirements indicated that the customer's programs
were not generating sufficient returns and, at the same time, were utilizing a
disproportionate amount of working capital. The Company expects lower revenues
in the third quarter of 2002, as the Company exits Dell, which is expected to be
offset by reduced expense levels and reduced working capital usage.
Six months ended June 30, 2002 Liquidity: Net cash provided by operating
activities for the first six months of 2002 was $1.8 million. Our net cash cycle
improved from 78 days for the second quarter of 2001 and 39 days for the first
quarter of 2002 to 33 days for the second quarter of 2002. Accounts receivable
days sales outstanding improved from 67 days in the second quarter of 2001 to 50
days in the first quarter of 2002 to 46 days in the second quarter of 2002.
Net cash used in financing activities for the six months ended June
30, 2002 was $10.9 million due to the repayment of long-term debt of $8.8
million, the repayment of capital leases of $0.1 million and the costs
associated with the amendment to our credit agreement of $2.0 million.
Net cash used in investing activities for the six months ended June
30, 2002 was $2.2 million due to the purchase of capital assets of $2.3 million,
offset by proceeds from the sale of capital assets of $0.1 million.
Six months ended July 1, 2001 Liquidity: Net cash generated from operating
activities for the six months ended July 1, 2001 was $32.2 million.
Net cash used in financing activities for the six months ended July 1,
2001 was $19.1 million due to the repayment of long-term debt of $14.0 million,
the repayment of capital leases of $0.2 million, the funding of loans to
shareholders of $5.2 million, offset by proceeds from the issuance of common
stock on the exercise of options of $0.3 million.
Net cash used in investing activities for the six months ended July 1,
2001 was $14.2 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 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.
30
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 for each of the six months ended June 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.
Effective January 1, 2003, the Company reverts back to the original
credit agreement and at that time it is unlikely the Company will earn
sufficient EBITDA (earnings before interest expense, income taxes, depreciation
and amortization), using a twelve month trailing formula, to satisfy the
requirements of the agreement. In the event of non-compliance, the Company's
lenders have the ability to demand repayment of the outstanding amounts under
the credit facility. Though the Company intends to seek an additional amendment
to ensure continued compliance with its credit agreement, there can be no
assurance that an amendment will be obtained on acceptable terms or at all.
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 June 30, 2002, we
had borrowed $114.0 million under this facility.
In connection with the February amendment, 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 December 31, 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. In
connection with the April 30, 2002 amendment, the Company agreed to accelerate
the grant date of the 0.5% warrants that were to be issued on December 31, 2002
to April 30, 2002. 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 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.
31
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 through the end of
the year, 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. 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 was required to 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 identified its reporting units to be consistent with its
business units as defined in note 6, with the exception of the Boston,
Massachusetts facility. This facility is not economically similar to the other
US facilities and as a result, is a separate reporting unit. The Company has
determined the fair value of each reporting unit and compared it to the
reporting unit's carrying amount. The first step of the transitional goodwill
impairment test has been completed and the Company has determined that there
will be a goodwill impairment charge relating to the Canadian, US and Boston
reporting units, which could be material, requiring the Company to 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.
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 Six months ended
June 30, July 1, June 30, July 1,
(in millions, except per share amounts) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------
Net loss $ (1.8) $(13.9) $(14.5) $(33.9)
Add back goodwill amortization,
net of tax -- 1.7 -- 3.4
- ---------------------------------------------------------------------------------
Net loss before goodwill amortization $ (1.8) $(12.1) $(14.5) $(30.5)
=================================================================================
Basic and diluted loss per share:
Net loss $(0.06) $(0.48) $(0.50) $(1.19)
32
Net loss before goodwill
amortization $(0.06) $(0.42) $(0.50) $(1.07)
=================================================================================
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.
