UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
ý
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended September 30, 2008
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from ________________ to
________________
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Commission
file number:
001-13924
SIMCLAR,
INC.
(Exact
name of registrant as specified in its charter)
Florida
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59-1709103
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(State
or other jurisdiction of
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(I.R.S.
Employer
|
incorporation
or organization)
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Identification
No.)
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2230
West 77
th
Street, Hialeah, FL
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33016
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(Address
of principal executive offices)
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(Zip
Code)
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(305)
556-9210
(Registrant’s
telephone number, including area code)
[None]
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
o
No
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
Accelerated
filer
o
Non-accelerated
filer
o
Smaller
reporting company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Class
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|
Outstanding at September 30, 2008
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Common
Stock, $.01 par value per share
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|
6,465,345
shares
|
SIMCLAR,
INC.
Form
10-Q
For
the
quarter ended September 30, 2008
TABLE
OF
CONTENTS
PART
I — FINANCIAL INFORMATION
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Item
1. Condensed Consolidated Financial Statements
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1)
Consolidated Balance Sheets as of September 30, 2008 (unaudited)
and
December 31, 2007
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3
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|
2)
Consolidated Statements of Operations for the three months and nine
months
ended September 30, 2008 and September 30, 2007
(unaudited)
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5
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|
3)
Consolidated Statements of Cash Flows for the nine months ended September
30, 2008 and September 30, 2007 (unaudited) .
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6
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4)
Notes to Consolidated Financial Statements as of September 30, 2008
(unaudited)
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7
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Item
2. Management's Discussion and Analysis of Financial Condition and
Results
of Operations
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11
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Item
4T. Controls and Procedures
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21
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PART
II — OTHER INFORMATION
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Item
1. Legal Proceedings
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23
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Item
1A. Risk Factors
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23
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Item
6. Exhibits
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23
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Signatures
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23
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PART
I –
FINANCIAL INFORMATION
Item
1
Financial Statements
SIMCLAR,
INC.
AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
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September 30,
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December 31,
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|
|
|
2008
|
|
2007
|
|
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(UNAUDITED)
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ASSETS
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|
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Current
assets:
|
|
|
|
|
|
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Cash
and cash equivalents
|
|
$
|
578,703
|
|
$
|
428,538
|
|
Accounts
receivable, less allowances of $175,000and $236,000 at September
30, 2008
and December 31, 2007, respectively
|
|
|
11,961,271
|
|
|
20,804,552
|
|
Amounts
receivable from major stockholder, net
|
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|
1,915,100
|
|
|
904,627
|
|
Inventories,
less allowances for obsolescence of $2,271,000 at September 30,2008
and
$2,364,000 at December 31, 2007
|
|
|
18,992,207
|
|
|
21,664,442
|
|
Prepaid
expenses and other current assets
|
|
|
717,111
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|
654,509
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|
Income
taxes receivable
|
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|
2,222,554
|
|
|
107,091
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|
Deferred
income taxes
|
|
|
1,214,160
|
|
|
1,214,160
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|
Total
current assets
|
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|
37,601,106
|
|
|
45,777,919
|
|
|
|
|
|
|
|
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Property
and equipment:
|
|
|
|
|
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Land
and improvements
|
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|
547,512
|
|
|
547,512
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Buildings
and building improvements
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1,235,904
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|
1,235,904
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|
Machinery,
computer and office equipment
|
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15,950,920
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|
15,342,401
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Tools
and dies
|
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366,347
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366,347
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Leasehold
improvements
|
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1,722,965
|
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1,957,170
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Construction
in progress
|
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14,748
|
|
|
259,829
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|
Total
property and equipment
|
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|
19,838,396
|
|
|
19,709,163
|
|
Less
accumulated depreciation and amortization
|
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11,794,936
|
|
|
9,922,589
|
|
Net
property and equipment
|
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|
8,043,460
|
|
|
9,786,574
|
|
|
|
|
|
|
|
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Deferred
expenses and other assets, net
|
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|
237,113
|
|
|
366,265
|
|
Goodwill
|
|
|
9,410,704
|
|
|
9,410,704
|
|
Intangible
assets, net
|
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606,618
|
|
|
904,841
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Total
assets
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$
|
55,899,001
|
|
$
|
66,246,303
|
|
See
notes
to consolidated financial statements
SIMCLAR,
INC.
AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Continued)
|
|
September 30,
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December 31,
|
|
|
|
2008
|
|
2007
|
|
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(UNAUDITED)
|
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
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Current
liabilities:
|
|
|
|
|
|
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Line
of credit
|
|
$
|
8,634,235
|
|
$
|
8,145,987
|
|
Accounts
payable
|
|
|
14,236,137
|
|
|
21,447,560
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Accrued
expenses
|
|
|
2,102,809
|
|
|
1,907,472
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|
Current
portion of long-term debt
