Item
1
Financial Statements
SIMCLAR,
INC.
AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
September
30,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
903,641
|
|
$
|
82,154
|
|
Accounts
receivable, less allowances of $296,398 and $293,364 at September
30, 2007
and December 31, 2006 respectively
|
|
|
20,304,491
|
|
|
20,801,668
|
|
Amounts
receivable from major stockholder, net
|
|
|
928,941
|
|
|
-
|
|
Inventories,
less allowances for obsolescence of $2,000,122 at September 30,
2007 and
$1,551,799 at December 31, 2006
|
|
|
25,172,474
|
|
|
20,259,037
|
|
Prepaid
expenses and other current assets
|
|
|
578,505
|
|
|
637,856
|
|
Prepaid
income taxes
|
|
|
-
|
|
|
15,405
|
|
Deferred
income taxes
|
|
|
1,037,655
|
|
|
1,034,532
|
|
Total
current assets
|
|
|
48,925,707
|
|
|
42,830,652
|
|
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
Land
and improvements
|
|
|
547,511
|
|
|
547,511
|
|
Buildings
and building improvements
|
|
|
1,235,904
|
|
|
1,235,904
|
|
Machinery,
computer and office equipment
|
|
|
15,836,224
|
|
|
15,563,042
|
|
Tools
and dies
|
|
|
366,347
|
|
|
363,992
|
|
Leasehold
improvements
|
|
|
1,990,712
|
|
|
660,949
|
|
Construction
in progress
|
|
|
195,709
|
|
|
537,879
|
|
Total
property and equipment
|
|
|
20,172,407
|
|
|
18,909,277
|
|
Less
accumulated depreciation and amortization
|
|
|
10,083,213
|
|
|
8,984,948
|
|
Net
property and equipment
|
|
|
10,089,194
|
|
|
9,924,329
|
|
|
|
|
|
|
|
|
|
Deferred
expenses and other assets, net
|
|
|
293,216
|
|
|
367,122
|
|
Goodwill
|
|
|
9,410,704
|
|
|
9,410,704
|
|
Intangible
assets, net
|
|
|
1,009,719
|
|
|
1,331,000
|
|
Total
assets
|
|
$
|
69,728,540
|
|
$
|
63,863,807
|
|
See
notes to consolidated financial
statements
SIMCLAR,
INC.
AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Continued)
|
|
September
30,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Line
of credit
|
|
$
|
7,321,539
|
|
$
|
5,065,771
|
|
Accounts
payable
|
|
|
23,828,400
|
|
|
16,396,407
|
|
Accrued
expenses
|
|
|
1,520,895
|
|
|
1,740,799
|
|
Accrued
income taxes
|
|
|
897,057
|
|
|
-
|
|
Amounts
payable to major stockholder, net
|
|
|
-
|
|
|
1,344,139
|
|
Current
portion of long-term debt
|
|
|
3,818,635
|
|
|
4,047,408
|
|
Total
current liabilities
|
|
|
37,386,526
|
|
|
28,594,524
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
10,650,000
|
|
|
15,300,000
|
|
Subordinated
long-term debt
|
|
|
570,533
|
|
|
1,217,986
|
|
Deferred
income taxes
|
|
|
362,491
|
|
|
429,031
|
|
Other
long term liabilities
|
|
|
400,000
|
|
|
400,000
|
|
Total
liabilities
|
|
|
49,369,550
|
|
|
45,941,541
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, authorized 10,000,000 shares; issued and
outstanding 6,465,345 shares at September 30, 2007 and December
31,
2006
|
|
|
64,653
|
|
|
64,653
|
|
Capital
in excess of par value
|
|
|
11,446,087
|
|
|
11,446,087
|
|
Retained
earnings
|
|
|
8,812,046
|
|
|
6,385,732
|
|
Accumulated
other comprehensive (loss) income
|
|
|
36,204
|
|
|
25,794
|
|
Total
stockholders' equity
|
|
|
20,358,990
|
|
|
17,922,266
|
|
|
|
$
|
69,728,540
|
|
$
|
63,863,807
|
|
See
notes to consolidated financial
statements
SIMCLAR,
INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENT OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
33,149,660
|
|
$
|
30,653,658
|
|
$
|
101,675,970
|
|
$
|
82,875,846
|
|
Cost
of goods sold
|
|
|
29,925,729
|
|
|
26,741,982
|
|
|
89,662,160
|
|
|
72,398,988
|
|
Gross
Margin
|
|
|
3,223,931
|
|
|
3,911,676
|
|
|
12,013,810
|
|
|
10,476,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
2,232,486
|
|
|
2,318,416
|
|
|
7,056,573
|
|
|
6,036,832
|
|
Income
from operations
|
|
|
991,445
|
|
|
1,593,260
|
|
|
4,957,237
|
|
|
4,440,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
404,264
|
|
|
522,811
|
|
|
1,394,553
|
|
|
1,285,451
|
|
Interest
and other income
|
|
|
(39,387
|
)
|
|
38,312
|
|
|
(112,896
|
)
|
|
(54,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
626,568
|
|
|
1,032,137
|
|
|
3,675,580
|
|
|
3,208,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
211,238
|
|
|
414,269
|
|
|
1,249,266
|
|
|
1,294,734
|
|
Net
income
|
|
$
|
415,330
|
|
$
|
617,868
|
|
$
|
2,426,314
|
|
$
|
1,913,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
$
|
0.10
|
|
$
|
0.38
|
|
$
|
0.30
|
|
See
notes to consolidated financial
statements
SIMCLAR,
INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CASH FLOWS
(UNAUDITED)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
Operating
activities:
|
|
|
|
|
|
Net
income
|
|
$
|
2,426,314
|
|
$
|
1,913,953
|
|
Adjustments
to reconcile net income to net cash
provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,582,068
|
|
|
1,319,704
|
|
Deferred
expenses and other assets
|
|
|
73,906
|
|
|
-
|
|
Provision
for inventory obsolescence
|
|
|
448,323
|
|
|
267,595
|
|
Gain
on disposal of property and equipment
|
|
|
(8,685
|
)
|
|
(23,874
|
)
|
Deferred
tax benefit
|
|
|
(66,540
|
)
|
|
-
|
|
Changes
relating to operating activities from:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
497,177
|
|
|
(96,705
|
)
|
Amounts
receivable from / payable to major stockholder, net
|
|
|
226,920
|
|
|
663,271
|
|
Inventories
|
|
|
(5,361,760
|
)
|
|
(2,493,902
|
)
|
Prepaid
expenses and other current assets
|
|
|
59,351
|
|
|
(246,271
|
)
|
Accounts
payable
|
|
|
7,431,993
|
|
|
1,359,253
|
|
Accrued
expenses
|
|
|
(219,904
|
)
|
|
585,508
|
|
Income
taxes payable
|
|
|
909,339
|
|
|
126,581
|
|
Net
cash provided by operating activities
|
|
|
7,998,502
|
|
|
3,375,113
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
|
(1,943,101
|
)
|
|
(574,750
|
)
|
Proceeds
from sale of property and equipment
|
|
|
526,134
|
|
|
228,387
|
|
Acquisition
of subsidiaries, net of cash acquired:
|
|
|
|
|
|
|
|
Simclar
(Mexico), Inc.
