Exhibit 99.2
Interim Consolidated Financial Statements of
SMART Technologies Inc.
Three and nine months ended December 31, 2010 and 2009
SMART Technologies Inc.
Consolidated Statements of Operations (unaudited)
(thousands of U.S. dollars, except per share amounts)
| Three months ended December 31, | Nine months ended December 31, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue | $ | 180,865 | $ | 156,110 | $ | 622,777 | $ | 492,419 | ||||||||
Cost of sales | 94,539 | 79,454 | 309,630 | 250,575 | ||||||||||||
Gross margin | 86,326 | 76,656 | 313,147 | 241,844 | ||||||||||||
Expenses | ||||||||||||||||
Selling, marketing and administration | 45,562 | 35,686 | 128,689 | 97,004 | ||||||||||||
Research and development | 13,793 | 8,992 | 38,297 | 23,682 | ||||||||||||
Depreciation and amortization of property and equipment | 4,825 | 3,939 | 17,335 | 9,279 | ||||||||||||
Amortization of intangible assets (note 8) | 2,355 | — | 6,590 | — | ||||||||||||
Interest expense | 5,329 | 7,180 | 21,555 | 21,337 | ||||||||||||
Interest expense on related party debt | — | 8,987 | 5,297 | 25,690 | ||||||||||||
Foreign exchange (gain) loss | (3,275 | ) | (8,705 | ) | 3,073 | (83,646 | ) | |||||||||
| 68,589 | 56,079 | 220,836 | 93,346 | |||||||||||||
Other income, net | 129 | 169 | 402 | 32 | ||||||||||||
Income before income taxes | 17,866 | 20,746 | 92,713 | 148,530 | ||||||||||||
Income tax expense (recovery) (note 12) | ||||||||||||||||
Current | 2,858 | 1,268 | 34,027 | 13,003 | ||||||||||||
Deferred | 2,536 | (451 | ) | (3,122 | ) | 4,013 | ||||||||||
| 5,394 | 817 | 30,905 | 17,016 | |||||||||||||
Net income | $ | 12,472 | $ | 19,929 | $ | 61,808 | $ | 131,514 | ||||||||
Earnings per share amounts (note 13) | ||||||||||||||||
Basic and diluted earnings per share | $ | 0.10 | $ | 0.11 | $ | 0.46 | $ | 0.75 | ||||||||
See accompanying notes to consolidated financial statements
SMART Technologies Inc.
Consolidated Balance Sheets (unaudited)
(thousands of U.S. dollars)
| December 31, 2010 | March 31, 2010 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 130,124 | $ | 230,169 | ||||
Trade receivables (note 5) | 113,148 | 81,901 | ||||||
Other current assets | 6,470 | 11,972 | ||||||
Inventory (note 6) | 79,306 | 58,743 | ||||||
Deferred income taxes | 11,534 | 11,683 | ||||||
| 340,582 | 394,468 | |||||||
Property and equipment (note 7) | 113,004 | 107,999 | ||||||
Goodwill (note 2) | 34,819 | — | ||||||
Intangible assets (note 8) | 44,431 | 506 | ||||||
Deferred income taxes | 8,503 | 14,962 | ||||||
Deferred financing fees | 9,070 | 9,652 | ||||||
Other long-term assets (note 16) | — | 507 | ||||||
| $ | 550,409 | $ | 528,094 | |||||
LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 29,258 | $ | 38,861 | ||||
Accrued and other current liabilities | 81,098 | 81,123 | ||||||
Deferred revenue | 30,061 | 24,697 | ||||||
Income taxes payable | 10,049 | 5,523 | ||||||
Current portion of long-term debt (note 9) | 3,050 | 92,790 | ||||||
Current portion of related party long-term debt (note 9) | — | 1,421 | ||||||
| 153,516 | 244,415 | |||||||
Long-term debt (note 9) | 362,038 | 473,732 | ||||||
Related party long-term debt (note 9) | — | 429,855 | ||||||
Deferred revenue | 84,988 | 74,407 | ||||||
| 600,542 | 1,222,409 | |||||||
Shareholders’ deficit | ||||||||
Share capital (note 10) | ||||||||
Class B Shares—no par value | ||||||||
Authorized—unlimited | ||||||||
Issued and outstanding—79,464,195 shares as of December 31, 2010 and zero shares as of March 31, 2010 | 238,407 | — | ||||||
Class A Subordinate Voting Shares—no par value | ||||||||
Authorized—unlimited | ||||||||
Issued and outstanding—44,308,596 shares as of December 31, 2010 and zero shares as of March 31, 2010 | 483,451 | — | ||||||
Voting Common Shares—no par value | ||||||||
Authorized—unlimited | ||||||||
Issued and outstanding—zero shares as of December 31, 2010 and 53,563,844 shares as of March 31, 2010 | — | 41,166 | ||||||
Voting Preferred Shares—no par value | ||||||||
Authorized—unlimited | ||||||||
Issued and outstanding—zero shares as of December 31, 2010 and 127,483,148 shares as of March 31, 2010 | — | — | ||||||
Non-voting Common Shares—no par value | ||||||||
Authorized—unlimited | ||||||||
Issued and outstanding—zero shares as of December 31, 2010 and 127,489,844 shares as of March 31, 2010 | — | 120,108 | ||||||
Accumulated other comprehensive loss (note 4) | (8,155 | ) | (24,364 | ) | ||||
Additional paid-in capital (notes 10 and 11) | 5,581 | — | ||||||
Deficit | (769,417 | ) | (831,225 | ) | ||||
| (50,133 | ) | (694,315 | ) | |||||
| $ | 550,409 | $ | 528,094 | |||||
See accompanying notes to consolidated financial statements
SMART Technologies Inc.
