SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. _________)*
SMTC CORPORATION
-------------------------------------------------
(Name of Issuer)
Common Stock, par value $.01 per share
-------------------------------------------------
(Title of Class of Securities)
832682207
---------------------------------------
(CUSIP Number)
RED OAK PARTNERS, LLC
145 Fourth Avenue, Suite 15A
New York, NY 10003
Attention: David Sandberg
Telephone: (212) 614-8952
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
March 19, 2008
-------------------------------------------------
(Date of Event Which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G
to report the acquisition that is the subject of this Schedule 13D, and is
filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the
following box [X].
Note. Schedules filed in paper format shall include a signed original
and five copies of the schedule, including all exhibits. See Section 240.13d-7
for other parties to whom copies are to be sent.
* The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 or otherwise subject to the liabilities of that section of the Act but
shall be subject to all other provisions of the Act (however, see the Notes.)
Page 1 of 7 pages
CUSIP No.: 832682207
1. NAME OF REPORTING PERSON
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (ENTITIES ONLY)
David Sandberg
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
(a) [ ]
(b) [ ]
3 SEC USE ONLY
4 SOURCE OF FUNDS
AF
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM
2(d) or 2(e) [ ]
6. CITIZENSHIP OR PLACE OF ORGANIZATION
United States
NUMBER OF 7 SOLE VOTING POWER 0
SHARES
BENEFICIALLY 8 SHARED VOTING POWER - 2,383,311
OWNED BY
EACH 9 SOLE DISPOSITIVE POWER 0
REPORTING
PERSON WITH 10 SHARED DISPOSITIVE POWER - 2,383,311
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
2,383,311
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ]
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
17.2%
14 TYPE OF REPORTING PERSON
IN
Page 2 of 7 pages
CUSIP No.: 832682207
1. NAME OF REPORTING PERSON
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (ENTITIES ONLY)
Red Oak Partners, LLC
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
(a) [ ]
(b) [ ]
3 SEC USE ONLY
4 SOURCE OF FUNDS
AF
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM
2(d) or 2(e) [ ]
6 CITIZENSHIP OR PLACE OF ORGANIZATION
New York
NUMBER OF 7 SOLE VOTING POWER 0
SHARES
BENEFICIALLY 8 SHARED VOTING POWER - 2,383,311
OWNED BY
EACH 9 SOLE DISPOSITIVE POWER 0
REPORTING
PERSON WITH 10 SHARED DISPOSITIVE POWER - 2,383,311
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
2,383,311
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ]
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
17.2%
14 TYPE OF REPORTING PERSON
OO
Page 3 of 7 pages
CUSIP No.: 832682207
1. NAME OF REPORTING PERSON
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (ENTITIES ONLY)
The Red Oak Fund, LP
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
(a) [ ]
(b) [ ]
3 SEC USE ONLY
4 SOURCE OF FUNDS
WC
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM
2(d) or 2(e) [ ]
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
NUMBER OF 7 SOLE VOTING POWER 0
SHARES
BENEFICIALLY 8 SHARED VOTING POWER - 2,383,311
OWNED BY
EACH 9 SOLE DISPOSITIVE POWER 0
REPORTING
PERSON WITH 10 SHARED DISPOSITIVE POWER - 2,383,311
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
2,383,311
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ]
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
17.2%
14 TYPE OF REPORTING PERSON
PN
Page 4 of 7 pages
ITEM 1. Security and Issuer.
The class of equity securities to which this Statement on Schedule 13D
(this "Statement") relates is the common stock, par value $0.01 per share (the
"Common Stock" or the "Shares"), of SMTC Corporation (the "Issuer"), with its
principal executive offices located at 635 Hood Road, Markham, Ontario, Canada
L3R 4N6.
ITEM 2. Identity and Background.