|
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|
5,923,994
|
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3,575,148
|
|
Total
current liabilities
|
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|
30,897,175
|
|
|
35,076,167
|
|
|
|
|
|
|
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Long-term
debt
|
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|
6,950,000
|
|
|
9,600,000
|
|
Deferred
trade accounts payable
|
|
|
139,209
|
|
|
349,257
|
|
Deferred
income taxes
|
|
|
515,283
|
|
|
515,283
|
|
Other
long term liabilities
|
|
|
400,000
|
|
|
400,000
|
|
Total
liabilities
|
|
|
38,901,667
|
|
|
45,940,707
|
|
|
|
|
|
|
|
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Stockholders'
equity:
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, authorized 10,000,000 shares; issued and
outstanding 6,465,345 shares at September 30, 2008 and December 31,
2007
|
|
|
64,653
|
|
|
64,653
|
|
Capital
in excess of par value
|
|
|
11,446,087
|
|
|
11,446,087
|
|
Retained
earnings
|
|
|
5,421,164
|
|
|
8,747,959
|
|
Accumulated
other comprehensive income
|
|
|
65,430
|
|
|
46,897
|
|
Total
stockholders' equity
|
|
|
16,997,334
|
|
|
20,305,596
|
|
|
|
$
|
55,899,001
|
|
$
|
66,246,303
|
|
See
notes
to consolidated financial statements
SIMCLAR,
INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENT OF OPERATIONS
(UNAUDITED)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
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2008
|
|
2007
|
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|
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|
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|
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Sales
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|
$
|
20,412,389
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|
$
|
33,149,660
|
|
$
|
76,957,209
|
|
$
|
101,675,970
|
|
Cost
of goods sold
|
|
|
19,339,469
|
|
|
29,925,729
|
|
$
|
74,411,273
|
|
|
89,662,160
|
|
Gross
Margin
|
|
|
1,072,920
|
|
|
3,223,931
|
|
|
2,545,936
|
|
|
12,013,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Selling,
general and administrative expenses
|
|
|
1,956,254
|
|
|
2,232,486
|
|
$
|
6,884,258
|
|
|
7,056,573
|
|
(Loss)
/ Income from operations
|
|
|
(883,334
|
)
|
|
991,445
|
|
|
(4,338,322
|
)
|
|
4,957,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
297,439
|
|
|
404,264
|
|
$
|
969,265
|
|
|
1,394,553
|
|
Interest
and other income
|
|
|
(82,194
|
)
|
|
(39,387
|
)
|
$
|
(207,572
|
)
|
|
(112,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
/ Income before income taxes
|
|
|
(1,098,579
|
)
|
|
626,568
|
|
|
(5,100,015
|
)
|
|
3,675,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (credit) / expense
|
|
|
(387,478
|
)
|
|
211,238
|
|
$
|
(1,773,220
|
)
|
|
1,249,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) /income
|
|
$
|
(711,101
|
)
|
$
|
415,330
|
|
$
|
(3,326,795
|
)
|
$
|
2,426,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
/ Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.11
|
)
|
$
|
0.06
|
|
$
|
(0.51
|
)
|
$
|
0.38
|
|
See
notes
to consolidated financial statements
SIMCLAR,
INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CASH FLOWS
(UNAUDITED)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
Operating
activities:
|
|
|
|
|
|
|
|
Net
(loss) / income
|
|
$
|
(3,326,795
|
)
|
$
|
2,426,314
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation
& amortization
|
|
$
|
1,327,803
|
|
|
1,582,068
|
|
Loss
on disposal of property & equipment
|
|
$
|
751,223
|
|
|
(8,685
|
)
|
Changes
relating to operating activities from:
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
8,843,281
|
|
|
497,177
|
|
Amounts
receivable / (payable) to major stockholder, net
|
|
$
|
(1,010,473
|
)
|
|
226,920
|
|
Inventories,
net
|
|
$
|
2,672,234
|
|
|
(4,913,437
|
)
|
Prepaid
expenses and other current assets
|
|
$
|
(62,602
|
)
|
|
133,257
|
|
Accounts
payable
|
|
$
|
(7,211,423
|
)
|
|
7,431,993
|
|
Accrued
expenses
|
|
$
|
324,490
|
|
|
(219,904
|
)
|
Income
taxes refundable
|
|
$
|
(2,115,463
|
)
|
|
842,799
|
|
Net
cash provided from operating activities
|
|
|
192,275
|
|
|
7,998,502
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
$
|
(201,102
|
)
|
|
(1,943,101
|
)
|
Proceeds
from sale of property and equipment
|
|
$
|
163,413
|
|
|
526,134
|
|
Net
cash used in investing activities
|
|
|
(37,689
|
)
|
|
(1,416,967
|
)
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
Borrowing
on bank line of credit
|
|
$
|
3,444,366
|
|
|
8,669,543
|
|
Repayments
on bank line of credit
|
|
$
|
(2,956,118
|
)
|
|
(6,413,775
|
)
|
Payments
on note payable to major stockholder
|
|
$
|
-
|
|
|
(2,500,000
|
)
|
Payments
on long-term borrowings
|
|
$
|
(511,202
|
)
|
|
(5,526,226
|
)
|
Net
cash used in financing activities
|
|
|
(22,954
|
)
|
|
(5,770,458
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate fluctuations on cash
|
|
$
|
18,533
|
|
|
10,410
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
150,165
|
|
|
821,487
|
|
Cash
and cash equivalents at beginning of period
|
|
$
|
428,538
|
|
|
82,154
|
|
Cash
and cash equivalents at end of period
|
|
$
|
578,703
|
|
$
|
903,641
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information :
|
|
|
|
|
|
|
|
Cash
paid for interest expense
|
|
$
|
830,479
|
|
$
|
1,450,806
|
|
Cash
paid for taxes
|
|
$
|
402,167
|
|
$
|
300,250
|
|
See
notes
to consolidated financial statements
NOTE
1 - Basis of Presentation
The
accompanying interim consolidated financial statements include the accounts
of
Simclar, Inc. ("Simclar") and its subsidiaries, including Simclar (Mexico),
Inc.
("Simclar Mexico"), Simclar de Mexico, S.A. de C.V. (“Simclar de Mexico”),
Simclar (North America), Inc. (“SNAI”), Simclar Interconnect Technologies, Inc.
(“SIT”), and Techdyne (Europe) Limited ("Techdyne (Europe)") collectively
referred to as the "company." All material intercompany accounts and
transactions have been eliminated in consolidation. The company is a 73.2%
owned
subsidiary of Simclar Group Limited ("Simclar Group"), a company incorporated
in
the United Kingdom.
These
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 8 of Regulation
S-X and have not been audited by an independent registered public accounting
firm. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, such
interim financial statements reflect all normal recurring adjustments considered
necessary to present fairly the financial position and the results of operations
and cash flows for the interim periods presented. The results of operations
for
the interim periods are not necessarily indicative of the results to be expected
for the full fiscal year. These financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
included in the company's Annual Report on Form 10-K for the year ended December
31, 2007.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
consolidated financial statements. Actual results could differ from those
estimates.
NOTE
2 - Recently Issued Accounting Pronouncements
In
May
2008 the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” The new standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting
principles. SFAS No. 162 establishes that the GAAP hierarchy should be
directed to entities because it is the entity (not its auditor) that is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. Statement 162 is effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
Auditing amendments to AU Section 411,
“The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles.” The company does not expect any significant impact from this
statement on its financial statements.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No. 133.” SFAS No. 161
changes disclosure requirements for derivative instruments and hedging
activities. Entities will be required to provide enhanced disclosures about
(a)
how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance and
cash flows. This statement is effective for fiscal years beginning after
November 15, 2008. The company does not expect any significant impact from
this
statement on its financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” an amendment of ARB No. 51, which we will
adopt on January 1, 2009. This standard will significantly change the accounting
and reporting related to noncontrolling interests in a consolidated subsidiary.
