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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to __________________
Commission file number 0-14659
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SIMCLAR, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-1709103
- -------------------------------------------- ---------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2230 West 77th Street, Hialeah, Florida 33016
- --------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
(305) 556-9210
----------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------------------
(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 |X| or No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes |_| No |X|
Common Stock Outstanding
Common Stock, $.01 par value - 6,465,345 shares as of March 31, 2004
SIMCLAR, INC. AND SUBSIDIARIES
------------------------------
FORM 10-Q
---------
For the quarter ended March 31, 2004
------------------------------------
INDEX
PART I -- FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements
- ------- --------------------
1) Consolidated Balance Sheets as of March 31, 2004 (Unaudited) and
December 31, 2003.
2) Consolidated Statements of Operations for the three months ended
March 31, 2004 and March 31, 2003 (Unaudited).
3) Consolidated Statements of Cash Flows for the three months ended
March 31, 2004 and March 31, 2003 (Unaudited).
4) Notes to Consolidated Financial Statements as of March 31, 2004
(Unaudited).
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
--------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
Item 4. Controls and Procedures
- ------- -----------------------
PART II -- OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
Signatures
----------
EXHIBITS
- --------
2
PART I -- FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
SIMCLAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003(A)
-----------------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 791,457 $ 230,183
Accounts receivable, less allowances of $279,000 at March 31 and December 31 6,046,335 5,726,814
Amounts receivable from major stockholder, net 1,940,647 2,048,921
Inventories, less allowances for obsolescence of $1,488,000 at March 31
and $1,421,000 at December 31 10,871,318 9,753,301
Prepaid expenses and other current assets 188,832 309,360
Deferred income taxes 857,600 857,600
-----------------------------------
Total current assets 20,696,189 18,926,179
-----------------------------------
Property and equipment:
Machinery, computer and office equipment 7,313,798 7,268,046
Tools and dies 283,828 283,828
Leasehold improvements 678,629 677,113
-----------------------------------
8,276,255 8,228,987
Less accumulated depreciation and amortization 5,996,343 5,733,519
-----------------------------------
2,279,912 2,495,468
-----------------------------------
Deferred expenses and other assets, net 6,115 --
Goodwill 4,234,113 4,234,113
Intangibles, net 18,000 18,000
-----------------------------------
4,258,228 4,252,113
-----------------------------------
$ 27,234,329 $ 25,673,760
===================================
(A) Reference is made to the company's Annual Report on Form 10-K for the
year ended December 31, 2003 filed with the United States Securities and
Exchange Commission on March 30, 2004.
CONTINUED ON FOLLOWING PAGE
3
SIMCLAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
March 31, December 31,
2004 2003(A)
--------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
Current liabilities:
Line of credit $ 1,750,000 $ 1,750,000
Accounts payable 4,165,364 2,960,279
Accrued expenses 1,234,738 914,916
Accrued income taxes 312,001 496,645
Current portion of long-term debt 1,000,000 1,000,000
--------------- ----------------
Total current liabilities 8,462,103 7,121,840
Long-term debt 3,750,000 4,000,000
Deferred trade accounts payable 2,500,000 2,500,000
Deferred income taxes 290,900 290,900
--------------- ----------------
Commitments and contingencies
Total liabilities 15,003,003 13,912,740
--------------- ----------------
Stockholders' equity:
Common stock, $.01 par value, authorized 10,000,000 shares; issued and
outstanding 6,465,345 shares at March 31 and December 31, respectively 64,653 64,653
Capital in excess of par value 11,446,087 11,446,087
Retained earnings 732,124 251,458
Accumulated other comprehensive loss (11,538) (1,178)
--------------- ----------------
Total stockholders' equity 12,231,326 11,761,020
--------------- ----------------
$ 27,234,329 $ 25,673,760
=============== ================
(A) Reference is made to the company's Annual Report on Form 10-K for the
year ended December 31, 2003 filed with the United States Securities and
Exchange Commission on March 30, 2004.
See notes to consolidated financial statements.
