UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
The Fiscal Year Ended December 31, 2007
OR
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
Commission
File Number: 001-13924
SIMCLAR,
INC.
(Exact
name of Registrant as specified in its charter)
Florida
|
|
59-1709103
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
2230
W. 77
th
Street
Hialeah,
Florida 33016
(Address
of principal executive offices,
including
zip code)
(305)
556-9210
(Registrant’s
telephone number,
including
area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Class
|
Name
of Exchange on which Registered
|
|
|
Common
Stock, $.01 par value
|
The
Nasdaq Capital Market
|
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
o
No
x
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 the filing requirements
for
at least the past 90 days.
Yes
x
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K.
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or smaller reporting company. See
the definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large
accelerated filer
o
Accelerated
filer
o
Non-accelerated
filer
o
Smaller
reporting company
x
(Do
not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act. Yes
o
No
x
The
aggregate market value of the Registrant’s common stock held by non-affiliates
was approximately $10,577,539 on June 30, 2007.
As
of
March 7, 2008, the Company had issued and outstanding 6,465,345 shares of its
common stock.
Documents
Incorporated By Reference
Portions
of our Information Statement for the 2008 Annual Meeting of Shareholders are
incorporated by reference in Part III
Table
of Contents
|
|
|
Page
|
|
Part
I
|
|
|
|
|
|
|
Item
1.
|
Business
|
|
2
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
12
|
|
|
|
|
Item
1B.
|
Unresolved
Staff Comments
|
|
18
|
|
|
|
|
Item
2.
|
Properties
|
|
18
|
|
|
|
|
Item
3.
|
Legal
Proceedings
|
|
19
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
19
|
|
|
|
|
|
Part
II
|
|
|
|
|
|
|
Item
5.
|
Market
for Registrant’s Common Equity and Related
|
|
|
|
Stockholder
Matters
|
|
20
|
|
|
|
|
Item
6.
|
Selected
Financial Data
|
|
21
|
|
|
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and
|
|
|
|
Results
of Operations
|
|
21
|
|
|
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
|
34
|
|
|
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and
|
|
|
|
Financial
Disclosure
|
|
34
|
|
|
|
|
Item
9A
|
Controls
and Procedures
|
|
34
|
|
|
|
|
Item
9B
|
Other
Information
|
|
35
|
|
|
|
|
|
|
|
|
|
Part
III
|
|
|
|
|
|
|
Item
10.
|
Directors
and Executive Officers of the Registrant
|
|
36
|
|
|
|
|
Item
11.
|
Executive
Compensation
|
|
36
|
|
|
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management
|
|
|
|
And
Related Stockholder Matters
|
|
36
|
|
|
|
|
Item
13.
|
Certain
Relationships and Related Transactions
|
|
36
|
|
|
|
|
Item
14.
|
Fees
and Services of Independent Registered Public Accounting
Firm
|
|
36
|
|
|
|
|
|
Part
IV
|
|
|
|
|
|
|
Item
15.
|
Exhibits,
Financial Statement Schedules and Reports on Form 8-K
|
|
37
|
|
|
|
|
Signatures
|
|
|
41
|
Part
I
Forward-Looking
Statements
This
document contains certain forward-looking statements that are based upon current
expectations and involve certain risks and uncertainties within the meaning
of
the U.S. Private Securities Litigation Reform Act of 1995. Words or expressions
such as “anticipate,” “believe,” “plan,” “expect,” “future,” “intend,”
“estimate,” “project,” or variations of these words as well as similar words or
expressions are intended to identify forward-looking statements. Readers should
not place undue reliance on the forward-looking statements contained in this
document, which apply only as of the date of this report. We undertake no
obligation to update the information contained herein. Our actual performance
and results could differ materially from those anticipated in these
forward-looking statements for many reasons, including, but not limited to
economic changes and changes in the electronics manufacturing services industry
generally. Key risk factors that might cause or contribute to such differences
include, but are not limited to, those discussed under the section entitled
“Risk Factors” included herein at Item 1A.
Item
1. Business
Introduction
Simclar,
Inc. (“we,” “our,” “us,” “Simclar” or “the company”) is a contract manufacturer
of electronic and electro-mechanical products, providing advanced electronics
manufacturing services (EMS) to original equipment manufacturers (OEMs). Our
products are manufactured to customer specifications and designed for OEMs
in
the data processing, telecommunications, instrumentation and food preparation
equipment industries. Our principal custom-designed products include complex
printed circuit boards (PCBs), conventional and molded cables, wire harnesses,
backplanes, and electro-mechanical assemblies. In addition, we provide OEMs
with
value-added, turnkey contract manufacturing services and total systems assembly
and integration. We also deliver manufacturing and test engineering services
and
materials management, with flexible and service-oriented manufacturing and
assembly services for our customers’ high-tech and rapidly changing
products.
We
were
incorporated in Florida in 1976, acquired by Medicore, Inc., our former parent,
in 1982, and became a public company in 1985. Effective June 27, 2001, control
of our company was acquired by Simclar International Limited
,
which
then transferred its ownership of our company to its parent, Simclar Group
Limited
(“Simclar
Group”)
both of
which are private United Kingdom companies. Other companies of the Simclar
Group
are engaged in the same electronic and electro-mechanical subcontract
manufacturing industry as is our company
.
Effective September 2, 2003, we changed our name from Techdyne, Inc. to Simclar,
Inc.
Since
we
were acquired by Simclar Group, we have completed a series of acquisitions
in
North America. In July, 2003 we acquired for approximately $3.4 million in
cash
the outstanding stock of AG Technologies, Inc., which has since changed its
name
to Simclar (Mexico), Inc. In May 2005, we acquired from Simclar Group all of
the
outstanding shares of Simclar (North America), Inc. for a net $37,000 adjustment
of an intercompany receivable. In February 2006, we acquired through a
subsidiary, Simclar Interconnect Technologies, Inc., certain U.S. assets
associated with the backplane assembly business of the Interconnect Technologies
division of Litton Systems, Inc., a subsidiary of Northrop Grumman Corporation,
for approximately $16 million in cash and the assumption of certain liabilities.
See Note 11 to our accompanying audited consolidated financial statements for
more information regarding the Litton acquisition.
Our
executive offices are located at 2230 West 77th Street, Hialeah, Florida 33016.
Our telephone number is (305) 556-9210. Our common stock is traded on the Nasdaq
Capital Market (Ticker: SIMC). We maintain an Internet website at
http://www.simclar.com, along with other members of the Simclar Group. We make
available free of charge on our website links to our annual reports on Form
10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K, and
any
amendments to those reports filed or furnished pursuant to Section 13(a) of
the
Securities Exchange Act of 1934 (http://www.simclar.com/investor.htm).
Information on our website is not incorporated by reference into this report.
Additionally, individuals can access our electronically filed reports, proxy
statements and other information through the Internet site maintained by the
Securities and Exchange Commission at http://www.sec.gov. The public may also
read and copy any materials we file with the Securities and Exchange Commission
at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC
20549.
In
Part
III of this Form 10-K, we incorporate by reference certain information from
our
Information Statement for our 2008 Annual Meeting of Shareowners. We expect
to
file that Information Statement with the Securities and Exchange Commission
(“SEC”) within 120 days of December 31, 2007, and we will promptly make it
available on our website. Please refer to the Information Statement when it
is
available.
Electronics
Manufacturing Services Industry
Until
2001, our industry exhibited significant year to year growth, due both to the
growth in the overall electronics industry, and the steadily increasing number
of OEMs deciding to outsource all or a significant portion of the production
of
their products. As a result of the general global recession beginning in 2001,
and its magnified effect in the computer and telecommunications equipment
segments, this pattern of growth in our industry was interrupted, and both
our
company and the industry as a whole experienced a decline in sales starting
in
2001 and continuing through the third quarter of 2003. Beginning in the fourth
quarter of 2003, our company and the industry began to experience a recovery
in
sales, which continued through 2007. We are continually seeking new business
opportunities with existing and new customers and considering strategic
acquisitions, but there is no assurance we will be successful in generating
additional sales.
We
believe that the fundamental factors contributing to the growth of our industry
prior to 2001 contributed to the resumption of the pattern of growth that
continued throughout 2007. These factors include increased capital requirements
for OEMs to acquire modern, highly automated manufacturing equipment, their
continuing effort to reduce inventory costs and the relative cost advantages
of
contract manufacturers. Using outsourcing for production of electronic
assemblies also enables OEMs to focus on product development, reduce working
capital requirements, and improve inventory management and marketability. We
believe OEMs will continue to rely on contract manufacturers, not only for
partial component assemblies, but complete turnkey manufacturing of entire
finished products. We also believe that OEMs will look more to contract
manufacturers to provide a broader scope of value-added services, including
manufacturing, engineering and test services.
We
assist
our customers from initial design and engineering through materials procurement,
to manufacturing of the complete product and testing. Involving contract
manufacturers earlier in the manufacturing process through “concurrent
engineering” allows OEMs to realize greater efficiencies and gives contract
manufacturers greater impact in product design, component selection, production
methods and the preparation of assembly drawings and test schematics. This
process also gives the customer the ability to draw upon our manufacturing
expertise at the outset and minimize manufacturing bottlenecks.
Another
factor which will continue to lead OEMs to utilize contract manufacturers is
reduced time-to-market. Due to the intense competition in the electronics
industry, OEMs are faced with increasingly shorter product life-cycles which
pressure them to reduce time constraints in bringing a product to market. This
reduction can be accomplished by using a contract manufacturer’s established
manufacturing expertise with its sophisticated, technically advanced and
automated manufacturing processes. We believe that this, coupled with the
elements discussed above, such as reduced production costs through economies
of
scale in materials procurement, improved inventory management, access to our
manufacturing technology, engineering, testing and related expertise, will
motivate OEMs to work with electronic contract manufacturers such as
us.
Business
Strategy
We
have
focused continuous attention on controlling costs to allow us to remain
competitive within our industry. Our affiliation with Simclar Group allows
us to
participate in the global economy, expands the product lines and services we
are
able to offer our customers, and increases our purchasing power for supplies
and
equipment.
The
primary industries we serve, electronics and technology, are constantly
innovating and tend to have short product life cycles. We have focused on
product development and marketing in order to remain a competitive provider
of
electronic contract manufacturing services for OEM customers. We continue to
seek to develop strong, long-term alliances with major-growth OEMs of complex,
market leading products. We believe that creating and maintaining long-term
relationships with customers requires providing high quality, cost-effective
manufacturing services marked by a high degree of customer responsiveness and
flexibility. Therefore, our strategy is to focus on leading manufacturers of
advanced electronic products that generally require custom-designed, more
complex interconnect products and short lead-time manufacturing services.
The
acquisition of Simclar (North America), Inc. (“SNAI”) added comprehensive sheet
metal fabrication and higher level assembly capabilities. The Mexico facility
was expanded in 2005 to add these same capabilities. In the fourth quarter
of
2007 management made the decision to transfer the SNAI customers and operations
from North Carolina to Mexico to take advantage of the newer facilities and
lower costs.
We
further strengthened our product and service offerings to the OEM market by
acquiring certain assets of
the
Interconnect Technologies assembly business of Litton Systems, Inc. (“Litton”),
a world-leading supplier of high-performance backplane interconnect solutions
to
major blue-chip customers in markets as diverse as network, wireline and
wireless infrastructure, and electronic data processing. Backplane interconnect
systems form the core of high-end electronic systems and provide the means
for
power distribution and data communications between electronic sub-system
building blocks.
We
strive
to build on our integrated manufacturing capabilities, final system assemblies
and testing.
The
combination of our advanced backplane interconnect solutions with our
capabilities to supply printed circuit board assemblies, metal fabrication,
cabling solutions and higher level assemblies will create a valuable
one-stop-shop for OEM system design and integration needs.
In
addition, vertical integration provides us with greater control over quality,
delivery and cost.
To
further satisfy customer needs, we develop long-term customer relationships
by
using our state-of-the-art technology to provide timely and quick-turnaround
manufacturing and comprehensive support for materials purchases and inventory
control. Through our use of electronic data interchange technology (“EDI”), the
customer is able to convey its inventory and product needs on a weekly basis
based on a rolling quantity forecast. More emphasis is placed on value-added
turnkey business for the manufacture of complete finished assemblies. This
is
accomplished with extended technology, continuous improvement of our processes,
and our early involvement in the design process using our computer-aided design
system.
We
believe that we can develop closer and more economically beneficial
relationships with our customers through our geographically diverse
manufacturing and assembly operations, presently located in Florida, Missouri,
Ohio, and Mexico. Our diverse locations have multiple advantages by helping
satisfy costs, timely deliveries and local market requirements of our customers.
We will continue to pursue expansion in different markets to better serve
existing customers and to obtain additional new customers. In alliance with
Simclar Group, we anticipate experiencing growth and the ability to increase
our
global presence and competitive position.
Products
and Services
We
manufacture over 1,000 products, including complete turnkey finished products,
sub-assemblies, molded and non-molded cable assemblies, wire harnesses, printed
circuit boards (PCBs), injection molded and electronic assembly products, for
over 100 OEM customers.
Printed
Circuit Boards
PCB
assemblies are electronic assemblies consisting of a basic printed circuit
laminate with electronic components including diodes, resistors, capacitors
and
transistors, inserted and wave soldered. PCBs may be used either internally
within the customer’s products or in peripheral devices. The PCBs produced by
the company include pin-through-hole assemblies, low and medium volume surface
mount technology assemblies, and mixed technology PCBs, which include multilayer
PCBs.
In
pin-through-hole assembly production, electronic components with pins or leads
are inserted through pre-drilled holes in a PCB and the pins are soldered to
the
electrical surface of a PCB. In surface mount technology production, electronic
components are attached and soldered directly onto the surface of a circuit
board, rather than inserted through holes. Surface mount technology components
are smaller so they can be spaced more closely together and, unlike
pin-through-hole components, surface mount technology components can be placed
on both sides of a PCB. This allows for product miniaturization, while enhancing
the electronic properties of the circuit. Surface mount technology manufacturing
requires substantial capital investment in expensive, automated production
equipment, which requires high usage. We are utilizing computerized testing
systems in order to verify that all components have been installed properly
and
meet certain functional standards, that the electrical circuits have been
properly completed, and that the PCB assembly will perform its intended
functions.
Our
Dayton, Ohio operations, with six automated lines, are more focused on PCB
manufacturing, primarily for the food preparation equipment industry.
Simclar
(Mexico), Inc. operates a manufacturing facility in Matamoros, Mexico, through
a
wholly-owned subsidiary, Simclar de México, S.A. de C.V. This Matamoros facility
provides PCB manufacturing capacity similar to our Ohio facility, but enables
us
to compete more effectively on medium and higher volume PCB orders. Additional
contract manufacturing capabilities were added with the opening of a second
Matamoros facility in January 2005.
Simclar
(Mexico) is an international value added provider of comprehensive electronic
manufacturing services to OEM’s serving the, industrial controls, medical, power
equipment and automotive industries. Simclar (Mexico)’s Mexican facilities
enable us to be competitive in the higher volume arena for assembly in North
America.
PCB
sales
contributed approximately 22% of total revenues in 2007 and 26% of total
revenues in 2006. Growth in PCB was not as strong as it was in other products
contributing to the lower percentage of overall revenues.
Cable
and Harness Assemblies
A
cable
is an assembly of electrical conductors insulated from each other, twisted
around a central core and jacketed. Cables may be molded or
non-molded.
Simclar
offers a wide range of custom manufactured cable and harness assemblies for
molded and mechanical applications. These assemblies include multiconductor,
ribbon, co-axial cable, and discrete wire harness assemblies. We use advanced
manufacturing processes, in-line inspection and computerized automated test
equipment.
We
maintain a large assortment of standard tooling for D-Subminiature, DIN
connectors and phono connectors. D-Subminiatures are connectors which are
over-molded with the imprint of the customer’s name and part number. DIN
connectors are circular connectors consisting of two to four pairs of wires
used
for computer keyboards.
Flat
ribbon cable or ribbon cable assemblies are cables with wires (conductors)
on
the same plane with connectors at each end. Flat ribbon cables are used in
computer assemblies and instrumentation.
Discrete
cable assemblies are wires with contacts and connectors. Harnesses are
prefabricated wiring with insulation and terminals ready to be attached to
connectors. These products experienced very strong sales growth in 2007. Our
cable and harness sales comprised approximately 27% and 24% of total revenue
for
2007 and 2006, respectively.
Contract
Manufacturing
Contract
manufacturing involves the manufacture of complete finished assemblies with
all
sheet metal, power supplies, fans, PCBs as well as complete sub-assemblies
for
integration into an OEM’s finished products, such as speaker and lock-key
assemblies and diode assemblies that consist of wire, connectors and diodes
that
are over-molded, packaged and bar coded for distribution. These products can
be
totally designed and manufactured by the company through our computer-aided
design system, engineering and supply procurement. We develop manufacturing
processes and tooling, and test sequences for new products of our customers.
We
provide design and engineering services in the early stages of product
development, thereby assuring mechanical and electrical considerations are
integrated with a total system. Alternatively, the customer may provide
specifications and we will assist in the design and engineering or manufacture
to the customer’s specifications.
In
January 2005, we opened a second manufacturing facility in Matamoros, Mexico,
providing additional capability to process soft-tooled sheet metal fabrication
and finishing. Further expansion phases will include hard-tooled sheet metal
fabrication, along with plastic injection molding, and overmolding for more
complex cable and harness manufacturing.
The
company expanded its product offerings by acquiring SNAI in May 2005. In the
fourth quarter of 2007 management made the decision to transfer the customers
and operations from North Carolina to Mexico to take advantage of newer
facilities and lower costs.