The company does not expect any significant impact from this statement on its
financial statements.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” SFAS No.
141R will replace SFAS No. 141 and provides new rules for accounting for the
acquisition of a business. This statement is effective for fiscal years
beginning after December 15, 2008. Generally, the effects of SFAS No. 141R
will
depend on future acquisitions.
NOTE
3 – Inventories
Inventories
are comprised of the following:
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Raw
materials and supplies
|
|
|
16,912,842
|
|
$
|
19,285,200
|
|
Work
in process
|
|
|
2,555,708
|
|
|
2,841,656
|
|
Finished
goods
|
|
|
1,794,718
|
|
|
1,902,052
|
|
Allowance
for obsolescence
|
|
|
(2,271,061
|
)
|
|
(2,364,466
|
)
|
|
|
$
|
18,992,207
|
|
$
|
21,664,442
|
|
NOTE
4 – Earnings per share
Following
is a reconciliation of amounts used in the computations:
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) / income - numerator basic computation
|
|
$
|
(711,101
|
)
|
$
|
415,330
|
|
$
|
(3,326,795
|
)
|
$
|
2,426,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares - denominator basic computation
|
|
|
6,465,345
|
|
|
6,465,345
|
|
|
6,465,345
|
|
|
6,465,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
/ Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.11
|
)
|
$
|
0.06
|
|
$
|
(0.51
|
)
|
$
|
0.38
|
|
The
net
loss for the three months ended September 30, 2008 includes pre-tax operating
losses of approximately $1.1 million from the company’s Mexico facility due to
the disruption to production as a result of corrective actions arising from
failures highlighted in the second quarter in the transfer of operations from
the company’s North Carolina facility and weaknesses within the newly
implemented ERP system. The net loss for the nine months ended September 30,
2008 also includes second quarter’s pre-tax exceptional and non-recurring
charges of approximately $2.8 million, including asset write-offs as a result
of
the problems in the company’s Mexico facility as described above. These pre-tax
exceptional charges include a loss on the disposal of plant and equipment of
approximately $0.75 million following the decision to no longer service certain
customers in the plastic molding business, write-off of inventory of
approximately $1.2 million resulting from decisions to exit low-margin business
and procurement errors of approximately $0.85 million. These costs are recorded
as a component of cost of goods sold.
NOTE
5 – Comprehensive Income
The
company follows SFAS No. 130, "Reporting Comprehensive Income," which contains
rules for the reporting of comprehensive income and its components.
Comprehensive income consists of net income and foreign currency translation
adjustments. Below is a detail of comprehensive income for the three and nine
month periods ended September 30, 2008 and 2007:
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) / income
|
|
$
|
(711,101
|
)
|
$
|
415,330
|
|
$
|
(3,326,795
|
)
|
$
|
2,426,314
|
|
Foreign
currency translation income (loss), net of tax
|
|
|
(57,391
|
)
|
|
(15,343
|
)
|
|
18,552
|
|
|
10,410
|
|
Comprehensive
(loss) / Income
|
|
$
|
(768,492
|
)
|
$
|
399,987
|
|
$
|
(3,308,243
|
)
|
$
|
2,436,724
|
|
NOTE
6 – Indebtedness
Effective
January 26, 2007, the company entered into amendments of the two working capital
facilities with Bank of Scotland (“BoS”). The term of the $1 million working
capital facility of SIT, originally entered into in December 2005, was extended
to January 28, 2008. The Simclar, Inc. $5 million working capital facility,
last
amended in December 2005, was increased to $7.5 million, and its maturity date
was extended to January 28, 2008. No other material changes were made to either
facility by the amendments. Effective March 27, 2008, the facilities were
further amended to extend the maturity dates of each to March 17, 2009. No
other
material changes were made to either facility by the 2008 amendments, except
that the default interest rate under both facilities was increased from 1.5%
to
2.0% and the interest rate under the $7.5 million facility was increased from
1.5% over LIBOR to 1.75% over LIBOR. The company was in breach of various
financial covenants at the end of the second and third quarters (EBIT to total
interest coverage ratio, trade accounts receivable to net borrowing ratio,
and
net borrowing to EBITDA ratio), which breaches have since been waived by BoS.
Given the adverse impact on the company’s financial position as a result of the
significant losses arising in its Mexico facility in the current year, and
in
recognition of the high level of voluntary bank term loan repayments in previous
financial periods, BoS agreed to reschedule the term loan repayments of $500,000
due on each of June 30, 2008 and September 30, 2008 to December 31, 2008, or
such later date as agreed before December 31, 2008 between the company and
BoS.
On
August
17, 2006, Simclar (Mexico) and Simclar entered into an agreement with Winsson
Enterprises Co., Ltd. (“Winsson”) and its affiliate, Computronics International
Corp. This agreement replaced a deferred trade payables agreement that expired
on July 14, 2006. The agreement is a non-cash refinance of approximately
$2,495,000 of trade accounts payable to long-term debt to be repaid within
a
three year period with an interest rate of 3% per annum. The agreement calls
for
quarterly payments of principal and interest of $225,000 commencing August
15,
2006, with a final payment of approximately $123,400 payable on May 15, 2009.
The debt is subordinated to the BoS credit facilities. The balance at September
30, 2008 was approximately $796,000 and is reflected as long-term debt on the
face of the balance sheet, net of $675,000 reflected in current portion of
long-term debt. The company is in advance discussion with Winsson with regard
to
the deferal of the repayment of $225,000 due on August 14, 2008 and the
implementation of a payment holiday until February 2009 when scheduled
repayments would re-commence, and, as a result of which, the final payment
date
would be November 14, 2009.
On
June
5, 2008, Simclar entered into an agreement with Litton Systems Inc. effecting
a
deferred trade payables arrangement. The agreement is a non-cash refinance
of
approximately $3,067,293 of trade accounts payable to long-term debt to be
repaid within a fifteen month period with an interest rate of 5% per annum.
The
agreement calls for quarterly payments of principal and interest of $1,052,573
commencing June 30, 2008 and ending December, 30 2008. Although the initial
quarter payment was made in June 30, 2008, the company is in discussions as
to
the rescheduling of the outstanding balance of $2,083,416 which is reflected
as
long-term debt on the face of the balance sheet.