|
|
|
-
|
|
|
(54,896
|
)
|
Simclar
Interconnect Technologies, Inc.
|
|
|
-
|
|
|
(16,122,149
|
)
|
Net
cash used in investing activities
|
|
|
(1,416,967
|
)
|
|
(16,523,408
|
)
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
Borrowing
on bank line of credit
|
|
|
8,669,543
|
|
|
1,559,748
|
|
Repayments
on bank line of credit
|
|
|
(6,413,775
|
)
|
|
(1,634,670
|
)
|
Payments
on note payable to major stockholder
|
|
|
(2,500,000
|
)
|
|
-
|
|
Proceeds
from long-term borrowings
|
|
|
-
|
|
|
16,000,000
|
|
Payments
on long-term bank borrowings
|
|
|
(5,526,226
|
)
|
|
(1,121,924
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(5,770,458
|
)
|
|
14,803,154
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate fluctuations on cash
|
|
|
10,410
|
|
|
(14,046
|
)
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
821,487
|
|
|
1,640,813
|
|
Cash
and cash equivalents at beginning of period
|
|
|
82,154
|
|
|
833,703
|
|
Cash
and cash equivalents at end of period
|
|
$
|
903,641
|
|
$
|
2,474,516
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Interest
paid in cash
|
|
$
|
1,450,806
|
|
$
|
1,201,303
|
|
See
notes to consolidated financial
statements
SIMCLAR,
INC.
AND
SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1 - Basis of Presentation
The
accompanying interim consolidated financial statements include the accounts
of
Simclar, Inc. ("Simclar") and its subsidiaries, including Simclar (Mexico),
Inc.
("Simclar Mexico"), Simclar de Mexico, S.A. de C.V. (“Simclar de Mexico”),
Simclar (North America), Inc. (“SNAI”), Simclar Interconnect Technologies, Inc.
(“SIT”), and Techdyne (Europe) Limited ("Techdyne (Europe)") collectively
referred to as the "company." All material intercompany accounts and
transactions have been eliminated in consolidation. The company is a 73.4%
owned
subsidiary of Simclar Group Limited ("Simclar Group"), a company incorporated
in
the United Kingdom.
These
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X and have not been audited by an independent registered public accounting
firm. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, such
interim financial statements reflect all normal recurring adjustments considered
necessary to present fairly the financial position and the results of operations
and cash flows for the interim periods presented. The results of operations
for
the interim periods are not necessarily indicative of the results to be expected
for the full fiscal year. These financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
included in the company's Annual Report on Form 10-K for the year ended December
31, 2006.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
consolidated financial statements. Actual results could differ from those
estimates.
NOTE
2 - Recently Issued Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS No. 157”) to clarify the definition of fair value,
establish a framework for measuring fair value and expand the disclosures on
fair value measurements. SFAS No. 157 defines fair value as the price that
would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (an exit price).
SFAS No. 157 also stipulates that, as a market-based measurement, fair value
measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability, and establishes a
fair
value hierarchy that distinguishes between (a) market participant assumptions
developed based on market data obtained from sources independent of the
reporting entity (observable inputs) and (b) the reporting entity’s own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). SFAS No.
157
becomes effective for the company in its fiscal year ending December 31, 2008.
The company is currently evaluating the impact of the provisions of SFAS No.
157
on its consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115”. This Statement allows companies the choice to measure many
financial instruments and certain other items at fair value. The objective
is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurements, which is consistent with the Board’s long-term measurement
objectives for accounting for financial instruments. This Statement is effective
as of the beginning of an entity’s first fiscal year that begins after November
15, 2007, or January 1, 2008 as to the company, and interim periods within
that
fiscal year. Early adoption is permitted as of the beginning of a fiscal year
that begins on or before November 15, 2007, provided the entity also elects
to
apply the provisions of SFAS No. 157, “Fair Value Measurements.” The company is
currently evaluating the impact the adoption of SFAS No. 159 will have on its
consolidated financial statements.
SIMCLAR,
INC.
AND
SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
3 - Inventories
Inventories
net of allowance for obsolescence are comprised of the following:
|
|
September
30,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Raw
materials and supplies
|
|
$
|
21,871,896
|
|
$
|
16,992,310
|
|
Work
in process
|
|
|
3,300,973
|
|
|
2,829,592
|
|
Finished
goods
|
|
|
1,999,727
|
|
|
1,988,934
|
|
Allowance
for obsolescence
|
|
|
(2,000,122
|
)
|
|
(1,551,799
|
)
|
|
|
$
|
25,172,474
|
|
$
|
20,259,037
|
|
NOTE
4 - Earnings per share
Following
is a reconciliation of amounts used in the basic and diluted
computations:
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
income - numerator basic computation
|
|
$
|
415,330
|
|
$
|
617,868
|
|
$
|
2,426,314
|
|
$
|
1,913,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares - denominator basic computation
|
|
|
6,465,345
|
|
|
6,465,345
|
|
|
6,465,345
|
|
|
6,465,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
$
|
0.10
|
|
$
|
0.38
|
|
$
|
0.30
|
|
There
were no potentially dilutive securities outstanding for the three months and
nine months ended September 30, 2007 or 2006.
NOTE
5 - Comprehensive Income
Comprehensive
income consists of net income and foreign currency translation adjustments.
Below is a detail of comprehensive income for the three months and nine months
ended September 30, 2007 and 2006:
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
415,330
|
|
$
|
617,868
|
|
$
|
2,426,314
|
|
$
|
1,913,953
|
|
Foreign
currency translation loss
|
|
|
(15,343
|
)
|
|
(4,462
|
)
|
|
10,410
|
|
|
(14,046
|
)
|
Comprehensive
Income
|
|
$
|
399,987
|
|
$
|
613,406
|
|
$
|
2,436,724
|
|
$
|
1,899,907
|
|
SIMCLAR,
INC.
AND
SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
6 - Long Term Debt
Effective
January 26, 2007, the company entered into amendments of its two working capital
facilities with the Bank of Scotland (“BoS”). The term of the $1 million working
capital facility of SIT, originally entered into in December 2005, was extended
to January 28, 2008. The Simclar, Inc. $5 million working capital facility,
last
amended in December 2005, was increased to $7.5 million, and its maturity date
was extended to January 28, 2008. No other material changes were made to either
facility by the amendments.
On
August
17, 2006, Simclar (Mexico) and Simclar entered into an agreement with Winsson
Enterprises Co., Ltd. (“Winsson”) and its affiliate, Computronics International
Corp. This agreement replaced a deferred trade payables agreement that expired
on July 14, 2006. The agreement is a non-cash refinance of approximately
$2,495,000 of trade accounts payable to long-term debt to be repaid within
a
three year period with an interest rate of 3% per annum. The agreement calls
for
quarterly payments of principal and interest of $225,000 commencing August
15,
2006, with a final payment of approximately $123,400 payable on May 15, 2009.