4
SIMCLAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
--------------------------------
2004 2003
---------------- ---------------
Sales $ 11,996,969 $ 7,376,492
Cost of goods sold 10,271,144 6,317,432
---------------- ---------------
Gross Margin 1,725,825 1,059,060
Selling, general and administrative expenses 909,125 685,339
---------------- ---------------
Income from operations 816,700 373,721
---------------- ---------------
Interest expense 42,796 60,010
Interest and other income (12,725) (16,683)
---------------- ---------------
Income before income taxes 786,629 330,394
Income tax provision 305,963 134,000
---------------- ---------------
Net income $ 480,666 $ 196,394
================ ===============
Earnings per share:
Basic & diluted $ 0.07 $ 0.03
================ ===============
See notes to consolidated financial statements
5
SIMCLAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
----------------------------------
2004 2003
---------------- -----------------
Operating activities:
Net income $ 480,666 $ 196,394
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization 265,264 201,993
Deferred expenses and other assets (6,115) 1,092
Provision for inventory obsolescence 77,074 53,109
Changes relating to operating activities from:
Accounts receivable (319,521) 304,605
Amounts receivable from major stockholder, net 108,274 95,078
Inventories (1,195,091) 47,162
Prepaid expenses and other current assets 120,528 157
Accounts payable 1,205,085 (162,550)
Accrued expenses 319,822 (36,914)
Income taxes payable (184,644) --
---------------- -----------------
Net cash provided by operating activities 871,342 700,126
---------------- -----------------
Investing activities:
Additions to property and equipment, net of minor disposals (49,709) (49,561)
---------------- -----------------
Net cash used in investing activities (49,709) (49,561)
---------------- -----------------
Financing activities:
Payments on long-term bank borrowings (250,000) (298,406)
---------------- -----------------
Net cash used in financing activities (250,000) (298,406)
---------------- -----------------
Effect of exchange rate fluctuations on cash (10,360) --
---------------- -----------------
Increase in cash and cash equivalents 561,273 352,159
Cash and cash equivalents at beginning of period 230,183 1,536,965
---------------- -----------------
Cash and cash equivalents at end of period $ 791,456 $ 1,889,124
================ =================
Supplemental disclosure of cash flow information:
Interest paid in cash $ 46,639 $ 62,827
================ =================
See notes to consolidated financial statements
6
SIMCLAR, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Simclar,
Inc. ("Simclar ") and its subsidiaries, including Simclar (Mexico), Inc.
("Simclar Mexico"), 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 72.4%
owned subsidiary of Simclar Group Limited ("Simclar Group").
BUSINESS
The company operates in one business segment, the manufacture of
electronic and electro-mechanical products primarily manufactured to customer
specifications in the data processing, telecommunication, instrumentation and
food preparation equipment industries.
INVENTORIES
Inventories, which consist primarily of raw materials used in the
production of electronic components, are valued at the lower of cost (first-in,
first-out and/or weighted average cost method) or market value. The cost of
finished goods and work in process consists of direct materials, direct labor
and an appropriate portion of fixed and variable manufacturing overhead.
Inventories net of allowance for obsolescence are comprised of the following:
March 31, December 31,
2004 2003
--------------- -------------------
Raw materials and supplies $ 8,303,904 $ 7,315,075
Work in process 1,607,335 1,776,538
Finished goods 960,079 661,688
--------------- -------------------
$ 10,871,318 $ 9,753,301
=============== ===================
LONG-LIVED ASSET IMPAIRMENT
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
long-lived assets to be held and used are reviewed for impairment whenever
events or circumstances indicate that the carrying amount may not be
recoverable. When required, impairment losses on assets to be held and used are
recognized based on the fair value of the asset. The fair value of these assets
is determined based upon estimates of future cash flows, market value of similar
assets, if available, or independent appraisals, if required. In analyzing the
fair value and recoverability using future cash flows, the company makes
projections based on a number of assumptions and estimates of growth rates,
future economic conditions, assignment of discount rates and estimates of
terminal values. An impairment loss is recognized if the carrying amount of the
long-
7
SIMCLAR, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
lived asset is not recoverable from its undiscounted cash flows. The measurement
of impairment loss is the difference between the carrying amount and fair value
of the asset. Long-lived assets to be disposed of and/or held for sale are
reported at the lower of carrying amount or fair value less cost to sell. The
company determines the fair value of these assets in the same manner as
described for assets held and used.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The company's sales are primarily derived from product manufacturing
including, but not limited to, finished molded and non-molded cables, wiring
harnesses, printed circuit board assemblies, electro-mechanical and electronic
assemblies. Revenue is recognized upon shipment of the product to the customer,
under contractual terms, which are generally FOB shipping point. Upon shipment,
title transfers and the customer assumes the risks and rewards of ownership of
the product. The selling price of the product is fixed and the ability to
collect for the sale to the customer is reasonably assured when the product is
shipped.