NOTE
7 – Amounts Due to Major Stockholder and Other Related Party
Transactions
The
company’s parent, Simclar Group, provides certain financial and administrative
services to the company under a service agreement. The amount of expenses
incurred under the service agreement totaled $150,000 and $420,000 respectively
for the three and nine months ending September, 30 2008.
SIT
pays
a monthly management fee to Simclar Interconnect Technologies Limited, a related
party to Simclar Group, based on 2% of sales. The purpose of the fee is to
support global research and development and sales and marketing management.
The
charges for the three and nine months ended September 30, 2008 are approximately
$198,000 and $712,000 respectively.
The
company had a net receivable due from its parent, Simclar Group, certain of
its
subsidiaries and a related party at September 30, 2008 and December 31, 2007
of
approximately $1,915,000 and $905,000 respectively. Amounts receivable accrue
interest at the rate of LIBOR plus 1.5%
In
connection with the acquisition of the Litton backplane assembly business in
February 2006, Simclar Group has provided a guarantee to BoS in respect of
loans
advanced to Simclar up to a maximum amount of $10,000,000; likewise, Simclar
has
guaranteed certain Simclar Group loans from BoS also up to a maximum amount
of
$10,000,000. In both cases this maximum amount reduces, subject to certain
ratios of borrowing to EBITDA being achieved.
Note
8 – Income Taxes
The
company adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”)
on January 1, 2007. As required by FIN 48, which clarifies SFAS No. 109
“Accounting for Income Taxes,” the company recognizes the financial statement
benefit of a tax position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit. For tax
positions meeting the more-likely-than-not threshold, the amount recognized
in
the financial statements is the largest benefit that has a greater than 50
percent likelihood of being realized upon ultimate settlement with the relevant
tax authority. At the adoption date, the company applied FIN 48 to all tax
positions for which the statute of limitations remained open. As a result of
the
implementation of FIN 48, the company was not required to record any liability
for unrecognized tax benefits as of January 1, 2007. There have been no material
changes in unrecognized tax benefits since January 1, 2007.
The
company is subject to income taxes in the U.S. federal jurisdiction, as well
as
various other jurisdictions. Tax regulations within each jurisdiction are
subject to the interpretation of the related tax laws and regulations and
require significant judgment to apply. With few exceptions, the company is
no
longer subject to U.S. federal, state, and local, or non-U.S. income tax
examinations by tax authorities for years before 2005.
The
company will recognize, if applicable, interest accrued related to unrecognized
tax benefits in interest expense and penalties in other expense. At September
30, 2008, the company had no unrecognized tax benefits.
The
company files federal and state income tax returns separately from Simclar
Group, and its income tax liability is therefore reflected on a separate return
basis.
Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes.
Net
income tax payments amounted to approximately $0 and $402,000 respectively
for
the three months and nine months ended September 30, 2008 and $0 and $300,000
for the comparable 2007 period.
NOTE
9 - Commitments and Contingencies
The
company leases several facilities which expire at various dates through 2010
with renewal options for periods of up to five years at the then fair market
rental value. The company sponsors two 401(k) profit sharing plans covering
substantially all of its employees, excluding Techdyne (Europe) and Simclar
Mexico.
The
company is involved in various legal actions arising in the ordinary course
of
business. In the opinion of management, the finalization of these matters will
not have a material effect on the company's financial position.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Cautionary
Statement Concerning Forward-Looking Statements
This
report includes certain forward-looking statements with respect to our company
and our business that involve risks and uncertainties. These statements are
influenced by our financial position, business strategy, budgets, projected
costs and the plans and objectives of management for future operations. They
use
words such as anticipate, believe, plan, estimate, expect, intend, project,
and
other similar expressions. Although we believe our expectations reflected in
these forward-looking statements are based on reasonable assumptions, we cannot
assure you that our expectations will prove correct. Actual results and
developments may differ materially from those conveyed in the forward-looking
statements. For these statements, we claim the protections for forward-looking
statements contained in the Private Securities Litigation Reform Act of
1995.
Investors
are cautioned that forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from historical or
anticipated results due to many factors, including, but not limited to, the
potential effects of a loss of one or more key customers, covenants contained
in
our bank loan agreements, competition in the electronics manufacturing services
industry, the cyclical nature of our business, the lack of long-term agreements
with our customers, shortages of and price increases in the components of
devices we manufacture, our ability to keep up with technological changes in
our
industry, changes in interest rates, changes in cash flows from operations,
the
effectiveness of our internal controls, and other risks, uncertainties and
factors described in our most recent Annual Report on Form 10-K and other
filings from time to time with the Securities and Exchange Commission. These
documents are available free of charge at the Commission’s website at
http://www.sec.gov. Forward-looking statements speak only as of the date on
which they are made, and we undertake no obligation to update or revise any
forward-looking statements to reflect events or circumstances occurring after
the date of this report.
Overview
Simclar,
Inc. has over the past years demonstrated strong revenue growth of existing
products and customers as well as adding new products and customers. Our
strategy remains to (1) leverage our relationship with Simclar Group to expand
our reach globally, (2) depend upon our long-term relationships with major
OEMs
to increase our business with our existing customer base and to grow our
customer base with other OEMs, and (3) seek strategic acquisitions and
alliances.
We
strive
to build on our integrated manufacturing capabilities, final system assemblies
and testing. The combination of our advanced backplane interconnect solutions
with our capabilities to supply printed circuit board (“PCB”) assemblies, metal
fabrication, cabling solutions and higher level assemblies provides a valuable
one-stop-shop for OEM system design and integration needs. In addition, vertical
integration provides us with greater control over quality, delivery and cost.
Our products are manufactured to customer specifications for OEMs in a variety
of markets including the data processing, telecommunications, instrumentation,
and food preparation equipment industries. Following the closure of our North
Carolina facility in the first quarter of 2008, the company has four
manufacturing plants and numerous sales offices and has approximately 730
employees.