Reworking
and Refurbishing
Customers
provide us with materials and sub-assemblies acquired from other sources, which
the customer has determined require modified design or engineering changes.
We
redesign, rework, refurbish and repair these materials and sub-assemblies.
Contract
manufacturing, sheet metal fabrication, reworking and refurbishing together
amounted to approximately 6% and 11% of sales for 2007 and 2006 respectively.
Backplane
Interconnect Systems
In
February 2006, we acquired certain backplane assembly assets of Litton. Litton
had a reputation as a world-leading supplier of high-performance backplane
interconnect solutions to major blue-chip customers in markets as diverse as
network, wireline and wireless infrastructure, defense and electronic data
processing. Backplane interconnect systems form the core of high-end electronic
systems and provide the means for power distribution and data communications
between electronic sub-system building blocks. Adding the ability to provide
backplane interconnect solutions with our metal fabrication, cable and harness,
printed circuit board, and high level assembly capabilities enables Simclar
to
offer a highly appealing single source solution to the electronics OEM
market.
Backplane
sales contributed approximately 45% of total
revenues in 2007 compared to 39% to total revenues in 2006.
Manufacturing
We
manufacture components and products that are custom designed and developed
to
fit specific customer requirements and specifications. Such service includes
computer integrated manufacturing and engineering services, quick-turnaround
manufacturing and prototype development, materials procurement, inventory
management, developing customer oriented manufacturing processes, tooling and
test sequences for new products from product designs received from our customers
or developed by Simclar from customer requirements. Our industrial, electrical
and mechanical engineers work closely with our customers’ engineering
departments from inception through design, prototypes, production and packaging.
We evaluate customer designs and, if appropriate, recommend design changes
to
improve the quality of the finished product, reduce manufacturing costs or
other
necessary design modifications. Upon completion of engineering, we produce
prototype or preproduction samples. Materials procurement includes planning,
purchasing and warehousing electronic components and materials used in the
assemblies and finished products. Our engineering staff reviews and structures
the bill of materials for purchase, coordinates manufacturing instructions
and
operations, and reviews inspection criteria with the quality assurance
department. The engineering staff also determines any special capital equipment
requirements, including tooling and dies, which must be acquired.
We
attempt to develop a “partnership” relationship with many of our customers by
providing a responsive, flexible, total manufacturing service. We have “supplier
partnerships” with certain customers pursuant to which we must satisfy in-house
manufacturing requirements of the customer that are based on the customer’s need
on a weekly basis based on a rolling quarterly forecast.
Our
PCB
assembly operations are geared toward advanced surface mount technology. We
provide the PCB production through state-of-the-art manufacturing equipment
and
processes and a highly trained and experienced engineering and manufacturing
workforce. We also offer a wide range of custom manufactured cables and
harnesses for molded and mechanical applications. We use advanced manufacturing
processes, in-line inspection and testing to focus on process efficiencies
and
quality. The cable and harness assembly process is accomplished with automated
and semi-automated preparation and insertion equipment and manual assembly
techniques.
Finished
turnkey assemblies include the entire manufacturing process from design and
engineering to purchasing raw materials, manufacturing and assembly of the
component parts, testing, packaging and delivery of the finished product to
the
customer. By contracting assembly production, OEMs are able to keep pace with
continuous and complex technological changes and improvements by making rapid
modifications to their products without costly retooling and without any
extensive capital investments for new or altered equipment.
At
our
Hialeah, Florida, and Matamoros, Mexico facilities, we maintain modern
state-of-the-art equipment for crimping, stripping, terminating, soldering,
sonic welding and sonic cleaning which permits us to produce conventional and
complex molded cables. We also maintain a large assortment of standard tooling.
New manufacturing jobs may require new tooling and dies, but most presses and
related equipment are standard.
The
acquisition of Litton’s backplane assembly assets added these capabilities to
our product offerings. Backplanes are the backbone of sophisticated electronics.
They are printed circuit boards with sockets that provide interconnection for
multiple printed circuit board cards.
At
our
Springfield, Missouri facility, we maintain specialized equipment for solder
and
press fit technology. This equipment is designed specifically to accommodate
oversized PCB's. We are focused on back panel technology through chassis
integration, up to frame or rack level assembly and test.
Supplies
and Materials Management
Materials
used in our operations consist of metals, electronic components such as cable,
wire, resistors, capacitors, diodes, memory products, PCBs and plastic resins.
On occasion some of these materials may be placed on a stringent allocation
basis by our suppliers; however, due to the excess manufacturing capacity
currently available at most component manufacturers, we do not anticipate any
major material purchasing or availability problems occurring in the foreseeable
future.
We
have
improved our overall efficiency of manufacturing, particularly in the area
of
inventory management, including purchasing, which is geared more closely to
current needs resulting in reduced obsolescence problems The company procures
components from a select group of vendors which meet our standards for timely
delivery, high quality and cost effectiveness. In order to control inventory
investment and minimize material obsolescence, components are generally ordered
when we have a purchase order or commitment from our customer for the completed
assembly. In addition, several of our vendors have agreed to consigned inventory
arrangements, which allow us to have their product in stock but not receive
it
until we pull it for production. This will have a positive impact on working
capital as we expand vendor participation. We continue our efforts to
consolidate the majority of our electronics material “spend” with that of the
entire Simclar Group, and quote and initiate contracts to the most competitive
suppliers.
We
use
Enterprise Resource Planning (“ERP”) management technologies and manage our
material pipelines and vendor base to allow our customers to increase or
decrease volume requirements within established frameworks. We have
Visual
Manufacturing
and
Made
2 Manage
computerized software systems providing us with material requirements planning,
purchasing, and sales and marketing functions. In 2005, the company made a
commitment to convert all locations to
Visual
Manufacturing
.
The
goal is to create consistency in our information systems to facilitate more
timely, accurate, and meaningful management information. In 2006 we successfully
converted the Springfield, MO operations to Visual and in February 2007 the
Dayton, OH operations successfully converted to Visual. Our Mexico operations
went live with Visual in January 2008.
Quality
and Process Control
All
of
our manufacturing locations are certified under the ISO 9001/2000 quality
assurance designation. These quality assurance designations are only provided
to
those manufacturers which exhibit stringent quality and process control
assurances after extensive evaluation and auditing by these independent quality
assurance organizations. Quality control is essential to the company’s
operations since customers demand strict compliance with design and product
specifications, and high quality production is a primary competitive standard
vital to our services.
Product
components, assemblies and sub-assemblies manufactured by the company are
thoroughly inspected visually and electronically to ensure all components are
made to strict specifications and are functional and safe. Strict process
controls relating to the entire manufacturing process are part of our standard
operating procedure.
Over
the
years, our product and manufacturing quality have received excellent ratings.
Total quality, timely delivery and customer satisfaction is our philosophy.
High
levels of quality in every area of our operations are essential. Quality
standards are established for each operation, performance tracked against those
standards, and identifying workflow and implementing necessary changes to
deliver higher quality levels. We maintain regular contact with our customers
to
ensure adequate information exchange and other activities necessary to ensure
customer satisfaction and to support our high level of quality and on-time
delivery. Any adverse change in our quality and process controls could adversely
affect our relationships with customers and ultimately our revenues and
profitability.
Customers
We
serve
a wide range of businesses, from emerging growth companies to multinational
OEMs, involved in a variety of markets including computer networking systems,
computer workstations, telecommunications, mass data storage systems,
instrumentation and food preparation equipment industries. Our revenues are
distributed over the following industry segments:
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Telecommunications
|
|
|
53
|
%
|
|
43
|
%
|
Contract
manufacturing
|
|
|
11
|
%
|
|
12
|
%
|
Data
processing
|
|
|
8
|
%
|
|
12
|
%
|
Power
equipment
|
|
|
7
|
%
|
|
9
|
%
|
Food
prep equipment
|
|
|
7
|
%
|
|
8
|
%
|
Instrumentation
|
|
|
7
|
%
|
|
8
|
%
|
Electrical
equipment and appliances
|
|
|
2
|
%
|
|
3
|
%
|
Military
and government
|
|
|
2
|
%
|
|
2
|
%
|
Other
|
|
|
3
|
%
|
|
3
|
%
|
We
seek
to serve a sufficiently large number of customers to avoid dependence on any
one
customer or industry. In 2007, there were 24 customers that made up
approximately 80% of our sales with our largest customer contributing
approximately 21% of the revenue.
Significant
reductions or delays in sales to any of these major customers would have a
material adverse effect on our results of operations. In the past, certain
of
our customers have terminated their manufacturing relationship with us, or
significantly reduced their product orders. We cannot assure you that any of
our
major customers will not terminate or significantly reduce or delay
manufacturing orders, any of which such terminations or changes in manufacturing
orders could have a material adverse effect on our results of operations.
We
depend
upon the continued growth, viability and financial stability of our customers,
who in turn substantially depend on the growth of the personal computer,
computer peripherals, communications, instrumentation, data processing and
food
preparation equipment industries. Most of these industries have been
characterized by rapid technological change, short product life cycles, pricing
and margin pressures. In addition, many of our customers in these industries
are
affected by general economic conditions. The factors affecting these industries
in general, and/or our customers in particular, could have a material adverse
effect on our results of operations. In addition, we generate significant
accounts receivable in connection with providing manufacturing services to
our
customers. If one or more of our customers were to become insolvent or otherwise
were unable to pay us for manufacturing services we have provided, our operating
results and financial condition would be adversely affected.
The
table
below sets forth the respective percentage of sales for the applicable period
attributable to customers and related suppliers who accounted for more than
10%
of our sales in any respective period.
|
|
2007
|
|
2006
|
|
Customer
1
|
|
|
21
|
%
|
|
20
|
%
|
Customer
2
|
|
|
12
|
%
|
|
8
|
%
|
Customer
3
|
|
|
12
|
%
|
|
6
|
%
|
Marketing
and Sales
We
are
continually pursuing expansion and diversification of our customer base. We
are
seeking to develop long term relationships by working closely with customers,
starting with the initial product design and development stage, and continuing
throughout the manufacturing and distribution process. Our principal sources
of
new business are the expansion in the volume and scope of services provided
to
existing customers, referrals from customers and suppliers, direct sales through
our sales managers and executive staff, and through independent sales
representatives. Our operations generate sales through eight regional
sales/general managers covering the Northeast, Southeast, West and Southwest
regions of the United States, as well as parts of Mexico. There are 13 in-house
sales/marketing personnel in the United States. In addition to sales through
sales representatives and in-house sales personnel, sales are also generated
through our website at http://www.simclar.com and through catalogues, brochures
and trade shows.
The
independent manufacturer sales representatives, primarily marketing electronic
and similar high-technology products, are retained under exclusive or
non-exclusive sales representative agreements for specific territories or
specific customers and are paid on a commission basis. Unless otherwise approved
by Simclar, the sales representatives cannot represent any other person engaged
in the business of manufacturing services similar to those of the company,
nor
represent any person who may be in competition with us. The agreements further
prohibit the sales representative from disclosing trade secrets or calling
on
our customers for a period of six months to one year from termination of their
agreement.
Substantially
all of our sales and reorders are affected through competitive bidding. Most
sales are accomplished through purchase orders with specific quantity, price
and
delivery terms. Some production, such as for our Kanban and Pull programs,
is
accomplished under open purchase orders with components released against
customer request.
Backlog
and Returns
Order
backlogs as of December 31, 2007 were approximately $30,023,000 compared to
$28,204,000 at December 31, 2006. Based on past experience and relationships
with our customers and knowledge of our manufacturing capabilities, we believe
that most of our backlog orders are firm and should be filled within six months.
Most of the purchase orders within which the company performs do not provide
for
cancellation. Over the last several years, cancellations have been minimal
and
management does not believe that any significant amount of the backlog orders
will be cancelled. However, based upon relationships with our customers, we
occasionally allow cancellations and more frequently provide for the
rescheduling of deliveries. The variations in the size and delivery schedules
of
purchase orders received by the company may result in substantial fluctuations
in backlog from period to period. Since orders and commitments may be
rescheduled or cancelled, and customers’ lead times may vary, backlog does not
necessarily reflect the timing or amount of future sales. Historically, customer
returns have not had a material adverse effect on our results of
operations.
Patents
and Trademarks
We
do not
have nor do we rely on patents or trademarks to establish or protect our market
position. Rather, we depend on design, engineering and manufacturing, cost
containment, quality, and marketing skills to establish or maintain market
position.
Competition
Simclar
is part of a highly competitive electronic manufacturing services industry.
We
face competition from divisions of large electronics and high-technology firms,
as well as numerous smaller specialized companies. Many of our competitors
are
larger and more geographically diverse and have greater financial, manufacturing
and marketing resources than we have. Our main PCB competitors in the Midwest
region include SMC, Diversified Systems, Epic Technologies, and CDR
Manufacturing,. The primary competitors for our Mexico PCB operations include
Kimball Electronics, Method Electronics, and Jabil. We have numerous competitors
in the cable and harness assembly market, including Tyco, Advanced Interconnect,
Amphenol, Sapphire, Volex Interconnect Systems, and Foxconn.
We
believe that we are favorably positioned with regard to primary competitive
factors - price, quality of production, manufacturing capability, prompt
customer service, timely delivery, engineering expertise, and technical support.
We also believe that our affiliation with Simclar Group enhances our competitive
position internationally. However, recent consolidation trends in the electronic
manufacturing services industry are resulting in changes in the competitive
landscape. Increased competition could result in lower priced components and
lower profit margins, or loss of customers, which could have a material adverse
effect on our business, financial condition and results of operations. Compared
to manufacturers who have greater direct buying power with component suppliers
or who have lower cost structures, we may be operating at a cost
disadvantage.
Due
to
the number and variety of competitors, reliable data reflective to our
competitive position in the electronic components and assembly industry is
difficult to develop and is not known.
Research
and Development
We
spend
limited amounts on research and development efforts. Our products are generally
manufactured to customer specifications.
Governmental
Regulation
Our
operations are subject to certain federal, state and local regulatory
requirements relating to environmental waste management and health and safety
matters. We believe that we comply with applicable regulations pertaining to
health, safety and the use, storage and disposal of materials that are
considered hazardous waste under applicable law. To date, our costs for
compliance and governmental permits and authorizations have not been material,
and we do not believe that compliance with current regulatory requirements
will
have a material effect on our capital expenditures, net income or competitive
position. However, additional or modified requirements that may require
substantial additional expenditures may be imposed in the future.
Employees
As
of
December 31, 2007 we had a total of approximately 950 employees.
We
have
no unions in our U. S. facilities, but have two unions in our Matamoros
facilities. We believe that our relationships with our employees, both union
and
non-union, are good.
Item
1A. Risk Factors
This
Report contains forward-looking statements that involve risks and uncertainties.
Our actual results may differ significantly from the prospects discussed in
the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those listed below.
The
loss of a major customer would adversely affect us
A
substantial percentage, approximately 45% of our sales for the year ended
December 31, 2007, has been to three customers, the loss of any of which would
adversely affect us. A substantial portion of our sales (21%) is with one major
customer. There are no long-term contracts with any customer. Substantially
all
of our sales and reorders are subject to competitive bids. Sales are dependent
on the success of our customers, some of which operate in businesses associated
with rapid technological change, vigorous competition, short product life
cycles, and pricing and margin pressures. Additionally, certain of the
industries served by us are subject to economic cycles and have in the past
experienced, and are likely in the future to experience, recessionary periods.
Developments adverse to our major customers or their products could have an
adverse effect on us. A variety of conditions, both specific to each individual
customer and generally affecting each customer’s industry, may cause customers
to cancel, reduce or delay purchase orders and commitments without penalty,
except for payment for services rendered, materials purchased and, in certain
circumstances, charges associated with such cancellation, reduction or delay.
In
addition, we generate large accounts receivable in connection with our providing
electronic contract manufacturing. If one or more of our customers experiences
financial difficulty and is unable to pay for the services provided by us,
our
operating results and financial condition would be adversely affected. We expect
to continue to depend on sales to a limited number of major customers.
Secured
loans - existence of liens on certain assets
All
of
our assets have been pledged as collateral for three bank loans.
We
have
entered into two amended credit facilities and one new credit facility with
Bank
of Scotland in Edinburgh, Scotland (“BoS”). These facilities were amended and
increased in January 2007. Please refer to the Liquidity and Capital Resources
section under Item 7 for further discussion regarding these credit facilities.
Our
credit facilities impose operational and financial restrictions on
us
Our
credit facilities with BoS, which include an Amended Term Loan Facility Letter,
an Amended Working Capital Facility Letter, a Working Capital Facility Letter,
and related security agreements, guaranties and mortgage, In addition to
subjecting all our assets as security for the bank financing these debt
agreements, they also include substantial covenants that impose significant
restrictions.
Please
refer to the Liquidity and Capital Resources section under Item 7 for further
discussion regarding these restrictions.
Our
ability to comply with these provisions may be affected by changes in our
financial condition or results of our operations, or other events beyond our
control. The breach of any of the covenants would result in a default under
our
debt facilities. A default in the covenants would permit BoS to accelerate
the
maturity of our credit facilities and to sell the assets securing them, which
could cause us to cease operations or seek bankruptcy protection.
Our
indebtedness requires us to dedicate a substantial portion of our cash flow
from
operations to payments on our debt, which could reduce amounts available for
working capital and other general corporate purposes. The restrictions in our
credit facility could also limit our flexibility in reacting to changes in
our
business and increases our vulnerability to general adverse economic and
industry conditions.