Revenue from contract manufacturing, rework and refurbishing is
recognized upon shipment of the product to the customer, under contractual
terms, which are generally FOB shipping point.
Trade receivables are uncollateralized customer obligations due under
normal trade terms requiring payment generally within 30 days from the invoice
date.
The company's estimate of the allowance for doubtful accounts for trade
receivables is primarily determined based upon the length of time that the
receivables are past due. In addition, management estimates are used to
determine probable losses based upon an analysis of prior collection experience,
specific account risks, and economic conditions.
The company has a series of actions that occur based upon the aging of
past due trade receivables, including letters and direct customer contact.
Accounts are deemed uncollectible based on their past payment account
experiences and their current financial condition.
EARNINGS PER SHARE
Diluted earnings per share gives effect to potential common shares that
were dilutive and outstanding during the period, such as stock options and
warrants using the treasury stock method and average market price. No
potentially dilutive securities were included in the diluted earnings per share
computation for the three months ended March 31, 2004 or for the same period of
the preceding year.
8
SIMCLAR, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED
Following is a reconciliation of amounts used in the basic and diluted
computations:
March 31, March 31,
2004 2003
--------------- -------------------
Net Sales $11,996,969 $ 9,598,449
Net Income 480,666 186,955
=============== ===================
Earnings per share:
Basic $ 0.07 $ 0.03
=============== ===================
Diluted $ 0.07 $ 0.03
=============== ===================
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 months ended March 31,
2004 and 2003:
Three Months Ended
March 31,
2004 2003
--------------- ------------------
Net Income $ 480,666 $ 196,394
Foreign currency translation loss (10,360) --
--------------- ------------------
Comprehensive Income $ 470,306 $ 196,394
=============== ==================
NOTE 2-INTERIM ADJUSTMENTS
The financial summaries for the three months ended March 31, 2004 and
2003 are unaudited and include, in the opinion of management of the company, all
adjustments consisting of normal recurring accruals necessary to present fairly
the earnings for such periods. Operating results for the three months ended
March 31, 2004 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 2004.
9
SIMCLAR, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 2-INTERIM ADJUSTMENTS-CONTINUED
While the company believes that the disclosures presented are adequate
to make the information not misleading, the company recommends that these
Consolidated Financial Statements be read in conjunction with the financial
statements and notes included in the company's latest Annual Report on Form 10-K
for the year ended December 31, 2003.
NOTE 3-AMOUNTS RECEIVABLE FROM MAJOR STOCKHOLDER
The company had a net receivable due from its parent, Simclar Group, of
approximately $1,941,000 and $2,049,000 at March 31, 2004 and December 31, 2003,
respectively. These amounts included a $1,500,000 demand note payable by Simclar
Group, bearing an annual interest rate of LIBOR plus 2.0% and accumulated
interest on this demand note of approximately $94,000 and $71,000 at March 31,
2004 and December 31, 2003, respectively.
NOTE 4-NOTES RECEIVABLE FROM OPTIONS EXERCISED
On February 27, 1995, the company granted non-qualified stock options
to directors of Simclar and its former subsidiary for 142,500 shares exercisable
at $1.75 per share for five years. In April 1995, the company granted a
non-qualified stock option for 10,000 shares, which vested immediately, to its
general counsel at the same price and terms as the directors' options. On
February 25, 2000, 145,000 of these options were exercised. The company received
cash payment of the par value and the balance in three-year promissory notes
totaling $207,825, which were presented in the stockholders' equity section of
the balance sheet, with interest at 6.19%. The notes, which were due in February
2003, were not repaid and, as a result, the notes as well as the related balance
sheet entries for common stock and capital in excess of par value were written
off in the first quarter of 2003. The common shares issued upon the exercise of
these options have been cancelled.
NOTE 5-INCOME TAXES
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.
The company had $306,000 domestic income tax expense for the three
months ended March 31, 2004, and $134,000 domestic income tax expense for the
three months ended March 31, 2003.
Income tax payments amounted to $491,000 for the three months ended
March 31, 2004, and $255,000 for the same period of the preceding year.