Consolidated Statements of Shareholders’ Deficit (unaudited)
(thousands of U.S. dollars)
For the nine months ended December 31, 2010
| Share capital stated amount | Deficit | Accumulated other comprehensive (loss) income | Additional paid-in capital | Total | ||||||||||||||||
Balance as of March 31, 2010 | $ | 161,274 | $ | (831,225 | ) | $ | (24,364 | ) | $ | — | $ | (694,315 | ) | |||||||
Net income | — | 61,808 | — | — | 61,808 | |||||||||||||||
Participant Equity Loan Plan (note 10) | 8,370 | — | — | — | 8,370 | |||||||||||||||
2010 Reorganization (notes 3 and 10) | 413,618 | — | — | — | 413,618 | |||||||||||||||
Initial public offering | 138,596 | — | — | — | 138,596 | |||||||||||||||
Foreign currency translation | — | — | 16,209 | — | 16,209 | |||||||||||||||
Stock-based compensation | — | — | — | 5,581 | 5,581 | |||||||||||||||
Balance as of December 31, 2010 | $ | 721,858 | $ | (769,417 | ) | $ | (8,155 | ) | $ | 5,581 | $ | (50,133 | ) | |||||||
For the nine months ended December 31, 2009
| Share capital stated amount | Deficit | Accumulated other comprehensive (loss) income | Additional paid-in capital | Total | ||||||||||||||||
Balance as of March 31, 2009 | $ | 160,247 | $ | (973,257 | ) | $ | 130,677 | $ | — | $ | (682,333 | ) | ||||||||
Net income | — | 131,514 | — | — | 131,514 | |||||||||||||||
Participant Equity Loan Plan (note 10) | (344 | ) | — | — | — | (344 | ) | |||||||||||||
Foreign currency translation | — | — | (133,041 | ) | — | (133,041 | ) | |||||||||||||
Balance as of December 31, 2009 | $ | 159,903 | $ | (841,743 | ) | $ | (2,364 | ) | $ | — | $ | (684,204 | ) | |||||||
See accompanying notes to consolidated financial statements
SMART Technologies Inc.
Consolidated Statements of Cash Flows (unaudited)
(thousands of U.S. dollars)
For the nine months ended December 31, 2010 and 2009
| December 31, 2010 | December 31, 2009 | |||||||
Cash (used in) provided by | ||||||||
Operations | ||||||||
Net income | $ | 61,808 | $ | 131,514 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Depreciation and amortization of property and equipment | 20,541 | 12,285 | ||||||
Amortization of intangible assets | 6,590 | — | ||||||
Amortization of deferred financing fees | 2,195 | 1,488 | ||||||
Non-cash interest expense (recovery) on long-term debt | (577 | ) | (1,979 | ) | ||||
Non-cash interest expense on related party long-term debt | 5,297 | 25,690 | ||||||
Loss (gain) on foreign exchange | (440 | ) | (85,218 | ) | ||||
Stock-based compensation | 5,581 | — | ||||||
Deferred income tax (recovery) expense | (3,122 | ) | 3,819 | |||||
Loss on disposal of property and equipment | 9 | 220 | ||||||
Trade receivables | (25,205 | ) | (9,549 | ) | ||||
Other current assets | 7,640 | 226 | ||||||
Inventory | (16,225 | ) | 18,291 | |||||
Income taxes recoverable and payable | 1,660 | 9,061 | ||||||
Accounts payable, accrued and other current liabilities | (16,187 | ) | (9,503 | ) | ||||
Deferred revenue | 13,325 | 10,818 | ||||||
Cash provided by operating activities | 62,890 | 107,163 | ||||||
Investing | ||||||||
Business acquisition | (82,000 | ) | — | |||||
Cash of subsidiary at date of acquisition | 7,974 | — | ||||||
Capital expenditures | (20,440 | ) | (19,508 | ) | ||||
Intangible assets | (417 | ) | (484 | ) | ||||
Cash used in investing activities | (94,883 | ) | (19,992 | ) | ||||
Financing | ||||||||
Proceeds from initial public offering, net | 134,314 | — | ||||||
Proceeds from sale of property and equipment | 14 | 18 | ||||||
Proceeds from issuance of debt | — | 7,910 | ||||||
Financing fees paid | (1,396 | ) | — | |||||
Repayment of debt | (213,544 | ) | (2,263 | ) | ||||
Repayment of loans under the Participant Equity Loan Plan | 8,223 | 283 | ||||||
Cash (used in) provided by financing activities | (72,389 | ) | 5,948 | |||||
Effect of exchange rate changes on cash and cash equivalents | 4,337 | 12,035 | ||||||
Net (decrease) increase in cash and cash equivalents | (100,045 | ) | 105,154 | |||||
Cash and cash equivalents, beginning of period | 230,169 | 37,055 | ||||||
Cash and cash equivalents, end of period | $ | 130,124 | $ | 142,209 | ||||
Cash and cash equivalents are comprised as follows | ||||||||
Cash | $ | 12,380 | $ | 8,085 | ||||
Short-term investments | 117,744 | 134,124 | ||||||
| $ | 130,124 | $ | 142,209 | |||||
Supplemental cash flow disclosures | ||||||||
Interest paid | $ | 26,989 | $ | 22,524 | ||||
Interest received | $ | 411 | $ | 261 | ||||
Income taxes paid | $ | 31,628 | $ | 3,795 | ||||
Amount of non-cash capital additions in accounts payable, accrued and other current liabilities | $ | 3,609 | $ | 105 | ||||
See accompanying notes to consolidated financial statements
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the nine months ended December 31, 2010 and 2009
1. Basis of presentation and significant accounting policies
The interim consolidated financial statements of SMART Technologies Inc. (the “Company”) have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applied on a basis consistent with those disclosed in our annual audited financial statements. They do not include all the disclosures required by GAAP for annual financial statements and should be read in conjunction with the Company’s audited financial statements for the year ended March 31, 2010, which have been prepared in accordance with GAAP. All normal recurring adjustments considered necessary for fair presentation have been included in these financial statements.
