Back to GetFilings.com
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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-14659
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. 77TH 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: None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock,
$.01 par value
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 [ ]
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant was approximately $3,624,995 on June 30, 2003.
As of March 15, 2004, 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 2004 Annual Meeting of
Stockholders are incorporated by reference in Part III.
TABLE OF CONTENTS
-----------------
Page
----
PART I
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 17
Item 3. Legal Proceedings............................................... 18
Item 4. Submission of Matters to a Vote of Security Holders............. 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................. 19
Item 6. Selected Financial Data......................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 20
Item 7A. Quantitative and Qualitative Disclosure About Market Risk....... 30
Item 8. Financial Statements and Supplementary Data..................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................ 30
Item 9A Controls and Procedures......................................... 30
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 32
Item 11. Executive Compensation.......................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management
And Related Stockholder Matters ................................ 32
Item 13. Certain Relationships and Related Transactions.................. 32
Item 14. Principal Accountant Fees and Services.......................... 32
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ....................................................... 34
Signatures ................................................................ 37
Independent Auditors Report on Supplemental Schedule....................... S-1
Schedule II - Valuation and Qualifying Accounts............................ S-2
PART I
ITEM 1. BUSINESS
INTRODUCTION
We are a contract manufacturer of electronic and electro-mechanical
products. Our products are manufactured to customer specifications and designed
for original equipment manufacturers (OEMs) and distributors 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 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
(Simclar International), which then transferred its 71.3% ownership of our
company to its parent, Simclar Group Limited (Simclar Group) both of which are
private United Kingdom companies. Simclar International is 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.
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 SmallCap Market (Ticker: SIMC).
ELECTRONIC MANUFACTURING 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 recent 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 has continued into
the first quarter of 2004. We are aggressively seeking new business
opportunities with existing and new customers, but there is no assurance we will
be successful in generating additional sales, particularly in this recessionary
segment of the economy.
We believe that the fundamental factors contributing to the growth of
our industry in past years will lead to a resumption of the pattern of growth
late in 2004. 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 their 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
2
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 believe that the cost reductions and restructuring of our operations
that we made in response to the continued economic downturn has put us in a
better position to compete once the economy and our industry recovers. We also
believe that our alliance with Simclar Group will allow us to expand our
customer base, broaden our product lines and provide greater efficiencies in
equipment, supplies, labor and manufacturing processes, both domestically and
internationally.
In response to industry trends, particularly in view of constantly
changing and improving technology and, therefore, shorter product life cycles,
we focus on product development and marketing in order to become 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. In 2004, we will also continue to target large contract
manufacturers as potential customers.
We strive to build on our integrated manufacturing capabilities, final
system assemblies and testing. In addition to PCBs, our custom cable assembly
capabilities provide us with further opportunities to leverage our vertical
integration and to provide greater value added services and be more competitive.
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, Texas,
Massachusetts, 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
3
customers. In alliance with Simclar Group, we anticipate experiencing growth and
ability to increase our global presence and competitive position.
PRODUCTS AND SERVICES
We manufacture approximately 850 products, including complete turnkey
finished products, sub-assemblies, molded and non-molded cable assemblies, wire
harnesses, 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.
In 1997, we acquired Lytton Incorporated (Lytton), whose Ohio
operations, with six automated lines, are more focused on PCB manufacturing,
primarily for the food preparation equipment industry. This expansion resulted
in PCB manufacturing yielding approximately 68% and 66% of our sales revenues in
2003 and 2002, respectively. Lytton was merged into Simclar effective August 13,
2003.
In July, 2003, we acquired all of the outstanding stock of AG
Technologies, Inc. (now Simclar (Mexico) Inc.) which operates a manufacturing
facility in Matamoros, Mexico, and which we currently operate through an
indirect, wholly-owned subsidiary, Simclar de Mexico, S.A. de C.V. Our 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.