(a)-(c) and (f) The names of the persons filing this statement on
Schedule 13D (the "Reporting Persons") are:
The Red Oak Fund, LP, a Delaware limited partnership (the "Fund");
Red Oak Partners, LLC, a New York limited liability company ("Red Oak
Partners"); and
David Sandberg, a United States citizen.
Red Oak Partners serves as the general partner of the Fund. Mr.
Sandberg is the managing member of Red Oak Partners. Red Oak Partners and Mr.
Sandberg may each be deemed to have voting and dispositive power with respect to
the shares of Common Stock held by the Fund.
The principal business of the Fund is that of a private investment
vehicle formed for the purpose of investing in primarily publicly traded equity
securities of small capitalization companies. The principal business of Red Oak
Partners is providing investment management services and serving as the general
partner of the Fund. Mr. Sandberg's principal occupation is serving as the
managing member of Red Oak Partners. The principal office or business address of
each Reporting Person is 145 Fourth Avenue, Suite 15A, New York, NY 10003.
(d)-(e) During the last five years, none of the Reporting Persons have
been (a) convicted in a criminal proceeding (excluding traffic violations or
similar misdemeanors) or (b) a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining future
violations of, or prohibiting or mandating activities subject to, federal or
state securities laws or finding any violation with respect to such laws.
ITEM 3. Source and Amount of Funds or Other Consideration
The source of cash funds for the purchased securities was working
capital of the Fund, and the amount of funds totaled $4,521,414.
ITEM 4. Purpose of Transaction.
On March 19, 2008, the Reporting Persons sent a letter to the Issuer
(the "March 19th Letter") reiterating their belief (which had previously been
communicated to the Issuer's Chief Executive Officer) that additions to the
board of directors of the Issuer are necessary to improve the Issuer's
responsiveness to stockholders and provide a fresh perspective, which hopefully
would contribute to improved operating results. Further, in the March 19th
Letter, the Reporting Persons, to preserve their rights, stated their intention
to nominate four directors for election to the Issuer's Board of Directors at
the next annual meeting of the Issuer, and to deliver a proxy statement and form
of proxy to holders of at least the percentage of the Common Stock required
under applicable law to elect their nominees. On March 31, 2008, the Reporting
Page 5 of 7 pages
Persons sent an additional letter to the Issuer (the "March 31st Letter")
addressing certain concerns with respect to the Issuer. The complete text of
each of the March 19th Letter and the March 31st Letter is attached hereto as
Exhibit B and Exhibit C, respectively.
All of the shares of Common Stock reported herein as beneficially owned
by the Reporting Persons were acquired for investment purposes. Except as set
forth herein, none of the Reporting Persons has any plans or proposals that
relate to or would result in any of the transactions described in subparagraphs
(a) through (j) of Item 4 of Schedule 13D.
The Reporting Persons reserve the right to acquire, or cause to be
acquired, additional securities of the Issuer, to dispose of, or cause to be
disposed, such securities at any time or to formulate other purposes, plans or
proposals regarding the Issuer or any of its securities, to the extent deemed
advisable in light of general investment and trading policies of the Reporting
Persons, market conditions or other factors.
ITEM 5. Interest in Securities of the Issuer.
(a) The Fund beneficially owns 2,383,311 shares of Common Stock,
representing 17.2% of all of the outstanding shares of Common Stock. Red Oak
Partners, as the general partner of the Fund, and Mr. Sandberg, as the managing
member of Red Oak Partners, each may be deemed to beneficially own the 2,383,311
shares of Common Stock held by the Fund. Each Reporting Person disclaims
beneficial ownership with respect to any shares of Common Stock other than the
shares owned directly and of record by such Reporting Person. The percentage set
forth in this response is based on the 13,854,799 shares of Common Stock
(excluding 791,533 exchangeable shares) outstanding as of December 31, 2007, as
reported to the Reporting Persons directly by the Issuer.
(b) Red Oak Partners, the Fund and Mr. Sandberg have shared power
(with each other, and not with any third party) to vote or direct the vote of
and to dispose or direct the disposition of the 2,383,311 shares of Common Stock
held by the Fund.
