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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, 2005
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
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, 2005
SIMCLAR, INC.
Form 10-Q
For the quarter ended March 31, 2005
TABLE OF CONTENTS
Page
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
1) Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004. ...................... 3
2) Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2005
and March 31, 2004................................................................................ 5
3) Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2005
and March 31, 2004................................................................................ 6
4) Notes to Consolidated Financial Statements as of March 31, 2005 (Unaudited)............................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II -- OTHER INFORMATION
Item 6. Exhibits 18
Signatures 18
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
SIMCLAR, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2005 2004(A)
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 461,556 $ 280,015
Accounts receivable, less allowances of $181,000 at March 31 and
$182,000 at December 31 6,777,780 8,066,978
Amounts receivable from major stockholder, net 2,949,449 2,918,037
Inventories, less allowances for obsolescence of $1,471,000 at March 31
and $1,481,000 at December 31 11,054,689 11,314,911
Prepaid expenses and other current assets 337,561 317,183
Deferred income taxes 795,400 795,400
------------ ------------
Total current assets 22,376,435 23,692,524
------------ ------------
Property and equipment:
Land and improvements 547,511 547,511
Buildings and building improvements 1,251,187 1,235,904
Machinery, computer and office equipment 9,054,583 8,171,056
Tools and dies 293,623 290,873
Leasehold improvements 393,005 377,082
------------ ------------
Total property and equipment 11,539,909 10,622,426
Less accumulated depreciation and amortization 6,824,458 6,613,775
------------ ------------
Net property and equipment 4,715,451 4,008,651
------------ ------------
Deferred expenses and other assets, net 19,530 20,622
Goodwill 4,840,545 4,840,545
Intangible assets, net 18,000 18,000
------------ ------------
4,878,075 4,879,167
------------ ------------
TOTAL ASSETS $ 31,969,961 $ 32,580,342
============ ============
(A) Reference is made to the company's Annual Report on Form 10-K for the year
ended December 31, 2004 filed with the United States Securities and
Exchange Commission on March 31, 2005.
Continued on the following page
3
SIMCLAR, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
March 31, December 31,
2005 2004(A)
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 3,500,000 $ 2,980,000
Accounts payable 4,793,981 5,414,262
Accrued expenses 1,181,490 1,124,732
Accrued income taxes 275,912 836,709
Current portion of long-term debt 1,200,000 1,200,000
------------ ------------
Total current liabilities 10,951,383 11,555,703
Long-term debt 3,900,000 4,200,000
Deferred trade accounts payable 2,500,000 2,500,000
Deferred income taxes 206,000 206,000
------------ ------------
Total liabilities 17,557,383 18,461,703
------------ ------------
Commitments and contingencies -- --
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 64,653 64,653
Capital in excess of par value 11,446,087 11,446,087
Retained earnings 2,885,912 2,593,238
Accumulated other comprehensive income 15,926 14,661
------------ ------------
Total stockholders' equity 14,412,578 14,118,639
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,969,961 $ 32,580,342
============ ============
(A) Reference is made to the company's Annual Report on Form 10-K for the year
ended December 31, 2004 filed with the United States Securities and
Exchange Commission on March 31, 2005.
See notes to consolidated financial statements.