We
operate in a highly competitive industry and our business may be harmed by
competitive pressures
Manufacturing
and assembly of electro-mechanical and electronic components is a highly
competitive industry characterized by a diversity and sophistication of products
and components. We compete with major electronics firms that have substantially
greater financial and technical resources and personnel than we do. We also
face
competition from many smaller, more specialized companies. We believe the
primary competitive factors are pricing, quality of production, prompt customer
service, timely delivery, engineering expertise, and technical assistance to
customers. Among this mix of competitive standards, we believe we are
competitive with respect to delivery time, quality, price and customer service.
Price sensitivity becomes a paramount competitive issue in recessionary periods,
and we may be at a competitive disadvantage with manufacturers with a lower
cost
structure, particularly off-shore manufacturers with lower labor and related
production costs. To compete effectively, we must also provide technologically
advanced manufacturing services, and respond flexibly and rapidly to customers’
design and schedule changes. Our inability to do so could have adverse effects
on us. Customers in our industry are price-sensitive and, particularly in the
recent economic downturn, there is substantial pressure from customers to reduce
our prices. Our ability to remain competitive depends on our ability to meet
these customer and competitive price pressures while protecting our profit
margins.
We
have
been engaged in and will have to continue cost reductions in overhead,
manufacturing processes, and equipment retooling, while maintaining product
flow, inventory control, and just-in-time shipping to our customers.
If
we are
unable to accomplish these factors, we will not be competitive, and our business
and operating results will be adversely impacted.
Our
revenues are contingent on the health of the industries we serve
We
rely
on the continued growth and financial stability of our customers who operate
in
the following industry segments:
·
|
food
preparation equipment;
|
·
|
contract
manufacturing;
|
·
|
military
and government.
|
These
industry segments, to a varying extent, are subject to dynamic changes in
technology, competition, short product life cycles, and economic recessionary
periods.
When
our
customers are adversely affected by these factors, we may be similarly affected.
Manufacture
of electronic and electro-mechanical products, particularly designed for OEMs
and manufactured to custom specifications, is cyclical, and demand for our
products may decline
Our
business depends substantially on both the volume of electronic and
electro-mechanical production by OEMs in the data processing,
telecommunications, instrumentation and food preparation industries, and new
specifications and designs for these OEMs.
These
industries have been cyclical over the years, and have experienced oversupply
as
well as significantly reduced demand, as we have experienced in recent years.
An
economic downturn can result in lower capacity utilization of our manufacturing
operations and a shift in product mix toward lower margin assemblies.
Changes
in economic conditions and demand can result in customer rescheduling of orders
and shipments, which affect our results of operations.
Moreover,
our need to invest in engineering, marketing, and customer services and support
capabilities will limit our ability to reduce expenses, as we would attempt
to
do, in response to such downturns.
We
do
not have long-term contracts with customers, and cancellations, reductions
or
delays in orders affect our profitability
We
do not
typically obtain firm long-term contracts from our customers. Instead, we work
closely with our customers to develop forecasts for upcoming orders, which
are
not binding, in order to properly schedule inventory and manufacturing. Our
customers may alter or cancel their orders or demand delays in production for
a
number of reasons beyond our control, which may include:
·
|
market
demand for products;
|
·
|
change
in inventory control and procedures;
|
·
|
acquisitions
of or consolidations among competing customers;
|
·
|
electronic
design and technological advancements; and
|
·
|
recessionary
economic environment.
|
Any
one
of these factors may significantly change the total volume of sales and affect
our operating results, in times of a recessionary environment and reduced demand
for our customers’ products and in turn, our products and services.
In
addition, since much of our costs and operating expenses are relatively fixed,
a
reduction in customer demand would adversely affect our gross margins and
operating income.
Although
we are always seeking new business and customers, we cannot be assured that
we
will be able to replace deferred, reduced or cancelled orders.
Shortages
of components as well as price fluctuations specified by our customers would
delay shipments and adversely affect our profitability
Substantially
all of our sales are derived from electro-mechanical and subcontract electronic
manufacturing in which we purchase components specified by our customers.
Industry-wide shortages of electronic components, particularly components for
PCB assemblies, have occurred. We have from time to time experienced some supply
shortages. Should our industry experience a rapid increase, shortages of
components mostly likely will occur, and we may be forced to delay shipments,
which could have an adverse effect on our profit margins and customer relations.
Because of the continued increase in demand for surface mount components, we
anticipate component shortages and longer lead times for certain components
to
occur from time to time. Also, we typically bear the risk of component price
increases that occur, which accordingly could adversely affect our gross profit
margins. As price increase pressures continue we are beginning to pass these
increases on as competition allows. At times, we are forced to purchase
components beyond customer demand on items which are in short supply. To the
extent there is less customer demand or cancellations, we could have increased
obsolescence.
Technological
developments, satisfying customer designs and production requirements, quality
and process controls are factors impacting our operations
Our
existing and future operations are and will be influenced by several factors,
including technological developments, our ability to efficiently meet the design
and production requirements of our customers, our ability to control costs,
our
ability to evaluate new orders to target satisfactory profit margins, and our
capacity to develop and manage the introduction of new products. We also may
not
be able to adequately identify new product trends or opportunities, or respond
effectively to new technological changes. Quality control is also essential
to
our operations, since customers demand strict compliance with design and product
specifications. Any deviation from our quality and process controls would
adversely affect our relationship with customers, and ultimately our revenues
and profitability.
Our
operating results are subject to annual and quarterly fluctuation which could
negatively impact our stock price
There
are
a number of factors, beyond our control, that may affect our annual and
quarterly results. These factors include:
·
|
the
volume and timing of customer orders;
|
·
|
changes
in labor and operating prices;
|
·
|
fluctuations
in material cost and availability;
|
·
|
changes
in domestic and international economies;
|
·
|
timing
of our expenditures in anticipation of future orders;
|
·
|
increase
in price competition, and competitive pressures on delivery time
and
product reliability;
|
·
|
changes
in demand for customer products;
|
·
|
the
efficiency and effectiveness of our automated manufacturing processes;
|
·
|
market
acceptance of new products introduced by our customers; and
|
·
|
uneven
seasonal demands by our customers.
|
Any
one
or combination of these factors can cause an adverse effect on our future annual
and quarterly financial results. Fluctuations in our operating results could
materially and adversely affect the market price of our common stock.
Environmental
laws may expose us to financial liability and restrictions on operations
We
are
subject to a variety of federal, state and local laws and regulations relating
to environmental, waste management, and health and safety concerns, including
the handling, storage, discharge and disposal of hazardous materials used in
or
derived from our manufacturing processes. Proper waste disposal is a major
consideration for
printed
circuit board
manufacturers,
which is a substantial part of our business, since metals and chemicals are
used
in our manufacturing process. Environmental controls are also essential in
our
other areas of electronic assembly. If we fail to comply with such environmental
laws and regulations, then we could incur liabilities and fines and our
operations could be suspended. This could also trigger indemnification of our
lender under our credit facilities, as well as being deemed a default under
such
credit facilities.
See
“Our
credit facilities impose operational and financial restrictions on us” above.
Such laws and regulations could also restrict our ability to modify or expand
our facilities, could require us to acquire costly equipment, or could impose
other significant capital expenditures. In addition, our operations may give
rise to claims of property contamination or human exposure to hazardous
chemicals or conditions. Although we have not incurred any environmental
problems in our operations, there can be no assurance that violations of
environmental laws will not occur in the future due to failure to obtain
permits, human error, equipment failure, or other causes. Furthermore,
environmental laws may become more stringent and impose greater compliance
costs
and increase risks and penalties for violations.
Simclar
Grou
p
controls over 73% of our common stock and the affairs of our company
Simclar
Group
owns
73.4% of our outstanding common stock. Our common stock does not provide for
cumulative voting, and therefore, the remaining shareholders, other than Simclar
Group, will be unable to elect any directors or have any significant impact
in
controlling the business or affairs of our company. The concentration of
ownership with Simclar Group may also have the effect of delaying, deterring
or
preventing a change in control of our company, and would make transactions
relating to our operations more difficult or impossible without the support
of
Simclar Group. Also, since we are a “controlled company” for purposes of the
Nasdaq Stock Market’s corporate governance requirements, we are not required to
comply with the provisions requiring that a majority of listed company directors
be independent, the compensation of our executives to be determined by
independent directors or nominees for election to our board of directors to
be
selected by independent directors.
The
price of our shares is volatile
The
market price of our common stock has substantially fluctuated in the past.
The
market price of our common stock has been as high as $13.74 in the fourth
quarter of 2007 to as low as $0.52 in the fourth quarter of 2002.
Our
common stock has limited trading volume, and it closed at $4.51 on March 7,
2008.
There
are
a variety of factors which contribute to the volatility of our common stock.
These
factors include domestic and international economic conditions, stock market
volatility, our reported financial results, fluctuations in annual and quarterly
operating results, and general conditions in the contract manufacturing and
technology sectors.
Announcements
concerning our company and competitors, our operating results, and any
significant amount of shares eligible for future sale
may also
have an impact on the market price of our common stock.
As
a
result of these factors, the volatility of our common stock prices may continue
in the future.
We
have not declared dividends, and our credit facilities prohibit us from paying
dividends without written consent from our lender
Under
Florida corporate law, holders of our common stock are entitled to receive
dividends from legally available funds, when and if declared by our board of
directors. We have not paid any cash dividends, and our board of directors
does
not intend to declare dividends in the foreseeable future. Our future earnings,
if any, will be used to finance our capital requirements, repay bank borrowings
and fund our operations.
Our
credit facilities
prohibit
us from paying any dividends without the written consent of the lender or making
any other payments on our capital stock without the written consent of the
lender. There can be no assurance that the lender will provide such consent.
Possible
delisting of our stock
Our
common stock trades on the Nasdaq Capital Market.
There
are
certain qualitative and quantitative criteria for continued listing on the
Nasdaq Capital Market, known as continued
listing
requirements.
Failure to satisfy any one of these continued listing requirements could result
in our securities being delisted from the Nasdaq Capital Market. These criteria
include at least two active market makers, maintenance of $2,500,000 of
stockholders’ equity (or alternatively, $35,000,000 in market capitalization or
$500,000 in net income from operations in the latest fiscal year or 2 of the
last 3 fiscal years), a minimum bid price for our common stock of $1.00, and
at
least 500,000 publicly held shares with a market value of at least $1,000,000,
among others. Continued listing also requires compliance with the Nasdaq Stock
Market’s corporate governance listing criteria. Usually, if a deficiency occurs
for a period of 30 consecutive trading days (10 consecutive trading days for
failure to satisfy the minimum market capitalization requirement), the
particular company is notified by Nasdaq and has a grace period in which to
achieve compliance.
If
the
company is unable to demonstrate compliance after the expiration of any
applicable grace period, the security is subject to delisting. The security
might be able to trade on
the
Nasdaq
OTC
Bulletin Board, a less transparent trading market which may not provide the
same
visibility for the company or liquidity for its securities, as does the Nasdaq
Capital Market.
As
a
consequence, an investor may find it more difficult to dispose of or obtain
prompt quotations as to the price of our securities, and may be exposed to
a
risk of decline in the market price of
our
common
stock.
The
Nasdaq Capital Market requires that we maintain a minimum market value of public
float of $1,000,000 for continued listing.
The
publicly trading shares, exclusive of any affiliate ownership, which is the
float for our common stock, is approximately 1,658,092 shares, and as the
closing price of our shares on March 7, 2008 was $4.51, we currently satisfy
that maintenance requirement.
Our
common stock has limited trading volume. There is the risk of being delisted
from the Nasdaq Capital Market should our common stock fail to maintain a
minimum bid price of $1.00 per share for 30 consecutive days, or we fail to
meet
other continued listing requirements In 2006, we were notified by Nasdaq of
failure to meet its listing requirements due to a delay in filing our quarterly
report for the second quarter of 2006, as a result of accounting errors at
our
Simclar (Mexico), Inc. subsidiary that led to a restatement of our 2005 and
first quarter 2006 results. We were able to correct this deficiency before
further action to delist our common stock. Continued satisfaction of certain
of
the Nasdaq Capital Market continued listing requirements is beyond our control.
There is no assurance that we will continue to satisfy the continued listing
maintenance criteria, which, without a timely cure, could cause our securities
to be delisted from the Nasdaq Capital Market.
A
significant downturn in the general economy could adversely affect our revenue,
gross margin and earnings.
Our
business is subject to inflation, rising interest rates, availability of capital
markets, consumer spending rates, the effects of governmental plans to manage
economic conditions and other national and global economic occurrences beyond
our control which could have an adverse affect on our revenue, gross margin
and
earnings. As suppliers to the OEM market many of our products, and hence
our revenue and gross margin, is strongly correlated with general economic
conditions and with the level of business activity of our customers.
Economic weakness and constrained customer spending has resulted in the
past, and may result in the future, in decreased revenue, gross margin,
earnings, or growth rates. We also have experienced, and may experience in
the future, gross margin declines reflecting the effects of increased pressure
for price concessions as our customers attempt to lower their cost structures
and increased material costs as our suppliers attempt to increase their prices.
In this environment, we may not be able to reduce our costs sufficiently
to maintain our margins.
Failure
to attract and retain qualified
personnel
may result in difficulties in managing our business effectively and meeting
revenue growth objective.
Our
ability to profitably manage and grow our business depends upon the
contributions and abilities of key executives, operating officers and other
personnel.
The
loss
of the services of any of these key employees could have a material impact
on
the Company's business and results of operations. In addition, continued growth
and expansion of the Company's contract manufacturing business in an extremely
competitive market will require that it attract, motivate and retain additional
skilled and experienced personnel. The inability to satisfy these requirements
could have a negative impact on the Company's ability to remain competitive
in
the future.
There
are inherent limitations in all control systems, and misstatements due to error
or fraud may occur and may not be detected.
Simclar’s
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that any company’s controls, including our own, will prevent all
error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. The design of a control system
must reflect the fact that there are resource constraints and the benefit of
controls must be evaluated in relation to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, in the company
have been detected. These inherent limitations include the realities that
judgments in decision making can be faulty and that breakdowns can occur because
of simple error or mistake. Further, controls can be circumvented by
individual acts of some persons, by collusion of two or more persons, or by
management override of the controls. The design of any system of controls
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, a control may
be
inadequate because of changes in conditions or the degree of compliance with
the
policies or procedures may deteriorate. Because of inherent limitations in
a cost-effective control system, misstatements due to error or fraud may occur
and not be detected.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
The
following chart summarizes the principal properties leased by the
company:
Space
|
|
Property
|
|
Term
|
16,000
sq. ft.
(exec.
offices, mfg.)
|
|
2230
W 77th St.
Hialeah,
FL
|
|
10
yrs. to August 31, 2010
|
|
|
|
|
|
12,000
sq. ft.
(mfg.,
warehouse)
|
|
2230
W 77th St.
Hialeah,
FL
|
|
10
yrs. to August 31, 2010
|
|
|
|
|
|
16,000
sq. ft.
(office,
warehouse)
|
|
2685
N. Coria
Brownsville,
TX
|
|
3
yrs. to April 30, 2008
|
|
|
|
|
|
37,919
sq. ft.
(mfg.,
office, warehouse)
|
|
Parque
Industrial CYLSA
Matamoros,
Mexico
|
|
5
yrs. to July 15, 2011
|
|
|
|
|
|
55,524
sq. ft.
(mfg.,
office, warehouse)
|
|
Parque
Industrial CYLSA
Matamoros,
Mexico
|
|
13
yrs. to October 31, 2017
|
|
|
|
|
|
90,000
sq. ft.
(mfg.,
office, warehouse)
|
|
176
Laurie Ellis Road
Winterville,
NC
|
|
5
yrs. to May 31, 2011
|
|
|
|
|
|
52,826
sq. ft.
(mfg.,
office, warehouse)
|
|
1624
West Jackson
Ozark,
MO
|
|
5
yrs. to December 31, 2011
|
The
company owns a 77,800 square foot manufacturing, office and warehouse facility
located at 1784 Stanley Avenue in Dayton, Ohio.
In
December 2006, the company entered into a lease agreement for a new facility
for
the SIT operation in Ozark, Missouri. The lease is an operating lease with
a
term of 5 years with renewal options and an estimated annual lease expense
of
approximately $120,000. The move to the new facility was completed in April
2007. While there was a disruption in product shipments during this process,
there were neither lost revenues nor any material negative effects as a result
of this move to the new facility.
We
maintain state-of-the-art manufacturing, quality control, testing and packaging
equipment at all of our facilities.
We
believe that our equipment and facilities are suitable and adequate for our
current operations and provide us with the productive capacity we need for
our
current business levels. We utilize approximately 60% of the capacity of each
of
our facilities on a one shift schedule for our business.
We
are
subject to a variety of environmental regulations relating to our manufacturing
processes and facilities. See “Government Regulation” under Item 1 and “Risk
Factors” under Item 1A.
Item
3. Legal Proceedings
We
are,
from time to time, a party to litigation which arises in the normal course
of
our business. When a loss is deemed probable and reasonably estimable, an amount
is recorded in our financial statements. Although the ultimate resolution of
pending proceedings cannot be determined, in the opinion of management, the
unfavorable resolution of these proceedings in the aggregate will not have
a
material adverse effect on our business, financial position, results of
operations, or liquidity.
Item
4. Submission of Matters to a Vote of Security Holders
None.
Part
II
Item
5.
Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Repurchases of Equity Securities
Market
for Common Stock
The
table
below reflects the high and low closing sales prices for our common stock,
which
trades under the symbol “SIMC”, as reported by the Nasdaq Capital Market.
The
prices shown represent quotations between dealers, without adjustment for retail
markups, markdowns or commissions and may not represent actual
transactions.