Simclar (Mexico) is an international value added provider of comprehensive
electronic manufacturing services to OEM's serving the automotive, industrial
controls, medical and power equipment industries. Simclar (Mexico)'s Mexican
facility will enable us to be competitive in the higher volume arena for
assembly in North America. Additionally, Simclar (Mexico) brings with it a list
of customers in a broad range of industries and extensive manufacturing and
design relationships in Asia.
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.
4
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. Our cable sales comprised approximately 27% and 29% of
total sales revenue for 2003 and 2002, 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.
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, reworking and refurbishing together amounted to
approximately 5% of sales for each of 2003 and 2002. We believe that PCB sales
and contract manufacturing could provide us with substantial increases in
revenues over the next few years. Our affiliation with Simclar Group gives us
access to a larger customer base and the ability to handle large customers both
in the USA and Europe.
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, tooling and dies, which must be
acquired.
5
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, Round Rock, Texas, 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.
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.
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 avoid material obsolescence,
components are generally ordered when we have a purchase order or commitment
from our customer for the completed assembly. 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, Symix and Made 2
Manage computerized software systems providing us with material requirements
planning, purchasing, and sales and marketing functions. See "Business Strategy"
above and Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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. We have
recently experienced minor disruptions from shortages of materials or delivery
delays from suppliers, but we believe that our present sources and the
availability of our required materials are adequate. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
QUALITY AND PROCESS CONTROL
Our Florida and Ohio facilities have received from independent quality
assurance organizations the ISO 9001/2000 quality assurance designation, which
is the international standard of quality with respect to all systems of
operations, including, among others, purchasing, engineering, manufacturing,
6
sales, inventory control and quality. Our other facilities (with the exception
of Matamoros) hold the ISO 9002 quality designation, which is the predecessor to
the ISO 9001/2000 standard. All of these facilities, as well as Matamoros, are
in the process of obtaining their ISO 9001/2000 certifications, which are
expected to be received by the end of the second quarter of 2004. 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. A
significant portion of our revenues are distributed over the following industry
segments:
Year Ended December 31,
----------------------------------------
2003 2002 2001
---- ---- ----
Food preparation equipment 23% 37% 23%
Data processing 24% 23% 13%
Telecommunications 14% 9% 9%
Military and government 9% 8% ___%
Instrumentation 11% 4% 19%
Power Equipment 13% ___% ___%
We seek to serve a sufficiently large number of customers to avoid
dependence on any one customer or industry. Nevertheless, historically a
substantial percentage of our net sales have been to multiple locations of a
small number of customers. Significant reductions or delays in sales to any of
those 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
7
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. In 2003, 46.4% of our sales
were made to numerous locations of five major customers.
The table below sets forth the respective portion 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.
Percentage of Sales
-------------------
2003 2002 2001
---- ---- ----
ITW Food Equipment Group 22% 36% 26%
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 five
regional sales managers covering the Northeast, Southeast, West and Southwest
regions of the United States. There are 13 in-house sales/marketing personnel in
the United States, as well as parts of Mexico. 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
sales representative agreements for specific territories 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
At December 31, 2003 and 2002, our backlog of orders amounted to
approximately $11,252,000 and $4,786,000, respectively. The increase in backlog
reflects the addition of Simclar (Mexico) backlog as of December 31, 2003. At
December 31, 2003 without the inclusion of Simclar (Mexico), our backlog of
orders amounted to approximately $7,154,000. 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
frequently the rescheduling of deliveries. The variations in the size and
delivery schedules of purchase
8
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.
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.
SEASONALITY
Our business is not seasonal.
COMPETITION
Simclar is a part of 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.
Certain competitors may have broader geographic coverage and competitive price
advantage based on their less expensive offshore operations, particularly in the
Far East. Many of our competitors are larger and more geographically diverse and
have greater financial, manufacturing and marketing resources than we have. Our
main competitors in the PCB area include Vickers Electronics Systems,
Diversified Systems, Inc., Epic Technologies, Inc., and others. We have numerous
competitors in the cable and harness assembly market, including Volex
Interconnect Systems, Inc., 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 the 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 result of
operations. Compared to manufacturers who have greater direct buying power with
component suppliers or who have lower cost structure, 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.