4
SIMCLAR, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
----------------------------
2005 2004
----------------------------
Sales $ 12,356,600 $ 11,996,969
Cost of goods sold 10,791,928 10,271,144
------------ ------------
Gross Margin 1,564,672 1,725,825
Selling, general and administrative expenses 1,018,461 909,125
------------ ------------
Income from operations 546,211 816,700
Interest expense 77,542 42,796
Interest and other income (11,126) (12,725)
------------ ------------
Income before income taxes 479,795 786,629
Income tax expense 187,121 305,963
------------ ------------
Net income $ 292,674 $ 480,666
============ ============
Earnings per share:
Basic & diluted $ 0.05 $ 0.07
============ ============
See notes to consolidated financial statements
5
SIMCLAR, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
----------------------------
2005 2004
----------------------------
Operating activities:
Net income $ 292,674 $ 480,666
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation & amortization 216,124 265,264
Deferred expenses and other assets 1,092 (6,115)
Provision for inventory obsolescence 72,856 77,074
Changes relating to operating activities from:
Decrease (increase) in accounts receivable 1,289,198 (319,521)
(Increase) decrease in amounts receivable from major
stockholder, net (31,412) 108,274
Decrease (increase) in inventories 187,366 (1,195,091)
(Increase) decrease in prepaid expenses and
other current assets (20,378) 120,528
(Decrease) increase in accounts payable (620,281) 1,205,085
Increase in accrued expenses 56,758 319,822
Decrease in income taxes payable (560,797) (184,644)
------------ ------------
Net cash provided by operating activities 883,200 871,342
------------ ------------
Investing activities:
Additions to property and equipment, net of minor disposals (922,924) (49,709)
------------ ------------
Net cash used in investing activities (922,924) (49,709)
------------ ------------
Financing activities:
Borrowing on bank line of credit 520,000 --
Payments on long-term bank borrowings (300,000) (250,000)
------------ ------------
Net cash provided by (used in) financing activities 220,000 (250,000)
------------ ------------
Effect of exchange rate fluctuations on cash 1,265 (10,360)
------------ ------------
Net change in cash and cash equivalents 181,541 561,273
Cash and cash equivalents at beginning of period 280,015 230,183
------------ ------------
Cash and cash equivalents at end of period $ 461,556 $ 791,456
============ ============
Supplemental disclosure of cash flow information:
Interest paid in cash $ 59,243 $ 46,639
============ ============
See notes to consolidated financial statements
6
SIMCLAR, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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"), 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. 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, 2004.
NOTE 2 - Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123(R), Share-Based
Payment, which requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the consolidated statement of
operations based on their fair values, effective for public companies for
interim periods beginning after June 15, 2005. SFAS No.123(R) permits public
companies to adopt its requirements using either the modified prospective or
retrospective method.
The United States Securities and Exchange Commission ("SEC") announced on
April 14, 2005 that it approved a phased-in implementation process for SFAS No.
123(R). Under the new SEC implementation process, the company's effective date
for adopting SFAS No. 123(R) has been extended by six months. The company will
adopt SFAS No. 123(R)'s fair value method of accounting for share-based payments
to employees in the first quarter of fiscal 2006, as opposed to the third
quarter of fiscal 2005, as originally required by SFAS No. 123(R), and as stated
in the company's Annual Report on Form 10-K for the year ended December 31,
2004. The company currently does not anticipate that the adoption of this
standard will have a material effect on its consolidated results of operations,
financial position, and cash flows.
7
SIMCLAR, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Inventories
Inventories net of allowance for obsolescence are comprised of the
following:
March 31, December 31,
2005 2004
---------------------------
Raw materials and supplies $ 8,560,237 $ 8,863,347
Work in process 1,625,286 1,584,258
Finished goods 869,166 867,306
------------ ------------
$ 11,054,689 $ 11,314,911
============ ============
NOTE 4 - Earnings per Share
Following is a reconciliation of amounts used in the basic and diluted
computations:
Three Months Ended
March 31,
2005 2004
---------------------------
Net income $ 292,674 $ 480,666
Weighted average number of shares of
common stock outstanding 6,465,345 6,465,345
------------ ------------
Earnings per share:
Basic & diluted $ 0.05 $ 0.07
============ ============
There were no potentially dilutive securities for the three months ended
March 31, 2005 or for the same period of the preceding year.
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.
8
SIMCLAR, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - Comprehensive Income (Continued)
Below is a detail of comprehensive income for the three months ended March
31, 2005 and 2004:
Three Months Ended
March 31,
2005 2004
---------------------------
Net income $ 292,674 $ 480,666
Foreign currency translation income (loss) 1,265 (10,360)
------------ ------------
Comprehensive income $ 293,939 $ 470,306
============ ============
NOTE 6 - Amounts Receivable from Major Stockholder
The company had a net receivable due from its parent, Simclar Group, of
approximately $2,949,000 and $2,918,000 at March 31, 2005 and December 31, 2004,
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 $134,000 and $123,000 at March 31,
2005 and December 31, 2004, respectively. During the three months to March 31,
2005, the company advanced funds to one company owned by Simclar Group for
operating capital, and accrued financial and administrative expenses under the
service agreement with Simclar Group. As of March 31, 2005, the company had a
net receivable from Simclar Group of approximately $1,315,000, excluding the
demand note and accrued interest.
NOTE 7 - 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 approximately $187,000 income tax expense for the three
months ended March 31, 2005, and approximately $306,000 income tax expense for
the three months ended March 31, 2004.
Income tax payments amounted to approximately $748,000 for the three months
ended March 31, 2005, and approximately $491,000 for the same period of the
preceding year.
