SIMC Simclar Inc (CE)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2008
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ________________ to ________________

Commission file number: 001-13924

SIMCLAR, INC.

(Exact name of registrant as specified in its charter)

Florida		59-1709103
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
2230 West 77 th Street, Hialeah, FL		33016
(Address of principal executive offices)		(Zip Code)

(305) 556-9210

(Registrant’s telephone number, including area code)

[None]

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes o       No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.    

Large accelerated filer o    Accelerated filer o    Non-accelerated filer o     Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class		Outstanding at September 30, 2008
Common Stock, $.01 par value per share		6,465,345 shares

SIMCLAR, INC.

 

Form 10-Q

For the quarter ended September 30, 2008

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
1) Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007		3
2) Consolidated Statements of Operations for the three months and nine months ended September 30, 2008 and September 30, 2007 (unaudited)		5
3) Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and September 30, 2007 (unaudited) .		6
4) Notes to Consolidated Financial Statements as of September 30, 2008 (unaudited)		7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		11
Item 4T. Controls and Procedures		21
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		23
Item 1A. Risk Factors		23
Item 6. Exhibits		23
Signatures		23

PART I – FINANCIAL INFORMATION

Item 1 Financial Statements

SIMCLAR, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		September 30,			December 31,
		2008			2007
		(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents		$	578,703		$	428,538
Accounts receivable, less allowances of $175,000and $236,000 at September 30, 2008 and December 31, 2007, respectively			11,961,271			20,804,552
Amounts receivable from major stockholder, net			1,915,100			904,627
Inventories, less allowances for obsolescence of $2,271,000 at September 30,2008 and $2,364,000 at December 31, 2007			18,992,207			21,664,442
Prepaid expenses and other current assets			717,111			654,509
Income taxes receivable			2,222,554			107,091
Deferred income taxes			1,214,160			1,214,160
Total current assets			37,601,106			45,777,919
Property and equipment:
Land and improvements			547,512			547,512
Buildings and building improvements			1,235,904			1,235,904
Machinery, computer and office equipment			15,950,920			15,342,401
Tools and dies			366,347			366,347
Leasehold improvements			1,722,965			1,957,170
Construction in progress			14,748			259,829
Total property and equipment			19,838,396			19,709,163
Less accumulated depreciation and amortization			11,794,936			9,922,589
Net property and equipment			8,043,460			9,786,574
Deferred expenses and other assets, net			237,113			366,265
Goodwill			9,410,704			9,410,704
Intangible assets, net			606,618			904,841
Total assets		$	55,899,001		$	66,246,303

 

SIMCLAR, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Continued)

		September 30,			December 31,
		2008			2007
		(UNAUDITED)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit		$	8,634,235		$	8,145,987
Accounts payable			14,236,137			21,447,560
Accrued expenses			2,102,809			1,907,472
Current portion of long-term debt			5,923,994			3,575,148
Total current liabilities			30,897,175			35,076,167
Long-term debt			6,950,000			9,600,000
Deferred trade accounts payable			139,209			349,257
Deferred income taxes			515,283			515,283
Other long term liabilities			400,000			400,000
Total liabilities			38,901,667			45,940,707
Stockholders' equity:
Common stock, $.01 par value, authorized 10,000,000 shares; issued and outstanding 6,465,345 shares at September 30, 2008 and December 31, 2007			64,653			64,653
Capital in excess of par value			11,446,087			11,446,087
Retained earnings			5,421,164			8,747,959
Accumulated other comprehensive income			65,430			46,897
Total stockholders' equity			16,997,334			20,305,596
		$	55,899,001		$	66,246,303

SIMCLAR, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2008			2007			2008			2007
Sales		$	20,412,389		$	33,149,660		$	76,957,209		$	101,675,970
Cost of goods sold			19,339,469			29,925,729		$	74,411,273			89,662,160
Gross Margin			1,072,920			3,223,931			2,545,936			12,013,810
Selling, general and administrative expenses			1,956,254			2,232,486		$	6,884,258			7,056,573
(Loss) / Income from operations			(883,334	)		991,445			(4,338,322	)		4,957,237
Interest expense			297,439			404,264		$	969,265			1,394,553
Interest and other income			(82,194	)		(39,387	)	$	(207,572	)		(112,896	)
(Loss) / Income before income taxes			(1,098,579	)		626,568			(5,100,015	)		3,675,580
Income tax (credit) / expense			(387,478	)		211,238		$	(1,773,220	)		1,249,266
Net (Loss) /income		$	(711,101	)	$	415,330		$	(3,326,795	)	$	2,426,314
(Loss) / Earnings per share:
Basic		$	(0.11	)	$	0.06		$	(0.51	)	$	0.38

SIMCLAR, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(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 73.2% 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 8 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, 2007.