2007
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
1
st
Quarter
|
|
$
|
6.67
|
|
$
|
5.31
|
|
2
nd
Quarter
|
|
$
|
7.25
|
|
$
|
5.78
|
|
3
rd
Quarter
|
|
$
|
12.19
|
|
$
|
5.45
|
|
4
th
Quarter
|
|
$
|
13.74
|
|
$
|
3.79
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
1
st
Quarter
|
|
$
|
3.83
|
|
$
|
3.15
|
|
2
nd
Quarter
|
|
$
|
11.33
|
|
$
|
3.70
|
|
3
rd
Quarter
|
|
$
|
13.18
|
|
$
|
4.36
|
|
4
th
Quarter
|
|
$
|
8.99
|
|
$
|
4.35
|
|
Approximate
Number of Holders of Common Stock
On
December 31, 2007, there were approximately
46
shareholders
of record of our common stock.
Our
transfer agent is Continental Stock Transfer & Trust Company, 17 Battery
Place, 8
th
Floor,
New York, New York 10004.
Dividends
We
have
not paid, nor do we have any present plans to pay cash dividends on our common
stock in the immediate future. In addition, our credit facilities with the
Bank
of Scotland prohibit us from declaring or paying dividends on our common stock
without the Bank of Scotland’s written consent. See Item 7, “Management’s
Discussion and Analysis of Financial Conditions and Results of Operations -
Liquidity and Capital Resources.”
Issuer
Repurchases
No
purchases of any of our outstanding shares were made by or on behalf of the
company or any affiliated purchaser during 2007 and 2006.
Item
6. Selected Financial Data
The
following selected financial data should be read in conjunction with the
consolidated financial statements, related notes and other financial information
included herein:
Consolidated
Statements of Operations Data
(in
thousands except per share amounts)
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Revenues
|
|
$
|
136,416
|
|
$
|
116,031
|
|
$
|
61,005
|
|
$
|
53,582
|
|
$
|
36,187
|
|
Net
income
|
|
|
2,362
|
|
|
2,863
|
|
|
947
|
|
|
2,342
|
|
|
1,106
|
|
Earnings
per share
|
|
$
|
0.37
|
|
$
|
0.44
|
|
$
|
0.15
|
|
$
|
0.36
|
|
$
|
0.17
|
|
Consolidated
Balance Sheet Data
(in
thousands)
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Working
capital
|
|
$
|
10,702
|
|
$
|
14,236
|
|
$
|
4,470
|
|
$
|
12,137
|
|
$
|
11,804
|
|
Total
assets
|
|
|
66,246
|
|
|
63,864
|
|
|
37,710
|
|
|
32,580
|
|
|
25,674
|
|
Total
debt
|
|
|
13,524
|
|
|
20,565
|
|
|
4,200
|
|
|
6,700
|
|
|
6,500
|
|
Total
liabilities
|
|
|
45,941
|
|
|
45,942
|
|
|
22,650
|
|
|
18,462
|
|
|
13,913
|
|
Stockholders’
equity
|
|
|
20,306
|
|
|
17,922
|
|
|
15,060
|
|
|
14,119
|
|
|
11,761
|
|
The
2006
financial data reflects the acquisition of the Litton backplane assembly assets,
2005 financial data reflects the acquisition of Simclar (North America), Inc.,
and the 2003 financial data reflects the acquisition of AG Technologies, Inc.
(Simclar (Mexico), Inc.).
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Simclar,
Inc. continued to demonstrate strong revenue growth of existing products and
customers through 2007 as well as adding new products and customers. Our
strategy remains to (1) leverage our relationship with Simclar Group to expand
our reach globally, (2) depend upon our long-term relationships with major
OEM’s
to increase our business with our existing customer base and to grow our
customer base with other OEM’s, and (3) seek strategic acquisitions and
alliances.
Some
of
the key highlights to be discussed further through this discussion and analysis
include:
|
·
|
2007
revenues were approximately $136 million; this is 18% above 2006.
|
|
·
|
2007
fourth quarter sales were approximately $34.7 million compared to
approximately $33.2 million for the fourth quarter in
2006
|
|
·
|
net
income for 2007 was approximately $2,362,000 and earnings per share
was
$0.37
|
|
·
|
as
previously announced, management has decided to transfer the North
Carolina operations to Mexico; in 2007 losses of approximately $2.1million
arose in North Carolina
|
|
·
|
bank
term loan repayments of $6.2 million included $3.0 million of voluntary
payments
|
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. See “Business Strategy” and
“Customers” under Item 1, “Business.”
The
industry segments we serve, and the electronics industry as a whole, are subject
to rapid technological change and product obsolescence. Discontinuance or
modification of products containing components manufactured by our company
could
adversely affect our results of operations. The electronics industry is also
subject to economic cycles and has in the past experienced, and is likely in
the
future to experience, recessionary periods. A prolonged worldwide recession
in
the electronics industry, as we experienced from 2001 through 2003, could have
a
material adverse effect on our business, financial condition and results of
operations. During periods of recession in the electronics industry, our
competitive advantages in the areas of quick-turnaround manufacturing and
responsive customer service may be of reduced importance to electronic OEMs,
who
may become more price sensitive.
We
typically do not obtain long-term volume purchase contracts from our customers,
but rather we work with our customers to anticipate future volumes of orders.
Based upon such anticipated future orders, we will make commitments regarding
the level of business we want and can accomplish given the current timing of
production schedules and the levels of and utilization of facilities and
personnel. Occasionally, we purchase raw materials without a customer order
or
commitment.
Customers
may cancel, delay or reduce orders, usually without penalty, for a variety
of
reasons, whether relating to the customer or the industry in general, which
orders are already made or anticipated. Any significant cancellations,
reductions or order delays could adversely affect our results of
operations.
We
use
Electronic
Data Interchange
(“EDI”)
with
both our customers and our suppliers in our efforts to continuously develop
accurate forecasts of customer volume requirements, as well as sharing our
future requirements with our suppliers.
We
depend
on the
timely availability of many components. Component shortages could result in
manufacturing and shipping delays or increased component prices, which could
have a material adverse effect on our results of operations.
It
is
important for us to efficiently manage inventory, 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. See “Electronic Manufacturing Industry” and “Supplies and Materials
Management” under Item 1, “Business” and “Results of Operations”
below.
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
performance metrics:
Orders
booked and backlog
–
the
ratio of orders booked to sales is reviewed on a monthly basis.
Sales
–
monthly
sales are compared against budget and the same month in the previous
year.
Gross
margin
–
the
gross margin achieved each month is compared against budget and the same month
in the previous year.
Selling,
general and administrative expenses –
the
ratio
of these expenses as a percentage of sales
each
month is compared against budget.
Working
capital
–
movements in the balance sheet amounts of inventory, accounts receivable and
accounts payable are reviewed on a monthly basis.
Bank
borrowings
-
movements in the company’s working capital facility with the bank are reviewed
on a weekly basis.
Weekly
business control
reviews
–
conference calls are conducted weekly by the president, CFO, and group
controller to review key performance metrics and general business update with
the general managers and financial controllers for each facility.
In
the
event that any of the above measures indicate unusual movements or trends,
further review is undertaken by management to ensure that satisfactory
explanations are obtained, and, where necessary, appropriate corrective action
is taken.
Results
of Operations
The
following
is a
discussion of the key factors that have affected our business over the last
two
years.
This
discussion
should
be read in conjunction with our consolidated financial statements and the
related footnotes included herein.
Net
Sales
(dollars
in thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
136,416
|
|
$
|
116,031
|
|
|
|
|
|
|
|
|
|
Change
from prior year
|
|
$
|
20,385
|
|
$
|
55,026
|
|
%
change from prior year
|
|
|
17.6
|
%
|
|
90.2
|
%
|
Revenues
were up approximately $20 million for the year ended December 31, 2007 compared
to the same period in 2006. This represents an approximate 18% growth.
Approximately 7% of the growth is attributed to a full year’s revenues for the
backplanes business acquired in February 2006 and approximately 11% came from
growth in business from both existing and new customers.
Gross
Profit Margin
(dollars
in thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
$
|
14,190
|
|
$
|
13,996
|
|
|
|
|
|
|
|
|
|
Change
from prior year
|
|
$
|
194
|
|
$
|
6,858
|
|
%
change from prior year
|
|
|
1.4
|
%
|
|
96.1
|
%
|
|
|
|
|
|
|
|
|
%
of sales
|
|
|
10.4
|
%
|
|
12.1
|
%
|
Gross
profit was up slightly due to the growth in revenues but was lower as a
percentage of sales. We continued to experience escalating losses in our North
Carolina operations which caused management to conclude that the operations
are
no longer financially viable and to begin a controlled transfer of the business
to Mexico and discontinuance of the North Carolina operations. The transfer
will
be completed in the first quarter of 2008. With a few exceptions for certain
employee guarantees and contract termination costs, current GAAP requires that
costs associated with the closing of a facility must be recognized in the period
incurred. Management estimates that the results for the first quarter of 2008
will be adversely affected by approximately $700,000 by the transfer, but the
longer term benefits will be improved profits and cash flow. Reserves of
approximately $310,000 were provided for inventory that was judged to be excess
or obsolete as a result of the decision to transfer the operations to Mexico,
and to reflect an additional write down on excess and obsolete inventories
arising in the year at other company locations.
Selling,
General, and Administrative Expenses
(dollars
in thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Selling,
general, and administrative expenses
|
|
$
|
8,735
|
|
$
|
8,023
|
|
|
|
|
|
|
|
|
|
Change
from prior year
|
|
$
|
712
|
|
$
|
3,038
|
|
%
change from prior year
|
|
|
8.9
|
%
|
|
61.0
|
%
|
|
|
|
|
|
|
|
|
%
of sales
|
|
|
6.4
|
%
|
|
6.9
|
%
|
Selling,
general, and administrative costs (SG&A) increased approximately $712,000
but decreased as a percentage of sales. Approximately $226,000 of the increased
SG&A was due to increased amortization of intangibles related to the Litton
asset acquisition in 2006.
Interest
Expense
(dollars
in thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
1,908
|
|
$
|
1,835
|
|
|
|
|
|
|
|
|
|
Change
from prior year
|
|
$
|
73
|
|
$
|
1,358
|
|
%
change from prior year
|
|
|
4.0
|
%
|
|
284.7
|
%
|
|
|
|
|
|
|
|
|
%
of sales
|
|
|
1.4
|
%
|
|
1.6
|
%
|
Interest
expense was slightly above last year, due to there being twelve months interest
paid in 2007 on the Litton acquisition debt compared to only ten months interest
paid in 2006. This additional interest expense, was however mitigated by the
effect of voluntary payments of $3 million in addition to the scheduled payments
of $3.2 million that reduced our debt with BoS by $6.2 million in 2007. The
average interest rate for tranches A and B of our credit facilities was
approximately 6.7% while the average interest rates for tranches C and D were
approximately 7.6% and 8.7% respectively. These credit facilities are described
in further detail below. Our weighted average interest rate for the year was
approximately 7.6% compared to approximately 7.7% in 2006.
Income
Before Income Taxes
(dollars
in thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
3,713
|
|
$
|
4,202
|
|
|
|
|
|
|
|
|
|
Change
from prior year
|
|
$
|
(489
|
)
|
$
|
2,457
|
|
%
change from prior year
|
|
|
-11.6
|
%
|
|
140.8
|
%
|
|
|
|
|
|
|
|
|
%
of sales
|
|
|
2.7
|
%
|
|
3.6
|
%
|
The
losses from our North Carolina operations and the adjustments to inventory
reserves contributed to lower income before income taxes in spite of higher
sales. See the discussion under gross profit margin.
Income
Tax Expense
(dollars
in thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$
|
1,351
|
|
$
|
1,339
|
|
|
|
|
|
|
|
|
|
Change
from prior year
|
|
$
|
12
|
|
$
|
542
|
|
%
change from prior year
|
|
|
0.9
|
%
|
|
67.9
|
%
|
|
|
|
|
|
|
|
|
%
of Income before tax
|
|
|
36.4
|
%
|
|
31.9
|
%
|
Income
taxes as a percentage of sales were approximately 4% points higher this year
due
to timing differences on the deductibility of certain cost for tax and book
purposes.
Liquidity
and Capital Resources
Cash
and
Cash Equivalents
(dollars
in thousands)
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
429
|
|
$
|
82
|
|
We
continue to prudently manage our cash flow as the business continues to grow.
Excess liquid funds are invested in short-term interest-bearing accounts at
financial institutions.
Net
Cash
Provided from Operating Activities
(dollars
in thousands)
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
Net
cash provided from operating activities
|
|
$
|
7,202
|
|
$
|
2,781
|
|
The
largest contributor to the improvement in net cash provided from operating
activities was approximately $2.5 million provided by working capital in 2007
compared to an approximately $1.9 million use of working capital in 2006. There
was net income before depreciation of approximately $4.7 million in both 2007
and 2006.
Accounts
Receivable
(dollars
in thousands)
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
20,805
|
|
$
|
20,802
|
|
|
|
|
|
|
|
|
|
Average
days sales outstanding
|
|
|
54.9
|
|
|
64.5
|
|
Accounts
receivable remained relatively unchanged in spite of the approximately 18%
growth in sales. The major factor in the lower days sales outstanding at
December 31, 2007 is attributed to the impact of our improved receivables
collections procedures.
Inventory
(dollars
in thousands)
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
21,664
|
|
$
|
20,259
|
|
|
|
|
|
|
|
|
|
Average
inventory turnover
|
|
|
5.6
|
|
|
5.0
|
|
Inventories
have grown in relationship to the increased sales volumes. We continue to focus
on improving our inventory utilization through improved systems, expanding
our
use of consigned inventories, reducing order quantities, and shortening lead
times.
Cash
Used
in Investing Activities
(dollars
in thousands)
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
$
|
1,572
|
|
$
|
17,074
|
|
The
most
significant difference in investing activity between 2007 and 2006 was
approximately $16.1 million related to the Litton asset acquisition in 2006.
Additions to property and equipment were approximately $2.1 million in 2007
compared to approximately $1.1 million in 2006.
Cash
(Used In) Provided by Financing Activities
(dollars
in thousands)
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
Cash
(used in) provided by financing activities
|
|
$
|
(5,305
|
)
|
$
|
13,543
|
|
The
most
significant contributor to financing activities in 2007 was the reduction of
term debt of approximately $7.1 million and repayment of a note payable to
Simclar Group of approximately $1.3 million. Term loan repayments were $6.2
million to BoS of which $3.2 million were scheduled payments and $3.0 million
were voluntary additional payments. Payments on other long-term borrowings
totaled $850,000 in 2007. This was offset by an increase in use our working
capital line of approximately $3 million. The major activity in 2006 was the
increase of $16 million in our long-term credit facility with BoS to fund the
Litton asset acquisition.
Our
near-term cash requirements are primarily related to funding our operations,
investing in acquisitions, and meeting the company’s required bank debt
obligations. We believe that the combination of internally-generated
funds, available cash reserves, and our existing credit facility is sufficient
to fund our operating, investing and financing activities.
In
December 2005, we entered into two amended and one new credit facilities with
Bank of Scotland, plc in Edinburgh, Scotland consisting of:
Borrower
|
|
Type of facility
|
|
Original
amount
|
|
Balance at
December 31,2007
|
|
Simclar,
Inc.
|
|
Working
capital
|
|
$
|
7,500,000
|
|
$
|
7,494,408
|
|
Simclar,
Inc.
|
|
Term
loan – four tranches (see detail of tranches below
)
|
|
$
|
21,650,000
|
|
$
|
12,300,000
|
|
Simclar Interconnect Technologies, Inc.
|
|
Working
Capital
|
|
$
|
1,000,000
|
|
$
|
651,579
|
|
Effective
March 27, 2008, we entered into amendments of the two working capital
facilities. The term of the $1 million working capital facility of Simclar
IT,
originally entered into in December 2005, and amended in January 2007, was
extended to March 17, 2009. The maturity date of the Simclar, Inc. $7.5 million
working capital facility, last amended in January 2006, was extended to March
17, 2009. No other material changes were made to either facility by the
amendments, except that the default interest rate under both facilities was
increased from 1.5% to 2.0% and the interest rate under the $7.5 million
facility was increased from 1.5% over LIBOR to 1.75% over LIBOR.
Interest
on the Simclar, Inc. working capital facility
accrues
at an annual rate equal to LIBOR plus 1.5% (increasing to 1.75% after March
2008), plus an amount, rounded to the nearest eighth of a percent, to cover
any
increases in certain regulatory costs incurred by the bank. The company may
elect to pay interest on advances every one, three or six months, with LIBOR
adjusted to correspond to the interest payment period selected by the
company
.
The
interest rate for the working capital facility at December 31, 2007 was 6.0%
based on the one month election.
Interest
on the Simclar Interconnect Technologies, Inc. working capital facility will
be
a margin over LIBOR determined by a ratio of net borrowings to EBITDA for any
given test period. The margin percentage can range from 1.75% to 2.5%. The
interest rate for this working capital facility at December 31, 2007 was
7.0%.
The
term
loan interest is also determined by a margin over LIBOR related to the ratio
of
net borrowings to EBITDA for any given test period. The margin percentage varies
from 1.5% to 3.5%. The term debt interest rate was 6.732% for tranches A and
B,
7.355% for tranche C, and 8.37% for tranche D at December 31, 2007 based on
the
one month election. The term loan is divided into four tranches each with its
own specific purpose and repayment schedule as shown in the following table:
Tranche
|
|
Principal Amount
|
|
Purpose
|
|
Payments
|
A
|
|
$
|
4,250,000
|
|
Refinance
existing facilities
|
|
Seventeen
quarterly payments of $250,000 beginning October 2004 through October
2008
|
|
|
|
|
|
|
|
|
B
|
|
$
|
1,400,000
|
|
Dayton
property acquisition
|
|
Twenty-eight
quarterly payments of $50,000 beginning January 2005 through October
2011
|
|
|
|
|
|
|
|
|
C
|
|
$
|
13,000,000
|
|
Acquisition
of certain assets of the Litton Interconnect Technologies assembly
operations
|
|
Thirteen
quarterly payments of $500,000 beginning December 2006 through December
2009, four quarterly payments of $250,000 from March 2010 through
December
2010, four quarterly payments of $750,000 from March 2011 through December
2011 and four quarterly payments of $625,000 from March 2012 through
December 2012
|
|
|
|
|
|
|
|
|
D
|
|
$
|
3,000,000
|
|
Acquisition
of certain assets of the Litton Interconnect Technologies assembly
operations
|
|
Single
payment due December 31, 2010
|
The
weighted average interest rate for 2007 was approximately 7.6%.