The debt is subordinated to the BoS credit facility. The balance at September
30, 2007 was approximately $1,439,000 and is reflected as subordinated long-term
debt on the face of the balance sheet, net of $869,000 reflected in current
portion of long-term debt.
NOTE
7 - Amounts Due to Major Stockholder and Other Related Party
Transactions
The
company had a net receivable due from its parent, Simclar Group, certain of
its
subsidiaries and a related party of approximately $929,000 at September 30,
2007
and a net payable of approximately $1,344,000 as of December 31, 2006. Amounts
receivable or payable accrue interest at the rate of LIBOR plus 1.5%. Interest
income net of interest expense related to this receivable was approximately
$9,000 and $26,000 respectively for the three months and nine months ended
September 30, 2007.
Beginning
in March 2006, SIT pays a monthly management fee to Simclar Interconnect
Technologies Limited, a related party to Simclar Group, based on 2% of sales.
The purpose of the fee is to support global research and development and sales
and marketing management. The charges for the three months and nine months
ended
September 30, 2007 totaled approximately $269,000 and $822,000 respectively.
During
the three months and nine months ended September 30, 2007, the company sold
goods with an approximate value of $17,000 to Simclar International Corporation,
a related party to Simclar Group.
In
connection with the acquisition of the Litton assets (see Note 10 below),
Simclar Group has provided a guarantee to BoS in respect of loans advanced
to
Simclar up to a maximum amount of $10,000,000; likewise, Simclar has guaranteed
certain Simclar Group loans from BoS also up to a maximum amount of $10,000,000.
In both cases this maximum amount reduces, subject to certain ratios of
borrowing to EBITDA being achieved.
Note
8 - Income Taxes
The
company adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”)
on January 1, 2007. As required by FIN 48, which clarifies SFAS No. 109
“Accounting for Income Taxes,” the company recognizes the financial statement
benefit of a tax position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit. For tax
positions meeting the more-likely-than-not threshold, the amount recognized
in
the financial statements is the largest benefit that has a greater than 50
percent likelihood of being realized upon ultimate settlement with the relevant
tax authority. At the adoption date, the company applied FIN 48 to all tax
positions for which the statute of limitations remained open. As a result of
the
implementation of FIN 48, the company was not required to record any liability
for unrecognized tax benefits as of January 1, 2007. There have been no material
changes in unrecognized tax benefits since January 1, 2007.
The
company is subject to income taxes in the U.S. federal jurisdiction, as well
as
various other jurisdictions. Tax regulations within each jurisdiction are
subject to the interpretation of the related tax laws and regulations and
require significant judgment to apply. With few exceptions, the company is
no
longer subject to U.S. federal, state, and local, or non-U.S. income tax
examinations by tax authorities for years before 2003.
SIMCLAR,
INC.
AND
SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note
8 - Income Taxes - continued
The
company is currently under examination by the Internal Revenue Service for
the
year ended December 31, 2005. The company expects this examination to be
concluded and settled in the next 12 months without material adverse affect
to
the company’s financial position or results of operations.
The
company will recognize, if applicable, interest accrued related to unrecognized
tax benefits in interest expense and penalties in other expense. At September
30, 2007, the company had no unrecognized tax benefits.
The
company files federal and state income tax returns separately from Simclar
Group, and its income tax liability is therefore reflected on a separate return
basis.
Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes.
Income
tax payments amounted to approximately $300,000 for the nine months ended
September 30, 2007 and approximately $956,000 for the comparable 2006
period.
NOTE
9 - Commitments and Contingencies
The
company leases several facilities which expire at various dates through 2017
with renewal options for periods of up to five years at the then fair market
rental value. The company sponsors a 401(k) profit sharing plan covering
substantially all of its employees, excluding Techdyne (Europe) and Simclar
Mexico.
The
company is involved in various legal actions arising in the ordinary course
of
business. In the opinion of management, the settlement of these matters will
not
have a material effect on the company's financial position or results of
operations.
NOTE
10 - Acquisitions
On
February 24, 2006, the company and SIT, its newly-formed wholly owned
subsidiary, purchased certain U.S. assets associated with the backplane assembly
business of the Interconnect Technologies Division of Litton Systems, Inc.
("Litton"), a subsidiary of Northrop Grumman Corporation, for $16 million in
cash and the assumption of certain liabilities. At the same time,
Simclar
Group Limited also acquired from Litton Systems International, Inc. and Litton
U.K. Ltd. all of the share equity of Litton Electronics (Suzhou) Co. Ltd.,
a
subsidiary organized in China, and certain assets of the Interconnect
Technologies Division assembly business in the U.K., respectively, through
its
subsidiary Simclar Interconnect Technologies Limited.
The
company financed the purchase of the assets under an amended term loan facility
with BoS. Refer to Note 6 for further details of this financing
arrangement.
The
acquisition was accounted for by the purchase method of accounting in accordance
with SFAS No. 141, “Business Combinations.” The purchase price and direct
expenses incurred were allocated to assets acquired and liabilities assumed
based on estimated fair values at the date of acquisition. The company recorded
goodwill of $3,373,397 and a $1,470,000 intangible asset for the customer
relationships and a non-compete agreement with Litton Systems, Inc.
Goodwill
will be evaluated for impairment on an annual basis, or more frequently if
impairment indicators arise, using a fair-value-based test. Intangible assets
have been valued using fair-value-based methodology and will be amortized on
an
accelerated basis over the estimated useful lives.
SIMCLAR,
INC.
AND
SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
10 - Acquisitions - continued
The
finalized purchase price allocation related to this acquisition is as
follows:
Current
Assets
|
|
$
|
13,149,821
|
|
Equipment
|
|
|
2,539,195
|
|
Intangible
assets
|
|
|
1,470,000
|
|
Goodwill
|
|
|
3,373,397
|
|
Total
assets acquired
|
|
$
|
20,532,413
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
4,410,264
|
|
Net
Assets Acquired
|
|
$
|
16,122,149
|
|
Intangibles
and goodwill arising from the acquisition are tax deductible.
Results
of operations have been included in the company's consolidated financial
statements prospectively from the effective date of acquisition. Refer to Note
11 for a summary of selected unaudited pro forma financial information for
the
nine months ended September 30, 2006, as if Litton had been acquired at the
beginning of 2006.
NOTE
11 - Pro Forma Financial Information (Unaudited)
The
following table provides selected unaudited pro forma financial information
for
the nine month period ended September 30, 2006 as if Litton had been acquired
at
the beginning of 2006. The unaudited pro forma financial information includes
adjustments for intercompany transactions.
|
|
Nine
Months Ended
|
|
|
|
September
30, 2006
|
|
Pro
forma sales
|
|
$
|
92,435,000
|
|
Pro
forma net income
|
|
$
|
2,627,000
|
|
Pro
forma earnings per share:
|
|
$
|
0.41
|
|
Basic
|
|
|
|
|
The
pro
forma financial information does not necessarily reflect the results that would
have occurred if the acquisition had been in effect for the period presented.