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 May 2008 the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles.  SFAS No. 162 establishes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP.  Statement 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411,   “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The company does not expect any significant impact from this statement on its financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” SFAS No. 161 changes disclosure requirements for derivative instruments and hedging activities. Entities will be required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for fiscal years beginning after November 15, 2008. The company does not expect any significant impact from this statement on its financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” an amendment of ARB No. 51, which we will adopt on January 1, 2009. This standard will significantly change the accounting and reporting related to noncontrolling interests in a consolidated subsidiary. The company does not expect any significant impact from this statement on its financial statements.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” SFAS No. 141R will replace SFAS No. 141 and provides new rules for accounting for the acquisition of a business. This statement is effective for fiscal years beginning after December 15, 2008. Generally, the effects of SFAS No. 141R will depend on future acquisitions.

NOTE 3 – Inventories

Inventories are comprised of the following:

 

		September 30,			December 31,
		2008			2007
Raw materials and supplies			16,912,842		$	19,285,200
Work in process			2,555,708			2,841,656
Finished goods			1,794,718			1,902,052
Allowance for obsolescence			(2,271,061	)		(2,364,466	)
		$	18,992,207		$	21,664,442

NOTE 4 – Earnings per share

Following is a reconciliation of amounts used in the computations:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Net (loss) / income - numerator basic computation		$	(711,101	)	$	415,330		$	(3,326,795	)	$	2,426,314
Weighted average shares - denominator basic computation			6,465,345			6,465,345			6,465,345			6,465,345
(Loss) / Earnings per share:
Basic		$	(0.11	)	$	0.06		$	(0.51	)	$	0.38

 

The net loss for the three months ended September 30, 2008 includes pre-tax operating losses of approximately $1.1 million from the company’s Mexico facility due to the disruption to production as a result of corrective actions arising from failures highlighted in the second quarter in the transfer of operations from the company’s North Carolina facility and weaknesses within the newly implemented ERP system. The net loss for the nine months ended September 30, 2008 also includes second quarter’s pre-tax exceptional and non-recurring charges of approximately $2.8 million, including asset write-offs as a result of the problems in the company’s Mexico facility as described above. These pre-tax exceptional charges include a loss on the disposal of plant and equipment of approximately $0.75 million following the decision to no longer service certain customers in the plastic molding business, write-off of inventory of approximately $1.2 million resulting from decisions to exit low-margin business and procurement errors of approximately $0.85 million. These costs are recorded as a component of cost of goods sold.

 

NOTE 5 – Comprehensive Income

The company follows SFAS No. 130, "Reporting Comprehensive Income," which contains rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income and foreign currency translation adjustments. Below is a detail of comprehensive income for the three and nine month periods ended September 30, 2008 and 2007:

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Net (loss) / income		$	(711,101	)	$	415,330		$	(3,326,795	)	$	2,426,314
Foreign currency translation income (loss), net of tax			(57,391	)		(15,343	)		18,552			10,410
Comprehensive (loss) / Income		$	(768,492	)	$	399,987		$	(3,308,243	)	$	2,436,724

NOTE 6 – Indebtedness

Effective January 26, 2007, the company entered into amendments of the two working capital facilities with 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. Effective March 27, 2008, the facilities were further amended to extend the maturity dates of each to March 17, 2009. No other material changes were made to either facility by the 2008 amendments, except that the default interest rate under both facilities was increased from 1.5% to 2.0% and the interest rate under the $7.5 million facility was increased from 1.5% over LIBOR to 1.75% over LIBOR. The company was in breach of various financial covenants at the end of the second and third quarters (EBIT to total interest coverage ratio, trade accounts receivable to net borrowing ratio, and net borrowing to EBITDA ratio), which breaches have since been waived by BoS. Given the adverse impact on the company’s financial position as a result of the significant losses arising in its Mexico facility in the current year, and in recognition of the high level of voluntary bank term loan repayments in previous financial periods, BoS agreed to reschedule the term loan repayments of $500,000 due on each of June 30, 2008 and September 30, 2008 to December 31, 2008, or such later date as agreed before December 31, 2008 between the company and BoS.

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 facilities. The balance at September 30, 2008 was approximately $796,000 and is reflected as long-term debt on the face of the balance sheet, net of $675,000 reflected in current portion of long-term debt. The company is in advance discussion with Winsson with regard to the deferal of the repayment of $225,000 due on August 14, 2008 and the implementation of a payment holiday until February 2009 when scheduled repayments would re-commence, and, as a result of which, the final payment date would be November 14, 2009.

On June 5, 2008, Simclar entered into an agreement with Litton Systems Inc. effecting a deferred trade payables arrangement. The agreement is a non-cash refinance of approximately $3,067,293 of trade accounts payable to long-term debt to be repaid within a fifteen month period with an interest rate of 5% per annum. The agreement calls for quarterly payments of principal and interest of $1,052,573 commencing June 30, 2008 and ending December, 30 2008. Although the initial quarter payment was made in June 30, 2008, the company is in discussions as to the rescheduling of the outstanding balance of $2,083,416 which is reflected as long-term debt on the face of the balance sheet.

NOTE 7 – Amounts Due to Major Stockholder and Other Related Party Transactions

 

The company’s parent, Simclar Group, provides certain financial and administrative services to the company under a service agreement. The amount of expenses incurred under the service agreement totaled $150,000 and $420,000 respectively for the three and nine months ending September, 30 2008.

 

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 and nine months ended September 30, 2008 are approximately $198,000 and $712,000 respectively.