The
company has previously reported the problems which came to light beginning
late
in the second quarter which highlighted significant issues arising as a result
of the transfer of our North Carolina sheet metal fabrication business to our
Mexican facility, along with significant deficiencies within the Mexican
facility’s recently implemented ERP system. A subsequent internal review was
performed which comprised a detailed review of the issues and deficiencies
that
have been highlighted along with a strategic review of the company’s Mexican
operations. The key findings were as follows :
|
§
|
Major
procurement errors arose with a number of material components being
purchased at significantly higher costs compared to both historic
and
budgeted costs.
|
|
§
|
The
transferred business with its low margins, low volumes and high variations
was ill-suited to the Mexican facility, and therefore steps were
taken to
exit the transferred business.
|
|
§
|
The
significant capital cost of transferring the plastic injection molding
business from North Carolina allied to the low margins arising from
this
business did not align itself with the company’s strategy for its Mexican
operations, and accordingly management decided to suspend this transfer
and to exit this area of business.
|
Having
identified the problems, the company has been aggressive in implementing
corrective actions and has undertaken a fundamental restructuring of the Mexican
management team. All senior members of management associated with the
deficiencies in the transfer plan have been dismissed and the company is
currently in the process of finalizing the completion of a new Mexican
management team. Although the charges relating to these issues were largely
borne in the second quarter, the extent of the necessary restructuring and
corrective actions and the consequent disruption had an adverse impact on the
operations of the Mexican production facility in the third quarter, resulting
in
net sales, below its breakeven level generating pre-tax operating losses of
approximately $1.1 million in the 3 months to September 30, 2008.
The
company’s newly recruited management team in Mexico, augmented by senior
management seconded from within the company and the parent company has
implemented the necessary corrective actions and have made significant
improvements within the production process. Management anticipate that these
improvements will see the Mexican facility return to profitability in the fourth
quarter of this year.
Some
of
the key highlights of the third quarter to be discussed further through this
discussion and analysis include:
|
·
|
2008
third quarter sales were approximately $20.4 million compared to
approximately $33.1 million in the same period in 2007, reflecting
significantly reduced sales to our customers within the telecommunication
sector, together with the impact of the operational problems within
our
Mexico facility as discussed above.
|
|
·
|
The
company recognized a net loss of $711,101 for the three months ended
September 30, 2008, compared to a profit of $415,330 in the same
period in
2007. This loss is caused by the reduced level of sales and the operating
difficulties within our Mexico facility as discussed
above.
|
|
·
|
Reported
earnings per share for the quarter ended September 30, 2008 is a
loss of
$0.11, compared to a profit of $0.06 in the same period in 2007.
|
|
·
|
Management
has implemented cost-reduction programs across each of the company’s
locations to mitigate the effect of lower sales and reduced
margins.
|
|
·
|
Deferred
shipments with certain of our key customers led to a higher than
expected
inventory balance, with inventory turns falling to 4.9 from 5.6 at
the end
of 2007. The necessity to reduce inventory levels led to the appointment
earlier this year of a Procurement Director to oversee and manage
the
company’s procurement and material control activities. As a result of the
initiatives that have been taken in this area, progress is being
made, and
management expects the financial benefits of this to be seen in future
periods.
|
|
·
|
Given
the losses that have arisen in the past two quarters and the high
level of
inventory, it has now been recognized that the voluntary bank term
loan
repayments which were made by the company in previous periods ($3.5
million since the beginning of 2007), were overly aggressive, and
have
placed undue pressure on the company’s operating cash flow. Management has
addressed this problem with its bankers and has been successful in
rescheduling the term loan repayments to later
periods.
|
|
·
|
Management
continues to address the issues caused by the failure to properly
effect
the transfer of the North Carolina operations to Mexico. The company
retains a current order backlog of approximately $28 million and
is
committed to taking whatever further steps are necessary in the coming
months to return all divisions of the business to
profitability.
|
Our
operations have continued to depend upon a relatively small number of customers
for a significant percentage of our net revenue. Significant reductions in
sales
to any of our large customers would have a material adverse effect on our
results of operations. The level and timing of orders placed by a customer
vary
due to the customer’s attempts to balance its inventory, design modifications,
changes in a customer’s manufacturing strategy, acquisitions of or
consolidations among customers, and variation in demand for a customer’s
products due to, among other things, product life cycles, competitive conditions
and general economic conditions. Termination of manufacturing relationships
or
changes, reductions or delays in orders could have an adverse effect on our
results of operations and financial condition, as has occurred in the past.
Our
results also depend to a substantial extent on the success of our OEM customers
in marketing their products. We continue to seek to diversify our customer
base
to reduce our reliance on our few major customers.
The
industry segments we serve, and the electronics industry as a whole, are subject
to rapid technological change and product obsolescence. Discontinuance or
modification of products containing components manufactured by our company
could
adversely affect our results of operations. The electronics industry is also
subject to economic cycles and has in the past experienced, and is likely in
the
future to experience, recessionary periods. A prolonged worldwide recession
in
the electronics industry could have a material adverse effect on our business,
financial condition and results of operations. During periods of recession
in
the electronics industry, our competitive advantages in the areas of
quick-turnaround manufacturing and responsive customer service may be of reduced
importance to electronic OEMs, who may become more price sensitive.
We
typically do not obtain long-term volume purchase contracts from our customers,
but rather we work with our customers to anticipate future volumes of orders.
Based upon such anticipated future orders, we will make commitments regarding
the level of business we want and can accomplish given the current timing
of
production schedules and the levels of and utilization of facilities and
personnel. Occasionally, we purchase raw materials without a customer order
or
commitment. Customers may cancel, delay or reduce orders, usually without
penalty, for a variety of reasons, whether relating to the customer or the
industry in general, which orders are already made or anticipated. Any
significant cancellations, reductions or order delays could adversely affect
our
results of operations.
We
use
Electronic Data Interchange
(“EDI”)
with both our customers and our suppliers in our efforts to continuously
develop
accurate forecasts of customer volume requirements, as well as sharing our
future requirements with our suppliers. We depend on the timely availability
of
many components. Component shortages could result in manufacturing and shipping
delays or increased component prices, which could have a material adverse
effect
on our results of operations. It is important for us to efficiently manage
inventory, proper timing of expenditures and allocations of physical and
personnel resources in anticipation of future sales, the evaluation of economic
conditions in the electronics industry and the mix of products, whether PCBs,
wire harnesses, cables, or turnkey products, for manufacture.
We
must
continuously develop improved manufacturing procedures to accommodate our
customers’ needs for increasingly complex products. To continue to grow and be a
successful competitor, we must be able to maintain and enhance our technological
capabilities, develop and market manufacturing services which meet changing
customer needs and successfully anticipate or respond to technological changes
in manufacturing processes on a cost-effective and timely basis. Although
we
believe that our operations utilize the assembly and testing technologies
and
equipment currently required by our customers, there can be no assurance
that
our process development efforts will be successful or that the emergence
of new
technologies, industry standards or customer requirements will not render
our
technology, equipment or processes obsolete or noncompetitive. In addition,
to
the extent that we determine that new assembly and testing technologies and
equipment are required to remain competitive, the acquisition and implementation
of such technologies and equipment are likely to require significant capital
investment.