In
addition, it is not intended to be a projection of future results and do not
reflect any synergies that might be achieved from combining the
operations.
NOTE
12 - Subsequent Events
On
November 2, 2007, the company announced that it will be consolidating its metal
fabrication operations into its Matamoros, Mexico facility and that this
decision will result in the discontinuance of operations at its Winterville,
North Carolina facility. Management has put in place a plan to commence the
controlled transfer of the business to Mexico.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Cautionary
Statement Concerning Forward-Looking Statements
This
report includes certain forward-looking statements with respect to our company
and our business that involve risks and uncertainties. These statements are
influenced by our financial position, business strategy, budgets, projected
costs and the plans and objectives of management for future operations. They
use
words such as anticipate, believe, plan, estimate, expect, intend, project,
and
other similar expressions. Although we believe our expectations reflected in
these forward-looking statements are based on reasonable assumptions, we cannot
assure you that our expectations will prove correct. Actual results and
developments may differ materially from those conveyed in the forward-looking
statements. For these statements, we claim the protections for forward-looking
statements contained in the Private Securities Litigation Reform Act of
1995.
Investors
are cautioned that forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from historical or
anticipated results due to many factors, including, but not limited to, the
potential effects of a loss of one or more key customers, covenants contained
in
our bank loan agreements, competition in the electronics manufacturing services
industry, the cyclical nature of our business, the lack of long-term agreements
with our customers, shortages of and price increases in the components of
devices we manufacture, our ability to keep up with technological changes in
our
industry, changes in interest rates, changes in cash flows from operations,
the
effectiveness of our internal controls, and other risks, uncertainties and
factors described in our most recent Annual Report on Form 10-K and other
filings from time to time with the Securities and Exchange Commission. These
documents are available free of charge at the Commission’s website at
http://www.sec.gov. Forward-looking statements speak only as of the date on
which they are made, and we undertake no obligation to update or revise any
forward-looking statements to reflect events or circumstances occurring after
the date of this report.
Introduction
and Overview
Simclar,
Inc. (“Simclar”) is a Florida corporation with five wholly owned subsidiaries -
Simclar (Mexico), Inc., Simclar de Mexico S.A. de C.V., Techdyne (Europe)
Limited, Simclar (North America), Inc. (“SNAI”) and Simclar Interconnect
Technologies, Inc. (“SIT”). Collectively, these entities are referred to as the
“company.” The company is a 73.4% owned subsidiary of Simclar Group Limited, a
company incorporated in the United Kingdom. On February 24, 2006, Simclar and
SIT purchased certain U.S. assets associated with the backplane assembly
business of the Interconnect Technologies Division of Litton Systems, Inc.,
a
subsidiary of Northrop Grumman Corporation, for $16 million in cash and the
assumption of certain liabilities (see Note 10 in the Notes to Consolidated
Financial Statements). All material intercompany accounts and transactions
have
been eliminated in consolidation.
We
strive
to build on our integrated manufacturing capabilities, final system assemblies
and testing.
The
combination of our advanced backplane interconnect solutions with our
capabilities to supply printed circuit board (“PCB”) assemblies, metal
fabrication, cabling solutions and higher level assemblies provides a valuable
one-stop-shop for OEM system design and integration needs.
In
addition, vertical integration provides us with greater control over quality,
delivery and cost.
Our
products are manufactured to customer specifications for OEMs in a variety
of
markets including the data processing, telecommunications, instrumentation,
and
food preparation equipment industries. The company has five manufacturing plants
and has approximately 1,026 employees.
The
following overview comments are discussed in further detail throughout this
Item
2:
·
|
Revenues
grew by approximately 8% and 23% respectively for the three months
and
nine months ended September 30, 2007 compared to the same period
in 2006;
all the growth in the third quarter was from existing customers and
facilities while for the nine month period, approximately 10% of
such
growth was from existing customers and facilities and there was an
approximate 13% increase in revenue from
acquisitions.
|
·
|
Escalating
losses in our North Carolina operations, poor trading results at
our
Dayton, OH facility and raw material shortages that created inefficiencies
and additional expedite charges for other locations contributed to
a
decrease in gross margin of approximately $688,000 for the three
months
ended September 30, 2007 compared to the same period in 2006; gross
margins improved by approximately $1.5 million for the nine months
ended
September 30, 2007 compared to the same period in 2006. The improved
gross
margin is attributed to the higher revenues mentioned above. Management
has concluded that the North Carolina operations are no longer financially
viable and has begun a controlled transfer of the business to our
facilities in Mexico.
|
·
|
Net
income was approximately $450,000 and $2.4 million respectively for
the
three months and nine months ended September 30, 2007 compared to
approximately $618,000 and $1.9 million respectively for the three
months
and nine months ended September 30,
2006.
|
Our
operations have continued to depend upon a relatively small number of customers
for a significant percentage of our net revenue. Significant reductions in
sales
to any of our large customers would have a material adverse effect on our
results of operations. The level and timing of orders placed by a customer
vary
due to the customer's attempts to balance its inventory, design modifications,
changes in manufacturing strategy, acquisitions and consolidations, and
variations in demand for its products due to, among other things, product life
cycles, competitive conditions and general economic conditions. Termination
of
manufacturing relationships or changes, reductions or delays in orders could
have an adverse effect on our results of operations and financial condition,
as
has occurred in the past. Our results also depend, to a substantial extent,
on
the success of our OEM customers in marketing their products. We continue to
seek to diversify our customer base to reduce our reliance on our major
customers.
The
industry segments we serve, and the electronics industry as a whole, are subject
to rapid technological change and product obsolescence. Discontinuance or
modification of products containing components manufactured by our company
could
adversely affect our results of operations. The electronics industry is also
subject to economic cycles and has in the past experienced, and is likely in
the
future to experience, recessionary periods. A prolonged worldwide recession
in
the electronics industry, as we experienced from 2001 through 2003, could have
a
material adverse effect on our business, financial condition and results of
operations. During periods of recession in the electronics industry, our
competitive advantages in the areas of quick-turnaround manufacturing and
responsive customer service may be of reduced importance to electronic OEMs,
who
may become more price sensitive.
We
typically do not obtain long-term volume purchase contracts from our customers,
but rather we work with our customers to anticipate future volumes of orders.
Based upon such anticipated future orders, we will make commitments regarding
the level of business we want and can accomplish given the current timing of
production schedules and the levels of and utilization of facilities and
personnel. Occasionally, we purchase raw materials without a customer order
or
commitment. Customers may cancel, delay or reduce orders, usually without
penalty, for a variety of reasons, whether relating to the customer or the
industry in general, which orders are already made or anticipated. Any
significant cancellations, reductions or order delays could adversely affect
our
results of operations.