(a) Intangible assets
Intangible assets are stated at cost less accumulated amortization and are comprised of acquired technology, customer relationships, and other intellectual property.
Intangible assets are amortized as follows.
Acquired technology | Five to ten years | |
Customer relationships | Five years | |
Other intellectual property | Five to ten years |
Intangibles with determinable lives are amortized using the straight-line method based on the estimated useful lives of the respective assets. When there is a change in the estimated useful life of a finite-lived intangible asset, amortization is adjusted prospectively. Intangible assets with finite lives are tested for impairment if events or conditions have occurred that indicate that their carrying value may not be recoverable. Any impairment charge is recognized to reduce the carrying value of the intangible asset to its estimated fair value in the period in which such determination is made.
(b) Goodwill
Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed, based on their fair values.
Goodwill is not amortized, but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of each identified reporting unit is compared with its fair value. When the fair value exceeds its carrying amount, goodwill is considered not to be impaired and the second step of the impairment test is unnecessary. The second step is carried out when the carrying amount exceeds its fair value, in which case the implied fair value of the goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the value of goodwill is determined in a business combination, using the fair value as if it was the purchase price. When the carrying amount of the goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.
(c) Business combinations
In December 2007, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard for business combinations, which established principles and requirements for how an acquirer is to recognize and
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the nine months ended December 31, 2010 and 2009
measure in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree in a business combination. This new accounting standard also established principles regarding how goodwill acquired in a business combination or gain from a bargain purchase should be recognized and measured, as well as providing guidelines on the disclosure requirements. In April 2009, FASB amended this new accounting standard to require the assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value, if the fair value can be determined during the measurement period. This new standard was applied to the Company’s accounting for its acquisition on April 21, 2010 (note 2).
(d) Stock-based compensation
Stock-based compensation expense for stock options is estimated at the grant date based on each option’s fair value as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The Company generally recognizes stock-based compensation expense ratably on a straight-line basis over the requisite service period with an offset to additional paid-in capital. Further information regarding stock-based compensation can be found in note 11, “Stock-based compensation”.
(e) Participant equity loan plan
The Company has a Participant Equity Loan Plan (the “Plan”) under which the Company loaned funds to certain employees for the purpose of allowing these employees the opportunity to purchase common shares of the Company at fair value. Common shares issued under the Plan are subject to voting and transferability restrictions that lapse based on certain events.
Shares purchased under the Plan are reported as share capital at their fair value on the date of issue. The outstanding related employee loans and accrued interest are reported as a deduction from share capital. When there is an amendment in the terms of the Plan, the difference between the fair value at the date of the amendment and the fair value at the original date of purchase is recognized as stock-based compensation ratably on a graded basis over the period that restrictions on the shares lapse.
2. Acquisition
On April 21, 2010 the Company acquired 100% of the issued and outstanding shares of Next Holdings Limited (“NextWindow”), a privately held New Zealand company, for $82,000 in cash. NextWindow designs components for optical touch screens for integration into electronic displays including PC displays.
The acquisition was accounted for using the acquisition method whereby identifiable assets acquired and liabilities assumed were measured at their fair values as of the date of acquisition. The excess of the acquisition price over such fair value was recorded as goodwill on acquisition. Fair values were determined based on information available at the date of acquisition. The Company has included the operating results of NextWindow in the consolidated financial statements from the date of acquisition. Revenue and net loss from NextWindow reported in the Company’s results for the three months ended December 31, 2010 amounted to $4,333 and $4,788, respectively, and for the nine months ended December 31, 2010 amounted to $19,583 and $8,822, respectively. The net loss for the three and nine months ended December 31, 2010 included amortization of intangible assets resulting from the acquisition of $2,364 and $6,539, respectively.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the nine months ended December 31, 2010 and 2009
The following table summarizes the allocation of the total consideration to the assets acquired and liabilities assumed based on fair values.
Assets purchased | ||||
Current assets | $ | 12,513 | ||
Capital assets | 2,177 | |||
Intangible assets | 50,061 | |||
Goodwill | 34,819 | |||
| $ | 99,570 | |||
Liabilities assumed | ||||
Current liabilities | $ | 10,514 | ||
Deferred income tax liability | 15,030 | |||
| $ | 25,544 | |||
Net non-cash assets acquired | $ | 74,026 | ||
Cash acquired | 7,974 | |||
Consideration paid—cash | $ | 82,000 | ||
The goodwill associated with the acquisition is primarily attributable to broader exposure to international markets, enhancing the Company’s work force with skilled researchers and engineers, and expected incremental revenue from new technologies and customers generated from the existing base of intangible assets. The goodwill is not expected to be deductible for income tax purposes.
The Company expensed $1,143 of acquisition-related costs included in selling, marketing and administration in the nine months ended December 31, 2010.
The weighted average amortization period of the total intangible assets related to the business acquisition is approximately 5.6 years at the date of acquisition.