In April 2002, the FASB issued Statement No. 145, "Recission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections" ("Statement 145"), which provides for the recission of several
previously issued accounting standards, new accounting guidance for the
accounting for certain lease modifications and various technical corrections
that are not substantive in nature to existing pronouncements. In addition,
gains and losses from extinguishment of debt will not longer be classified as an
extraordinary item. The Statement will be effective for fiscal 2003, with early
adoption of the provisions related to the classification of gains and losses on
extinguishment of debt encouraged. Upon adoption, enterprises must reclassify
prior period items that do not meet the extraordinary item classification
criteria in APB 30. The Company plans to adopt the provisions of Statement 145
in fiscal 2003 and expects no material effect as a result of this Statement
except for the reclassification of prior period extraordinary items to ordinary
income. In fiscal 1999 and 2000, $1,247 and 2,678 respectively, was booked as an
extraordinary loss. These amounts will be reclassified to ordinary income.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("Statement 146"). Statement 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities, and is effective for exit or disposal activities initiated
after December 31, 2002 with early application encouraged. Statement 146
nullifies Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3") "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in Restructuring)". The principal
difference between Statement 146 and EITF 94-3 relates to the recognition of a
liability for a cost associated with an exit or disposal activity. FAS 146
requires that the cost associated with an exit or disposal activity be
recognized when the liability is incurred, whereas under EITF 94-3 the liability
was recognized at the date of an entity's commitment to an exit plan. The
Company is currently assessing the impact of this Statement.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Note 2 to the Consolidated Financial Statements in our Annual Report on Form
10-K for the fiscal year ended December 31, 2001 describes the significant
accounting policies and methods used in the preparation of our consolidated
financial statements. The following critical accounting policies are impacted
significantly by judgments, assumptions and estimates used in the preparation of
financial statements. We believe the following
33
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements.
Allowance for Doubtful Accounts
The Company determines the allowance for doubtful accounts for estimated credit
losses based on the financial condition of its customers, concentration of
credit risk, historical experience, industry conditions and the age of past due
receivables. Unanticipated changes in the liquidity or financial position of our
customers may require additional provisions for doubtful accounts.
Inventory Valuation
Inventories are valued on a first-in, first-out basis at the lower of cost and
replacement cost for raw materials and at the lower of cost and net realizable
value for work in progress and finished goods. Inventories include an
application of relevant overhead. Our industry is characterized by rapid
technological change, short-term customer commitments and rapid changes in
demand. The Company writes down estimated obsolete or excess inventory for the
difference between the cost of inventory and estimated market value based on
customer forecasts and the ability to sell back inventory to customers or
suppliers. If actual market conditions or our customers' product demands are
less favorable than those projected, additional provisions may be required.
Restructuring and Other Charges
In response to excess capacity caused by the slowing technology end market, the
Company recorded restructuring and other charges aimed at reducing its cost
structure. In connection with exit activities, the Company recorded charges for
inventory write-downs, employee termination costs, lease and other contractual
obligations, long-lived asset impairment and other exit-related costs. These
charges were incurred pursuant to formal plans developed by management. The
recognition of restructuring and other charges required the Company to make
certain judgments and estimates regarding the nature, timing and amount of costs
associated with the planned exit activities. The estimates of future liabilities
may change, requiring the recording of additional charges or the reduction of
liabilities already recorded. At the end of each reporting period, the Company
evaluates the remaining accrued balances to ensure that no excess accruals are
retained and the utilization of the provision are for their intended purposed in
accordance with the developed exit plans.
Long-lived Assets
The Company reviews property and equipment for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of property and equipment is measured by comparing
the carrying amount of the assets to the projected discounted cash flows the
assets are expected to generate. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds its fair market value.
In accordance with Statement of Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets", we evaluate goodwill for impairment, on at least
an annual basis and whenever events or circumstances indicate that the carrying
amount may not be recoverable from its estimate future cash flows.
Recoverability of goodwill is measured at the reporting unit level by comparing
the reporting unit's carrying amount, including goodwill, to the fair value of
the reporting unit, based on projected discounted future cash flows. The Company
must make estimates in the calculation of projected discounted future cash flows
including estimates of future economic and business conditions, changes in
technology and customer orders. If the carrying amount of the reporting unit
exceeds its fair value, goodwill is considered impaired and a second test is
performed to measure the amount of impairment loss, if any. Adverse changes in
the technology end market, customer demand and other market conditions could
result in future impairments of goodwill. There can be no assurances that future
goodwill impairment tests will not result in a charge.
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
34
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 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 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 2001 and the first half of 2002. 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 three largest customers during the second quarter of 2002 were
Dell, IBM and Alcatel, which represented approximately 24.9%, 16.2% and 10.0%,
respectively, of our total revenue for that period. Our top ten largest
customers (including Dell, IBM and Alcatel) collectively represented
approximately 81% of our total revenue during the second quarter of 2002. During
the second quarter of 2002, the Company informed Dell of its intention to
terminate its supply agreement with them, and to end production with Dell over
the next quarter. The Company expects lower revenues in the third quarter of
2002, as the Company exits Dell. The Company's decision was taken after a review
of the Company's return on capital requirements indicated that the customer's
programs were not generating sufficient returns and, at the same time, were
utilizing a disproportionate amount of working capital. 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.