(c) The Reporting Persons did not effect any transactions in the
Common Stock in the last sixty (60) days, except as follows: The Fund purchased,
on the open market, the following amounts of Common Stock at the prices stated:
(i) on January 18, 2008, 21,401 shares at $1.17 per share; and (ii) on January
23, 2008, 60,250 shares at $1.1458 per share.
(d) Not applicable.
(e) Not applicable.
ITEM 6. Contracts, Arrangements, Understandings or Relationships With Respect
to Securities of the Issuer.
Not applicable.
ITEM 7. Material to be Filed as Exhibits.
Exhibit A - Joint Filing Agreement
Exhibit B - Letter to the Issuer dated March 19, 2008
Exhibit C - Letter to the Issuer dated March 31, 2008
Page 6 of 7 pages
SIGNATURES
After reasonable inquiry and to the best of its knowledge and belief,
each of the undersigned certifies that the information set forth in this
Statement is true, complete and correct.
Dated: April 1, 2008
/s/ David Sandberg
-------------------------
David Sandberg
Red Oak Partners, LLC
By: /s/ David Sandberg
-------------------------------
David Sandberg, Managing Member
The Red Oak Fund, LP
By: Red Oak Partners, LLC, its general partner
By: /s/ David Sandberg
-------------------------------
David Sandberg, Managing Member
Page 7 of 7 pages
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
Exhibit A Joint Filing Agreement
Exhibit B Letter to the Issuer dated March 19, 2008
Exhibit C Letter to the Issuer dated March 31, 2008
EXHIBIT A
JOINT FILING AGREEMENT
The undersigned hereby agree that the statement on Schedule 13D with
respect to the Common Stock, par value $0.01 per share, of SMTC Corporation
dated as of April 1, 2008 is, and any amendments thereto signed by each of the
undersigned shall be, filed pursuant to and in accordance with the provisions of
Rule 13(d)-1(k) under the Securities Exchange Act of 1934, as amended.
Dated: April 1, 2008
/s/ David Sandberg
---------------------------
David Sandberg
Red Oak Partners, LLC
By: /s/ David Sandberg
-------------------------------
David Sandberg, Managing Member
The Red Oak Fund, LP
By: Red Oak Partners, LLC, its general partner
By: /s/ David Sandberg
-------------------------------
David Sandberg, Managing Member
EXHIBIT B
LETTER TO THE ISSUER DATED MARCH 19, 2008
March 19, 2008
SMTC Corporation
635 Hood Road
Markham Ontario
Canada L3R 4N6
Attn: Corporate Secretary
Attention: Corporate Secretary
The Red Oak Fund, L.P. is the registered holder at the above address of 100
shares of common stock ("Common Stock") of SMTC Corporation. As of the date of
this letter Red Oak Partners, LLC are the beneficial owners of 2,383,311 shares
of Common Stock.
We have previously communicated to your CEO our belief that additions to the
board of directors of SMTC are necessary to improve the company's responsiveness
to stockholders and provide a fresh perspective, which we hope would contribute
to improved operating results. Recently we contacted Mr. Caldwell and suggested
that the Board could benefit from the addition of new membership. Discussions
about this have not ended, but to preserve our rights, we are sending you this
notice that we intend to nominate four directors for election to the company's
board of directors at the next annual meeting. We intend to deliver a proxy
statement and form of proxy to holders of at least the percentage of the Common
Stock required under applicable law to elect our nominees.