3. 2010 Reorganization
On May 13, 2010, the Company’s board of directors approved a reorganization (the “2010 Reorganization”) of the capital of the Company. Through a series of transactions including a payment on May 25, 2010 of $8,016 on the shareholder note payable, the 2010 Reorganization resulted in the shareholder note payable and the cumulative preferred shares, together with all accrued interest and accumulated dividends thereon, as well as the Company’s existing share capital being effectively converted into new share capital. At the completion of the 2010 Reorganization, the Company’s share capital consisted of 433,676,686 Class A Preferred Shares, 170,089,800 Class B Shares and 10,957,191 Class A Subordinate Voting Shares. As part of the 2010 Reorganization, the Company amalgamated with a successor corporation to School 3 ULC, a corporation that, prior to giving effect to the 2010 Reorganization, held all of the outstanding non-voting common shares. This series of transactions was completed on June 8, 2010. On June 24, 2010, the Company effected a one-for-two reverse stock split for both the Class A Subordinate Voting Shares and the Class B Shares. In July 2010, in connection with the Company’s initial public offering (“IPO”) transaction, all the issued and outstanding Class A Preferred Shares were converted into Class B or Class A Subordinate Voting Shares and the Class A Preferred Shares were removed from the authorized share capital of the Company. Also refer to notes 9 and 10 which describe the impact of the 2010 Reorganization on the Company’s financial position in greater detail.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the nine months ended December 31, 2010 and 2009
4. Accumulated other comprehensive (loss) income and comprehensive income (loss)
| Three months ended December 31, | Nine months ended December 31, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Accumulated other comprehensive (loss) income | ||||||||||||||||
Balance at beginning of period | $ | (4,865 | ) | $ | 13,521 | $ | (24,364 | ) | $ | 130,677 | ||||||
Unrealized (losses) gains on translation of consolidated financial statements to U.S. dollar reporting currency | (1,869 | ) | (14,562 | ) | 15,773 | (134,722 | ) | |||||||||
Unrealized (losses) gains on translation of foreign subsidiaries to Canadian dollar functional currency | (1,421 | ) | (1,323 | ) | 436 | 1,681 | ||||||||||
Other comprehensive (loss) income | (3,290 | ) | (15,885 | ) | 16,209 | (133,041 | ) | |||||||||
Balance at end of period | $ | (8,155 | ) | $ | (2,364 | ) | $ | (8,155 | ) | $ | (2,364 | ) | ||||
| Three months ended December 31, | Nine months ended December 31, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Comprehensive income (loss) | ||||||||||||||||
Net income | $ | 12,472 | $ | 19,929 | $ | 61,808 | $ | 131,514 | ||||||||
Foreign currency translation | (3,290 | ) | (15,885 | ) | 16,209 | (133,041 | ) | |||||||||
Comprehensive income (loss) | $ | 9,182 | $ | 4,044 | $ | 78,017 | $ | (1,527 | ) | |||||||
5. Trade receivables
| December 31, 2010 | March 31, 2010 | |||||||
Trade receivables | $ | 116,684 | $ | 85,769 | ||||
Allowance for doubtful receivables | (3,536 | ) | (3,868 | ) | ||||
| $ | 113,148 | $ | 81,901 | |||||
6. Inventory
| December 31, 2010 | March 31, 2010 | |||||||
Raw materials | $ | 20,173 | $ | 11,061 | ||||
Finished goods | 63,342 | 51,408 | ||||||
Provision for obsolescence | (4,209 | ) | (3,726 | ) | ||||
| $ | 79,306 | $ | 58,743 | |||||
The provision for obsolescence is related to finished goods inventory.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the nine months ended December 31, 2010 and 2009
7. Property and equipment
| December 31, 2010 | March 31, 2010 | |||||||
Cost | ||||||||
Building | $ | 73,841 | $ | 72,180 | ||||
Information systems, hardware and software | 43,820 | 45,607 | ||||||
Assembly equipment, furniture, fixtures and other | 38,332 | 40,852 | ||||||
Capital additions in progress | 12,224 | 3,107 | ||||||
| $ | 168,217 | $ | 161,746 | |||||
Accumulated depreciation and amortization | ||||||||
Building | $ | 5,731 | $ | 3,167 | ||||
Information systems, hardware and software | 23,421 | 21,434 | ||||||
Assembly equipment, furniture, fixtures and other | 26,061 | 29,146 | ||||||
| $ | 55,213 | $ | 53,747 | |||||
Net book value | ||||||||
Building | $ | 68,110 | $ | 69,013 | ||||
Information systems, hardware and software | 20,399 | 24,173 | ||||||
Assembly equipment, furniture, fixtures and other | 12,271 | 11,706 | ||||||
Capital additions in progress | 12,224 | 3,107 | ||||||
| $ | 113,004 | $ | 107,999 | |||||
8. Intangible assets
| December 31, 2010 | March 31, 2010 | |||||||
Cost | ||||||||
Acquired technology | $ | 29,600 | $ | — | ||||
Customer relationships | 17,500 | — | ||||||
Other intellectual property | 3,943 | 527 | ||||||
| $ | 51,043 | $ | 527 | |||||
Accumulated amortization | ||||||||
Acquired technology | $ | 3,700 | $ | — | ||||
Customer relationships | 2,421 | — | ||||||
Other intellectual property | 491 | 21 | ||||||
| $ | 6,612 | $ | 21 | |||||
Net book value | ||||||||
Acquired technology | $ | 25,901 | $ | — | ||||
Customer relationships | 15,080 | — | ||||||
Other intellectual property | 3,450 | 506 | ||||||
| $ | 44,431 | $ | 506 | |||||
The increase in intangible assets in the nine months ended December 31, 2010 relates to the acquisition of NextWindow (note 2).
Amortization expense of finite-lived intangibles for the three months ended December 31, 2010 was $2,355 (2009—zero) and for the nine months ended December 31, 2010 was $6,590 (2009—zero).