35
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.,
Sanmina-SCI Corp. and Solectron Corporation. In addition, we may in the future
encounter competition from other large electronics manufacturers that are
selling, or may begin to sell, electronics manufacturing services. Many of our
competitors have international operations, and some may have substantially
greater manufacturing, financial research and development and marketing
resources and lower cost structures than we do. We also face competition from
the manufacturing operations of current and potential customers, which are
continually evaluating the merits of manufacturing products internally versus
the advantages of using external manufacturers.
We may experience variability in our operating results, which could negatively
impact the price of our shares.
Our annual and quarterly results have fluctuated in the past. The
reasons for these fluctuations may similarly affect us in the future.
Historically, our calendar fourth quarter revenue has been highest and our
calendar first quarter revenue has been lowest. Prospective investors should not
rely on results of operations in any past period to indicate what our results
will be for any future period. Our operating results may fluctuate in the future
as a result of many factors, including:
. variations in the timing and volume of customer orders relative
to our manufacturing capacity;
. variations in the timing of shipments of products to customers;
. introduction and market acceptance of our customers' new
products;
. changes in demand for our customers' existing products;
. the accuracy of our customers' forecasts of future production
requirements;
. effectiveness in managing our manufacturing processes and
inventory levels;
. changes in competitive and economic conditions generally or in
our customers' markets;
. changes in the cost or availability of components or skilled
labor; and
. the timing of, and the price we pay for, acquisitions and related
integration costs.
In addition, most of our customers typically do not commit to firm
production schedules more than 30 to 90 days in advance. Accordingly, we cannot
forecast the level of customer orders with certainty. During 2001 and 2002, many
customers have placed orders on short notice for delivery in the last month of
each fiscal quarter. 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.
36
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 is
experiencing a significant downturn. A continued recession or 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 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 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,
37
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 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:
38
. fluctuations in the value of currencies and high levels of
inflation;
. longer payment cycles and greater difficulty in collecting
amounts receivable;
. unexpected changes in and the burdens and costs of compliance
with a variety of foreign laws;
. political and economic instability;
. increases in duties and taxation;
. inability to utilize net operating losses incurred by our foreign
operations to reduce our U.S. and Canadian income taxes;
. imposition of restrictions on currency conversion or the transfer
of funds;
. trade restrictions; and
. dependence on key customers.
We are subject to a variety of environmental laws, which expose us to potential
financial liability.
Our operations are regulated under a number of federal, state,
provincial, local and foreign environmental and safety laws and regulations,
which govern, among other things, the discharge of hazardous materials into the
air and water as well as the handling, storage and disposal of such materials.
Compliance with these environmental laws is a major consideration for us because
we use metals and other hazardous materials in our manufacturing processes. We
may be liable under environmental laws for the cost of cleaning up properties we
own or operate if they are or become contaminated by the release of hazardous
materials, regardless of whether we caused such release. In addition we, along
with any other person who arranges for the disposal of our wastes, may be liable
for costs associated with an investigation and remediation of sites at which we
have arranged for the disposal of hazardous wastes, if such sites become
contaminated, even if we fully comply with applicable environmental laws. In the
event of a contamination or violation of environmental laws, we could be held
liable for damages including fines, penalties and the costs of remedial actions
and could also be subject to revocation of our discharge permits. Any such
revocations could require us to cease or limit production at one or more of our
facilities, thereby having a material adverse effect on our operations.
Environmental laws could also become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with any
violation, which could have a material adverse effect on our business, financial
condition and results of operations.
RISKS RELATED TO OUR CAPITAL STRUCTURE
Our indebtedness could adversely affect our financial health and severely limit
our ability to plan for or respond to changes in our business.