Our
results of operations are also affected by other factors, including price
competition, the level and timing of customer orders, fluctuations in material
costs (due to availability), the overhead efficiencies achieved by management
in
managing the costs of our operations, our experience in manufacturing a
particular product, the timing of expenditures in anticipation of increased
orders, selling, and general and administrative expenses. Accordingly, gross
margins and operating income margins have generally improved during periods
of
high volume and high capacity utilization. We generally have idle capacity
and
reduced operating margins during periods of lower-volume
production.
Key
Financial Performance Measures
We
manage
and assess the performance of our business primarily through the following
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 corporate
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
Three
months and nine months ended September 30, 2008
Net
Sales
(dollars in thousands)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,412
|
|
$
|
33,150
|
|
$
|
76,957
|
|
$
|
101,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
from prior year
|
|
$
|
(12,738
|
)
|
$
|
2,496
|
|
$
|
(24,719
|
)
|
$
|
18,800
|
|
%
change from prior year
|
|
|
-38.4
|
%
|
|
8.1
|
%
|
|
-24.3
|
%
|
|
22.7
|
%
|
The
worsening global economic environment has particularly impacted the
telecommunications infrastructure sector which accounts for some 60% of the
company’s business, and accounted for approximately $7.5 million of the sales
decrease in the quarter compared to the same quarter in 2007. In addition,
the
production problems experienced in our Mexican facility had an adverse impact
on
the quarter’s shipments.
Gross
Profit (dollars in thousands)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
$
|
1,073
|
|
$
|
3,224
|
|
$
|
2,546
|
|
$
|
12,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
from prior year
|
|
$
|
(2,151
|
)
|
$
|
(688
|
)
|
$
|
(9,468
|
)
|
$
|
1,537
|
|
%
change from prior year
|
|
|
-66.7
|
%
|
|
-17.6
|
%
|
|
-78.8
|
%
|
|
14.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of sales
|
|
|
5.3
|
%
|
|
9.7
|
%
|
|
3.3
|
%
|
|
11.8
|
%
|
The
main
factors that influence our gross margin percentage are material costs, product
mix and plant utilization. The reduced margin reflects both the disruption
caused by the corrective actions plan in the Mexico facility, and the effect
of
the under absorption of fixed production costs caused by the significant
reduction in sales in the quarter. While margins are continually under pressure
from customer cost reduction programs, the company actively seeks to mitigate
the effect through production efficiency improvements and procurement
savings.
Selling,
General, and Administrative Expenses (dollars in thousands)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative expenses
|
|
$
|
1,956
|
|
$
|
2,232
|
|
$
|
6,884
|
|
$
|
7,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
from prior year
|
|
$
|
(276
|
)
|
$
|
(86
|
)
|
$
|
(173
|
)
|
$
|
1,020
|
|
%
change from prior year
|
|
|
-12.4
|
%
|
|
-3.7
|
%
|
|
-2.5
|
%
|
|
16.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of sales
|
|
|
9.6
|
%
|
|
6.7
|
%
|
|
8.9
|
%
|
|
6.9
|
%
|
Selling,
general, and administrative expenses reduced compared with prior year levels
reflecting the benefit of cost reduction plans, although the significant
decline
in the quarter’s sales results in this expense increasing as a percentage of
sales compared to the prior year.
Interest
Expense (dollars in thousands)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
297
|
|
$
|
404
|
|
$
|
969
|
|
$
|
1,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
from prior year
|
|
$
|
(107
|
)
|
$
|
(119
|
)
|
$
|
(426
|
)
|
$
|
110
|
|
%
change from prior year
|
|
|
-26.5
|
%
|
|
-22.8
|
%
|
|
-30.5
|
%
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of sales
|
|
|
1.5
|
%
|
|
1.2
|
%
|
|
1.3
|
%
|
|
1.4
|
%
|
The
reduction in interest expense in 2008 reflects the fall in lending rates
and the
reduced level of debt compared to last year. Average debt levels for the
three
month period ended September 30, 2008 and same period for 2007 were
approximately $21.1 million and $24.7 million respectively (including interest
bearing debt owed to related parties), while average interest rates in the
quarter ended September 30, 2008 were 5.5% compared to 7.5% for the quarter
ended September 30, 2007.
(Loss)
/
Income Before Income Taxes
(dollars
in thousands)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
/ Income before taxes
|
|
$
|
(1,099
|
)
|
$
|
627
|
|
$
|
(5,100
|
)
|
$
|
3,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
from prior year
|
|
$
|
(1,726
|
)
|
$
|
(405
|
)
|
$
|
(8,776
|
)
|
$
|
467
|
|
%
change from prior year
|
|
|
-275.3
|
%
|
|
-39.2
|
%
|
|
-238.7
|
%
|
|
14.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of sales
|
|
|
-5.4
|
%
|
|
1.9
|
%
|
|
-6.6
|
%
|
|
3.6
|
%
|
The
decrease in income before tax in the third quarter of 2008 compared to the
same
period in 2007 is due to the losses arising in the company’s Mexican operations,
the reduction in margins caused by the significant decline in sales in the
quarter, and the under-utilization of production capacity.
Income
Tax (Credit) / Expense
(dollars
in thousands)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (credit) / expense
|
|
$
|
(388
|
)
|
$
|
211
|
|
$
|
(1,773
|
)
|
$
|
1,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
from prior year
|
|
$
|
(599
|
)
|
$
|
(203
|
)
|
$
|
(3,022
|
)
|
$
|
(46
|
)
|
%
change from prior year
|
|
|
-283.9
|
%
|
|
-49.0
|
%
|
|
-242.0
|
%
|
|
-3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
35.3
|
%
|
|
33.7
|
%
|
|
34.8
|
%
|
|
34.0
|
%
|
Income
tax credit for the three months ended September 30, 2008 was approximately
$388,000, compared to a income tax expense of approximately $211,000 in the
same
period in 2007. The higher effective tax rate reflects the rebates achieved
from
state tax.