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the nine months ended December 31, 2010 and 2009
9. Long-term debt and credit facilities
Long-term debt
| December 31, 2010 | March 31, 2010 | |||||||
First lien facility | $ | 295,088 | $ | 337,375 | ||||
Second lien facility | 70,000 | 100,000 | ||||||
Unsecured term loan | — | 79,407 | ||||||
Term construction facility | — | 49,740 | ||||||
| 365,088 | 566,522 | |||||||
Current portion of long-term debt | (3,050 | ) | (92,790 | ) | ||||
| $ | 362,038 | $ | 473,732 | |||||
Related party long-term debt
| December 31, 2010 | March 31, 2010 | |||||||
Construction loan | $ | — | $ | 1,421 | ||||
Shareholder note payable | — | 327,864 | ||||||
Cumulative preferred shares | — | 101,991 | ||||||
| — | 431,276 | |||||||
Current portion of related party long-term debt | — | (1,421 | ) | |||||
| $ | — | $ | 429,855 | |||||
The term construction facility, construction loan, shareholder note payable and cumulative preferred shares were Canadian dollar facilities. All other debt and credit facilities are U.S. dollar facilities.
In the nine months ended December 31, 2010 the Company repaid in full the $40,000 balance drawn on the revolving portion of the First lien facility at March 31, 2010.
As part of the 2010 Reorganization disclosed in note 3:
| (a) | The Company made a payment of $8,016 on the shareholder note payable; |
| (b) | The shareholder note payable of C$253,972 plus accrued interest to May 22, 2010 of C$75,074 were effectively converted to Class A Preferred Shares and Class B Shares (note 10); and |
| (c) | The 84,883,191 cumulative preferred shares of C$84,883 plus accrued dividends to May 22, 2010 of C$19,748 were converted to Class A Preferred Shares (note 10). |
As part of the Company’s IPO transaction which closed on July 20, 2010, the Company put into place an additional $55,000 revolving credit facility under the First lien facility maturing August 28, 2013, which increased the total revolving credit capacity to $100,000, which remains undrawn as of December 31, 2010. In addition, the Company repaid $40,000 and $19,244 of the unsecured term loan and term construction facility, respectively, from the IPO proceeds.
In September 2010, the remaining balances of $42,389 of the unsecured term loan, $29,836 of the term construction facility and $1,438 of the construction loan were repaid in full. In November 2010, $30,000 of the Second lien facility was repaid.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the nine months ended December 31, 2010 and 2009
10. Share capital
(a) Share capital
The Company’s share capital was reorganized as a result of the 2010 Reorganization (note 3) and the IPO on July 20, 2010.
(i) Authorized
The Company’s authorized share capital consists of an unlimited number of Class A Subordinate Voting Shares, an unlimited number of Class B Shares, 433,676,686 Class A Preferred Shares and an unlimited number of Preferred Shares issuable in series.
Each holder of Class B Shares and each holder of Class A Subordinate Voting Shares is entitled to receive notice of and attend all meetings of the Company’s shareholders, except meetings at which only holders of another particular class or series have the right to vote. At each such meeting, each Class B Share entitles its holder to 10 votes and each Class A Subordinate Voting Share entitles its holder to one vote, voting together as a single class, except as otherwise set forth in the Company’s articles of amalgamation or prescribed by applicable laws.
(ii) Issued and outstanding
| March 31, 2010 | Participant Equity Loan Plan | 2010 Reorganization | Initial Public Offering | December 31, 2010 | ||||||||||||||||
Voting Common Shares | ||||||||||||||||||||
Shares | 53,563,844 | — | (53,563,844 | ) | — | — | ||||||||||||||
Stated amount | $ | 41,166 | $ | 2,122 | $ | (43,288 | ) | $ | — | $ | — | |||||||||
Non-voting Common Shares | ||||||||||||||||||||
Shares | 127,489,844 | — | (127,489,844 | ) | — | — | ||||||||||||||
Stated amount | $ | 120,108 | $ | — | $ | (120,108 | ) | $ | — | $ | — | |||||||||
Voting Preferred Shares | ||||||||||||||||||||
Shares | 127,483,148 | — | (127,483,148 | ) | — | — | ||||||||||||||
Stated amount | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Class A Subordinate Voting Shares | ||||||||||||||||||||
Shares | — | — | 5,478,596 | 38,830,000 | 44,308,596 | |||||||||||||||
Stated amount | $ | — | $ | 6,248 | $ | 3,156 | $ | 474,047 | $ | 483,451 | ||||||||||
Class B Shares | ||||||||||||||||||||
Shares | — | — | 85,044,901 | (5,580,706 | ) | 79,464,195 | ||||||||||||||
Stated amount | $ | — | $ | — | $ | 160,242 | $ | 78,165 | $ | 238,407 | ||||||||||
Class A Preferred Shares | ||||||||||||||||||||
Shares | — | — | 433,676,686 | (433,676,686 | ) | — | ||||||||||||||
Stated amount | $ | — | $ | — | $ | 413,616 | $ | (413,616 | ) | $ | — | |||||||||
Total share capital | ||||||||||||||||||||
Shares | 308,536,836 | — | 215,663,347 | (400,427,392 | ) | 123,772,791 | ||||||||||||||
Stated amount | $ | 161,274 | $ | 8,370 | $ | 413,618 | $ | 138,596 | $ | 721,858 | ||||||||||
The 2010 Reorganization completed on June 8, 2010 effectively resulted in the conversion of the Company’s Voting Common Shares, Voting Preferred Shares, cumulative preferred shares including accrued interest (note 9) and shareholder note payable (note 9) into 10,957,191 Class A Subordinate Voting Shares, 170,089,800 Class B Shares and 433,676,686 Class A Preferred Shares. The Company’s Non-voting Common Shares were cancelled as part of the 2010 Reorganization.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the nine months ended December 31, 2010 and 2009
On June 24, 2010, the Company effected a one-for-two reverse split of the Class A Subordinate Voting Shares and the Class B Shares.