At June 30, 2002, we had $114.0 million of indebtedness under our
senior credit facility. This debt could have adverse consequences for our
business, including:
. We will be more vulnerable to adverse general economic
conditions;
. We will be required to dedicate a substantial portion of our cash
flow from operations to repayment of debt, limiting the
availability of cash for other purposes;
. We may have difficulty obtaining financing in the future for
working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes;
39
. We may have limited flexibility in planning for, or reacting to,
changes in our business and industry;
. We could be limited by financial and other restrictive covenants
in our credit arrangements in our borrowing of additional funds;
and
. We may fail to comply with the covenants under which we borrowed
our indebtedness which could result in an event of default. If an
event of default occurs and is not cured or waived, it could
result in all amounts outstanding, together with accrued
interest, becoming immediately due and payable. If we were unable
to repay such amounts, the lenders could proceed against any
collateral granted to them to secure that indebtedness.
There can be no assurance that our leverage and such restrictions will
not materially adversely affect our ability to finance our future operations or
capital needs or to engage in other business activities. In addition, our
ability to pay principal and interest on our indebtedness to meet our financial
and restrictive covenants and to satisfy our other debt obligations will depend
upon our future operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, certain of which
are beyond our control, as well as the availability of revolving credit
borrowings under our senior credit facility or successor facilities.
Effective January 1, 2003, the Company reverts back to the original
credit agreement and at that time it is unlikely the Company will earn
sufficient EBITDA (earnings before interest expense, income taxes, depreciation
and amortization), using a twelve month trailing formula, to satisfy the
requirements of the agreement. In the event of non-compliance, the Company's
lenders have the ability to demand repayment of the outstanding amounts under
the credit facility. Though the Company intends to seek an additional amendment
to ensure continued compliance with its credit agreement, there can be no
assurance that an amendment will be obtained on acceptable terms or at all.
The terms of our credit agreement impose significant restrictions on our ability
to operate.
The terms of our current credit agreement restrict, among other
things, our ability to incur additional indebtedness, 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 June 30, 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
40
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 June 30, 2002 was 7.2%. Our debt of $114.0 million bore interest at 7.3%
on June 30, 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 second 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.
41
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its annual meeting on May 7, 2002.
(b) At the annual meeting, stockholders elected Messrs. Khalil Barsoum, Mark
Benham and William Brock as directors. Messrs. Stephen Adamson, Michael
Griffiths, Blair Hendrix, Ian Loring, Gary Walker and Paul Walker continued
serving their terms of office as directors after the annual meeting.
(c) Results of annual meeting votes:
-----------------------------------------------------------------------
Proposal For Withheld
-----------------------------------------------------------------------
To elect as director Khalil Barsoum to hold 20,053,889 39,024
office until the 2005 annual meeting of
stockholders and in accordance with the by-laws
of the Company
-----------------------------------------------------------------------
To elect as director Mark Benham to hold office 20,054,124 38,789
until the 2005 annual meeting of stockholders
and in accordance with the by-laws of the
Company
-----------------------------------------------------------------------
To elect as director William Brock to hold 20,053,889 39,024
office until the 2005 annual meeting of
stockholders and in accordance with the by-laws
of the Company
-----------------------------------------------------------------------
ITEM 5. OTHER INFORMATION.
Accompanying this Quarterly Report on Form 10-Q are the certificates of the
Chief Executive Officer and Chief Financial Officer required by Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, copies of which are furnished as exhibits to
this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
10.1 Seventh Amendment and Fourth Waiver dated as of April 30, 2002 to
the Amended and Restated Credit and Guarantee Agreement.
10.2 Amendment No. 1 dated as of April 30, 2002 to Warrant Agreement
between the Company and Mellon Investor Services LLC.
99.1 Certification of Paul Walker, pursuant to Section 1350, Chapter
63 of Title 18, United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated August 14, 2002.
99.2 Certification of Frank Burke, pursuant to Section 1350, Chapter
63 of Title 18, United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated August 14, 2002.
(b) Reports on Form 8-K: None.
42
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: August 14, 2002
43
EXHIBIT INDEX
Exhibit
Number Document
- ------- --------
10.1 Seventh Amendment and Fourth Waiver dated as of April 30, 2002 to
the Amended and Restated Credit and Guarantee Agreement.
10.2 Amendment No. 1 dated as of April 30, 2002 to Warrant Agreement
between the Company and Mellon Investor Services LLC.
99.1 Certification of Paul Walker, pursuant to Section 1350, Chapter
63 of Title 18, United States Code, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated August 14,
2002.
99.2 Certification of Frank Burke, pursuant to Section 1350, Chapter
63 of Title 18, United States Code, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated August 14,
2002.
44