Our
credit facilities with BoS, which include an Amended Term Loan Facility Letter,
an Amended Working Capital Facility Letter, a Working Capital Facility Letter,
and related security agreements, guaranties and a mortgage, in addition to
subjecting all our assets as security for the bank financing, include
substantial covenants that impose significant restrictions on us, including,
among others, requirements that:
|
·
|
the
facilities take priority over all our other obligations;
|
|
·
|
we
must maintain sufficient and appropriate insurance for our business
and
assets;
|
|
·
|
we
must maintain all necessary licenses and authorizations for the conduct
of
our business;
|
|
·
|
we
indemnify the bank against all costs and expenses incurred by it
which
arise as a result of any actual or threatened (i) breach of environmental
laws; (ii) release or exposure to a dangerous substance at or from
our
premises; or (iii) claim for an alleged breach of environmental law
or
remedial action or liability under such environmental law which could
have
an adverse material effect;
|
|
·
|
if
environmental harm has occurred to our property securing the credit
facility, we have to ensure we were not responsible for the harm,
and we
have to be aware of the person responsible and its financial condition;
and
|
|
·
|
we
must notify the bank of a variety of pension and benefit plans and
ERISA
issues, including, among others, (i) material adverse changes in
the
financial condition of any such plan; (ii) increase in benefits;
(iii)
establishment of any new plan; (iv) grounds for termination of any
plan;
and (v) our affiliation with or acquisition of any new ERISA affiliate
that has an obligation to contribute to a plan that has an accumulated
funding deficiency.
|
In
addition, our credit facilities require us to maintain:
|
·
|
consolidated
adjusted net worth greater than $15,000,000 with effect from March
31,
2006 (tested on a quarterly basis);
|
|
·
|
a
ratio of consolidated current assets to consolidated net borrowing
prior
to December 31, 2007 of not less than 1:1 and thereafter not to be
less
than 1.5:1 (tested on a quarterly basis);
|
|
·
|
a
ratio of consolidated trade receivables to consolidated net borrowing
of
not less than 0.5:1 prior to December 31, 2007 and not less than
0.75:1
thereafter (tested on a quarterly basis); and
|
|
·
|
a
ratio of EBIT to total interest not less than 3:1 until March 31,
2006;
not less than 3.5:1 from April 1, 2006 to December 31, 2007; and
not less
than 4:1 thereafter (tested on a quarterly basis beginning December
31,
2005);
|
|
·
|
a
ratio of net borrowings to EBITDA not to exceed 5:1 through December
31,
2006; not to exceed 4.5:1 from January 1, 2007 to December 31, 2007;
not
to exceed 4:1 from January 1, 2008 to December 31, 2008; not to exceed
3.5:1 from January 1, 2009 to December 31, 2009; and not to exceed
3:1
thereafter (tested on a quarterly basis beginning December 31, 2006).
|
Finally,
without the prior written consent of BoS, our credit facilities prohibit us
from:
|
·
|
granting
or permitting a security agreement against our consolidated assets
except
for permitted security agreements;
|
|
·
|
declaring
or paying any dividends or making any other payments on our capital
stock;
|
|
·
|
consolidating
or merging with any other entity or acquiring or purchasing any equity
interest in any other entity, or assuming any obligations of any
other
entity, except for notes and receivables acquired in the ordinary
course
of business;
|
|
·
|
incurring,
assuming, guaranteeing, or remaining liable with respect to any
indebtedness, except for certain existing indebtedness disclosed
in our
financial statements;
|
|
·
|
undertaking
any capital expenditures in excess of $1,000,000 of the relevant
estimates
in the aggregate budget approved by BoS;
|
|
·
|
effecting
any changes in ownership of our company;
|
|
·
|
making
any material change in any of our business objectives, purposes,
operation
or taxes; and
|
|
·
|
incurring
any material adverse event in business conditions as defined by the
Bank.
|
The
company did not satisfy the EBIT to total interest coverage covenant contained
in the credit facilities at December 31, 2006. Bank of Scotland nonetheless
agreed to suspend the effectiveness of this covenant and instead agreed that
total interest coverage must exceed 3:1 on a quarterly basis and the other
financial covenants must be complied with. The company successfully maintained
compliance with the 3:1 interest coverage ratio.
Our
indebtedness requires us to dedicate a substantial portion of our cash flow
from
operations to payments on our debt, which could reduce amounts for working
capital and other general corporate purposes. The restrictions in our credit
facility could also limit our flexibility in reacting to changes in our business
and increases our vulnerability to general adverse economic and industry
conditions.
We
have
no off-balance sheet financing arrangements with related or unrelated parties
and no unconsolidated subsidiaries. In the normal course of business, we enter
into various contractual and other commercial commitments that impact or can
impact the liquidity of our operations.
Effect
of Recently Issued Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51,” (SFAS 160).
SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated
Financial Statements,” to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This standard defines a noncontrolling interest, sometimes called
a
minority interest, as the portion of equity in a subsidiary not attributable,
directly or indirectly, to a parent. SFAS 160 requires, among other items,
that
a noncontrolling interest be included in the consolidated statement of financial
position within equity separate from the parent’s equity; consolidated net
income to be reported at amounts inclusive of both the parent’s and
noncontrolling interest’s shares and, separately, the amounts of consolidated
net income attributable to the parent and noncontrolling interest all on the
consolidated statement of income; and if a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary be measured
at fair value and a gain or loss be recognized in net income based on such
fair
value. SFAS 160 becomes effective for the company on January 1, 2009.
Management is currently evaluating the potential impact of SFAS 160 on the
consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115,” (SFAS 159). SFAS No. 159 permits companies to choose to
measure certain financial instruments and other items at fair value. The
Company’s preliminary conclusion is that it will not choose the fair value
measurement options permitted by SFAS 159 for any of its assets and liabilities.
Therefore, this statement will not impact the company’s future financial
statements.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,”
(SFAS 141R). SFAS 141R replaces SFAS No. 141, “Business Combinations,”
(SFAS 141) and retains the fundamental requirements in SFAS 141, including
that
the purchase method be used for all business combinations and for an acquirer
to
be identified for each business combination. SFAS 141R does change many aspects
of SFAS 141, especially with respect the treatment of direct acquisition costs
and recognition of contingent consideration. This standard defines the acquirer
as the entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control instead of the date that the consideration is transferred.
SFAS
141R requires an acquirer in a business combination, including business
combinations achieved in stages (step acquisition), to recognize the assets
acquired, liabilities assumed, and any noncontrolling interest in the acquiree
at the acquisition date, measured at their fair values of that date, with
limited exceptions. It also requires the recognition of assets acquired and
liabilities assumed arising from certain contractual contingencies as of the
acquisition date, measured at their acquisition-date fair values. SFAS 141R
becomes effective for the company for any business combination with an
acquisition date on or after January 1, 2009. Management is currently
evaluating the potential impact of SFAS 141R on the consolidated financial
statements.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS No. 157”) to clarify the definition of fair value,
establish a framework for measuring fair value and expand the disclosures on
fair value measurements. SFAS No. 157 defines fair value as the price that
would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (an exit price).
SFAS No. 157 also stipulates that, as a market-based measurement, fair value
measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability, and establishes a
fair
value hierarchy that distinguishes between (a) market participant assumptions
developed based on market data obtained from sources independent of the
reporting entity (observable inputs) and (b) the reporting entity’s own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). SFAS No.
157
becomes effective for the company in its fiscal year ending December 31, 2008.
The company is currently evaluating the impact of the provisions of SFAS No.
157
on its consolidated financial statements.
Critical
Accounting Policies
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements :
Provision
for Inventory Obsolescence
The
company reviews its inventories on a regular basis to identify parts that have
not been used in the manufacturing process during the previous two year period
and are not believed to be required for use in the manufacturing process. The
carrying value of these identified parts is reduced to estimated realizable
value with a charge to the allowance for obsolescence. Additional write-downs,
if required, are recorded in the period identified.
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-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.
Goodwill
and Intangible Assets
Goodwill
is the excess of the purchase price paid over the fair value of the businesses
acquired and is not amortized. Intangible assets with determinable lives
are amortized over the estimated useful life in a manner reflective of the
pattern in which the economic benefits of the intangible assets are used
up. Goodwill and indefinite-lived intangibles are evaluated for impairment
on an annual basis, or more frequently if impairment indicators arise, using
fair-value-based tests. For the year ended December 31, 2007, the company
changed the reporting unit for goodwill impairment testing purposes and changed
the date of its annual goodwill impairment test from various dates throughout
the year to the first day following the end of their 3rd quarter. Management
believes that the accounting change is preferable in the circumstances because
it better aligns management’s consideration of the operations of the company and
also better aligns the timing of the company’s long-range planning with this
test, as the impairment test is dependent on the results of the company’s
long-range planning process. Management requested a review of this accounting
change from our independent registered public accounting firm to which they
concurred. During 2007 and 2006, the company evaluated goodwill and other
intangible assets in accordance with SFAS No. 142 and determined there was
no
impairment related to the carrying value of such assets.
Income
Taxes
Deferred
income taxes at the end of each period are determined by applying enacted tax
rates applicable to future periods in which the taxes are expected to be paid
or
recovered on differences between the financial accounting and tax basis of
assets and liabilities. Effective January 1, 2007, the company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,
Accounting for Income Taxes.” FIN 48 requires that the financial statement
effects of a tax position taken or expected to be taken in a tax return to
be
recognized in the financial statements when it is more likely than not, based
on
the technical merits, that the position will be sustained upon examination.
The adoption of FIN 48 had no impact on the company’s consolidated
financial statements.
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 which, under
contractual terms, is 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 which, under contractual terms, is
generally FOB shipping point. Trade receivables are uncollateralized customer
obligations due under normal trade terms generally requiring payment 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 undertakes a series of actions based
upon the aging of past due trade receivables, including letters and direct
customer contact. Accounts are deemed uncollectible based on a customer’s
payment experience and current financial condition.
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 the financial results of Simclar,
Inc. 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 the company.
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.
Item
8. Financial Statements and Supplementary Data
Our
financial statements, and the related notes, together with the
report
of Grant
Thornton LLP dated March 31, 2008 are set forth at pages F-1 through F-22
attached hereto.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item
9A. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
The
company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized,
and reported within the specified time periods. As a part of these controls,
our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f)
under the Exchange Act. The company’s internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and
includes those policies and procedures that:
|
·
|
pertain
to the maintenance of records that, in reasonable detail accurately
reflect the transactions and dispositions of the assets of the
company;
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles and, that receipts and expenditures of the
company
are being made only in accordance with authorization of management
and
directors of the company; and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company's assets
that
could have a material effect on the financial
statements.
|
Under
the
supervision and with the participation of our management, including our chief
executive officer and chief financial officer, we evaluated the effectiveness
of
the design and operation of our disclosure controls and procedures as of
December 31, 2007. Based on that evaluation, our chief executive officer and
chief financial officer have concluded that, as of December 31, 2007, our
disclosure controls and procedures are adequately designed and effective to
provide reasonable assurance that the information required to be disclosed
by us
in the reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the applicable
rules and forms.
Our
management, including our chief executive officer and chief financial officer,
does not expect that our disclosure controls and procedures will prevent all
errors and all improper conduct. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute assurance that the
objectives of the control systems are met. Further, a design of a control system
must reflect the fact that there are resource constraints, and the benefit
of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of improper conduct,
if
any, have been detected. These inherent limitations include the realities that
judgments and decision-making can be faulty, and that breakdowns can occur
because of a simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more persons,
or
by management override of the control. Further, the design of any system of
controls is also based in part upon assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Over time, controls
may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations and a cost-effective control system, misstatements due to error
or
fraud may occur and may not be detected.
Management's
Report on Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting. Our internal control system was
designed to provide reasonable assurance to management and the board of
directors regarding the preparation and fair presentation of published financial
statements. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation
The
company's management has assessed the effectiveness of the company's internal
control over financial reporting as of December 31, 2007. In making this
assessment, the company used the criteria established by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in "Internal
Control-Integrated Framework." Based on the company's processes and assessment,
management has concluded that, as of December 31, 2007, the company's internal
control over financial reporting was effective.
This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management’s report
in this annual report.
Changes
in Control Over Financial Reporting
Except
for the efforts to strengthen our internal controls described above, during
the
year ended December 31, 2007, there were no changes in our internal controls
over financial reporting that materially affected, or is reasonably likely
to
materially affect, our internal control over financial reporting.
Item
9B. Other Information
On
March
31, 2008, the company issued a press release announcing its 2007 earnings (see
Exhibit 99.1).
Part
III
Item
10. Directors and Executive Officers of the Registrant and Corporate
Governance
The
information required by this item is included under the caption,
“Information
About Directors, Executive Officers, and Corporate
Governance”
in our
Information Statement relating to our 2008 Annual Meeting of Shareholders (the
“Information Statement”) to be held on June 9, 2008, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14C under the
Securities Exchange Act of 1934, is incorporated herein by
reference.
We
have
adopted a code of conduct and ethics that applies to our directors, officers
and
all employees. The code of business conduct and ethics is posted on our website
at
www.simclar.com
,
and may
be obtained free of charge by writing to Simclar, Inc., Attn: Chief Financial
Officer, 1784 Stanley Avenue, Dayton, Ohio 45404.
Item
11. Executive Compensation
The
information required by this item is included under the caption,
“Executive
Compensation”
in the
Information Statement and is incorporated herein by reference.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
information required by this item is included under the caption,
“Security
Ownership of Certain Beneficial Owners and Management”
and
“
Equity
Compensation Plan Information
”
in
the
Information Statement and is incorporated herein by reference.
Item
13. Certain Relationships and Related Transactions
and
Director Independence
The
information required by this item is included under the caption,
“Certain
Relationships and Related Transactions, and Director
Independence”
in the
Information Statement and is incorporated herein by reference.
Item
14. Principal Accountant Fees and Services
The
information required by this item is included under the caption
“Report
of the Audit Committee”
in the
Information Statement, and is incorporated herein by reference.
Part
IV
Item
15. Exhibits and Financial Statement Schedules
|
(a)
|
The
following documents are filed as part of this
Report.
|
(1)
The
following financial statements are filed as part of this Annual Report on Form
10-K:
Reports
of Independent Registered Public Accountants.
Consolidated
Balance Sheets as of December 31, 2007 and 2006.
Consolidated
Statements of Operations for the Years Ended December 31, 2007 and 2006.
Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31, 2007 and
2006.
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007 and
2006.
Notes
to
the Consolidated Financial Statements.
(3)
Exhibits:
Number
|
|
Exhibit
Description
|
|
|
|
3.1
|
|
Amended
and Restated Articles of Incorporation (incorporated by reference
to
Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed November
14, 2003).
|
|
|
|
3.2
|
|
Amended
By-Laws of Simclar, Inc. (incorporated by reference to Exhibit 3.2
to the
Company’s Annual Report on Form 10-K filed March 31,
2006).
|
|
|
|
4.1
|
|
Form
of Common Stock Certificate (incorporated by reference to Exhibit
4(i) to
the Company’s Annual Report on Form 10-K filed March 30, 2004).
|
|
|
|
10.1
|
|
Stock
Purchase Agreement, dated May 19, 2005 but effective May 1, 2005,
between
Simclar, Inc. and Simclar Group Limited (incorporated by reference
to
Exhibit 10.1 of the Company’s Quarterly Report of Form 10-Q filed August
12, 2005).
|
|
|
|
10.2
|
|
Share
and Asset Purchase and Sale Agreement, dated as of December 21, 2005,
by
and among Litton Systems, Inc., Litton Systems International, Inc.
and
Litton U.K., Inc. as Sellers, and Simclar Group Limited, Simclar,
Inc.,
Simclar Interconnect Technologies, Inc., and Simclar Interconnect
Technologies Limited. (incorporated by reference to Exhibit 10.2
to the
Company’s Annual Report on Form 10-K filed March 31,
2006).
|
|
|
|
10.3
|
|
First
Amendment to Share and Asset Purchase and Sale Agreement, dated as
of
February 24, 2006 by and among Litton Systems, Inc., Litton Systems
International, Inc. and Litton U.K., Inc. as Sellers, and Simclar
Group
Limited, Simclar, Inc., Simclar Interconnect Technologies, Inc.,
and
Simclar Interconnect Technologies Limited. (incorporated by reference
to
Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed March 31,
2006).
|
10.4
|
|
Lease
Agreement, dated August 29, 2000, between the Company and Medicore,
Inc.
(incorporated by reference to Exhibit 10(i) to Medicore Inc.’s Current
Report on Form 8-K filed December 19, 2000).
|
|
|
|
10.5
|
|
Lease
Agreement, dated March 25, 1997, between the Company and Route 495
Commerce Park Limited Partnership(incorporated by reference to Exhibit
10(i) to the Company’s Quarterly Report on Form 10-Q filed May 9,
1997).
|
|
|
|
10.6
|
|
Lease
Agreement, dated April 30, 1997, between the Company and PruCrow
Industrial Properties, L.P., (incorporated by reference to Exhibit
10(i)
to the Company’s Current Report on Form 8-K dated June 4,
1997).
|
|
|
|
10.7
|
|
Lease
Agreement
,
dated
July 16, 2001,
between Simclar de Mexico, SA de CV and Consorcio Inmobiliario Del
Noreste,
S.A.
de
C.V.