NOTE 8 - 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
market rental value. The company sponsors a 401(k) profit sharing plan covering
substantially all of its employees, excluding Techdyne (Europe) and Simclar
9
SIMCLAR, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Commitments and Contingencies (Continued)
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 9 - 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 OEM's serving the automotive, industrial
controls, medical and power equipment industries. Simclar Mexico's Mexican
facility enables the company to be competitive in the higher volume arena for
assembly in North America.
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. The
additional earn-out for the period July 15, 2003 to July 14, 2004 of $606,432
was paid on September 15, 2004. This additional earn-out payment increased the
company's goodwill to $1,885,550.
Results of operations have been included in the company's consolidated
financial statements prospectively from the date of acquisition.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction and Overview
In the three months ended March 31, 2005, we experienced moderate sales
growth over the same period of the preceding year. We continued to focus on the
following key priorities: (1) expanding our customer base through our alliance
with Simclar Group, (2) seeking to develop strong, long-term alliances with
major growth original equipment manufacturers ("OEMs"), and (3) developing the
opportunities arising from our acquisition of Simclar Mexico in July 2003.
During the three months ended March 31, 2005, we continued to see new business
awards from existing and new customers.
As discussed in more detail throughout this Item 2:
o our revenues increased by 3.0% for the three months ended March 31,
2005 compared to the three months ended March 31, 2004;
o gross margin for the three months ended March 31, 2005 decreased by
approximately $161,000 compared to the same period of the preceding
year, primarily due to a decline in sales in one of our facilities
which resulted in a reduction in gross margin in that facility of
approximately $141,000 in the three months to March 31, 2005
compared to the same period in 2004;
o net income for the three months ended March 31, 2005 of $293,000
decreased by approximately $188,000 from the same period of the
preceding year, primarily due to pre-production costs of
approximately $96,000 incurred in respect of the new Mexico sheet
metal plant which was opened in January 2005, such costs being
included within selling, general and administrative expenses, with
the remainder of the decrease being due to the factors affecting
gross margin described above and increased interest expense, offset
by lower income tax expense due to the reduction in income before
income taxes;
o cash flows used in investing activities were approximately $923,000
in the three months ended March 31, 2005, mainly due to purchases of
machinery and equipment for our new manufacturing facility in
Mexico.
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, 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.
11
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, proper
timing of expenditures and allocations of physical and personnel resources in
anticipation of future sales, the evaluation of economic conditions in the
electronics industry and the mix of products, whether PCBs, wire harnesses,
cables, or turnkey products, for manufacture.
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, 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.
Key Financial Performance Measures
We manage and assess the performance of our business primarily through the
following measures:
o 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.
o Sales - monthly sales for each plant are compared against budget and
the same month in the previous year.
o Gross margin - the gross margin achieved by each plant each month is
compared against budget and the same month in the previous year.
o Selling, general and administrative expenses - the ratio of these
expenses as a percentage of sales for each plant each month is
compared against budget.
12
o Working capital - movements in the balance sheet amounts of
inventory, accounts receivable and accounts payable for each plant
are reviewed on a monthly basis.
o Bank borrowings - movements 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.
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.
Important factors include changes in general economic, business and market
conditions, as well as changes in such conditions that may affect industries or
the markets in which we operate, 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 Report. Further, information on other factors that could affect our
financial results is included in the company's other filings with the Securities
and Exchange Commission. These documents are available free of charge at the
Commission's website at http://www.sec.gov and/or from Simclar, Inc. The
forward-looking statements speak only as of the date on which they are made, and
we undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date of this Report.
Results of Operations
The following is a discussion of the key factors that have affected our
business during the quarter ended March 31, 2005. This discussion should be read
in conjunction with our consolidated financial statements and the related
footnotes included herein.
Consolidated sales increased approximately $360,000 (3.0%) for the three
months ended March 31, 2005, compared to the same period of the preceding year,
as a result of continual improvements in our sales to the computer peripherals,
instrumentation, and food preparation equipment industries. Our sales to the
military-government sector, power equipment and telecommunications industries
declined in the three months ended March 31, 2005, compared to the same period
of the preceding year.
Interest and other income decreased approximately $2,000 in the three
months ended March 31, 2005, compared to the same period of the preceding year.
The decrease was due to a lower average cash and cash equivalents balance as a
result of our October 2004 acquisition of the land and building of our Dayton,
Ohio facility, which we formerly had leased, as well as our continued investment
in Mexico and other equipment in order to facilitate future growth.