As part of the Company’s IPO on July 20, 2010, the 433,676,686 Class A Preferred Shares were converted to 5,898,744 Class B Shares and 18,550,550 Class A Subordinate Voting Shares and then 11,479,450 Class B Shares were converted to 11,479,450 Class A Subordinate Voting Shares. New Class A Subordinate Voting Shares issued by the Company to the public pursuant to the IPO totaled 8,800,000 at an issue price of $17.00. Proceeds from the IPO were $138,596, net of underwriting commissions of $7,854 and other offering expenses of $7,429, net of tax of $4,279. Other offering expenses were also recorded as a reduction of IPO proceeds effective the date of the IPO. Concurrent with this transaction, 30,030,000 Class A Subordinate Voting Shares were sold to the public by existing shareholders at an issue price of $17.00.
(b) Participant equity loan plan
In 2009 the Company implemented a Participant Equity Loan Plan (the “Plan”) under which the Company loaned funds to certain employees for the purpose of allowing them to purchase common shares of the Company at fair market value as determined by a third party valuation.
Shares granted under the Plan are reported as share capital in shareholders’ equity at their value on the date of issue. The outstanding related loans and accrued interest are reported as a reduction of share capital. Total loans and accrued interest amounted to $2,584 at December 31, 2010.
Share capital increased by $8,370 in the nine months ended December 31, 2010 as a result of Plan activity which consisted of loan principal and interest repayments totaling $8,347, interest accrued during the period of $171 and foreign exchange adjustments of $194. Also, during the nine months ended December 31 2010, 26,250 shares of employees who left the Company were repurchased and related loans and accrued interest amounting to $93 were repaid.
Shares issued under the Plan are subject to restrictions that lapse as follows: 40% of the Plan shares are subject to restrictions that lapse based on passage of time and 60% are subject to restrictions that lapse based on performance of the Company. The restrictions on performance-based shares lapse upon a liquidity event that provides a return on invested capital earned by the principal shareholders of the Company above certain valuation thresholds. At the time of the IPO, 789,176 time-vesting shares were unrestricted and as a result of the Company’s IPO, 1,951,594 performance-based shares became unrestricted, causing employee loans of $6,537 to become immediately repayable.
In August 2010, the Plan was amended such that the 40% of shares with performance-based restrictions that did not become unrestricted as part of the IPO transaction, representing 24% of the total shares under the Plan, would become unrestricted in two equal installments on each of the next two anniversary dates of the IPO. As a result of this amendment, the difference between the fair value of the affected shares at the date of the amendment and the fair value at the initial issuance of the shares is being recognized as stock-based compensation ratably on a graded basis over the period the restrictions lapse. The expense is included in selling, marketing, and administration and research and development, with an offsetting credit to additional paid-in capital. The total number of shares affected by this amendment was 1,301,063 Class A Subordinate Voting Shares. The weighted average grant date price was $2.36 and the fair value at the date of the amendment was $13.38. The total amount of compensation cost is adjusted to reflect expected forfeitures based on Company historical data. Changes in the forfeiture rate will result in changes in the amount of compensation cost recognized over the amortization period. The total value to be expensed over two years is $13,746, of which $4,852 was expensed in the nine months ended December 31, 2010.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the nine months ended December 31, 2010 and 2009
11. Stock-based compensation
On June 3, 2010 the Company approved the 2010 Equity Incentive Plan (“2010 Plan”) which provides for the grant of options, restricted share units and deferred share units to the directors, officers, employees, consultants and service providers of the Company and its subsidiaries. Under the 2010 Plan, the Company has reserved for issuance Class A Subordinate Voting Shares representing up to 10% of the total outstanding Class A Subordinate Voting Shares and Class B Shares.
The Company has granted the following stock options to purchase an equivalent number of the Company’s Class A Subordinate Voting Shares: 1,140,000 options on July 15, 2010 at an exercise price of $17.00 and 297,000 options in the three months ended December 31, 2010 at a weighted average price of $13.42. These options will vest over various periods ranging between three and four years.
A summary of the status of the Company’s stock options at December 31, 2010 and 2009 and changes during the three and nine months ended on those dates is as follows.
| Three months ended December 31, | Nine months ended December 31, | |||||||||||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||||
| Number of options | Weighted average exercise price per option | Number of options | Weighted average exercise price per option | Number of options | Weighted average exercise price per option | Number of options | Weighted average exercise price per option | |||||||||||||||||||||||||
Balance at beginning of period | 1,132,000 | $ | 17.00 | — | $ | — | — | $ | — | — | $ | — | ||||||||||||||||||||
Granted | 297,000 | $ | 13.42 | — | $ | — | 1,437,000 | $ | 16.26 | — | $ | — | ||||||||||||||||||||
Exercised | — | $ | — | — | $ | — | — | $ | — | — | $ | — | ||||||||||||||||||||
Forfeited | (8,000 | ) | $ | 17.00 | — | $ | — | (16,000 | ) | $ | 17.00 | — | $ | — | ||||||||||||||||||
Balance at end of period | 1,421,000 | $ | 16.25 | — | $ | — | 1,421,000 | $ | 16.25 | — | $ | — | ||||||||||||||||||||
Vested at December 31, 2010 | — | $ | — | — | $ | — | — | $ | — | — | $ | — | ||||||||||||||||||||
Exercisable at December 31, 2010 | — | $ | — | — | $ | — | — | $ | — | — | $ | — | ||||||||||||||||||||
The fair value of each stock-based award is estimated at the date of grant using the BSM option-pricing model and the assumptions noted in the table below. The amounts computed according to the model may not be indicative of the actual values realized upon the exercise of the options by the holders. The weighted average fair value of options granted in the nine months ended December 31, 2010 was $5.60. No options were granted in the nine months ended December 31, 2009.