However, additional or modified requirements that may require substantial
additional expenditures may be imposed in the future.
9
EMPLOYEES
We presently have 314 employees located in our U.S. facilities and 224
employees located at our Mexican facility. 98 of our employees are employed as
part time or temporary help. Approximately 467 of our employees are engaged in
manufacturing, quality assurance, related operations and support activities, 30
are in material handling and procurement, 10 are in sales and marketing, 11 are
in engineering, and 20 are in administrative, accounting and support activities.
We have no unions in our U. S. facilities, but have two unions in our
Matamoros facility. We believe that our relationships with our employees, both
union and non-union, are good.
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 46.4% of our sales for the year
ended December 31, 2003, has been to five customers, the loss of any of which
would adversely affect us. A substantial portion of our sales (22.3%) is with
one major customer, Illinois Tool Works (formerly PMI Foods Equipment Group)
("ITW"). 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 of 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, except for those of Techdyne (Europe) and Simclar
(Mexico), have been pledged as collateral for two bank loans. On October 24,
2001, we entered into two credit facilities with Bank of Scotland in Edinburgh,
Scotland for an aggregate borrowing of $10,000,000. This financing replaced the
lines of credit and three commercial loans with The Provident Bank of Ohio. The
financing included a $3,000,000 line of credit with an interest rate at LIBOR
rate plus 1.5% for a one, three or six month period, at our election, and which
expires September 30, 2004. We elected the three-month interest rate period at
2.69% until January 24, 2004. After this date the rate is 2.60% until April 24,
2004. This line of credit had an outstanding balance of $1,750,000 at December
31, 2003. The 2001 Bank of Scotland financing also included a seven-year term
loan of $7,000,000 at the same interest rate as the line of credit. The term
loan specifies quarterly payments of $250,000 due in January, April, July and
October
10
of each year, plus interest. The term loan had an outstanding balance of
$5,000,000 at December 31, 2003.
Our credit facilities impose operational and financial restrictions on us
Our credit facilities with the Bank of Scotland, which include a
Facility Letter, a Working Capital Facility Letter, a Security Agreement, a
Pledge Agreement, and a Guaranty, 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:
o the facilities take priority over all our other obligations;
o we must maintain sufficient and appropriate insurance for our
business and assets;
o we must maintain all necessary licenses and authorizations for the
conduct of our business;
o 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;
o 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
o a variety of pension and benefit plans and ERISA issues,
including, among others, requiring us to notify the bank of (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:
o consolidated adjusted net worth greater than $11,000,000;
o a ratio of consolidated assets to consolidated net borrowing not
less than 1.75 to 1;
o a ratio of consolidated trade receivables to consolidated net
borrowing of not less than .75 to 1; and
o a ratio of consolidated net income before interest, income taxes
and management fees to total consolidated interest costs of not
less than 2 to 1.
Finally, without the prior written consent of the Bank of Scotland, our
credit facilities prohibit us from:
o granting or permitting a security agreement against our
consolidated assets except for permitted security agreements;
o declaring or paying any dividends or making any other payments on
our capital stock;
o 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;
o incurring, assuming, guaranteeing, or remaining liable with respect
to any indebtedness, except for certain existing indebtedness
disclosed in our financial statements;
o undertaking any capital expenditures in excess of $1,000,000 in any
one fiscal year;
o effecting any changes in ownership of our company;
o making any material change in any of our business objectives,
purposes, operation or taxes; and
o incurring any material adverse event in business conditions as
defined by the bank.