10
SIMCLAR, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 6-COMMITMENTS AND CONTINGENCIES
The company leases several facilities which expire at various dates
through 2010 with renewal options for a period of five years at the then fair
maket 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 contributes a 50% match based on the first 4% of each
employee's annual earnings contributed to the plan.
The company is involved in various legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
liability, if any, resulting from these matters will not have a material effect
on the company's financial position.
NOTE 7-TECHDYNE (EUROPE) LAND AND BUILDINGS
On April 2, 2003, a fire started by vandals destroyed the Techdyne
(Europe) building located in Livingston, Scotland. The claims with the insurance
companies were settled during the third quarter of 2003 in the amount of
(pound)364,900 ($588,185) less demolition expenses. The company realized a net
gain on this disposition of (pound)34,500 ($55,621).
On October 17, 2003, the company received the net proceeds from the
sale of land located in Livingston, Scotland in the amount of (pound)114,868
($192,163). The company realized a net loss on this disposition of (pound)5,132
($8,585).
NOTE 8-ACQUISITION OF AG TECHNOLOGIES, INC.
On July 15, 2003, the company acquired for cash all of the outstanding
stock of AG Technologies, Inc., a privately owned company based in Schaumburg,
Illinois. The company name was changed to Simclar (Mexico), Inc. on August 29,
2003. Additional consideration of up to $1,300,000 is payable based on Simclar
Mexico's net sales in each of the three years ending July 14, 2004, 2005 and
2006. Simclar Mexico is an international value added provider of comprehensive
electronic manufacturing services to Original Equipment Manufactures' ("OEMs")
serving the automotive, industrial controls, medical and power equipment
industries. Simclar Mexico's Mexican facility will enable the company to be
competitive in the higher volume arena for assembly in North America. Simclar
Mexico additionally brings with it a list of customers in a broad range of
industries and extensive manufacturing and design relationships in Asia.
The acquisition was accounted for by the purchase method of accounting
under SFAS No. 141, "Business Combinations." The purchase price for the
acquisition, including loan repayment and net of cash received, totaled
$1,951,547, and was allocated to assets acquired and liabilities assumed based
on estimated fair values at the date of acquisition. The company recorded
$1,279,118 of goodwill and $18,000 of intangibles based on the opening balance
sheet. Additional consideration payable based on Simclar Mexico's sales through
July 14, 2006 could increase the amount of this goodwill to $2,579,118.
11
SIMCLAR, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 8-ACQUISITION OF AG TECHNOLOGIES, INC.--CONTINUED
The purchase allocation is as follows:
Current assets $ 3,414,149
Equipment 867,322
Goodwill 1,279,118
Intangibles 18,000
Other assets 743
---------------
Total assets acquired $ 5,579,332
---------------
Current liabilities $ 1,556,485
Long-term debt 9,000
Long-term liabilities 2,062,300
---------------
Total liabilities $ 3,627,785
---------------
$ 1,951,547
Net assets acquired ===============
Results of operations have been included in the company's consolidated
financial statements prospectively from the date of acquisition. The following
table summarizes selected unaudited pro forma financial information for the
three months ended March 31, 2003, as if Simclar Mexico had been acquired at the
beginning of 2003. The unaudited pro forma financial information includes
adjustments for income taxes, prepaid expenses, accrued expenses, depreciation
and amortization.
The pro forma financial information does not necessarily reflect the
results that would have occurred if the acquisition had been in effect for the
periods presented. In addition, they are not intended to be a projection of
future results and do not reflect any synergies that might be achieved from
combining the operations.
Three Months Ended
March 31,
2003
-------------------------
Net Sales $ 9,598,449
Net Income 186,955
=========================
Earnings per share:
Basic $ 0.03
=========================
Diluted $ 0.03
=========================
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
FORWARD-LOOKING INFORMATION
This report includes certain forward-looking statements with respect to
the company and its business that involve risks and uncertainties. These
statements are influenced by the company's 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, the company cannot assure the reader that its
expectations will prove correct. Actual results and developments may differ
materially from those conveyed in the forward-looking statements. For these
statements, the company claims the protections for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
Important factors such as changes in general economic, business and
market conditions, as well as changes in such conditions that may affect
industries or the markets in which the company operates, including, in
particular, the impact of our nation's current war on terrorism, could cause
actual results to differ materially from the expectations reflected in the
forward-looking statements made in this Form 10-Q. Further, information on other
factors that could affect the financial results of Simclar is included in the
company's other filings with the Securities and Exchange Commission (the
"Commission"). These documents are available free of charge at the Commission's
website at http://www.sec.gov and/or from Simclar. The forward-looking
statements speak only as of the date on which they are made, and the company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date of this report.