Liquidity
and Capital Resources
Cash
and
Cash Equivalents
(dollars
in thousands)
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
579
|
|
$
|
429
|
|
Cash
and
cash equivalents as of September 30, 2008 are broadly in line with balances
at
December 31, 2007, with cash generated being used to repay debt balances and
meet operating costs. Excess liquid funds are invested in short-term,
interest-bearing accounts at financial institutions.
Net
Cash
Provided from Operating Activities
(dollars
in thousands)
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Net
cash provided from operating activities
|
|
$
|
192
|
|
$
|
7,999
|
|
Net
cash
provided in operating activities for the nine months ended September 30,
2008
was approximately $192,000 compared to approximately $7,999,000 for the same
period last year. The main reasons for this significant adverse movement
are the
net operating loss (adjusted for depreciation) of approximately $1.4 million
in
the nine month period ended September 30, 2008 compared to net income (adjusted
for depreciation) of approximately $4.0 million in the same period in 2007,
and
the failure to reduce working capital in line with the reduced levels of
sales
in the period.
Accounts
Receivable
(dollars
in thousands)
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
11,961
|
|
$
|
20,805
|
|
|
|
|
|
|
|
|
|
Average
days sales outstanding
|
|
|
42.0
|
|
|
54.9
|
|
Accounts
receivable at September 30, 2008 decreased by approximately $8.8 million
compared to December 31, 2007 due to the lower level of sales in the third
quarter of 2008 compared to the higher sales in the fourth quarter of 2007.
In
the current year, the company has introduced new procedures which continue
to
help improve the collection of overdue receivables as evidenced by the reduction
in average days outstanding.
Inventory
(dollars
in thousands)
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
18,992
|
|
$
|
21,664
|
|
|
|
|
|
|
|
|
|
Average
inventory turnover
|
|
|
4.9
|
|
|
5.6
|
|
Although
inventory as of September 30, 2008 decreased by approximately $2.7 million
compared to December 31, 2007, average inventory turns in the period reduced
to
4.9 from 5.6. This reduction in average turns reflects the significant levels
of
inventory held for key customers that have failed to take shipments in line
with
their forecast demand. This unacceptable increase in the company’s working
capital requirement is being addressed as a matter of urgency with our customers
and our material suppliers, as appropriate. The company has appointed a
Procurement Director to oversee and manage its procurement and material control
initiatives, with an immediate objective of improving inventory turnover
through
smaller order quantities, vendor managed inventories, and the active liquidation
of excess inventory balances.
Net
cash
used in investing activities
(dollars
in thousands)
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
$
|
(38
|
)
|
$
|
(1,417
|
)
|
Investing
activities for the nine months ended September 30, 2008 related, in the main,
to
the installation in Mexico of equipment transferred from our closed facility
in
North Carolina, offset by proceeds from asset disposals, whilst the investing
activities in the comparable period of 2007 included leasehold improvements
related to the move of our Missouri facility from Springfield to
Ozark.
Net
cash
used in financing activities
(dollars
in thousands)
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
Net
cash used in financing activities
|
|
$
|
(23
|
)
|
$
|
(5,770
|
)
|
Net
cash
used in financing activities in the nine months ended September 30, 2008
was
approximately $23,000 compared to approximately $5,770,000 in the same period
of
2007. This large fluctuation is caused by the 2007 repayment of a $2.5 million
balance to our major stockholder in addition to advance bank repayments of
$2.0
million.
Our
near-term cash requirements are primarily related to funding our operations
and
servicing the company’s bank debt obligations. We believe that the
combination of internally-generated funds, available cash reserves, and our
existing credit facilities are 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 (BoS) in Edinburgh, Scotland consisting of:
Borrower
|
|
Type of facility
|
|
Original
amount
|
|
Balance at
September 30,2008
|
|
Simclar,
Inc.
|
|
|
Working
capital
|
|
$
|
7,500,000
|
|
$
|
7,524,388
|
|
|
|
|
|
|
|
|
|
|
|
|
Simclar,
Inc.
|
|
|
Term
loan – four tranches (see detail of tranches below)
|
|
$
|
21,650,000
|
|
$
|
10,150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Simclar
Interconnect Technologies, Inc.
|
|
|
Working
Capital
|
|
$
|
1,000,000
|
|
$
|
1,091,260
|
|
Effective
March 27, 2008, we entered into amendments of the two working capital
facilities. The term of the $1 million working capital facility of SIT,
originally entered into in December 2005, 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 2007, 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 1.75%, 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 June 30, 2008
was
5.0% based on the one month election.
Interest
on the Simclar Interconnect Technologies, Inc. working capital facility will
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 September 30, 2008 was
5.7%.
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 4.2% for tranches A and
B,
5.7% for tranche C, and 6.7% for tranche D at September 30, 2008 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following
discussions with BoS and in recognition of the high level of
previous
advanced term loan repayments made by the company, it was agreed
to
reschedule the June 2008 repayment of $500,000 to a later
period
|
|
|
|
|
|
|
|
|
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 the quarter ended September, 30 2008 was
5.5%.
Reference
should be made to the company’s annual report on 10-K report for the year ended
December 31, 2007 for details of the credit facilities, all of which continue
to
be effective.
Given
the
adverse impact on the company’s financial position as a result of the
significant losses arising in its Mexico facility in the current year, the
company was in breach of various financial covenants at the end of the second
and third quarters (EBIT to total interest coverage ratio, trade accounts
receivable to net borrowing ratio, and net borrowing to EBITDA ratio), which
breaches have since been waived by BoS. In recognition of these factors and
the
high level of voluntary bank term loan repayments in previous financial periods,
BoS agreed to reschedule the term loan repayments of $500,000 due on June
30,
2008 and September 30, 2008 to December 31, 2008, or such later date as agreed
before December 31, 2008 between the company and BoS.
Due
to
the results for the 3 months ended June 30, 2008 being significantly reduced
by
the exceptional Mexico charges, the company did not satisfy the EBIT to total
interest coverage covenant of its debt facilities for that period. Given
these
particular circumstances, BoS has agreed to waive the facility covenants
as at
September 30, 2008.
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.
Critical
Accounting Policies
In
preparing its financial statements and accounting for the underlying
transactions and balances, the company has applied the accounting policies
as
disclosed in the Notes to the Consolidated Financial Statements contained
in the
company's annual report on Form 10-K for the year ended December 31, 2007.