The assumed volatility used in the stock option valuation for options granted for the three and nine months ended December, 2010 is the Company’s estimate of the future volatility of the share price based on a review of the volatility of comparable public companies. The assumed dividend yield reflects the Company’s intention to not pay cash dividends in the foreseeable future. The assumed expected life is the Company’s estimated expected exercise pattern of the options. The assumed risk free interest rate is based on the yield of a U.S. government zero coupon Treasury bill issue with a remaining life approximately equal to the expected term of the option.
The Company estimates forfeitures at the time of grant based on the Company’s historical data and revises these estimates in subsequent periods if actual forfeitures differ from those estimates.
Stock-based compensation expense related to these options included in selling, marketing and administration expense and research and development expense for the three months ended December 31, 2010 was $405 (2009—zero) and for the nine months ended December 31, 2010 was $729 (2009—zero). As at December 31, 2010, the total compensation cost not yet recognized related to stock options was $5,971. This amount is expected to be recognized over the next 48 months on a weighted average basis.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the nine months ended December 31, 2010 and 2009
The weighted average fair value of the stock options granted was calculated using the BSM option-pricing model with the following assumptions.
| Three months ended December 31, 2010 | Nine months ended December 31, 2010 | |||||||
Fair value of stock options granted during the periods | $ | 3.41 | $ | 5.60 | ||||
Assumptions | ||||||||
Risk free interest rate | 0.96%-1.49 | % | 0.96%-1.49 | % | ||||
Expected life in years | 4.0 | 4.0 | ||||||
Expected dividend yield | 0.0 | % | 0.0 | % | ||||
Volatility | 45.0 | % | 45.0 | % | ||||
12. Income taxes
Income tax expense differs from the amount that would be computed by applying the combined Canadian federal and provincial statutory income tax rates to income before income taxes. The reasons for these differences are as follows.
| Nine months ended December 31, | ||||||||
| 2010 | 2009 | |||||||
Income before income taxes | $ | 92,713 | $ | 148,530 | ||||
Combined tax rate | 27.89 | % | 29.40 | % | ||||
Expected income tax expense | 25,858 | 43,668 | ||||||
Adjustments | ||||||||
Non-deductible, non-taxable items | 3,697 | (25,008 | ) | |||||
Variation in foreign tax rates | 1,015 | 509 | ||||||
Deferred income tax rate differences | 1,069 | (129 | ) | |||||
Change in valuation allowance | 1,546 | 496 | ||||||
Investment tax credits | (3,200 | ) | (2,194 | ) | ||||
Other | 920 | (326 | ) | |||||
Income tax expense | $ | 30,905 | $ | 17,016 | ||||
The Canada Revenue Agency (the “CRA”) has commenced an examination of the Company’s Canadian income tax returns for taxation years ended in the 2008 and 2009 fiscal years which is in its preliminary stages. Notwithstanding management’s belief in the merit of the Company’s tax filing position, it is possible that any reassessments to be issued by the CRA, on an aggregate basis, could result in a material effect on the Company’s consolidated financial statements.
13. Earnings per share amounts
| Three months ended December 31, | Nine months ended December 31, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Weighted average number of shares outstanding—basic and diluted | 123,772,791 | 180,508,997 | 133,067,015 | 174,867,315 | ||||||||||||
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the nine months ended December 31, 2010 and 2009
The weighted average number of shares outstanding for the three and nine months ended December 31, 2010 reflects voting common shares and non-voting shares outstanding on a pro-rata basis from April 1, 2010 to June 8, 2010, the date of the 2010 Reorganization and Class A Subordinate Voting Shares and Class B Shares outstanding on a pro-rata basis from June 9, 2010 to December 31, 2010, after giving effect to the one-for-two reverse share split effected June 24, 2010 for the Class A Subordinate Voting Shares and the Class B Shares. Options to purchase 1,421,000 Class A Subordinate Voting Shares were outstanding at December 31, 2010 of which 134,500 options had an exercise price lower than the weighted average trading price of underlying Class A Subordinate Voting Shares during the three and nine months ended December 31, 2010. These options were excluded from the calculation of diluted earnings per share because the combined exercise price and unamortized fair value is greater than the average trading price of the Class A Subordinate Voting shares for the three and nine months ended December 31, 2010 and therefore their inclusion would have been anti-dilutive. All other options were excluded from the computation of diluted earnings per share because their exercise prices exceeded the trading price of the underlying Class A Subordinate Voting Shares during the three months and nine months ended December 31, 2010.
The weighted number of shares outstanding for the three and nine months ended December 31, 2009 reflects voting and non-voting common shares.
14. Guarantees and contingencies
(a) Indemnities and Guarantees
In the normal course of business, the Company enters into guarantees that provide indemnification and guarantees to counterparties to secure sales agreements and purchase commitments. Should the Company be required to act under such agreements, it is expected that no material loss would result.
(b) Litigation
Since December 2010, several class action complaints have been filed in the United States District Courts in New York and Illinois on behalf of the purchasers of the Class A Subordinate Voting Shares against the Company and other parties alleging certain violations of federal securities laws relative to the IPO. The New York actions have been dismissed voluntarily and the Illinois action is pending. Pursuant to the provisions governing class action litigation as set out in thePrivate Securities Litigation Reform Actof 1995, it is expected that the various complaints will be consolidated into one action going forward. Several individuals and entities have applied to the Courts to be appointed Lead Plaintiff and those applications remain pending.