GENERAL
The company's operations have continued to depend upon a relatively
small number of customers for a significant percentage of its net revenue.
Significant reductions in sales to any of the company's large customers would
have a material adverse effect on its 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 the company's results of operations and
financial condition, as has occurred in the past. The company's results also
depend to a substantial extent on the success of its original equipment
manufacturer ("OEM") customers in marketing their products. The company
continues to seek to diversify its customer base to reduce its reliance on the
company's few major customers.
The industry segments the company serves, 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
the company could adversely affect the 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 was experienced beginning in
the third quarter of 2000 and continuing into the fourth quarter of 2003, had a
material adverse effect on the company's business and financial condition and
required it to realign its organization and operations beginning the second half
of 2001 and continuing through the third quarter of 2003. The company typically
does not obtain long-term volume purchase contracts from customers, but rather
works with customers to anticipate future volumes of orders. Based upon these
anticipated future orders and considering the level of production schedules and
facilities utilization, the company will make commitments regarding the
acceptable level of new business. Occasionally, the company purchases raw
materials without a customer order or commitment. Customers may cancel,
13
delay or reduce orders, usually without penalty, for a variety of reasons,
whether relating to the customer or the industry in general. Any significant
cancellations, reductions or order delays could adversely affect results of
operations.
The company uses "Electronic Data Interchange" ("EDI") with customers
and suppliers in an effort to continuously develop accurate forecasts of
customer volume requirements, as well as sharing future requirements with
suppliers. The company depends 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
results of operations. In anticipation of future sales, it is important for the
company to efficiently manage inventory by assuring proper timing of
expenditures and allocations of physical and personnel resources used in
manufacturing.
The company must continuously develop improved manufacturing procedures
to accommodate customers' needs for increasingly complex products. To continue
to grow and be a successful competitor, the company must be able to maintain and
enhance its 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 the company believes that its operations utilize the
assembly and testing technologies and equipment currently required by customers,
there can be no assurance that process development efforts will be successful or
that the emergence of new technologies, industry standards or customer
requirements will not render the company's technology, equipment or processes
obsolete or noncompetitive. In addition, to the extent that the company
determines 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.
During periods of recession in the electronics industry, as we have
experienced in 2001, 2002 and 2003, 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.
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 operations, experience in manufacturing a
particular product, the timing of expenditures in anticipation of increased
orders, 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. The company generally has idle
capacity and reduced operating margins during periods of lower-volume
production.
The company competes with much larger electronic manufacturing entities
for expansion opportunities. Any acquisitions may result in potentially dilutive
issuance of equity securities, the incidence of debt and amortization expenses
related to intangible assets, and other costs and expenses, all of which could
materially affect financial results adversely. Acquisition transactions also
involve numerous business risks, including difficulties in successfully
integrating the acquired operations, technologies and products or formalizing
anticipated synergies, and the diversion of management's attention from other
business concerns.
CRITICAL ACCOUNTING ESTIMATES
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, 2003.
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
14
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, 2003. There have been no
material changes to these accounting policies during the three months ended
March 31, 2004.
RESULTS OF OPERATIONS
Consolidated sales increased approximately $4,620,000 for the three
months ended March 31, 2004, compared to the same period of the preceding year.
The four facilities we operated throughout 2003 increased consolidated sales
approximately $2,009,000 for the three months ended March 31, 2004, compared to
the same period of the preceding year. The balance of the increase in sales for
the quarter ended March 31, 2004 is attributable to the Simclar Mexico facility
acquired in July 2003. Strong sales increases were experienced across all the
industries served by the company, during the three months ended March 31, 2004,
compared to the same period of the preceding year.
Interest and other income decreased by approximately $4,000 for the
three months ended March 31, 2004, compared to the same period of the preceding
year.
Approximately 17.1% of the company's consolidated sales for the three
months ended March 31, 2004, compared to 20% in the quarter ended March 31,
2003, were made to one customer.
Cost of goods sold as a percentage of sales amounted to 85.6% in each
of the three months ended March 31 in 2004 and 2003.