Approximately 50% of our consolidated sales for the three months ended
March 31, 2005 were made to five customers. Illinois Tool Works ("ITW") (22%) is
13
the only customer that accounts for more than 10% of our total sales. The loss
of or substantial reduction of sales to any major customer would have an adverse
effect on our operations if such sales were not replaced.
Gross margin for the three months ended March 31, 2005 decreased by
approximately $161,000 compared to the same period of the preceding year,
primarily due to a decline in sales in one of our facilities which resulted in a
reduction in gross margin in that facility of approximately $141,000 in the
three months to March 31, 2005 compared to the same period in 2004.
Cost of goods sold as a percentage of sales amounted to 87.3% for the
three months ended March 31, 2005 and 85.6% for the same period of the preceding
year. The company experienced higher material costs as a percentage of sales, at
63% percent of sales for the products manufactured in the three months ended
March 31, 2005, compared to 58% in the same period of the preceding year. The
higher material cost was due to price increases from suppliers of electronic
components and higher cost bills of materials for certain products manufactured
in the three months ended March 31, 2005. The labor content of our manufactured
products was 20% for the three months ended March 31, 2005 compared to 24% for
the same period of the preceding year. The reduction in labor content is
primarily due to a greater proportion of our consolidated sales being
manufactured in our Mexico facilities. The overhead component of cost of goods
sold as a percentage of sales was 5% in the three months ended March 31, 2005,
compared to 4% in the same period the preceding year.
Selling, general and administrative expenses increased by approximately
$109,000 (12.0%) for the three months ended March 31, 2005, compared to the same
period of the preceding year, and amounted to approximately 8.2% and 7.6% of
sales for those periods, respectively. Pre-production costs in respect of the
new sheet metal facility in Mexico of approximately $96,000 were the primary
reason for the increase in selling, general and administrative expenses in the
three months ended March 31, 2005 compared with the same period of the preceding
year, with increased employee costs being the main contributor to the remainder
of the increase.
Interest expense increased approximately $35,000 for the three months
ended March 31, 2005, compared to the preceding year, reflecting the increased
borrowings to acquire the land and building of our Dayton, Ohio facility, which
we formerly had leased, and to invest in our new sheet metal facility in Mexico.
The three month LIBOR was 3.15% and 1.19% at March 31, 2005 and March 31, 2004,
respectively.
Liquidity and Capital Resources
Our cash and cash equivalents balances at March 31, 2005 were approximately
$462,000, compared to approximately $280,000 at December 31, 2004. Net cash
provided by operating activities was approximately $883,000 in the three months
ended March 31, 2005, compared to approximately $871,000 in the same period of
2004. The increase in cash provided from operating activities in 2005 as
compared to 2004 was due primarily to improved credit collection performance and
a net reduction in inventories held during the quarter compared to a net
increase in the same period of the preceding year, offset by reduced net income
for the period, a larger reduction in income taxes payable, and a decrease in
accounts payable during the quarter compared to an increase in the same period
of the preceding year.
At March 31, 2005, our average outstanding days sales was 49 days as
compared to 54 days at December 31, 2004. The overall trend we experienced over
the last two years is that the majority of our customers are stretching out
payment terms, however our continued focus on working capital management has
helped to improve our average outstanding days sales. Average inventory turnover
was 3.9 and 4.1 times at March 31, 2005 and December 31, 2004, respectively.
Cash used in investing activities was approximately $923,000 in the three
months ended March 31, 2005, compared to approximately $50,000 in the same
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period of the preceding year. Cash used in investing activities was primarily
for purchases of machinery and equipment for our new manufacturing facility in
Mexico.
Cash provided by financing activities was approximately $220,000 in the
three months ended March 31, 2005, compared to cash used of approximately
$250,000 in the same period of the preceding year. Cash provided by investing
activities represented a drawdown of $520,000 on our working capital credit
facility in order to help finance our investing activities, offset by $300,000
in repayments of long-term debt. The company made all scheduled repayments on
its long-term debt during the period.