(incorporated by reference to Exhibit 10(x) to the Company’s Annual Report
on Form 10-K filed March 30, 2004 ).
|
|
|
|
10.8
|
|
Lease
Agreement,
dated
as of November 1, 2004,
between
Simclar de Mexico, SA de CV and Consorcio Inmobiliario Del Noreste,
S.A.
de
C.V.,
(incorporated
by reference to Exhibit 10(xviii) to the Company’s Annual Report on Form
10-K filed March 31, 2005).
|
|
|
|
10.9
|
|
Commercial
Lease, dated October 1, 1999, between Simclar (Mexico) and Fleet
Management Co. (incorporated by reference to Exhibit 10(xi) to the
Company’s Annual Report on Form 10-K filed March 30,
2004).
|
|
|
|
10.10
|
|
Sublease,
dated August 23, 1999, between the Company and United Consulting
Group
(incorporated by reference to Exhibit (10)(xiv) of the Company’s Annual
Report on Form 10-K filed March 30, 2000).
|
|
|
|
10.11
|
|
Amendment
to Sublease and Consent to Sublease among the Company, United Consulting
Group, Inc., and United Computing Group, Inc. (incorporated by reference
to Exhibit 10(xxv) to the Company’s Annual Report on Form 10-K filed March
30, 2001).
|
|
|
|
10.12
|
|
License
Agreement, dated February 24, 2006, between the Company and Litton
Systems, Inc. (incorporated by reference to Exhibit 10.12 to the
Company’s
Annual Report on Form 10-K filed March 31, 2006).
|
|
|
|
10.13
|
|
Transition
Services Agreement, dated February 24, 2006, between the Company
and
Litton Systems, Inc. (incorporated by reference to Exhibit 10.13
to the
Company’s Annual Report on Form 10-K filed March 31,
2006).
|
|
|
|
10.14
|
|
Lease
Agreement, dated as of December 28, 2006, between Simclar Interconnect
Technologies, Inc. and Phillip A. Wiland and Linda S. Wiland.
(incorporated by reference to Exhibit 10.14 to the Company’s Annual Report
on Form 10-K filed April 6, 2007).
|
|
|
|
10.15
|
|
Facility
Letter, dated October 2, 2001, between the Company and the Bank of
Scotland (incorporated by reference to Exhibit 10(a) to the Company’s
Quarterly Report on Form 10-Q filed November 14,
2001).
|
10.16
|
|
Working
Capital Facility Letter, dated October 2, 2001, between the Company
and
the Bank of Scotland (incorporated by reference to Exhibit 10(b)
to the
Company’s Quarterly Report on Form 10-Q filed November 14,
2001).
|
|
|
|
10.17
|
|
Letter
Agreement, dated November 10, 2003, between the Company and the Bank
of
Scotland (incorporated by reference to Exhibit 10(xviii) to the Company’s
Annual Report on Form 10-K filed March 30, 2004).
|
|
|
|
10.18
|
|
Letter
Agreement dated January 17, 2003 with the Bank of Scotland (incorporated
by reference to Exhibit 10(xvii) to the Company’s Annual Report on Form
10-K filed March 30, 2004).
|
|
|
|
10.19
|
|
Amendment
Letter, dated October 14, 2004, to Term Loan Facility Letter between
the
Company and Bank of Scotland, (incorporated by reference to Exhibit
99.1
to the Company’s Current Report on Form 8-K filed October 20,
2004).
|
|
|
|
10.20
|
|
Amendment
Letter, dated October 14, 2004, to Working Capital Facility Letter
between
the Company and Bank of Scotland (incorporated by reference to Exhibit
99.2 to the Company’s Current Report on Form 8-K filed October 20,
2004).
|
|
|
|
10.21
|
|
Amendment
Letter 4, dated December 21, 2005, to Term Loan Facility Letter between
the Company and Bank of Scotland. (incorporated by reference to Exhibit
10.20 to the Company’s Annual Report on Form 10-K filed March 31,
2006).
|
|
|
|
10.22
|
|
Working
Capital Facility Letter, dated December 21, 2005, between the Company
and
Bank of Scotland. (incorporated by reference to Exhibit 10.21 to
the
Company’s Annual Report on Form 10-K filed March 31,
2006).
|
|
|
|
10.23
|
|
Amendment
Letter 1, dated January 26, 2007, to Working Capital Facility Letter
between the Company and Simclar Interconnect Technologies, Inc.,
as
borrowers, and Bank of Scotland , (incorporated by reference to Exhibit
99.1 to the Company’s Current Report on Form 8-K filed February 19,
2007).
|
|
|
|
10.24
|
|
Amendment
Letter 5, dated January 26, 2007, to Working Capital Facility Letter
between the Company and Bank of Scotland, (incorporated by reference
to
Exhibit 99.2 to the Company’s Current Report on Form 8-K filed February
19, 2007).
|
|
|
|
10.25
|
|
Third
Amended and Restated General Security Agreement, dated February 28,
2007,
among the Company,
Simclar
(Mexico) Inc, Simclar Interconnect Technologies, Inc., Simclar De
Mexico,
S.A. de C.V. and Bank of Scotland. (incorporated by reference to
Exhibit
10.25 to the Company’s Annual Report on Form 10-K filed April 6,
2007).
|
|
|
|
10.26
|
|
Third
Amended and Restated Pledge Agreement, dated February 23, 2006, among
the
Company, Simclar (Mexico) Inc, and Bank of Scotland. (incorporated
by
reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K
filed March 31, 2006).
|
|
|
|
10.27
|
|
Management
Services Agreement, effective July 17, 2005, between Simclar, Inc.
and
Simclar Group Limited (incorporated by reference to Exhibit 10.2
to the
Company’s Quarterly Report on Form 10-Q filed August 12,
2005).
|
|
|
|
10.28
|
|
Amendment,
dated July 17, 2007, to Management Services Agreement, effective
July 17,
2005, between Simclar, Inc. and Simclar Group Limited. (incorporated
by
reference to Exhibit 99.1 to the Company’s Quarterly Report on Form 10-Q
filed August 14, 2007).
|
10.29
|
|
Employment
Agreement between the Company and Barry Pardon dated February 22,
2006.
(incorporated by reference to Exhibit 10.23 to the Company’s Annual Report
on Form 10-K filed March 31, 2006).
|
|
|
|
10.30
|
*
|
Amendment
Letter 2, dated March 25, 2008, to Working Capital Facility Letter
between
the Company and Simclar Interconnect Technologies, Inc., as borrowers,
and
Bank of Scotland.
|
|
|
|
10.31
|
*
|
Amendment
Letter 6, dated March 25, 2008, to Working Capital Facility Letter
between
the Company and Bank of Scotland.
|
|
|
|
18.1
|
*
|
Letter
Regarding Change in Accounting Principles.
|
|
|
|
21
|
*
|
Subsidiaries
of the registrant.
|
|
|
|
24
|
*
|
Powers
of Attorney.
|
|
|
|
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.
|
|
|
|
99.1
|
*
|
Press
release dated March 31, 2008 entitled “Simclar Announces 2007
Earnings.”
|
*
|
Filed
with this Report.
|
The
exhibits to this report follow the Signature Page.
|
(c)
|
Financial
Statement Schedules.
|
The
financial statement schedule follows the exhibits to this report.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
|
|
|
Date:
March
31, 2008
|
By:
|
/s
/
Barry
J. Pardon
|
|
|
Barry
J. Pardon, President and Director
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
Samuel
J. Russell*
|
|
Chairman
of the Board of Directors
|
|
March
31, 2008
|
Samuel
J. Russell
|
|
and
Chief Executive Officer
|
|
|
|
|
|
|
|
/s/
Barry J. Pardon
|
|
President
and Director
|
|
March
31, 2008
|
Barry
J. Pardon
|
|
(principal
executive officer)
|
|
|
|
|
|
|
|
John
Ian Durie*
|
|
Vice-President
(Finance) and
|
|
March
31, 2008
|
John
Ian Durie
|
|
Director
|
|
|
|
|
|
|
|
/s/
Stephen Donnelly
|
|
Chief
Financial Officer and
|
|
March
31, 2008
|
Stephen
Donnelly
|
|
Secretary
|
|
|
|
|
(principal
financial and principal
|
|
|
|
|
accounting
officer)
|
|
|
|
|
|
|
|
A.
Graeme Manson *
|
|
Director
|
|
March
31, 2008
|
A.
Graeme Manson
|
|
|
|
|
|
|
|
|
|
Kenneth
M. MacKay, M. D.*
|
|
Director
|
|
March
31, 2008
|
Kenneth
M. MacKay, M. D.
|
|
|
|
|
|
|
|
|
|
Christina
M. J. Russell*
|
|
Director
|
|
March
31, 2008
|
Christina
M. J. Russell
|
|
|
|
|
|
|
|
|
|
William
J. Sim*
|
|
Director
|
|
March
31, 2008
|
William
J. Sim
|
|
|
|
|
*By:
|
/s/
Barry J. Pardon
|
|
|
Barry
J. Pardon, Attorney-in-Fact
|
FORM
10-K—ITEM 8
LIST
OF FINANCIAL STATEMENTS
The
following reports of independent registered public accounting firms and
consolidated financial statements of Simclar, Inc. and subsidiaries are included
in Item 8:
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated
Balance Sheets – December 31, 2007 and 2006.
|
F-3
|
|
|
Consolidated
Statements of Operations – Years ended December 31, 2007 and
2006
|
F-5
|
|
|
Consolidated
Statements of Stockholders’ Equity – Years ended December 31, 2007 and
2006.
|
F-6
|
|
|
Consolidated
Statements of Cash Flows – Years ended December 31, 2007 and
2006.
|
F-7
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of Simclar, Inc. and
subsidiaries:
We
have
audited the accompanying consolidated balance sheets of Simclar, Inc. and
subsidiaries (the “Company”) (a Florida corporation) as of December 31, 2007 and
2006, and the related consolidated statements of operations, stockholders’
equity and cash flows for each of the two years in the period ended December
31,
2007. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Simclar, Inc. and
subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2007, in conformity with accounting principles generally accepted
in the United States of America.
/s/
GRANT
THORNTON LLP
Cincinnati,
Ohio
March
31
, 2008
SIMCLAR,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
428,538
|
|
$
|
82,154
|
|
Accounts
receivable, less allowances of $236,000 and $294,000 at December
31, 2007
and 2006 respectively
|
|
|
20,804,552
|
|
|
20,801,668
|
|
Amounts
receivable from major stockholder, net
|
|
|
904,627
|
|
|
-
|
|
Inventories,
less allowances for obsolescence of $2,3640,000 and $1552,000 at
December
31, 2007 and 2006 respectively
|
|
|
21,664,442
|
|
|
20,259,037
|
|
Prepaid
expenses and other current assets
|
|
|
654,509
|
|
|
637,856
|
|
Prepaid
income taxes
|
|
|
107,091
|
|
|
15,405
|
|
Deferred
income taxes
|
|
|
1,214,160
|
|
|
1,034,532
|
|
Total
current assets
|
|
|
45,777,919
|
|
|
42,830,652
|
|
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
Land
and improvements
|
|
|
547,512
|
|
|
547,511
|
|
Buildings
and building improvements
|
|
|
1,235,904
|
|
|
1,235,904
|
|
Machinery,
computer and office equipment
|
|
|
15,342,401
|
|
|
15,563,042
|
|
Tools
and dies
|
|
|
366,347
|
|
|
363,992
|
|
Leasehold
improvements
|
|
|
1,957,170
|
|
|
660,949
|
|
Construction
in progress
|
|
|
259,829
|
|
|
537,879
|
|
Total
property and equipment
|
|
|
19,709,163
|
|
|
18,909,277
|
|
Less
accumulated depreciation and amortization
|
|
|
9,922,589
|
|
|
8,984,948
|
|
Net
property and equipment
|
|
|
9,786,574
|
|
|
9,924,329
|
|
|
|
|
|
|
|
|
|
Deferred
expenses and other assets, net
|
|
|
366,265
|
|
|
367,122
|
|
Goodwill
|
|
|
9,410,704
|
|
|
9,410,704
|
|
Intangible
assets, net
|
|
|
904,841
|
|
|
1,331,000
|
|
Total
assets
|
|
$
|
66,246,303
|
|
$
|
63,863,807
|
|
See
notes
to consolidated financial statements
SIMCLAR,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Line
of credit
|
|
$
|
8,145,987
|
|
$
|
5,065,771
|
|
Accounts
payable
|
|
|
21,447,560
|
|
|
16,396,407
|
|
Accrued
expenses
|
|
|
1,907,472
|
|
|
1,740,799
|
|
Amounts
payable to major stockholder, net
|
|
|
-
|
|
|
1,344,139
|
|
Current
portion of long-term debt
|
|
|
3,575,148
|
|
|
4,047,408
|
|
Total
current liabilities
|
|
|
35,076,167
|
|
|
28,594,524
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
9,600,000
|
|
|
15,300,000
|
|
Long-term
debt, subordinated
|
|
|
349,257
|
|
|
1,217,986
|
|
Deferred
income taxes
|
|
|
515,283
|
|
|
429,031
|
|
Other
long term liabilities
|
|
|
400,000
|
|
|
400,000
|
|
Total
liabilities
|
|
|
45,940,707
|
|
|
45,941,541
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, authorized 10,000,000 shares; issued
and outstanding 6,465,345 shares at December 31, 2007 and
2006
|
|
|
64,653
|
|
|
64,653
|
|
Capital
in excess of par value
|
|
|
11,446,087
|
|
|
11,446,087
|
|
Retained
earnings
|
|
|
8,747,959
|
|
|
6,385,732
|
|
Accumulated
other comprehensive income
|
|
|
46,897
|
|
|
25,794
|
|
Total
stockholders' equity
|
|
|
20,305,596
|
|
|
17,922,266
|
|
|
|
$
|
66,246,303
|
|
$
|
63,863,807
|
|
See
notes
to consolidated financial statements
SIMCLAR,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Sales
|
|
$
|
136,416,278
|
|
$
|
116,031,435
|
|
Cost
of goods sold Gross Profit
|
|
|
122,226,381
|
|
|
102,034,927
|
|
|
|
|
14,189,897
|
|
|
13,996,508
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
8,735,459
|
|
|
8,023,333
|
|
Income
from operations
|
|
|
5,454,438
|
|
|
5,973,175
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
1,907,540
|
|
|
1,834,736
|
|
Interest
and other income
|
|
|
(165,912
|
)
|
|
(63,679
|
)
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
3,712,810
|
|
|
4,202,118
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
1,350,583
|
|
|
1,339,378
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,362,227
|
|
$
|
2,862,740
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
$
|
0.37
|
|
$
|
0.44
|
|
See
notes
to consolidated financial statements
SIMCLAR,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS
ENDED DECEMBER 31, 2007 AND 2006
|
|
|
|
|
|
|
|
Retained
|
|
Accumulated
|
|
Notes
|
|
|
|
|
|
|
|
Capital
in
|
|
|
|
Earnings
|
|
Other
|
|
Receivable
|
|
|
|
|
|
Common
|
|
Excess
of
|
|
Comprehensive
|
|
(Accumulated)
|
|
Comprehensive
|
|
Stock
|
|
|
|
|
|
Stock
|
|
Par
Value
|
|
Income
|
|
(Deficit)
|
|
Income
(Loss)
|
|
Options
|
|
Total
|
|
Balance
at December 31, 2005
|
|
$
|
64,653
|
|
$
|
11,446,087
|
|
|
|
|
$
|
|
|
$
|
26,564
|
|
$
|
-
|
|
$
|
15,060,296
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
2,862,740
|
|
|
2,862,740
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
(770
|
)
|
|
|
|
|
(770
|
)
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
$
|
2,861,970
|
|
|
|
|
|
|
|
|
|
|
$
|
2,861,970
|
|
Balance
at December 31, 2006
|
|
$
|
64,653
|
|
$
|
11,446,087
|
|
|
|
|
|
6,385,732
|
|
$
|
25,794
|
|
$
|
-
|
|
$
|
17,922,266
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
2,362,227
|
|
|
2,362,227
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
21,103
|
|
|
|
|
|
21,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,383,330
|
|
|
|
|
|
|
|
|
|
|
|
2,383,330
|
|
Comprehensive
income Balance at December 31, 2007
|
|
$
|
64,653
|
|
$
|
11,446,087
|
|
|
|
|
$
|
8,747,959
|
|
$
|
46,897
|
|
$
|
-
|
|
$
|
20,305,596
|
|
See
notes
to consolidated financial statements
SIMCLAR,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year
Ended
|
|
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Operating
activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,362,227
|
|
$
|
2,862,740
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
& amortization
|
|
|
2,132,354
|
|
|
1,807,917
|
|
Loss
/ (Gain) on disposal of property & equipment
|
|
|
3,725
|
|
|
(26,961
|
)
|
Other
liabilities
|
|
|
-
|
|
|
400,000
|
|
Deferred
income tax benefit
|
|
|
(93,376
|
)
|
|
(139,371
|
)
|
Changes
relating to operating activities from:
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(2,883
|
)
|
|
(3,363,108
|
)
|
Amounts
payable to major stockholder, net
|
|
|
(904,627
|
)
|
|
(529,324
|
)
|
Inventories,
net
|
|
|
(1,405,406
|
)
|
|
(3,268,144
|
)
|
Prepaid
expenses and other current assets
|
|
|
(16,653
|
)
|
|
(181,017
|
)
|
Accounts
payable
|
|
|
5,051,153
|
|
|
5,414,486
|
|
Accrued
expenses
|
|
|
167,530
|
|
|
190,683
|
|
Income
taxes refundable
|
|
|
(91,686
|
)
|
|
(387,275
|
)
|
Net
cash provided by operating activities
|
|
|
7,202,358
|
|
|
2,780,626
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
|
(2,093,153
|
)
|
|
(1,131,369
|
)
|
Proceeds
from sale of property and equipment
|
|
|
520,988
|
|
|
234,367
|
|
Acquisition
of subsidiaries, net of cash acquired
|
|
|
|
|
|
|
|
Simclar
(Mexico), Inc.