Selling, general and administrative expenses increased by
approximately $224,000 for the three months ended March 31, 2004, compared to
the same period of the preceding year. $165,000 of this increase was
attributable to Simclar Mexico for the three months ended March 31, 2004,
Interest expense decreased approximately $17,000 for the three months
ended March 31, 2004, compared to the same period of the preceding year,
reflecting lower interest rates during the 2004 period. The LIBOR was 1.19% and
1.33% at March 31, 2004 and 2003, respectively.
Income taxes increased by $172,000 for the three months ended March 31,
2004, compared to the same period in 2003. This increase resulted from the
company's increased net income before income taxes in the three months ending
March 31, 2004, compared to the same period of the preceding year.
LIQUIDITY AND CAPITAL RESOURCES
The company's cash and cash equivalents balance at March 31, 2004 was
approximately $791,000, compared to approximately $230,000 at December 31, 2003.
Net cash provided by operating activities was approximately $871,000 in the
three months ended March 31, 2004, compared to approximately $700,000 in the
same period of 2003. The increase in net income of approximately $284,000 during
the first quarter of 2004, compared to the same period of 2003, was offset by
increased working capital needs to generate the increase in cash provided by
operations of approximately $158,000.
At March 31, 2004, the company's average days of sales outstanding in
accounts receivable for the quarter was 46 days as compared to 51 days at March
31, 2003. The decrease in average days of sales outstanding in accounts
receivable is primarily due to increased collection efforts during the period.
Average inventory turnover was 4.1 and 3.5 times for the three months ended
March 31, 2004 and 2003, respectively. The increase in inventory turnover
reflects the strong growth in customers' demands for
15
products from the food preparation equipment, telecommunications and computer
peripherals industries during the three months ended March 31, 2004, compared
with the same period ended in 2003.
Cash used in investing activities was approximately $50,000 in both the
three months ended March 31, 2004 and 2003. Cash used in investing activities
was primarily for the acquisition of equipment used in manufacturing operations.
Cash used in financing activities was approximately $250,000 in the
three months ended March 31, 2004, compared to approximately $298,000 used in
the same period of the preceding year. Cash used in financing activities was
primarily for debt reduction. The company made all scheduled repayments on its
long term debt during the period.
On October 24, 2001, the company entered into two credit facilities
with Bank of Scotland in Edinburgh, Scotland for an aggregate borrowing of
$10,000,000. The financing included a $3,000,000 line of credit, which expires
September 30, 2004, with an interest rate at LIBOR plus 1.5% for a one, three or
six month period, at the company's election. The company elected the three-month
interest period at 2.63% until April 24, 2004, after this date the rate is 2.69%
until July 24, 2004. This line of credit had an outstanding balance of
$1,750,000 at March 31, 2004. The financing also included a seven-year term loan
of $7,000,000 at the same interest rate as the line of credit. The term loan
specifies quarterly payments of $250,000 due in January, April, July and October
of each year, plus interest. The term loan had an outstanding balance of
$4,750,000 at March 31, 2004.
All of the assets of the company, except for the assets of Techdyne
(Europe) and Simclar Mexico collateralize the credit facilities. The credit
facilities contain affirmative and negative covenants. Certain of the
affirmative covenants require maintenance of a consolidated adjusted net worth
greater than $11,000,000; a ratio of consolidated current assets to consolidated
net borrowing not less than 1.75 to 1; a ratio of consolidated trade receivables
to consolidated net borrowings not less than .75 to 1; and a ratio of
consolidated net income before interest and income taxes to total consolidated
interest costs not less than 2 to 1. Some of the negative covenants, among
others, prohibit (1) granting or permitting a security agreement against the
consolidated assets of the companies other than permitted security agreements,
(2) declaring or paying any dividends or making any other payments on the
company's capital stock, (3) 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, (4) incurring, assuming, guaranteeing, or
remaining liable with respect to any indebtedness, except for certain existing
indebtedness disclosed in these financial statements, or (5) undertaking any
capital expenditure in excess of $1,000,000 in any one fiscal year. The
agreements also preclude changes in ownership in the companies, any material
change in any of the company's business objectives, purposes, operations and tax
residence or any other circumstances or events which will have a material
adverse effect as defined by the agreements. The Bank of Scotland consented to
the Simclar Mexico acquisition on July 15, 2003.