The proceedings relative to the above litigation are currently pending and as such the likelihood of damages or recoveries and the ultimate amounts, if any, relative to the above litigation (or any associated litigation) are not determinable. Accordingly, no amount has been recorded in these financial statements as at December 31, 2010.
(c) General
The Company is subject to claims and contingencies related to lawsuits and other matters arising in the normal course of operations. Management believes the ultimate liability, if any, arising from such claims and contingencies, is not likely to have a material effect on the consolidated results of operations or financial condition of the Company.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the nine months ended December 31, 2010 and 2009
15. Segmented disclosure
The Company operates in one reportable segment, which is the design, development, assembly and sale of hardware and software of interactive whiteboards and related products that enable group collaboration and learning.
The Company conducts business globally. Revenue information relating to the geographic locations in which the Company sells products is as follows.
| Three months ended December 31, | Nine months ended December 31, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue | ||||||||||||||||
United States | $ | 103,280 | $ | 83,302 | $ | 404,678 | $ | 320,993 | ||||||||
Canada | 12,651 | 7,952 | 44,322 | 32,116 | ||||||||||||
Europe, Middle East and Africa | 51,151 | 43,760 | 132,304 | 107,409 | ||||||||||||
Rest of World | 13,783 | 21,096 | 41,473 | 31,901 | ||||||||||||
| $ | 180,865 | $ | 156,110 | $ | 622,777 | $ | 492,419 | |||||||||
For the nine months ended December 31, 2010 and 2009, no single customer accounted for more than 10% of revenues.
Most of the Company’s assets are held in Canada. As a result of the acquisition of NextWindow on April 21, 2010 (note 2), one country outside Canada, New Zealand, has more than 10% of the Company’s total consolidated long-lived assets at December 31, 2010. Total long-lived assets in New Zealand amounted to $81,007 and total long-lived assets outside of Canada amounted to $81,758 at December 31, 2010.
16. Financial instruments
The Company’s financial instruments consist of foreign exchange and interest rate derivative instruments and other financial instruments including cash and cash equivalents, trade receivables, accounts payable, accrued and other current liabilities and long-term debt.
The Company uses derivatives to partially offset its business exposure to foreign exchange risk and interest rate risk. The Company generally enters into derivative transactions with high credit counterparties and, by policy, seeks to limit the amount of credit exposure to any one counterparty based on an analysis of the counterparty’s relative credit standing. The Company does not use derivative financial instruments for trading or speculative purposes.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the nine months ended December 31, 2010 and 2009
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis.
December 31, 2010
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets | ||||||||||||||||
Money market funds | $ | 117,744 | $ | — | $ | — | $ | 117,744 | ||||||||
Derivative instruments | — | 1,996 | — | 1,996 | ||||||||||||
Total assets | $ | — | $ | 1,996 | $ | — | $ | 119,740 | ||||||||
Liabilities | ||||||||||||||||
Derivative instruments | $ | — | $ | 1,850 | $ | — | $ | 1,850 | ||||||||
Total liabilities | $ | — | $ | 1,850 | $ | — | $ | 1,850 | ||||||||
a) Fair value of derivative contracts
December 31, 2010
| Fair value | Contract expiry | Rates | Notional amounts of quantity | |||||||
Foreign exchange forward derivative contracts | $
| 1,141 285 206 |
| Jan 2011 to Sep 2011 Jan 2011 to Sep 2011 Jan 2011 to Sep 2011 | 1.0311 - 1.0602 1.2970 - 1.4945 1.5081 - 1.7171 | USD 29,000 EUR 11,500 GBP 7,250 | ||||
| $ | 1,632 | |||||||||
Foreign exchange collar derivative contracts | $ | 183 | Jan 2011 to Mar 2011 | 1.0215 - 1.0615 | USD 12,000 | |||||
Interest rate derivative contracts | $ | (1,669 | ) | Dec 2011 | 1.253% | 55% of the outstanding principal on the first and second lien term loans over the contract term | ||||
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the nine months ended December 31, 2010 and 2009
March 31, 2010
| Fair value | Contract expiry | Rates | Notional amounts of quantity | |||||||
Foreign exchange forward derivative contracts | $
| 331 1,927 1,657 |
| Apr 2010 to Sep 2010 Apr 2010 to Dec 2010 Apr 2010 to Jan 2011 | 1.0140 - 1.0800 1.4945 - 1.5882 1.7171 - 1.7778 | USD 31,000 EUR 13,500 GBP 9,150 | ||||
| $ | 3,915 | |||||||||
Interest rate derivative contracts | $ | (4,299 | ) | Sep 2010 | 4.756% | 80% declining to 50% of the outstanding principal on the first and second lien term loans over the contract term | ||||
| (952 | ) | Dec 2011 | 1.253% | 50% of the outstanding principal on the first and second lien term loans over the contract term | ||||||
| $ | (5,251 | ) | ||||||||
The fair value of foreign exchange derivative contracts of $1,996 is included in other current assets at December 31, 2010 ($3,915 at March 31, 2010). The fair value of foreign exchange derivative contracts of $181 is included in accrued and other current liabilities at December 31, 2010 (zero at March 31, 2010).
The fair value of interest rate derivative contracts included in accrued and other current liabilities is $1,669 at December 31, 2010 ($5,758 at March 31, 2010). The fair value of interest rate derivative contracts included in other long-term assets is zero at December 31, 2010 ($507 at March 31, 2010).
17. Related party transactions
All transactions with related parties were nominal for the nine months ended December 31, 2010 and 2009 with the exception of those disclosed in notes 9 and 10.
18. Comparative figures
Certain reclassifications have been made to prior periods’ figures to conform to the current period’s presentation.