The name, age, address and beneficial holdings as of the date of this letter of
each of our proposed nominees are as follows:
o Anthony Snow, 32
41 Park Avenue Suite #14
New York, NY 10016
Shares beneficially owned: 0
o Eric Pessagno, 32
150 East 44th Street, 49th Floor
New York, NY 10017
Shares beneficially owned: 0
o Rich Effress, 37
8545 Avenida de las Ondas
La Jolla, CA 92037
Shares beneficially owned: 0
o Rahul Advani, 33
51 JFK Parkway, Suite 200
Short Hills, NJ 07078
Shares beneficially owned: 0
Attached is a description of the principal occupation or employment of each
nominee during the past five years. Other than their consent to stand for
election, we do not have any understanding or agreement at this time with the
nominees. None of the proposed nominees has during the past five years (1) filed
a petition under federal bankruptcy laws or any state insolvency law, (2) been
convicted in a criminal proceeding or was a named subject of a criminal
proceeding (excluding traffic violations and other minor offices), (3) been
found by any court or competent jurisdiction to have violated any federal or
state securities law or federal commodities law, or (4) been the subject of any
order, judgment or decree limiting him from engaging in any type of business
practice or in any activity in connection with the purchase or sale of any
security or commodity.
Also attached is the consent of each nominee to serve as a director if so
elected. Our representative will appear in person at the meeting to nominate our
nominees.
We are prepared to meet with your board to discuss our nominees in the hope the
board will see fit to nominate them for election by your stockholders at the
next annual meeting. If we must engage in a proxy contest, we are prepared to do
so in an expeditious and civil manner. We have discussed our goals with a
limited number of other holders, and believe (although at this point we cannot
ask for commitments) that they are sympathetic to our views. We remain open to
discussions with any of you.
Kind Regards,
David Sandberg
Red Oak Partners, LLC
Portfolio Manager
dsandberg@redoakpartners.com
(212) 614-8952 direct
(646) 390-6784 fax
145 Fourth Avenue, Suite 15A
New York , NY 10003
Director Nominee Biographies
RICHARD EFFRESS is currently principal of Integris, LLC, a venture management
firm. From September 2004 to September 2005, Rich served as Managing Director
and COO of Deephaven Capital Management. Previously, Rich was Chairman, CEO and
Co-founder of MedSource Technologies, Inc., a global provider of manufacturing
and engineering services and supply chain management solutions to the medical
device industry. MedSource was acquired by UTI Corporation in June 2004. Rich
was also a founding partner of Kidd & Company, where he participated in the
development and growth of Chatham Technologies, Inc., a leading provider of
custom electronic enclosure systems for the communications industry. Chatham was
sold to Flextronics International Ltd. (Nadaq:FLEX) in August 2000. Rich
received a B.S. in Economics from the Wharton School of the University of
Pennsylvania and an M.B.A. from Harvard Business School, where he was a Baker
Scholar.
RAHUL ADVANI is a Vice President at Energy Capital Partners. Prior to joining
Energy Capital, Mr. Advani was a Director of Corporate Investments and
Development at Starwood Hotels. Prior to that, Mr. Advani worked at Orion Power
as a member of the finance and M&A departments and as the Director of Investor
Relations & Finance. Additionally, Mr. Advani was a Financial Analyst in the
Investment Banking Division of Morgan Stanley and a consultant at
PricewaterhouseCoopers. Mr. Advani received a BA in mathematical economics from
Colgate University and an MBA from Harvard University.
TONY SNOW has been self employed as a private investor since February 2008. From
2004 - 2008 Mr. Snow worked at WYPER CAPITAL MANAGEMENT, L.P. as an Analyst. Mr.
Snow received a B.S. in business administration from the University of Michigan
and an MBA from Harvard University.
ERIC PESSAGNO has been self employed as a private investor since January 2008.
From 2007 - 2008 he was a co-portfolio manager and equity analyst at Diamondback
capital and from 2003-2007 was an equity analyst at Trellus Management Corp. Mr.
Pessagno received a BA from Columbia University in Mathematics and an MS in
Mathematics from Yale University.