The company's ability to comply with bank covenants may be affected by
changes in financial condition or results of operations, or other events beyond
the company's control. The breach of any of these covenants would result in
default under the company's credit facilities. At March 31, 2004, the company
was in compliance with the bank covenants.
The company indebtedness requires it to dedicate a substantial portion
of its cash flow from operations to payments of debt, which could reduce amounts
for working capital and other general corporate purposes. The restrictions in
the company's credit facility could also limit its flexibility in reacting to
changes in business and increases vulnerability to general adverse economic and
industry conditions.
16
In the normal course of business, the company enters into various
contractual and other commercial commitments that impact or can impact the
liquidity of our operations. The following table summarizes the company's
significant contractual obligations at March 31, 2004:
Total Less than 1-3 4-5 Over 5
In thousands Amounts 1 Year Years Years Years
----------- ----------- ----------- ---------- -----------
Long-term debt $ 4,750 $ 1,000 $ 2,000 $ 1,750 $ --
Operating leases
(non-cancelable) 2,450 662 1,084 478 226
Bank line of credit 1,750 1,750 -- -- --
Vendor open line of credit 2,899 399 2,500 -- --
----------- ----------- ----------- ---------- --------------
Total contractual $ 11,849 $ 3,811 $ 5,584 $ 2,228 $ 226
=========== =========== =========== ========== ==============
Management will continue to seek acquisitions that will add talent,
technology, and capabilities that advance the company's strategy and prospects.
Management believes that the combination of internally generated funds,
available cash reserves, and the credit facility are sufficient to fund the
company's operations over the next year.
OFF BALANCE SHEET ARRANGEMENTS
The company has no off balance sheet financing arrangements with
related or unrelated parties and no unconsolidated subsidiaries.
INFLATION
Inflationary factors have not had a significant effect on operations.
The company attempts to pass on increased costs and expenses by increasing
selling prices when and where possible and by developing different and improved
products for customers that can be sold at targeted profit margins.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------
The company is exposed to market risks from changes in interest rates
and foreign currency exchange rates.
Sensitivity of results of operations to interest rate risks on
investments is managed by conservatively investing liquid funds in short-term
government securities and interest-bearing accounts at financial institutions in
which the company had invested approximately $39,000 at March 31, 2004.
Interest rate risks on debt are managed by negotiation of appropriate
rates on new financing obligations based on current market rates. There is an
interest rate risk associated with the company's variable debt agreements, which
totaled approximately $6,500,000 at March 31, 2004.
The company has exposure to both rising and falling interest rates. A
1/2% decrease in rates on the company's investments at the end of the reporting
period would be insignificant. A 1% increase in rates on the company's variable
rate debt at the end of the reporting period would result in a negative impact
of approximately $16,000 on results of operations.
17
The company's exposures to market risks are impacted by changes in the
foreign currency exchange rates related to the company's Mexican subsidiary
whose operating results, when translated into U.S. dollars, are impacted by
changes in foreign exchange rates. A 10% strengthening of the U.S. dollar
against the local Mexican currency, the peso, would have had a positive impact
of $57,000 on the three month's earnings. The company has not incurred any
significant realized losses on exchange transactions and does not utilize
foreign exchange contracts to hedge foreign currency fluctuations. If realized
losses on foreign transactions were to become significant, the company would
evaluate appropriate strategies, including the possible use of foreign exchange
contracts, to reduce such losses.
ITEM 4. CONTROLS AND PROCEDURES
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 defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of the period covered by this report, our disclosure controls and procedures are
adequately designed to ensure 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. During the period covered by this Quarterly Report
on Form 10-Q, there was no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. Subsequent to the date of this evaluation there have
been no significant changes in our internal controls or in other factors that
could significantly affect these controls and no corrective actions taken with
regard to significant deficiencies or perceived weaknesses in such controls.
18
PART II -- OTHER INFORMATION
----------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits
Description
Exhibit 31.1 Certification of Chief Executive Officer pursuant
to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer pursuant
to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer of
Periodic Financial Reports pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
Exhibit 32.2 Certification of Chief Financial Officer of
Periodic Financial Reports pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
(b) Reports on Form 8-K
None
ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED
- ---------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIMCLAR, INC.
By /s/ Barry J. Pardon
----------------------------------------
BARRY J. PARDON, President
By /s/David L. Watts
----------------------------------------
DAVID L. WATTS, Chief Financial Officer
Dated: May 14, 2004