We
use
Electronic Data Interchange (EDI) with both our customers and our suppliers
in
our efforts to continuously develop accurate forecasts of customer volume
requirements, as well as sharing our future requirements with our suppliers.
We
depend on the timely availability of many components. Component shortages could
result in manufacturing and shipping delays or increased component prices,
which
could have a material adverse effect on our results of operations. It is
important for us to efficiently manage inventory, properly time expenditures
and
allocations of physical and personnel resources in anticipation of future sales,
and evaluate economic conditions in the electronics industry and the mix of
products for manufacture, whether PCBs, wire harnesses, cables, or turnkey
products.
We
must
continuously develop improved manufacturing procedures to accommodate our
customers' needs for increasingly complex products. To continue to grow and
be a
successful competitor, we must be able to maintain and enhance our technological
capabilities, develop and market manufacturing services which meet changing
customer needs and successfully anticipate or respond to technological changes
in manufacturing processes on a cost-effective and timely basis. Although we
believe that our operations utilize the assembly and testing technologies and
equipment currently required by our customers, there can be no assurance that
our process development efforts will be successful or that the emergence of
new
technologies, industry standards or customer requirements will not render our
technology, equipment or processes obsolete or noncompetitive. In addition,
to
the extent that we determine that new assembly and testing technologies and
equipment are required to remain competitive, the acquisition and implementation
of such technologies and equipment are likely to require significant capital
investment.
Our
results of operations are also affected by other factors, including price
competition, the level and timing of customer orders, fluctuations in material
costs (due to availability), the overhead efficiencies achieved by management
in
managing the costs of our operations, our experience in manufacturing a
particular product, the timing of expenditures in anticipation of increased
orders, and selling, and general and administrative expenses. Accordingly,
gross
margins and operating income margins have generally improved during periods
of
high volume and high capacity utilization. We generally have idle capacity
and
reduced operating margins during periods of lower-volume
production.
In
December 2006, the company entered into a lease agreement for a new facility
for
the SIT operations in Ozark, Missouri. The lease is an operating lease with
a
term of 5 years with renewal options and an estimated annual lease expense
of
approximately $120,000. The move to the new facility was completed in April
2007. While there was a disruption in product shipments during this process,
there were no lost revenues nor any material negative effects as a result of
this move to the new facility.
Key
Financial Performance Measures
We
manage
and assess the performance of our business primarily through the following
measures:
·
|
Orders
booked and backlog - the ratio of orders booked to sales is reviewed
on a
monthly basis for each of the company's five manufacturing
plants.
|
·
|
Sales
- monthly sales for each plant are compared against budget and the
same
month in the previous year.
|
·
|
Gross
margin - the gross margin achieved by each plant each month is compared
against budget and the same month in the previous
year.
|
·
|
Selling,
general and administrative expenses - the ratio of these expenses
as a
percentage of sales for each plant each month compared against
budget.
|
·
|
Working
capital - movements in the balance sheet amounts of inventory, accounts
receivable and accounts payable for each plant are reviewed on a
monthly
basis.
|
·
|
Bank
borrowings - changes in the company's working capital facility with
the
bank are reviewed on a weekly
basis.
|
In
the
event that any of the above measures indicate unusual movements or trends,
further review is undertaken by management to ensure that satisfactory
explanations are obtained, and, where necessary, appropriate corrective action
is taken.
Results
of Operations - Three months and nine months ended September 30,
2007
Net
Sales
(dollars
in thousands)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
33,150
|
|
$
|
30,654
|
|
$
|
101,676
|
|
$
|
82,876
|
|
Change
from prior year
|
|
$
|
2,496
|
|
$
|
14,062
|
|
$
|
18,800
|
|
$
|
39,936
|
|
%
change from prior year
|
|
|
8.1
|
%
|
|
84.8
|
%
|
|
22.7
|
%
|
|
93.0
|
%
|
The
increase in third quarter 2007 sales of approximately $2.5 million over the
same
period in 2006 is all organic growth. For the nine month period ended September
30, 2007 sales grew by approximately $18.8 million over the same period in
2006.
The nine month sales growth is attributed to $10.8 million from acquisition
and
$8.0 million from existing customers and facilities. The backlog grew during
this nine month period by approximately 10.6% or $3.0 million. The backlog
as of
September 30, 2007 was $31.2 million.
Gross
Profit
(dollars
in thousands)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
3,224
|
|
$
|
3,912
|
|
$
|
12,014
|
|
$
|
10,477
|
|
Change
from prior year
|
|
$
|
(688
|
)
|
$
|
2,093
|
|
$
|
1,537
|
|
$
|
5,362
|
|
%
change from prior year
|
|
|
-17.6
|
%
|
|
115.1
|
%
|
|
14.7
|
%
|
|
104.8
|
%
|
%
of sales
|
|
|
9.7
|
%
|
|
12.8
|
%
|
|
11.8
|
%
|
|
12.6
|
%
|
Gross
profit for the three months ended September 30, 2007 was down by approximately
$688,000 compared to the same period in 2006. Gross profit increased by
approximately $1.5 million for the nine months ended September 30, 2007,
compared to the same period in 2006. Escalating losses in our North Carolina
operations, poor performance in our Dayton, OH facility and raw material
shortages for other locations that created inefficiencies and incurred expedite
charges contributed to the lower gross profit for the three month period.
Management has continually monitored the situation in North Carolina and has
concluded that due to the increasing losses the operations are no longer
financially viable and has begun a controlled transfer of the business to Mexico
and discontinuance of the North Carolina operations. The poor performance in
the
Ohio facility precipitated a change in plant management. The primary cause
of
the raw material shortages was due to a large supplier for our Ozark, MO
facility being unable to meet its delivery commitments. Gross profit for the
nine month period benefited by higher sales volumes as discussed above. The
main
factors that influence our gross margin percentage are material costs, product
mix and plant utilization. While the company expects to incur charges as a
result of the discontinuance of its North Carolina operations that will affect
its fourth quarter statement of operations, management has not yet made an
estimate of the potential amount or categories of such changes.
Selling,
General, and Administrative Expenses
(dollars
in thousands)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative expenses
|
|
$
|
2,232
|
|
$
|
2,318
|
|
$
|
7,057
|
|
$
|
6,037
|
|
Change
from prior year
|
|
$
|
(86
|
)
|
$
|
1,032
|
|
$
|
1,020
|
|
$
|
2,496
|
|
%
change from prior year
|
|
|
-3.7
|
%
|
|
80.2
|
%
|
|
16.9
|
%
|
|
70.5
|
%
|
%
of sales
|
|
|
6.7
|
%
|
|
7.6
|
%
|
|
6.9
|
%
|
|
7.3
|
%
|
Selling,
general, and administrative expenses (SG&A) decreased by approximately
$86,000 and increased by approximately $1.0 million respectively for the three
months and nine months ended September 30, 2007, compared to the same period
in
2006. The increase for the nine month period is primarily due to the acquisition
of Litton. A continued focus to control spending has resulted in SG&A
decreasing as a percentage of sales.