EXHIBIT C
LETTER TO THE ISSUER DATED MARCH 31, 2008
March 31, 2008
VIA FACSIMILE AND CERTIFIED MAIL
--------------------------------
Board of Directors
SMTC Corporation
635 Hood Road
Markham Ontario
Canada L3R 4N6
cc: Corporate Secretary
Dear Board of Directors:
Red Oak Partners LLC and its investment advisory clients beneficially own
approximately 17.2% of the shares of SMTC Corporation ("SMTC"). As the company's
largest shareholder we are writing to share our concerns related to the
strategic direction of SMTC and the responsibility of the Board of Directors to
maximize shareholder value. At the time the company's by-laws were written
(2000) and new management was put in place (2003), SMTC was a larger company
with different needs, specifically related to restructuring the company and
procuring banking/lending relationships during difficult times to keep the
company afloat. For this, the Board maintained by-laws and other company
provisions (such as those limiting the power of large stockholders) in order to
dissuade takeovers at levels below what would be considered fair value. The
needs of the business have since changed, and restructuring and lending
relationships are no longer SMTC's primary obstacles. Instead, the company faces
new challenges and for several years has struggled, with our research showing
that SMTC is the only company in its peer group to have grown neither revenue
nor EBITDA in the past three and four year periods from 2003/2004 to 2007. In
fact, only 2006 was an up year, and we have seen no evidence that 2008 will show
marked improvement (though by sharing "hurdle rates" from which management
bonuses are assessed and paid, SMTC can provide its shareholders - as the owners
of the business - with this information, something we believe should be done).
We are concerned with long-term performance at the company level which has
resulted in poor long-term performance for shareholders in what has otherwise
been a good environment for peer companies. Despite this, Board turnover has
been light due to shareholder unfriendly staggered board provisions, the richest
compensation plans in the peer group have been granted both to management and to
the Board (as described in more detail below), and out-dated by-laws have been
maintained. Given the company's challenges and with the stock trading at what we
believe to be unacceptably low levels, the company is in need of change. As the
largest shareholder - by a wide margin - we ask that our recommendations be
heard and strongly considered in the best interests of all shareholders and not
just for us.
Specifically, we believe the company would benefit from: 1) a change in its
by-laws to remove out-dated or shareholder unfriendly provisions; 2) the
addition of a Board member and consultant experienced in building and selling
contract manufacturing and assembly businesses; and 3) a change in Board
committees to ensure objectivity, independence, and performance.
A change in out-dated by-laws and other shareholder unfriendly provisions.
-------------------------------------------------------------------------
o The company maintains staggered board elections -established when the
2000 by-laws were created under Paul Walker's tenure and no longer
required by the company today. Staggered boards are viewed as
shareholder-unfriendly (by Institutional Shareholder Services,
independent Harvard studies, and others) as they dissuade potential
takeovers and result in stagnant boards with less turnover and
therefore less accountability to shareholders. In fact, the SMTC 2000
S-1 (which contains the company's original by-laws still used today)
states that "the classified (staggered) board provision... could
increase the likelihood that incumbent directors will retain their
positions." We recommend that the company meet its fiduciary
responsibility to its shareholders and become a more shareholder
friendly company open to giving shareholders a say in their own company
- something commonly done across the public company universe. We
request an immediate change to annual Director elections.
o The company has provisions limiting the number (to one) of candidates
which 5%+ stockholders (bottom of page 10 of Schedule 14A filed with
the SEC on 4/20/2007) may nominate for election to the Board of
Directors. We recently nominated four candidates in the face of this
policy, as we are hopeful that SMTC's Board will recognize that this is
out-dated policy and that providing shareholders with several qualified
options as opposed to one is in their best interests. We request that
SMTC remove this provision to accommodate investor needs and interests.
o Other limitations regarding Board votes made by Directors representing
large shareholders should be removed, as all shareholders should have a
say in line with their share ownership. Although a valid concern could
be that we at Red Oak - as the largest shareholder - could seek to
obtain more control of the company for its own purposes via the removal
of these provisions, we submit that we have never taken a company
private nor is it our intention to do so now. In fact, we are willing
to put this in writing to assure all shareholders that we "are doing
the right thing" provided that SMTC similarly does the right thing and
changes company policy to be consistent with that of other public
companies.