|
|
|
-
|
|
|
(54,896
|
)
|
Simclar
Interconnect Technologies, Inc. (Litton)
|
|
|
-
|
|
|
(16,122,149
|
)
|
Net
cash used in investing activities
|
|
|
(1,572,165
|
)
|
|
(17,074,047
|
)
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
Borrowing
on bank line of credit
|
|
|
10,455,269
|
|
|
2,498,907
|
|
Repayments
on bank line of credit
|
|
|
(7,375,053
|
)
|
|
(2,423,531
|
)
|
Payments
on note payable to major stockholder
|
|
|
(1,344,139
|
)
|
|
-
|
|
Proceeds
from long-term borrowings
|
|
|
-
|
|
|
16,000,000
|
|
Debt
issuance costs
|
|
|
-
|
|
|
(403,042
|
)
|
Payments
on long-term borrowings
|
|
|
(7,040,989
|
)
|
|
(2,129,692
|
)
|
Net
cash (used in) / provided by financing activities
|
|
|
(5,304,912
|
)
|
|
13,542,642
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate fluctuations on cash
|
|
|
21,103
|
|
|
(770
|
)
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
346,384
|
|
|
(751,549
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
82,154
|
|
|
833,703
|
|
Cash
and cash equivalents at end of year Cash paid for Interest
expense
|
|
$
|
428,538
|
|
$
|
82,154
|
|
|
|
|
|
|
|
|
|
Cash
paid for Interest expense
|
|
$
|
1,810,490
|
|
$
|
1,719,762
|
|
See
notes
to consolidated financial statements
SIMCLAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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)”), Simclar de Mexico, S.A. de C.V. (“Simclar de Mexico”), Techdyne
(Europe) Limited (“Techdyne (Europe)”), Simclar (North America), Inc. (“SNAI”),
and Simclar Interconnect Technologies, Inc. (“SIT”), collectively referred to as
the “company.” During 2003, the company changed its name to Simclar, Inc. from
Techdyne, Inc. following a merger with its wholly owned subsidiary, Lytton
Inc.
SIT was acquired during the first quarter of 2006 (refer to Note 11). 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 privately owned company incorporated in the United
Kingdom.
Business
The
company operates in one business segment, manufacturing electronic and
electro-mechanical products in the data processing, telecommunication,
instrumentation and food preparation equipment industries.
Cash
and Cash Equivalents
The
company considers all highly liquid investments with an original maturity
of
three months or less as cash equivalents. The carrying amounts reported in
the
balance sheets for cash and cash equivalents approximate fair values. The
credit
risk associated with cash and cash equivalents is considered low due to the
high
quality of the financial institutions in which the assets are
invested.
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 a portion of fixed
and
variable-manufacturing overhead. The company reviews its inventories on a
regular basis to identify parts that have not been used in the manufacturing
process during the previous two year period and are not believed to be required
for use in the manufacturing process. The carrying value of these identified
parts is reduced to estimated realizable value with a charge to the allowance
for obsolescence. Additional write-downs, if required, are recorded in the
period identified.
Property,
Plant and Equipment
Property,
plant and equipment is stated on the basis of cost. Depreciation is computed
by
the straight-line method over the useful lives of the assets, generally
estimated to be 25 years for buildings and improvements; 3 to 10 years for
machinery, computer and office equipment; 3 to 10 years for tools and dies;
and
5 to 15 years or the expected life of the related lease which ever is shorter
for leasehold improvements. Replacements and betterments that extend the
lives
of assets are capitalized. Maintenance and repairs are expensed as incurred.
Upon the sale or retirement of assets, the related cost and accumulated
depreciation are removed and any gain or loss is recognized. Depreciation
expense totaled approximately $1,700,000 and $1,608,000 for the years ended
December 31, 2007 and 2006 respectively.
SIMCLAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
Continued
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-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.
Deferred
Expenses
Deferred
expenses, except for deferred loan costs, are amortized on the straight-line
method, over their estimated benefit period ranging to 60 months. Deferred
loan
costs are amortized over the lives of the respective loans. Amortization
expense
for the years ended December 31, 2007 and 2006 was approximately $529,000
and
$282,000 respectively.
Goodwill
and Intangible Assets
Goodwill
is the excess of the purchase price paid over the fair value of the businesses
acquired and is not amortized. Intangible assets with determinable lives
are amortized over the estimated useful life in a manner reflective of the
pattern in which the economic benefits of the intangible assets are used
up. Goodwill and indefinite-lived intangibles are evaluated for impairment
on an annual basis, or more frequently if impairment indicators arise, using
fair-value-based tests.
For
the
year ended December 31, 2007, the company changed the reporting unit for
goodwill impairment testing purposes and changed the date of its annual goodwill
impairment test from various dates throughout the year to the first day
following the end of the 3
rd
quarter.
Management believes that the accounting change is preferable in the
circumstances because it better aligns management’s consideration of the
operations of the company and also better aligns the timing of the company’s
long-range planning with this test, as the impairment test is dependent on
the
results of the company’s long-range planning process. During 2007 and 2006,
the company evaluated goodwill and other intangible assets in accordance
with
SFAS No. 142 and determined there was no impairment related to the carrying
value of such assets. The goodwill recognized from acquisitions is:
Balance
at January 1, 2006
|
|
$
|
5,917,938
|
|
Goodwill
arising from acquisitions in 2006
|
|
|
3,492,766
|
|
Balance
at December 31, 2006 and 2007
|
|
$
|
9,410,704
|
|
SIMCLAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
Continued
Identifiable
intangible assets consist of the following:
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Non-compete
agreement
|
|
$
|
70,880
|
|
|
($51,436
|
)
|
$
|
70,880
|
|
|
($26,939
|
)
|
Customer
List
|
|
$
|
1,472,207
|
|
|
($586,810
|
)
|
$
|
1,472,207
|
|
|
($185,148
|
)
|
|
|
$
|
1,543,087
|
|
|
($638,246
|
)
|
$
|
1,543,087
|
|
|
($212,087
|
)
|
Amortization
expense for intangible assets was approximately $426,000 for 2007 and $202,000
for 2006. Estimated amortization expense for the next five years is as follows:
2008-$372,000; 2009-$280,000; 2010-$138,000; and 2011 $114,000. At
December 31, 2007, the weighted average amortization period for intangible
assets was 3.9 years.
Income
Taxes
Deferred
income taxes at the end of each period are determined by applying enacted
tax
rates applicable to future periods in which the taxes are expected to be
paid or
recovered on differences between the financial accounting and tax basis of
assets and liabilities.
Effective
January 1, 2007, the company adopted Financial Accounting Standards Board
(FASB)
Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes
- an
interpretation of FASB Statement No. 109, Accounting for Income Taxes.”
FIN 48 requires that the financial statement effects of a tax position
taken or expected to be taken in a tax return to be recognized in the financial
statements when it is more likely than not, based on the technical merits,
that
the position will be sustained upon examination. The adoption of FIN 48
had no impact on the company’s consolidated financial statements.
SIMCLAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
Continued
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. The company had no stock options or warrants outstanding
during the reported periods. Accordingly, for the years presented, there
is no
dilutive effect.
Following
is a reconciliation of amounts used in the computations:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Net
income - numerator basic computation
|
|
$
|
2,362,227
|
|
$
|
2,862,740
|
|
Weighted
average shares - denominator basic computation
|
|
|
6,465,345
|
|
|
6,465,345
|
|
Earnings
per share
|
|
$
|
0.37
|
|
$
|
0.44
|
|
Estimated
Fair Value of Financial Instruments
The
carrying value of cash, accounts receivable and debt in the accompanying
financial statements approximate their fair value because of the short-term
maturity of these instruments, or in the case of debt, because such instruments
bear variable interest rates which approximate market rates.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. The accounting estimates and
assumptions that place the most significant demands on management’s judgment
include, but are not limited to, doubtful accounts receivable, income taxes,
impairment of goodwill and long-lived assets, business combinations, and
inventory obsolescence. These estimates and assumptions are based on information
presently available and actual results could differ from those
estimates.
SIMCLAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
Continued
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 which, under
contractual terms, is 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 t
he
product to
the
customer which, under contractual terms, is generally FOB shipping
point.
Trade
receivables are uncollateralized customer obligations due under normal trade
terms generally requiring payment 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 undertakes a series of actions based upon the aging of past due trade
receivables, including letters and direct customer contact. Accounts are
deemed
uncollectible based on a customer’s payment experience and current financial
condition.
Shipping
Costs
Shipping
costs related to the transportation of products sold to customers are charged
to
cost of goods sold.
Warranty
Costs
The
company warrants that products used in its manufacturing process are free
from
defects in material and workmanship for a period of one year from shipment
to
the customer. If the manufactured product fails in this period due to defect,
the company will rework the product until it functions per the customer’s
specifications. The costs associated with the rework of any return of defective
products are treated as a period expense when the products are reshipped
to the
customer. The company estimates the cost or reworking defective products
is
historically less than 1% of its annual sales.
SIMCLAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
Continued
Foreign
Operations
The
financial statements of the foreign subsidiaries have been translated into
U.S.
dollars in accordance with SFAS No. 52. All balance sheet accounts have been
translated using the current exchange rates at the balance sheet date. Income
statement accounts have been translated using the average exchange rate for
the
period. The translation adjustments resulting from the change in exchange
rates
from period to period have been reported separately as a component of
accumulated other comprehensive income in stockholders’ equity. Foreign currency
transaction gains and losses, which are not material, are included in the
results of operations. These gains and losses result from exchange rate changes
between the time transactions are recorded and settled, and for unsettled
transactions, exchange rate changes between the time the transactions are
recorded and the balance sheet date.
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 and is presented in the consolidated statement of stockholders’
equity.
Reclassifications
Certain
expense categories within the prior-year amounts for cost of goods sold and
selling, general, and administrative expenses have been reclassified to conform
to the current-year presentation.
New
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51,” (SFAS 160).
SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated
Financial Statements,” to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This standard defines a noncontrolling interest, sometimes called
a
minority interest, as the portion of equity in a subsidiary not attributable,
directly or indirectly, to a parent. SFAS 160 requires, among other items,
that
a noncontrolling interest be included in the consolidated statement of financial
position within equity separate from the parent’s equity; consolidated net
income to be reported at amounts inclusive of both the parent’s and
noncontrolling interest’s shares and, separately, the amounts of consolidated
net income attributable to the parent and noncontrolling interest all on
the
consolidated statement of income; and if a subsidiary is deconsolidated,
any
retained noncontrolling equity investment in the former subsidiary be measured
at fair value and a gain or loss be recognized in net income based on such
fair
value. SFAS 160 becomes effective for the company on January 1, 2009. The
company is currently evaluating the potential impact of SFAS 160 on its
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,”
(SFAS 141(R)). SFAS 141(R) replaces SFAS No. 141, “Business Combinations,”
(SFAS 141) and retains the fundamental requirements in SFAS 141, including
that
the purchase method be used for all business combinations and for an acquirer
to
be identified for each business combination. This standard defines the acquirer
as the entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control instead of the date that the consideration is transferred.
SFAS
141(R) requires an acquirer in a business combination, including business
combinations achieved in stages (step acquisition), to
SIMCLAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
Continued
recognize
the assets acquired, liabilities assumed, and any noncontrolling interest
in the
acquiree at the acquisition date, measured at their fair values of that date,
with limited exceptions. It also requires the recognition of assets acquired
and
liabilities assumed arising from certain contractual contingencies as of
the
acquisition date, measured at their acquisition-date fair values. SFAS 141(R)
becomes effective for the company for any business combination with an
acquisition date on or after January 1, 2009 and will only impact the
company’s financial statements for acquisitions completed subsequent to that
date.
In
June 2006, the Financial Accounting Standards Board issued Financial
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109”, (“FIN 48”). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109,
Accounting
for Income Taxes.
The
provisions of FIN 48 prescribe a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position
taken
or expected to be taken in a tax return. In addition, the provisions of FIN
48
provide guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The provisions
of FIN
48 are effective for fiscal years beginning after December 15, 2006, or
January 1, 2007 as to the company. The company adopted FIN 48 in the first
quarter of 2007 as required with no material adverse effect on the company’s
consolidated financial position or results of operations.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS No. 157”) to clarify the definition of fair value,
establish a framework for measuring fair value and expand the disclosures
on
fair value measurements. SFAS No. 157 defines fair value as the price that
would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (an exit
price).
SFAS No. 157 also stipulates that, as a market-based measurement, fair value
measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability, and establishes
a fair
value hierarchy that distinguishes between (a) market participant assumptions
developed based on market data obtained from sources independent of the
reporting entity (observable inputs) and (b) the reporting entity’s own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). SFAS No.
157
becomes effective for the company in its fiscal year ending December 31,
2008.
The company is currently evaluating the impact of the provisions of SFAS
No. 157
on its consolidated financial statements.
NOTE
2—INVENTORIES
Inventories
are comprised of the following:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Raw
materials and supplies
|
|
$
|
19,285,200
|
|
$
|
16,992,310
|
|
Work
in process
|
|
|
2,841,656
|
|
|
2,829,592
|
|
Finished
goods
|
|
|
1,902,052
|
|
|
1,988,934
|
|
Allowance
for obsolescence
|
|
|
(2,364,466
|
)
|
|
(1,551,799
|
)
|
|
|
$
|
21,664,442
|
|
$
|
20,259,037
|
|
SIMCLAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3—ACCRUED EXPENSES
Accrued
expenses are comprised of the following:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Accrued
compensation
|
|
$
|
894,358
|
|
$
|
975,130
|
|
Accrued
property taxes
|
|
|
141,756
|
|
|
160,338
|
|
Accrued
commissions
|
|
|
95,692
|
|
|
166,640
|
|
Other
|
|
|
775,666
|
|
|
438,691
|
|
|
|
$
|
1,907,472
|
|
$
|
1,740,799
|
|
NOTE
4—LONG-TERM DEBT
In
December 2005, we entered into two amended credit facilities and one new
credit
facility with Bank of Scotland in Edinburgh, Scotland (“BoS”) consisting
of:
Borrower
|
|
Type of facility
|
|
Original
amount
|
|
Balance
at
December 31, 2007
|
Simclar,
Inc.
|
|
Working
capital
|
|
|
$
|
7,500,000
|
|
|
$
|
7,494,408
|
|
Simclar,
Inc.
|
|
Term
loan -four tranches (see
|
|
|
|
|
|
|
|
|
|
|
|
detail
of tranches below)
|
|
|
$
|
21,650,000
|
|
|
$
|
12,300,000
|
|
Simclar
Interconnect
|
|
|
|
|
|
|
|
|
|
|
|
Technologies,
Inc.
|
|
Working
capital
|
|
|
$
|
1,000,000
|
|
|
$
|
651,579
|
|
Effective
January 26, 2007, we entered into amendments of the two working capital
facilities. The term of the $1 million working capital facility of Simclar
IT,
originally entered into in December 2005, was extended to January 28, 2008.
The
Simclar, Inc. $5 million working capital facility, last amended in December
2005, was increased to
$7.5
million, and its maturity date was extended to January 28, 2008. No other
material changes were made to either facility by the amendments. Effective
March
27 2008, the facilities were further amended to extend the maturity dates
of
each to March 17, 2009. No other material changes were made to either facility
by the 2008 amendments, except that the default interest rate under both
facilities was increased from 1.5% to 2.0% and the interest rate under the
$7.5
million facility was increased from 1.5% over LIBOR to 1.75% over
LIBOR.
Interest
on the Simclar, Inc. working capital facility
accrues
at an annual rate equal to LIBOR plus 1.5% (increasing to 1.75% after March
2008), plus an amount, rounded to the nearest eighth of a percent, to cover
any
increases in certain regulatory costs incurred by the bank. The company may
elect to pay interest on advances every one, three or six months, with LIBOR
adjusted to correspond to the interest payment period selected by the
company
.
The
interest rate for the working capital facility at December 31, 2007 was 6.0%
based on the one month election.
Interest
on the Simclar Interconnect Technologies, Inc. working capital facility is
a
margin over LIBOR determined by a ratio of net borrowings to EBITDA for any
given test period. The margin percentage can range from 1.75% to 2.5%. The
interest rate for this working capital facility at December 31, 2007 was
7.0%.