On October 14, 2004, the company restructured its existing term loan and
working capital facilities with Bank of Scotland. The term loan was made
pursuant to an Amended and Restated Facility Letter providing for a term loan of
$5,650,000, of which Tranche A represents outstanding borrowings of $4,250,000,
and Tranche B represents the $1,400,000 loan to acquire the property located at
1784 Stanley Avenue, Dayton, Ohio. The principal of Tranche A is repayable in
quarterly installments of $250,000 in January, April, July and October of each
year from 2004 through 2008, with the final payment due in October 2008. The
principal of Tranche B is payable in twenty-eight equal quarterly installments
of $50,000, with the first installment payable on January 20, 2005. Interest on
each advance 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 company elected the
three-month interest period at 3.8% until January 24, 2005 and 4.17% until April
24, 2005. After this date the rate is 4.65% until July 24, 2005. The term loan
had an outstanding balance of $5,100,000 at March 31, 2005.
The company's existing working capital facility with the Bank was also
amended on October 14, 2004 to increase the amount of the facility from
$3,000,000 to $5,000,000. Advances bear interest, and interest is payable, on
the same terms as under the Amended Term Loan Facility. This line of credit had
an outstanding balance of $3,500,000 at March 31, 2005, and expires on September
30, 2005. The Company intends to renew this credit facility prior to its
expiration date.
All of the assets of the company 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, include (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, guarantying, 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, without the bank's prior written consent,
changes in ownership in the company, any mergers or acquisitions, any material
change in any of our 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.
Our ability to comply with these provisions may be affected by changes in
our business condition or results of our operations, or other events beyond our
control. The breach of any of these covenants would result in a default under
our debt agreements. At March 31, 2005, the company was in compliance with the
bank covenants. A default of the covenants would permit our lender to accelerate
15
the maturity of our credit facilities and to sell the assets securing them,
which would cause us to cease operations and seek bankruptcy protection.
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 March 31, 2005:
Total Less than 1-3 4-5 Over 5
In thousands Amounts 1 Year Years Years Years
---------- ---------- ---------- ---------- ----------
Long-term debt with interest $ 5,669 $ 1,417 $ 2,665 $ 1,221 $ 366
Operating leases (non-
cancelable) 5,293 722 1,103 1,015 2,453
Bank line of credit with interest 3,569 3,569 -- -- --
Vendor open line of credit 2,701 201 2,500 -- --
---------- ---------- ---------- ---------- ----------
Total contractual $ 17,232 $ 5,909 $ 6,268 $ 2,236 $ 2,819
========== ========== ========== ========== ==========
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.
Effect of Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123(R), Share-Based Payment, which requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
consolidated statement of operations based on their fair values, effective for
public companies for interim periods beginning after June 15, 2005. SFAS
No.123(R) permits public companies to adopt its requirements using either the
modified prospective or retrospective method.
The United States Securities and Exchange Commission (SEC) announced on
April 14, 2005 that it approved a phased-in implementation process for SFAS No.
123(R). Under the new SEC implementation process, the company's effective date
for adopting SFAS No. 123(R) has been extended by six months. The company will
adopt SFAS No. 123(R)'s fair value method of accounting for share-based payments
to employees in the first quarter of fiscal 2006, as opposed to the third
quarter of fiscal 2005, as originally required by SFAS No. 123(R), and as stated
in the company's Annual Report on Form 10-K for the year ended December 31,
2004. The company currently does not anticipate that the adoption of this
standard will have a material effect on its consolidated results of operations,
financial position, and cash flows.
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, 2004.
Preparation of the company's financial statements requires company management to
16
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, 2004. There have been no
material changes to these accounting policies during the three months ended
March 31, 2005.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks from changes in interest rates and foreign
currency exchange rates.
Sensitivity of results of operations to interest rate risks on our
investments is managed by conservatively investing liquid funds in short-term
government securities and interest-bearing accounts at financial institutions in
which we had approximately $39,000 invested at March 31, 2005.
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 our variable rate debt agreements which
totaled approximately $8,600,000 at March 31, 2005.
We have exposure to both rising and falling interest rates. A 1/2%
decrease in rates on our quarter-end investments would have an insignificant
impact on our results of operations. A 1% increase in rates on our quarter-end
variable rate debt would result in a negative impact of approximately $19,000 on
our quarterly results of operations.
Our exposure to market risks from foreign currency exchange rates is
minimal.
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.
17
PART II -- OTHER INFORMATION
Item 6. Exhibits
Exhibit
No. Description
31.1 Certification of Chief Executive Officer pursuant to section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to section 302 of
the Sarbanes-Oxley Act of 2002
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
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
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/Steven T. Ker
----------------------------------------
STEVEN T. KER, Chief Financial Officer
Dated: May 16, 2005
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