o Any remaining clauses granting Bain, Celerity, Kilmer, or anyone else
any preferential treatment regarding their ownership or voting rights
should be removed. It's been a long-time since any of these firms were
the largest shareholders - in fact Red Oak owns 3x more stock than any
of them, yet we seek no preferential treatment. We specifically refer
to the above three firms' exclusion from being defined as "interested
stockholders" in the company's by-laws and Certificate of
Incorporation, but reference the removal of any and all other
preferential treatment they (or others) may receive as well.
The addition of a Board member and consultant experienced in building and
-------------------------------------------------------------------------
selling contract manufacturing and assembly businesses.
------------------------------------------------------
o We believe that shareholder value can clearly be maximized by the
eventual sale of the company, whereupon the value of significant cost
savings to an acquiror could be passed along to SMTC shareholders ($250
million in revenues, just $12 million in EBITDA; we believe there are
real costs that can be saved in a business combination). Although
offering different and valuable skillsets, we do not believe the
current Board has significant prior experience within the contract
manufacturing sector. We believe having this specific expertise and
experience to help direct the company is a must for this company and
its future. Further, retaining an outside strategic consultant with a
history of success whose sole purpose is to evaluate strategic
alternatives and position the company for a sale is what is needed at
this time. We recently nominated Rich Effress for election to the Board
- he is the ideal candidate for both roles, and we are fortunate that
he has agreed to serve (under the combined roles). Mr. Effress has
significant prior success building and selling two contract
manufacturing companies for a combined estimated $1.2 billion (and
significant profit to investors). He is experienced and can help bring
about long overdue change. Red Oak Partners, LLC has no prior or
current economic relationship with Mr. Effress - he is truly
independent and is being recommended by a current shareholder, which we
believe is how Directors should be elected going forward. As a
consultant qualified to evaluate strategic alternatives, we believe Mr.
Effress is one of the most qualified candidates the company can
possibly find and is more experienced than outside advisors or banking
firms yet can be retained at a better price for SMTC shareholders. We
believe that a 1-time 125,000 option grant (vesting ratably over 3
years to ensure a long-term focus) could provide the right incentives
to align Mr. Effress with shareholders in evaluating strategic and
accretive alternatives. As the largest shareholder of SMTC, these
options come out of our pockets more than anyone else's and we view
this as a more than acceptable grant given Mr. Effress' resume of
success and potential contribution to the company. Additionally, as
they are options, they only have value in the event that the company's
stock price increases - there is no free money. We ask that SMTC's
Board add him to the Board under Blair Hendrix's spot (which has sat
empty nearly one year now) and as a consultant under the aforementioned
terms or alternatively add his name to the proxy for the upcoming Board
elections and allow shareholders to vote on whether they want him on
board in both roles.
Improvements by the Audit Committee
-----------------------------------
o SMTC pays $600,000/year for its audit - one of the highest bills among
its peer group - yet was the second to last company in its peer group
(behind Sigmatron, ticker symbol "SGMA") to reports recent earnings.
This comes despite many of its peers also holding operations in
numerous locations, including Mexico and Asia. As owners of the
business, we believe it is highly important that the company be able to
close its books in a timely manner. Failure to do so means that the
company is unable to evaluate performance in a timely manner,
potentially hurting its ability to react to changes in its business,
the marketplace, corporate finance events, etc. For investors, learning
about our company's prior quarter performance when the current quarter
is nearly completed and when other companies have already reported is
unacceptable. We request that the Audit Committee provide investors
with its solution as to how it intends to shorten the time required to
close its books each quarter, as we believe this is a top priority.