Preparation of the company's financial statements requires company management
to
make estimates and assumptions that affect the reported amount of assets
and
liabilities, disclosure of contingent assets and liabilities at the date
of the
financial statements and the reported amounts of revenue and expenses during
the
reporting period. Actual results may differ from those estimates, and the
differences may be material. For a detailed discussion of the application
of
these and other accounting policies, see "Summary of Significant Accounting
Policies" in the Notes to the Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results
of
Operations - Critical Accounting Policies" contained in the company's annual
report on Form 10-K for the year ended December 31, 2007. There have been
no
material changes to these accounting policies during the three months ended
September 30, 2008. Further, the company may be subject to the recently issued
accounting pronouncements outlined in Note 2, to the financial
statements.
Item
4T. Controls and Procedures
Overview
The
company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934 (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 defined
in Rule 13a-15(e) under the Exchange Act) as of September 30, 2008. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that (i) information required to be disclosed by us in
the
reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure, and (ii) 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.
As
noted
earlier in this report (Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Overview), beginning late in the second
quarter of 2008 management became aware of problems associated with the transfer
of the company’s sheet metal fabrication business from North Carolina to its
Mexican facility, along with significant deficiencies within the Mexican
facility’s recently implemented ERP system. Given the significance of these
matters and the fact that the internal review which had been commenced as
a
result of these issues was ongoing, management concluded in early August
that
the company was not in a position at that time to file its Form 10-Q for
the
second quarter of 2008, and that the filing should be delayed until completion
of the internal review.
The
internal review comprised a detailed review of the issues and deficiencies
that
had been highlighted along with a strategic review of the company’s Mexican
operations, and was completed during the third quarter. The key findings
were as
follows :
|
·
|
Major
procurement errors arose with a number of material components being
purchased at significantly higher costs compared to both historic
and
budgeted costs.
|
|
·
|
Early
in the internal review it was clear that the transferred business
with its
low margins, low volumes and high variations was ill-suited to
the Mexican
facility, and therefore steps have been taken in this quarter to
exit this
the transferred business.
|
|
·
|
The
significant capital cost of transferring the plastic injection
molding
business from North Carolina allied to the low margins arising
from this
business did not align itself with the company’s strategy for its Mexican
operations, and accordingly management decided to suspend this
transfer
and to exit this area of business.
|
As
a
result of this review and evaluation, management concluded
that
our disclosure controls and procedures as they existed at June 30, 2008 were
not
effective, due to a material weakness in internal control over financial
reporting
.
Rule
12b-2 under the Exchange Act defines “material weakness” as a deficiency, or a
combination of significant deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material
misstatement of the registrant’s annual or interim financial statements will not
be prevented or detected on a timely basis. The rule defines a “significant
deficiency” as a deficiency, or combination of deficiencies, in internal control
over financial reporting that is less severe than a material weakness, yet
important enough to merit attention by those responsible for oversight of
the
registrant’s financial reporting.
The
control deficiencies identified by our management that existed at June 30,
2008,
which in combination, resulted in a material weakness, were (a) failure to
establish effective system access controls as part of the new ERP system
implementation (b) failure to establish effective system controls over standard
costing as part of the new ERP system implementation (c) failure of key control
processes that allowed material errors to occur and go undetected on a timely
basis, and (d) the failure of key management to identify the errors on a
timely
basis and take appropriate corrective actions. The control deficiencies were
determined to be a material weakness due to combined impact of the actual
misstatements identified, the potential for additional material misstatements
that could have occurred as a result of the deficiencies, and the lack of
other
mitigating controls. While the misstatements were still ultimately identified
by
the reporting controls, the company was required to perform a significant
internal review to fully identify the weaknesses, resulting in the inability
to
timely file our report on Form 10-Q for the second quarter of 2008
.
However,
based upon the changes in internal controls implemented in the third quarter
of
2008 as a result of management’s review, which changes are described below, and
management’s evaluation of effectiveness of the design and operation of our
disclosure controls and procedures after taking such changes into consideration,
our Chief Executive Officer and Chief Financial Officer have concluded that,
as
of September 30, 2008, our disclosure controls and procedures were effective
in
providing reasonable assurance of achieving the objectives that (i) information
required to be disclosed by us in the reports that we file or submit under
the
Exchange Act is accumulated and communicated to our management, including
our
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure, and (ii) 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.
Changes
in Internal Controls over Financial Reporting
During
the quarter ended September 30, 2008, there were a number of changes in our
internal controls over financial reporting that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. These changes include:
|
·
|
Replacement
of key management that had failed in their responsibility to identify
control weaknesses and take corrective action.
|
|
·
|
Correction
of system access controls on new ERP system to ensure that all
users have
restricted access in line with internal control
matrix.
|
|
·
|
Correction
of the standard cost system within the new ERP system and training
of
employees responsible for its
maintenance.
|
|
·
|
Re-engineer
and strengthen the processes and controls throughout the procurement
function.
|
The
company continues to evaluate these and other possible improvements to its
disclosure controls and internal control over financial reporting.
PART
II – OTHER INFORMATION
Item
1. 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
1A. Risk Factors
The
following additional risk factor is added to the risk factors previously
disclosed in Item 1A to Part 1 our Annual Report on Form 10-K for the year
ended
December 31, 2007:
We
have risks related to the recent economic and credit
conditions.
The
Company's operating cash flows provide funding for debt repayment and various
discretionary items such as capital expenditures. Recent uncertainty in global
economic conditions resulting from disruption in the credit markets has
negatively impacted the overall economy which could adversely impact demand
for
our products and our ability to manage commercial relationships with our
customers, suppliers and creditors.
Items
2, 3, and 5 are not applicable and have been omitted.
Item
6. Exhibits
Exhibit
No.
|
Description
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
Certification
of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley
Act of 2002
|
32.1
|
Certification
of Chief Executive Officer of Periodic Financial Reports pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350
|
32.2
|
Certification
of Chief Financial Officer of Periodic Financial Reports pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
SIMCLAR,
INC.
|
|
|
|
|
|
|
|
|
|
Date:
November 17, 2008
|
By:
|
/s/
Barry J. Pardon
|
|
|
|
BARRY
J. PARDON, President
|
|
|
|
|
|
|
|
|
|
Date:
November 17, 2008
|
By:
|
/s/
Stephen P. Donnelly
|
|
|
|
STEPHEN P DONNELLY, Chief Financial Officer
|
|
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