Interest
Expense
(dollars
in thousands)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
404
|
|
$
|
523
|
|
$
|
1,395
|
|
$
|
1,285
|
|
Change
from prior year
|
|
$
|
(119
|
)
|
$
|
383
|
|
$
|
110
|
|
$
|
965
|
|
%
change from prior year
|
|
|
-22.8
|
%
|
|
273.6
|
%
|
|
8.6
|
%
|
|
301.6
|
%
|
%
of sales
|
|
|
1.2
|
%
|
|
1.7
|
%
|
|
1.4
|
%
|
|
1.6
|
%
|
The
increase in interest expense for the nine months ended September 30, 2007 is
due
to a combination of increased borrowing attributed to the acquisition of the
Litton assets, the increase in the working capital line of credit and increased
interest rates. However, interest expense decreased in the three months ended
September 30, 2007 compared to the same period in 2006 due to aggressive efforts
to reduce bank debt by making additional payments along with the normally
scheduled payments.
Average
debt levels for the nine month period ended September 30, 2007 and same period
for 2006 were approximately $24.7 million and approximately $20.0 million
respectively (including interest bearing debt owed to related
parties).
Average
interest rates in the quarter ended September 30, 2007 were 7.5% compared to
7.2% for the quarter ended September 30, 2006.
Income
Before Income Taxes
(dollars
in thousands)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes
|
|
$
|
627
|
|
$
|
1,032
|
|
$
|
3,676
|
|
$
|
3,209
|
|
Change
from prior year
|
|
$
|
(405
|
)
|
$
|
636
|
|
$
|
467
|
|
$
|
1,931
|
|
%
change from prior year
|
|
|
-39.2
|
%
|
|
160.6
|
%
|
|
14.6
|
%
|
|
151.1
|
%
|
%
of sales
|
|
|
1.9
|
%
|
|
3.4
|
%
|
|
3.6
|
%
|
|
3.9
|
%
|
Income
before taxes decreased approximately $405,000 for the three month period and
increased approximately $467,000 for the nine month period ended September
30,
2007, compared to the same periods in 2006. As discussed above the lower profit
is due to escalating losses in North Carolina, poor performance in our Ohio
facility and material shortage issues experienced at other locations that have
led to inefficiencies and expedite charges. Management has continually monitored
the situation in North Carolina and has concluded that the operations are no
longer financially viable and has begun a controlled transfer of the business
to
Mexico and discontinuance of the North Carolina operations. A change in General
Manager at our Dayton, OH facility has now been made as a result of the
unsatisfactory trading results at that location. The material shortages were
primarily due to a large supplier for our Ozark, MO operations not being able
to
meet its commitments.
Income
Tax Expense
(dollars
in thousands)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$
|
211
|
|
$
|
414
|
|
$
|
1,249
|
|
$
|
1,295
|
|
Change
from prior year
|
|
$
|
(203
|
)
|
$
|
260
|
|
$
|
(46
|
)
|
$
|
772
|
|
%
change from prior year
|
|
|
-49.0
|
%
|
|
168.8
|
%
|
|
-3.6
|
%
|
|
147.6
|
%
|
Effective
tax rate
|
|
|
33.7
|
%
|
|
40.1
|
%
|
|
34.0
|
%
|
|
40.4
|
%
|
Income
tax expense for the three months and nine months ended September 30, 2007 was
approximately $211,000 and $1.2 million respectively. The lower effective tax
rate is the result of more effective state tax planning strategies and a lower
percentage of items which were nondeductible for tax purposes.
Liquidity
and Capital Resources at September 30, 2007
Cash
and
Cash Equivalents
(dollars
in thousands)
|
|
September
30,
2007
|
|
December
31,
2006
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
904
|
|
$
|
82
|
|
Cash
and
cash equivalents were approximately $904,000 as of September 30, 2007 compared
to approximately $82,000 as of December 31, 2006. The increase is primarily
due
to the timing of our accounts payable disbursements at the end of the period.
Excess liquid funds are invested in short-term interest-bearing accounts at
financial institutions.
Net
Cash
Provided from Operating Activities
(dollars
in thousands)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
cash provided from operating activities
|
|
$
|
7,999
|
|
$
|
3,375
|
|
Net
cash
provided from operating activities for the nine months ended September 30,
2007
was approximately $4.6 million higher than the same period last year. In the
first nine months of 2007 net income adjusted for depreciation, deferred
expenses, gain on disposal of property and equipment and provision for
obsolescence provided approximately $4.4 million and changes in working capital
provided approximately $3.6 million.
Accounts
Receivable
(dollars
in thousands)
|
|
September
30,
2007
|
|
December
31,
2006
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
20,304
|
|
$
|
20,802
|
|
Average
days sales outstanding
|
|
|
57.9
|
|
|
64.5
|
|
Accounts
receivable as of September 30, 2007 decreased by approximately $498,000 compared
to December 31, 2006. The September 30, 2007 days sales outstanding (DSO) is
calculated on sales for the nine months ended September 30, 2007. The December
31 DSO is affected by higher sales in the fourth quarter. If viewed on a period
by period basis the DSO would have been in the 53 to 55 day range at December
31, 2006.
Inventory
(dollars
in thousands)
|
|
September
30,
2007
|
|
December
31,
2006
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
25,172
|
|
$
|
20,259
|
|
Average
inventory turnover
|
|
|
5.2
|
|
|
5.3
|
|
Inventory
as of September 30, 2007 increased by approximately $4.9 million compared to
December 31, 2006. The growth was primarily due to critical material shortages
which caused many orders to get backed up in work in process and sub-components
which are built internally. The average inventory turnover was 5.2 in the three
months to September 30, 2007 compared to 5.3 in the year ended December 31,
2006. The lower inventory turnover is directly related to the material shortage
issues and resultant increase in work in process and sub-components. The company
continues to seek improvements in inventory turnover through smaller order
quantities and vendor managed inventories.
Cash
Used
in Investing Activities
(dollars
in thousands)
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
$
|
1,417
|
|
$
|
16,523
|
|
Investing
activities for the nine months ended September 30, 2007 included approximately
$1.9 million for property and equipment purchases and approximately $526,000
proceeds for equipment sold. Approximately $958,000 of the property and
equipment purchases was due to the leasehold improvements related to the move
of
our Missouri facility from Springfield to Ozark. The February 2006 acquisition
of the Litton assets accounted for $16.1 million of the cash used in
2006.
Net
cash
(used in) provided by financing activities
(dollars
in thousands)
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
Net
cash (used in) provided by financing activities
|
|
$
|
(5,770
|
)
|
$
|
14,803
|
|
Financing
activities for the nine months ended September 30, 2007 included term loan
repayments of $4.9 million, a principal payment of approximately $635,000 on
the
Winsson debt, a payment of a note to Simclar Group of $2.5 million and an
increase in the amount borrowed on our lines of credit of approximately $2.3
million. The $4.9 million in term loan repayments included $2.4 million in
scheduled payments plus $2.5 million of additional payments. The increase in
the
line of credit was used to repay the note due to Simclar Group. The financing
activity in 2006 was primarily the $16 million increase in our long-term credit
facility to fund the Litton asset acquisition.