o By closing its books earlier, insiders will have shorter black-out
dates. A key criticism of SMTC's Board has been its lack of stock
ownership aside from what's been granted to it by the company and aside
from Bain and Celerity's long-time holdings (although Bain left the
Board a year ago and we question Celerity's involvement at this point -
see below under Compensation Committee). SMTC is the only company we
have found with a practice of "blacking-out" the entire month before
each quarter-end. Coupling that with late reporting translates into
near-constant black-outs for insider transactions, perhaps explaining
why insiders (who are paid well and we believe have significant net
worths) have never purchased stock in the open market (even at prices
as low as $0.90/share). We ask that the Board shorten its black-out
dates to two weeks before each quarter-end - a level consistent with
nearly the entire public company universe.
Changes in the Compensation Committee to ensure objectivity, independence, and
------------------------------------------------------------------------------
performance.
-----------
o We request the appointment of a new - and independent - head of the
compensation committee with a mandate to review SMTC compensation in
order to ensure it is in line with SMTC's peers as well as to review
bonus hurdles and ensure they provide the right incentives for
management to perform. We are concerned with Board controls and
independence, particularly regarding compensation both at the Board and
management level, leading to excess compensation throughout the
company. We base this on thorough analysis we are happy to provide to
the company and make public, which demonstrates that SMTC's Board and
management are paid well in excess of its peer group despite average to
poor performance. The compensation committee is Chaired by Mr. Adamson,
with Mr. Brock and Mr. Hendrix also serving on the committee. We
believe that Mr. Brock - who helped SMTC survive during the 2001-2003
time period - brought the current CEO Mr. Caldwell into the company
(initially as a consultant). We believe a prior relationship on a
business and/or personal level may have existed between the two, and -
while we believe Mr. Brock to be a skilled and capable Director - we
believe in order to maintain true independence, his fiduciary
responsibility to shareholders should have precluded him from serving
on the Compensation Committee and having input into Mr. Caldwell's (and
the rest of the management team's) compensation. Additionally, based on
conversations we had with Mr. Adamson in late 2007 regarding our
questioning his committee's approval of excess management compensation,
we do not believe sufficient time and analysis was performed either
overall or by him personally. When questioned as to why high salaries
and raises were approved and higher than comparable companies (based on
our analysis), we were solely told that a compensation consultant had
been hired - no other answer was provided. When we provided him with
our peer compensation analysis (over email, which clearly illustrated
our point), no further communication was received from Mr. Adamson
related to this topic. This is especially important as earlier that
year - in March 2007 - after the company's sole "up" year in the past 4
years - management was granted raises and a new employee agreement with
costly (to SMTC and its shareholders) severance packages and perks such
as significant car allowances. Of note is that just one month after
this agreement was approved, Mr. Hendrix resigned from the Board. For
background, it is our understanding that that both Mr. Adamson and Mr.
Hendrix have served as Directors of SMTC on behalf of their respective
companies' (Celerity and Bain), who were each once significant
investors of the company. The value of their firms' holdings has each
decreased by (we believe) 90%+, down to under $3 million at the time
the employee agreements were approved and Mr. Hendrix subsequently
resigned from the Board. That given, these reduced levels of
investment, concerns as to how involved either of these members were on
the Board are valid. We further question Mr. Adamson's involvement
(when flying from California to Markham for Board meetings), and based
on this as well as what we felt were unacceptable answers to our
inquiries regarding management compensation (which we felt should have
been known by the Chairman of the Committee), we question how involved
Mr. Adamson has been in his role on the Board. We request records of
his (and Mr. Brock's and Mr. Hendrix's) personal attendance at Board
meetings during the 2006 and 2007 time periods during which time his
committee approved the employee agreements we call into question. We
additionally request that the company provide the minutes and
transcripts of its Board and Compensation Committee meetings during the
2006 and 2007 time periods. According to our analysis, SMTC
compensation is 25-50% higher than its peers, and this has the negative
effect of not keeping management hungry to perform, perhaps explaining
SMTC's revenue and EBITDA under-performance relative to its peers in
the past four years. Due to our concerns regarding how appropriate it
was for Mr. Brock to serve on the compensation committee, questions as
to Mr. Adamson's fiduciary responsibility to maintain a minimum level
of involvement and analysis in his role as Chair of the committee, and
Mr. Hendrix's near-immediate departure from the Board, we call this new
plan into question. We remind Boards members of their fiduciary
responsibilities to shareholders to actively represent their best
interests in roles the Directors accepted upon agreeing to serve on the
Board.