The company had a net receivable due from its parent, Simclar Group, certain of its subsidiaries and a related party at September 30, 2008 and December 31, 2007 of approximately $1,915,000 and $905,000 respectively. Amounts receivable accrue interest at the rate of LIBOR plus 1.5%

In connection with the acquisition of the Litton backplane assembly business in February 2006, 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.

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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 2005.

The company will recognize, if applicable, interest accrued related to unrecognized tax benefits in interest expense and penalties in other expense. At September 30, 2008, 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.

Net income tax payments amounted to approximately $0 and $402,000 respectively for the three months and nine months ended September 30, 2008 and $0 and $300,000 for the comparable 2007 period.

NOTE 9 - Commitments and Contingencies

The company leases several facilities which expire at various dates through 2010 with renewal options for periods of up to five years at the then fair market rental value. The company sponsors two 401(k) profit sharing plans 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 finalization of these matters will not have a material effect on the company's financial position.

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.

Overview

Simclar, Inc. has over the past years demonstrated strong revenue growth of existing products and customers as well as adding new products and customers. Our strategy remains to (1) leverage our relationship with Simclar Group to expand our reach globally, (2) depend upon our long-term relationships with major OEMs to increase our business with our existing customer base and to grow our customer base with other OEMs, and (3) seek strategic acquisitions and alliances.

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. Following the closure of our North Carolina facility in the first quarter of 2008, the company has four manufacturing plants and numerous sales offices and has approximately 730 employees.

The company has previously reported the problems which came to light beginning late in the second quarter which highlighted significant issues arising as a result of the transfer of our North Carolina sheet metal fabrication business to our Mexican facility, along with significant deficiencies within the Mexican facility’s recently implemented ERP system. A subsequent internal review was performed which comprised a detailed review of the issues and deficiencies that have been highlighted along with a strategic review of the company’s Mexican operations. The key findings were as follows :

§

Major procurement errors arose with a number of material components being purchased at significantly higher costs compared to both historic and budgeted costs.

§

The transferred business with its low margins, low volumes and high variations was ill-suited to the Mexican facility, and therefore steps were taken to exit the transferred business.

§

The significant capital cost of transferring the plastic injection molding business from North Carolina allied to the low margins arising from this business did not align itself with the company’s strategy for its Mexican operations, and accordingly management decided to suspend this transfer and to exit this area of business.

Having identified the problems, the company has been aggressive in implementing corrective actions and has undertaken a fundamental restructuring of the Mexican management team. All senior members of management associated with the deficiencies in the transfer plan have been dismissed and the company is currently in the process of finalizing the completion of a new Mexican management team. Although the charges relating to these issues were largely borne in the second quarter, the extent of the necessary restructuring and corrective actions and the consequent disruption had an adverse impact on the operations of the Mexican production facility in the third quarter, resulting in net sales, below its breakeven level generating pre-tax operating losses of approximately $1.1 million in the 3 months to September 30, 2008.

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The company’s newly recruited management team in Mexico, augmented by senior management seconded from within the company and the parent company has implemented the necessary corrective actions and have made significant improvements within the production process. Management anticipate that these improvements will see the Mexican facility return to profitability in the fourth quarter of this year.

Some of the key highlights of the third quarter to be discussed further through this discussion and analysis include:

·

2008 third quarter sales were approximately $20.4 million compared to approximately $33.1 million in the same period in 2007, reflecting significantly reduced sales to our customers within the telecommunication sector, together with the impact of the operational problems within our Mexico facility as discussed above.

 

·

The company recognized a net loss of $711,101 for the three months ended September 30, 2008, compared to a profit of $415,330 in the same period in 2007. This loss is caused by the reduced level of sales and the operating difficulties within our Mexico facility as discussed above.

 

·

Reported earnings per share for the quarter ended September 30, 2008 is a loss of $0.11, compared to a profit of $0.06 in the same period in 2007.

 

·

Management has implemented cost-reduction programs across each of the company’s locations to mitigate the effect of lower sales and reduced margins.

 

·

Deferred shipments with certain of our key customers led to a higher than expected inventory balance, with inventory turns falling to 4.9 from 5.6 at the end of 2007. The necessity to reduce inventory levels led to the appointment earlier this year of a Procurement Director to oversee and manage the company’s procurement and material control activities. As a result of the initiatives that have been taken in this area, progress is being made, and management expects the financial benefits of this to be seen in future periods.

 

·

Given the losses that have arisen in the past two quarters and the high level of inventory, it has now been recognized that the voluntary bank term loan repayments which were made by the company in previous periods ($3.5 million since the beginning of 2007), were overly aggressive, and have placed undue pressure on the company’s operating cash flow. Management has addressed this problem with its bankers and has been successful in rescheduling the term loan repayments to later periods.

 

·

Management continues to address the issues caused by the failure to properly effect the transfer of the North Carolina operations to Mexico. The company retains a current order backlog of approximately $28 million and is committed to taking whatever further steps are necessary in the coming months to return all divisions of the business to profitability.

 

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 a customer’s manufacturing strategy, acquisitions of or consolidations among customers, and variation in demand for a customer’s 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 few 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 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.

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