In
December 2005, we entered into two amended credit facilities and one new credit
facility with Bank of Scotland in Edinburgh, Scotland consisting
of:
Borrower
|
|
Type
of facility
|
|
Original
amount
(
as
amended)
|
|
Balance
at
September
30,2007
|
|
Simclar,
Inc.
|
|
|
Working
capital
|
|
$
|
7,500,000
|
|
$
|
7,321,539
|
|
Simclar,
Inc.
|
|
|
Term
loan - four tranches (see detail of tranches below)
|
|
$
|
21,650,000
|
|
$
|
13,600,000
|
|
Simclar
Interconnect Technologies, Inc.
|
|
|
Working
Capital
|
|
$
|
1,000,000
|
|
|
-
|
|
Effective
January 26, 2007, we entered into amendments of the two working capital
facilities. The term of the $1 million working capital facility of SIT,
originally entered into in December 2005, was extended to January 28, 2008.
The
Simclar, Inc. working capital facility, last amended in December 2005, was
increased to $7.5 million from $5 million, and its maturity date was extended
to
January 28, 2008. No other material changes were made to either facility by
the
amendments.
Interest
on the Simclar, Inc. working capital facility
accrues
at an annual rate equal to LIBOR plus 1.5%, plus an amount, rounded to the
nearest eighth of a percent, to cover any increases in certain regulatory costs
incurred by the bank. The company may elect to pay interest on advances every
one, three or six months, with LIBOR adjusted to correspond to the interest
payment period selected by the company
.
The
interest rate for the working capital facility at September 30, 2007 was 6.82%
based on the one month election.
Interest
on the Simclar Interconnect Technologies, Inc. working capital facility is
a
margin over LIBOR determined by a ratio of net borrowings to EBITDA for any
given test period. The margin percentage can range from 1.5% to 2.5%.
The
term
loan interest is also determined by a margin over LIBOR related to the ratio
of
net borrowings to EBITDA for any given test period. The margin percentage can
range from 1.5% to 3.5%. The interest rate in effect for tranches A and B at
September 30, 2007 was 6.82% based on the three month election. The interest
rate in effect at September 30, 2007 for tranche C was 7.82% and for tranche
D
was 8.82% based on the one month election. The term loan is divided into four
tranches each with its own specific purpose and repayment schedule as shown
in
the following table:
Tranche
|
|
Original
Amount
|
|
Purpose
|
|
Payments
|
|
|
|
|
|
|
|
A
|
|
$4,250,000
|
|
Refinance
existing facilities
|
|
Seventeen
quarterly payments of $250,000 beginning October 2004 through October
2008
|
B
|
|
$1,400,000
|
|
Dayton
property acquisition
|
|
Twenty-eight
quarterly payments of $50,000 beginning January 2005 through October
2011
|
C
|
|
$13,000,000
|
|
Acquisition
of certain assets of the Litton Interconnect Technologies assembly
operations
|
|
Thirteen
quarterly payments of $500,000 beginning December 2006 through December
2009, four quarterly payments of $250,000 from March 2010 through
December
2010, four quarterly payments of $750,000 from March 2011 through
December
2011 and four quarterly payments of $625,000 from March 2012 through
December 2012
|
D
|
|
$3,000,000
|
|
Acquisition
of certain assets of the Litton Interconnect Technologies assembly
operations
|
|
Single
payment due December 31, 2010
|
Our
credit facilities with BoS, which include an Amended Term Loan Facility Letter,
an Amended Working Capital Facility Letter, a Working Capital Facility Letter,
an Amended and Restated General Security Agreement, an Amended and Restated
Pledge Agreement, a Mortgage and a Guaranty, in addition to subjecting all
our
assets as security for the bank financing, include substantial covenants that
impose significant restrictions on us, including, among others, requirements
that:
·
|
the
facilities take priority over all our other obligations;
|
·
|
we
must maintain sufficient and appropriate insurance for our business
and
assets;
|
·
|
we
must maintain all necessary licenses and authorizations for the conduct
of
our business;
|
·
|
we
indemnify the bank against all costs and expenses incurred by it
which
arise as a result of any actual or threatened (i) breach of environmental
laws; (ii) release or exposure to a dangerous substance at or from
our
premises; or (iii) claim for an alleged breach of environmental law
or
remedial action or liability under such environmental law which could
have
an material adverse effect;
|
·
|
if
environmental harm has occurred to our property securing the credit
facility, we have to ensure we were not responsible for the harm,
and we
have to be aware of the person responsible and its financial condition;
and
|
·
|
we
must notify the bank of a variety of pension and benefit plans and
ERISA
issues, including, among others, (i) material adverse changes in
the
financial condition of any such plan; (ii) increase in benefits;
(iii)
establishment of any new plan; (iv) grounds for termination of any
plan;
and (v) our affiliation with or acquisition of any new ERISA affiliate
that has an obligation to contribute to a plan that has an accumulated
funding deficiency.
|
In
addition, our credit facilities require us to maintain:
·
|
consolidated
adjusted net worth greater than $15,000,000 with effect from September
30,
2006 (tested on a quarterly basis);
|
·
|
a
ratio of consolidated current assets to consolidated net borrowing
prior
to December 31, 2007 of not less than 1:1 and thereafter not to be
less
than 1.5:1 (tested on a quarterly basis);
|
·
|
a
ratio of consolidated trade receivables to consolidated net borrowing
of
not less than 0.5:1 prior to December 31, 2007 and not less than
0.75:1
thereafter (tested on a quarterly basis);
|
·
|
a
ratio of EBIT to total interest not less than 3:1 until March 31,
2006;
not less than 3.5:1 from April 1, 2006 to December 31, 2007; and
not less
than 4:1 thereafter (tested on a quarterly basis beginning December
31,
2005);
and
|
·
|
a
ratio of net borrowings to EBITDA not to exceed 5:1 through December
31,
2006; not less than 4.5:1 from January 1, 2007 to December 31, 2007;
not
less than 4:1 from January 1, 2008 to December 31, 2008; not less
than
3.5:1 from January 1, 2009 to December 31, 2009; and not less than
3:1
thereafter (tested on a rolling quarterly basis beginning December
31,
2006).
|
Finally,
without the prior written consent of BoS, our credit facilities prohibit us
from:
·
|
granting
or permitting a security agreement against our consolidated assets
except
for permitted security agreements;
|
·
|
declaring
or paying any dividends or making any other payments on our capital
stock;
|
·
|
consolidating
or merging with any other entity or acquiring or purchasing any equity
interest in any other entity, or assuming any obligations of any
other
entity, except for notes and receivables acquired in the ordinary
course
of business;
|
·
|
incurring,
assuming, guaranteeing, or remaining liable with respect to any
indebtedness, except for certain existing indebtedness disclosed
in our
financial statements;
|
·
|
undertaking
any capital expenditures in excess of $1,000,000 of the relevant
estimates
in the aggregate budget approved by BoS;
|
·
|
effecting
any changes in ownership of our company;
|
·
|
making
any material change in any of our business objectives, purposes,
operation
or taxes; and
|
·
|
incurring
any material adverse event in business conditions as defined by the
Bank.
|
The
company did not satisfy the EBIT to total interest coverage covenant contained
in the credit facilities at December 31, 2006. Bank of Scotland nonetheless
agreed to suspend the effectiveness of this covenant until the earlier of
December 31, 2007 or the negotiation of revised financial covenants. In this
regard, the company was to submit by April 30, 2007 a financial projection
for
the remainder of 2007 showing relevant measurements against the financial
covenants. The company submitted the requested projections as required. EBIT
to
total interest coverage, pending renegotiation of the covenant, must exceed
3:1
on a quarterly basis and the other financial covenants must be complied with.