The
term
loan interest is also determined by a margin over LIBOR related to the ratio
of
net borrowings to EBITDA for any given test period. The margin percentage
can
range from 1.5% to 2.5%. The term debt interest rate was 6.732% for tranches
A
and B, 7.355% for tranche C, and 8.37% for tranche D at December 31, 2007
SIMCLAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4
—
LONG-TERM DEBT –
Continued
Tranche
|
|
Principal
Amount
|
|
Purpose
|
|
Payments
|
|
A
|
|
$
|
4,250,000
|
|
|
Refinance
existing facilities
|
|
|
Seventeen
quarterly payments of $250,000 beginning October 2004 through October
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
B
|
|
$
|
1,400,000
|
|
|
Dayton
property acquisition
|
|
|
Twenty-eight
quarterly payments of $50,000 beginning January 2005 through October
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
C
|
|
$
|
13,000,000
|
|
|
Acquisition
of certain assets of the Litton Interconnect Technologies assembly
operations
|
|
|
Thirteen
quarterly payments of $500,000 beginning December 2006 through December
2009, four quarterly payments of $250,000 from March 2010 through
December
2010, four quarterly payments of $750,000 from March 2011 through
December
2011 and four quarterly payments of $625,000 from March 2012 through
December 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
D
|
|
$
|
3,000,000
|
|
|
Acquisition
of certain assets of the Litton Interconnect Technologies assembly
operations
|
|
|
Single
payment due December 31, 2010
|
|
The
weighted average interest rate on long-term debt for 2007 and 2006 was 7.6%
and
7.7% respectively.
All
of
the assets of the company collateralize the credit facilities. The credit
facilities contain affirmative and negative covenants.
In
addition, our credit facilities require us to maintain:
|
·
|
consolidated
adjusted net worth greater than $15,000,000 from March 31, 2006 (tested
on
a quarterly basis);
|
|
·
|
a
ratio of consolidated current assets to consolidated net borrowing
prior
to December 31, 2007 of not less than 1:1 and thereafter not to be
less
than 1.5:1 (tested on a quarterly basis);
|
|
·
|
a
ratio of consolidated trade receivables to consolidated net borrowing
of
not less than 0.5:1 prior to December 31, 2007 and not less than
0.75:1
thereafter (tested on a quarterly basis); and
|
|
·
|
a
ratio of EBIT to total interest not less than 3:1 until March 31,
2006;
not less than 3.5:1 from April 1, 2006 to December, 2007; and not
less
than 4:1 thereafter (tested on a quarterly basis beginning December
31,
,
2005)
|
SIMCLAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4
—
LONG-TERM DEBT – Continued
|
·
|
a
ratio of net borrowings to EBITDA not to exceed 5:1 through December
31,
2006; not to exceed 4.5:1 from January 1, 2007 to December 31, 2007;
not
to exceed 4:1 from January 1, 2008 to December 31, 2008; not to exceed
3.5:1 from January 1, 2009 to December 31, 2009; and not to exceed
3:1
thereafter (tested on a quarterly basis beginning December 31, 2006).
|
The
company did not satisfy the EBIT to total interest coverage covenant contained
in the credit facilities at December 31, 2006. Bank of Scotland agreed to
suspend the effectiveness of this covenant until the earlier of December 31,
2007 or the negotiation of revised financial covenants. In this regard, the
company was asked to submit by April 30, 2007 a financial projection for the
remainder of 2007 showing relevant measurements against the financial covenants.
The company submitted the requested projections as required. EBIT to total
interest coverage pending renegotiation of the covenant must exceed 3:1 on
a
quarterly basis and the other financial covenants must be complied with. The
company is in compliance with the 3:1 interest coverage ratio and management
is
of the opinion that such compliance will be maintained during such
period.
In
connection with the credit facilities, the company and its subsidiaries entered
into an amended security agreement, pursuant to which BoS was granted a security
interest in substantially all of their respective assets to secure the company's
borrowings under its credit facilities, and guarantees pursuant to which SIT
and
SNAI guaranteed the obligations of the company to BoS under the credit
facilities. Additionally, the company and Simclar (Mexico) entered into an
amended pledge agreement, pursuant to which all of the shares owned by the
company in its subsidiaries, other than Simclar de Mexico were pledged as
security for the company's obligations to BoS under the credit facilities.
Simclar Group Limited has provided a guarantee to BoS in respect of loans
advanced to Simclar, Inc. up to a maximum amount of $10,000,000; likewise,
Simclar, Inc. has guaranteed certain Simclar Group Limited’s loans from BoS also
up to a maximum amount of $10,000,000. In both cases, this maximum amount
reduces, subject to certain ratios of borrowings to EBITDA being
achieved.
Long-term
debt outstanding:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Term
loan
|
|
$
|
12,300,000
|
|
$
|
18,500,000
|
|
Less
current portion
|
|
$
|
2,700,000
|
|
|
3,200,000
|
|
|
|
|
9,600,000
|
|
$
|
15,300,000
|
|
Scheduled
maturities of
long-term debt outstanding at December 31, 2007 are approximately: 2008 -
$2,700,000; 2009 - $2,200,000; 2010 - $4,200,000; and 2011 - $3,200,000.
Interest payments on all of the above debt amounted to approximately $1,233,000
and $1,061,000 in 2007 and 2006 respectively.
On
August
17, 2006, Simclar (Mexico) and Simclar entered into an agreement with Winsson
Enterprises Co., Ltd. (“Winsson”) and its affiliate, Computronics International
Corp. This agreement replaces a deferred trade payables agreement that expired
on July 14, 2006. The agreement is a non-cash refinance of approximately
$2,495,000 of trade accounts payable to long-term debt to be repaid within
a
three year period with an interest rate of 3% per annum. The agreement calls
for
quarterly payments of principal and interest of $225,000 commencing August
15,
2006, with a final payment of approximately $123,400 payable on May 15, 2009.
The debt is subordinated to the BoS debt. The balance at December 31, 2007
was
approximately $1,224,000 and is reflected
as
subordinated long-term debt on the face of the financial statements, net of
$875,000 reflected in current portion of long-term debt.
SIMCLAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5
—
INCOME TAXES
For
financial reporting purposes, income before income taxes includes the following
components:
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
United
States income
|
|
$
|
3,305,626
|
|
$
|
3,841,168
|
|
Foreign
income
|
|
|
407,184
|
|
|
360,950
|
|
|
|
$
|
3,712,810
|
|
$
|
4,202,118
|
|
Income
tax payments were approximately $1,300,000 and $ 1,356,000 in 2007 and 2006
respectively.
The
components of the current net deferred tax asset and long-term net deferred
tax
liability are as follows:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Deferred
tax asset:
|
|
|
|
|
|
Inventory
obsolescence
|
|
$
|
922,142
|
|
$
|
605,201
|
|
Costs
captialized in ending inventory
|
|
|
142,338
|
|
|
129,880
|
|
Accrued
expenses
|
|
|
68,901
|
|
|
185,039
|
|
Other
|
|
|
80,779
|
|
|
114,412
|
|
Total
current asset
|
|
|
1,214,160
|
|
|
1,034,532
|
|
|
|
|
|
|
|
|
|
Deferred
tax asset (liability)
|
|
|
|
|
|
|
|
NOL
carryforwards
|
|
|
8,368,698
|
|
|
8,286,335
|
|
Depreciation
and amortization
|
|
|
(500,310
|
)
|
|
(414,062
|
)
|
Other
|
|
|
(14,973
|
)
|
|
(14,969
|
)
|
Total
long-term asset
|
|
|
7,853,415
|
|
|
7,857,304
|
|
Less:
valuation allowance
|
|
|
(8,368,698
|
)
|
|
(8,286,335
|
)
|
Net
long-term liabilty
|
|
|
(515,283
|
)
|
|
(429,031
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
$
|
698,877
|
|
$
|
605,501
|
|
During
2005, the company acquired SNAI and the related net operating loss (NOL)
carryforwards. At December 31, 2007, SNAI had unused U.S. federal and state
net
operating loss carryforwards of approximately $22,200,000 and $8,800,000,
respectively, generally expiring from 2022 through 2025. Based on the
available evidence at the date of the acquisition and as of December 31, 2007
regarding the likelihood of utilizing these loss carryforwards before the
expiration date, a valuation allowance has been provided for the full amount
of
possible
tax
benefit. The company has not provided a valuation allowance for the remainder
of
the deferred tax asset based on taxes paid in the current year and available
carryback years.
During
2007 the company’s 2005 federal income tax return was examined by the Internal
Revenue Service. The examination resulted in a tax refund of
$158,739.
SIMCLAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5
—
INCOME TAXES – Continued
Significant
components of the provision for income taxes are as follows:
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Current:
|
|
|
|
|
|
Federal
|
|
|
1,273,689
|
|
|
1,276,535
|
|
State
and Local
|
|
|
112,944
|
|
|
124,616
|
|
Foreign
|
|
|
57,326
|
|
|
77,597
|
|
|
|
|
1,443,959
|
|
|
1,478,748
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
|
|
(83,799
|
)
|
|
(149,272
|
)
|
State
|
|
|
(9,577
|
)
|
|
9,901
|
|
|
|
|
(93,376
|
)
|
|
(139,371
|
)
|
|
|
|
1,350,583
|
|
|
1,339,377
|
|
Simclar
de Mexico files a separate income tax return in Mexico.
The
reconciliation of income tax rates attributable to income before income taxes
computed at the U.S. federal statutory rates to income tax expense
is:
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Statutory
tax rate (34%) applied to income before
income
taxes
|
|
|
34.0
|
%
|
|
34
|
%
|
Increases
(reduction) in taxes resulting from :
|
|
|
|
|
|
|
|
State
income taxes expense net of federal
|
|
|
|
|
|
|
|
income
tax effect
|
|
|
2.0
|
%
|
|
1.9
|
%
|
Tax
rate differential relating to tax benefit of
foreign operating
income
|
|
|
-2.2
|
%
|
|
-1.1
|
%
|
Nondeductible
items
|
|
|
1.3
|
%
|
|
1.2
|
%
|
Refund
of prior U.S. income taxes
|
|
|
0.1
|
%
|
|
-0.6
|
%
|
Settlement
of U.S. income taxes
|
|
|
0.0
|
%
|
|
-2.2
|
%
|
Other
|
|
|
1.2
|
%
|
|
-1.3
|
%
|
|
|
|
36.4
|
%
|
|
31.9
|
%
|
The
earnings of the company’s Mexican subsidiary are expected to be permanently
reinvested in the operations of that subsidiary. As such, the company has
historically not recorded a deferred tax liability based on the subsidiary’s
accumulated undistributed earnings. As of December 31, 2007 undistributed
earnings were approximately $768,000.
SIMCLAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6
—
TRANSACTIONS WITH SIMCLAR GROUP
The
company’s parent, Simclar Group, provides certain financial and administrative
services to the company under a service agreement. The amount of expenses
incurred under the service agreement totaled $480,000 per year in 2007 and
2006.
The
company has a net receivable due from Simclar Group and related parties of
approximately $905,000 at December 31, 2007 compared to a net payable due to
Simclar Group and related parties of $1,344,000 at December 31, 2006. The net
receivable due from Simclar Group incurs interest of LIBOR + 1.5%. For
additional information related to pledge agreements and guarantees with BoS
refer to Note 4.
NOTE
7
—
RELATED PARTY TRANSACTIONS
For
2007
and 2006 the company had sales with Simclar Corp., a related party of Simclar
Group, totaling approximately $720,000 and $1,521,000 respectively, and sales
to
Simclar Group of approximately $210,000 and $94,000 respectively. The company
had net receivables from related parties as of December 31, 2007 of
approximately $166,000 from Simclar Corp. and approximately $109,000 from
Simclar China.
NOTE
8
—
COMMITMENTS AND CONTINGENCIES
Commitments
The
company has leases for several facilities which expire at various dates through
2017 with renewal options for a period of five years at the then fair market
rental value. The company’s aggregate lease commitments at December 31, 2007,
are approximately: 2008—$1,088,000, 2009—$1,092,000, 2010 —$1,095,000,
2011—$664,000, 2012 — $320,000 and thereafter —$1,546,000. Total rent
expense was approximately $1,132,000 and $1,040,000 for the years ended December
31, 2007 and 2006 respectively.
Retirement
Plan
The
company sponsors a 401(k) Profit Sharing Plans covering substantially all of
its
employees, excluding Techdyne (Europe) and Simclar (Mexico). The plan offers
a
50% corporate match based on the first 4% of each employee’s annual earnings
contributed to the plan. The matching expense amounted to approximately $105,000
and $95,000 for the years ended December 31, 2007, and 2006
respectively.
Contingencies
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, results of operations, or cash flow.
NOTE
9
—
QUARTERLY FINANCIAL INFORMATION
(Unaudited)
The
following summarizes certain quarterly operating data:
|
|
2007
|
|
2006
|
|
|
|
Mar
31
|
|
Jun
30
|
|
Sep
30
|
|
Dec
31
|
|
Mar
31
|
|
Jun
30
|
|
Sep
30
|
|
Dec
31
|
|
|
|
(In
thousands except per share data)
|
|
Net
Sales
|
|
$
|
31,408
|
|
$
|
37,119
|
|
$
|
33,150
|
|
$
|
34,740
|
|
$
|
21,823
|
|
$
|
30,399
|
|
$
|
30,654
|
|
$
|
33,156
|
|
Gross
Profit
|
|
|
3,826
|
|
|
4,964
|
|
|
3,224
|
|
|
2,176
|
|
|
2,791
|
|
|
3,774
|
|
|
3,912
|
|
|
3,520
|
|
Net
Income
|
|
|
639
|
|
|
1,372
|
|
|
415
|
|
|
(64)
|
|
|
|
|
|
790
|
|
|
618
|
|
|
949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share
|
|
$
|
0.10
|
|
$
|
0.21
|
|
$
|
0.07
|
|
$
|
(0.01
|
)
|
$
|
0.08
|
|
$
|
0.12
|
|
$
|
0.10
|
|
$
|
0.14
|
|
SIMCLAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10
—
MAJOR CUSTOMERS
Sales
to
major customers are as follows:
|
|
Year
Ended December 31,
|
|
Major
Customers
|
|
|
2007
|
|
|
2006
|
|
Customer
1
|
|
|
21
|
%
|
|
20
|
%
|
Customer
2
|
|
|
12
|
%
|
|
8
|
%
|
Customer
3
|
|
|
12
|
%
|
|
6
|
%
|
The
loss
of or substantially reduced sales to these customers would have an adverse
effect on the company’s operations if such sales were not replaced. A
significant customer would be any customer with annual sales volume from the
company of 10% or more. Customers 1 & 3 make up approximately 20% and 11%
respectively of the accounts receivable balance at the year end.
NOTE
11—ACQUISTION OF CERTAIN U.S. ASSETS OF LITTON SYSTEMS,
INC.
In
2006,
the company and Simclar Interconnect Technologies, Inc., its newly-formed wholly
owned subsidiary ("Simclar IT") purchased certain U.S. assets associated with
the backplane assembly business of the Interconnect Technologies Division of
Litton Systems, Inc. ("Litton"), a subsidiary of Northrop Grumman Corporation,
for $16 million in cash (subject to certain purchase price adjustments) and
the
assumption of certain liabilities (the "Acquisition"). At the same time, Simclar
Group Limited also acquired from Litton Systems International, Inc. and Litton
U.K. Ltd. all of the share equity of Litton Electronics (Suzhou) Co. Ltd.,
a
subsidiary organized in China, and certain assets of the Interconnect
Technologies Division assembly business in the U.K., respectively, through
its
subsidiary Simclar Interconnect Technologies Limited.
In
connection with the Acquisition, the company and Simclar IT entered into an
occupancy agreement pursuant to which Simclar IT occupied space in Litton's
Springfield, Missouri facility until April 2007, and a transition services
agreement pursuant to which Litton provided certain administrative services
to
the company and Simclar IT to support its operations during the occupancy
period.
The
company financed the purchase of the assets under its amended term loan facility
with the BoS.
In
connection with the loan, the company, Simclar IT and other subsidiaries entered
into an amended security agreement, pursuant to which BoS was granted a security
interest in substantially all of their respective assets
to
secure
the company's borrowings under its credit facilities, and a guaranty pursuant
to
which Simclar IT guarantied the obligations of the company to BoS under the
credit facilities. Additionally, the company and Simclar (Mexico), Inc. entered
into an amended pledge agreement, pursuant to which all of the shares owned
by
the company in its subsidiaries other than Simclar de Mexico were pledged as
security for the company's obligations to BoS under the credit
facilities.
SIMCLAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11—ACQUISTION OF CERTAIN U.S. ASSETS OF LITTON SYSTEMS, INC. -
Continued
The
finalized purchase price allocation related to this acquisition is as
follows:
Current
assets
|
|
$
|
13,149,821
|
|
Equipment
|
|
|
2,539,195
|
|
Goodwill
|
|
|
3,373,397
|
|
Intangibles
Total assets acquired
|
|
|
1,470,000
|
|
|
|
$
|
20,532,413
|
|
Current
liabilities
|
|
|
4,410,264
|
|
Total
liabilities assumed
|
|
$
|
4,410,264
|
|
Net
assets acquired
|
|
$
|
16,122,149
|
|
The
recorded intangible and goodwill arising from the acquisition are expected
to be
tax deductible.
NOTE
12— PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The
following table summarizes selected unaudited pro forma financial information
for year ended December 31, 2006 as if Litton had been acquired as of January
1,
2006. The unaudited pro forma financial information includes adjustments for
intercompany transactions.
|
|
Year
Ended
December 31, 2006
|
|
Pro
forma sales
|
|
$
|
125,600,000
|
|
Pro
forma net income
|
|
$
|
3,600,000
|
|
Pro
forma earnings per share:
|
|
$
|
0.56
|
|
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 ultimately be achieved from combining
the
operations.
NOTE
13—SUBSEQUENT EVENTS
In
the
fourth quarter of 2007, management of Simclar, Inc. decided to transfer
customers and operations at Simclar North America (“SNAI”) to Simclar de Mexico.
This transaction was the result of our on-going strategic review of our
operations. As a result of the transaction, the company will realize losses
to
be recorded in fiscal year 2008 of approximately $700,000.
Simclar (CE) (USOTC:SIMC)
Historical Stock Chart
From May 2024 to Jun 2024
Simclar (CE) (USOTC:SIMC)
Historical Stock Chart
From Jun 2023 to Jun 2024