o We request that the compensation committee review and reduce Board
compensation to that in line with other public companies of similar
profitability, market capitalizations, and enterprise values. According
to SMTC's most recent Schedule 14A, SMTC's Board earned a combined
$370,000 in 2006 in total compensation for 5 individuals. This nearly
2x higher than standard board compensation for a company of this
profitability and value. We make special note that despite
aforementioned concerns regarding SMTC maintaining out-dated by-laws
(dating back to the original 2000 S-1), that one of the few provisions
that were changed was Board compensation, as in 2000 Board members
(including Mr. Adamson) voluntarily agreed to take zero compensation.
At that time, Board members reflected significant ownership in the
company - something not present today. We have performed much research
on Board compensation, and request that a newly elected Chairman of the
Compensation Committee evaluate reasonable compensation. As a large
shareholder, we request that the Chairman's compensation be reduced
from the current $75,000 base level to $35,000 cash and 20,000 options.
Further, we recommend that all other Board members receive $20,000 in
cash per year and 20,000 options, plus $600 per call and $1,200 per
meeting (as is currently in place). Audit and compensation committee
members should each receive $3,000, with the Chairman of each receiving
an additional $3,000. We believe this is an important step in the
company "right-sizing" and realizing that it is no longer a $1.3
Billion market cap company, but instead has a current market cap below
$30 million, generated EBITDA less capital expenditures less interest
expense (i.e. pre-tax cash profits) of approximately $5 million in
2007, and that the Board's compensation should be rightly aligned with
this level of profit.
o We recommend that SMTC discontinue all further grants of restricted or
non-restricted common stock and instead implement a company-wide option
plan, monitored by a newly elected Chairman of the Compensation
Committee. We believe that annual dilution of 3% is an acceptable
level, which correlates to roughly 450,000 newly issued options/year.
These would be integrated into management bonuses, as we feel they
better align management with shareholders. To address concerns
regarding the expensing of options hurting the company's stock price,
we point out that options only have value when the company performs -
so its better for shareholders, but has potentially significant value
for management. We also point out that we do not believe SMTC is
trading on its reported or "GAAP" income, but instead trades at levels
reflective of where investors feels the company's EBITDA and free cash
flow are and will be.
o We recommend that a newly elected Chairman of the Compensation
Committee review and re-negotiate with management on a new compensation
plan and employee agreement better suited and fairer for investors than
the current plan. We believe management is capable of performing but
that ensuring the right incentives is of paramount importance - we do
not believe prior plans (and the management of these plans by the prior
Chairman of the Compensation Committee) yielded success for the company
or its investors in any of the prior years. We would like to see
management motivated to get rich as investors do, but not at the
expense of investors during periods of modest (if any) success, such as
2007. We also request that senior management voluntarily terminate
their car allowances (as much as $30,000/year for the CEO) in a show of
good faith by recognizing these are "perks" that were granted after one
good year. As 2007 was not a good year, perks (at the expense of
shareholders) should no longer continue - this is not only common sense
but the right way to run a public company.
We would appreciate your comments, as we think it is important to begin a
meaningful dialogue as to the most effective way to enhance shareholder value
and address the concerns and recommendations listed above. We look forward to
discussing this further with you shortly.
Sincerely,
David Sandberg
Red Oak Partners, LLC
145 4th Ave, Suite 15A
New York, NY 10003