The company is in compliance with the 3:1 interest coverage ratio and management
is of the opinion that such compliance will be maintained during such period
of
renegotiating the debt covenants. The company is also in compliance with all
other covenants, as referenced above.
Our
indebtedness requires us to dedicate a substantial portion of our cash flow
from
operations to payments on our debt, which could reduce amounts for working
capital and other general corporate purposes. The restrictions in our credit
facility could also limit our flexibility in reacting to changes in our business
and increases our vulnerability to general adverse economic and industry
conditions.
We
have
no off-balance sheet financing arrangements with related or unrelated parties
and no unconsolidated subsidiaries. In the normal course of business, we enter
into various contractual and other commercial commitments that impact or can
impact the liquidity of our operations.
The
following table outlines our commitments at September 30, 2007:
In
Thousands
|
|
Total
Amounts
|
|
Less
than
1
Year
|
|
1
-
3
Years
|
|
4
-
5
Years
|
|
Over
5
Years
|
|
Long-term
debt with interest
|
|
$
|
16,268
|
|
$
|
3,913
|
|
$
|
5,057
|
|
$
|
7,298
|
|
$
|
-
|
|
Operating
leases
|
|
|
6,125
|
|
|
1,128
|
|
|
2,205
|
|
|
1,166
|
|
|
1,626
|
|
Bank
line of credit with interest
|
|
|
7,823
|
|
|
7,823
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Long-term
subordinated debt with interest
|
|
|
1,477
|
|
|
900
|
|
|
577
|
|
|
-
|
|
|
-
|
|
|
|
$
|
31,693
|
|
$
|
13,764
|
|
$
|
7,839
|
|
$
|
8,464
|
|
$
|
1,626
|
|
The
company’s near-term cash requirements are primarily related to funding our
operations, investing in acquisitions, and meeting the company’s required bank
debt obligations. We believe that the combination of internally-generated funds,
available cash reserves, and our existing credit facility is sufficient to
fund
our operating, investing, and financing activities.
Critical
Accounting Policies
In
preparing its financial statements and accounting for the underlying
transactions and balances, the company has applied the accounting policies
as
disclosed in the Notes to the Consolidated Financial Statements contained in
the
company's annual report on Form 10-K for the year ended December 31, 2006.
Preparation of the company's financial statements requires company management
to
make estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure 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 may differ from those estimates, and the
differences may be material. For a detailed discussion of the application of
these and other accounting policies, see "Summary of Significant Accounting
Policies" in the Notes to the Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies" contained in the company's annual
report on Form 10-K for the year ended December 31, 2006. There have been no
material changes to these accounting policies during the nine months ended
September 30, 2007.
Item
4. Controls and Procedures
Overview
The
company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and reported within
the
specified time periods. As a part of these controls,
our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f)
under the Exchange Act. The company’s internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and
includes those policies and procedures that:
·
|
pertain
to the maintenance of records that, in reasonable detail accurately
reflect the transactions and dispositions of the assets of the
company;
|
·
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles and, that receipts and expenditures of the
company
are being made only in accordance with authorization of management
and
directors of the company; and
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company's assets
that
could have a material effect on the financial
statements.
|
Under
the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness
of
the design and operation of our disclosure controls and procedures as of
September 30, 2007. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that, as of September 30, 2007, our
disclosure controls and procedures were effective to provide reasonable
assurance that the information required to be disclosed by us in the reports
we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the applicable rules and
forms
.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures will prevent all
errors and all improper conduct. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute assurance that the
objectives of the control systems are met. Further, a design of a control system
must reflect the fact that there are resource constraints, and the benefit
of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of improper conduct,
if
any, have been detected. These inherent limitations include the realities that
judgments and decision-making can be faulty, and that breakdowns can occur
because of a simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more persons,
or
by management override of the control. Further, the design of any system of
controls is also based in part upon assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Over time, controls
may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations and a cost-effective control system, misstatements due to error
or
fraud may occur and may not be detected.
Material
Weakness in Control Over Financial Reporting
In
August
2006, during the review and analysis of results of operations during the second
quarter of 2006 and the company’s financial condition at June 30, 2006,
management discovered certain accounting errors associated with operations
at
the Brownsville, Texas and Matamoros, Mexico facilities of the company’s
consolidated subsidiary, Simclar (Mexico), Inc. As a result of the discovery
of
these errors, our management concluded that our disclosure controls and
procedures were not effective as of December 31, 2005.
The
Public Company Accounting Oversight Board’s Auditing Standard No. 2, which
provided the applicable standard for assessment of the Company’s internal
controls in 2005 and 2006, defines a material weakness as “a significant
deficiency, or a combination of significant deficiencies, that results in more
than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected.” A significant
deficiency is a control deficiency, or combination of control deficiencies,
that
adversely affects the company’s ability to initiate, authorize, record, process
or report external financial data reliably in accordance with generally accepted
accounting principles such that there is more than a remote likelihood that
a
misstatement of the company’s annual or interim financial statements that is
more than inconsequential will not be prevented or detected.
The
control deficiencies identified by our management, which in combination resulted
in a material weakness, were (a) misstatement in amounts reported in a
consolidated subsidiary, (b) processes that allowed material errors to occur
and
go undetected on a timely basis, and (c) the failure of key accounting managers
to identify the errors and take appropriate corrective actions. The control
deficiencies were determined to be a material weakness due to the actual
misstatements identified, the potential for additional material misstatements
to
have occurred as a result of the deficiencies, and the lack of other mitigating
controls.
This
material weakness led to a restatement of our consolidated financial statements
for 2005 and for the first quarter of 2006.
In
order
to remedy these material weaknesses, during the third and fourth quarters of
2006 we made significant remedial efforts to increase the effectiveness of
our
internal controls.
These
remedial steps have been in place for a sufficient period of time to permit
management to conclude that our controls were effective as of September 30,
2007.
Changes
in Control Over Financial Reporting
During
the quarter ended September 30, 2007, there were no changes in our internal
controls over financial reporting that materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.