11
Our ability to comply with these provisions may be affected by changes
in our business condition or results of our operations, or other events beyond
our control. The breach of any of these covenants would result in a default
under our debt. At December 31, 2002, we were in violation of the covenant
requiring a ratio of consolidated trade receivables to consolidated net
borrowings of .75 to 1. Although the Bank of Scotland waived this default, and
as of December 31, 2003 we were in compliance with all loan covenants and
management believes that we will remain in compliance with our covenants for
the remainder of 2004, there can be no assurance that defaults in these or other
covenants will not occur in the future, nor can there be any assurance that our
lender will waive future covenant violations. A default in the covenants would
permit our lender 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
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, as we are now experiencing, 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:
o food preparation equipment;
o data processing;
o telecommunications;
o instrumentation; and
o 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.
12
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 are currently experiencing. Declining demand for our products and
services may continue into the immediate future. The result of the economic
downturn has resulted in lower capacity utilization of our manufacturing
operations and a shift in product mix toward lower margin assemblies. OEMs may
not increase production or may shift to new customer specifications and designs,
in which case demand for our products and services may continue to slow. These
changes in economic conditions and demand have resulted and may continue to
result in customer rescheduling of orders and shipments, which affects our
results of operations. Any continuation in the downturn in OEM products is
anticipated to have an adverse effect on our business, financial condition, and
operating results. Moreover, our need to invest in engineering, marketing, and
customer services and support capabilities will limit our ability to reduce
expenses, as we have been attempting 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:
o market demand for products;
o change in inventory control and procedures;
o acquisitions of or consolidations among competing customers;
o electronic design and technological advancements; and
o recessionary economic environment.
Any one of these factors may significantly change the total volume of
sales and affect our operating results, as has been the case with the
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 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 did not experience any
substantial supply shortages in 2002 or 2003, but have experienced minor
shortages in early 2004, which may increase as the world economy recovers and
demand for electronic products increases. Should our industry experience a rapid
recovery, 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
13
accordingly could adversely affect our gross profit margins. 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. Due to the current difficult economic environment,
there may be cut-backs and/or shut-downs of semi-conductor foundries, which
could reinitiate component shortages.
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 prices
There are a number of factors, beyond our control, that may affect our
annual and quarterly results. These factors include:
o the volume and timing of customer orders;
o changes in labor and operating prices;
o fluctuations in material cost and availability;
o changes in domestic and international economies;
o timing of our expenditures in anticipation of future orders;
o increase in price competition, and competitive pressures on
delivery time and product reliability;
o changes in demand for customer products;
o the efficiency and effectiveness of our automated manufacturing
processes;
o market acceptance of new products introduced by our customers; and
o 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
14
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 Group controls over 73% of our common stock and the affairs of our
company
Simclar Group acquired 71.3% of our common stock in June 2001, and
controls the affairs of our company. In September 2001, Simclar Group announced
its intention to acquire up to an additional 200,000 shares of our common stock.
To date, Simclar Group has purchased 70,500 shares of our common stock in the
open market, giving Simclar Group a 73.4% ownership of our company. 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.
The price of our shares is volatile
The market price of our common stock has substantially fluctuated in
the past, which resulted in its delisting from the Nasdaq National Market in
1992. In 1995, we completed a public offering of our common stock, which then
was listed with the Nasdaq SmallCap Market and Boston Stock Exchange. On
November 6, 1996, the common stock was relisted for trading on the Nasdaq
National Market and delisted from the Boston Stock Exchange. On February 18,
2000, our common stock transferred to the Nasdaq SmallCap Market, since the
market value of the public float was not equal to or greater than the minimum
required for listing. The market price of our common stock has been as high as
$5.00 in the 2nd quarter of 1998 to as low as $.52 in the fourth quarter of
2002. Our common stock has limited trading volume, and it closed at $2.65 on
March 15, 2004.
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.
15
Possible delisting of our stock
Our common stock trades on the Nasdaq SmallCap Market. There are
certain qualitative and quantitative criteria for continued listing on the
Nasdaq SmallCap 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 SmallCap 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 Over-The-Counter 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
SmallCap 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 SmallCap Market requires that we maintain a minimum market
value of public float of $1,000,000 for continued listing on the Nasdaq SmallCap
Market. The publicly trading shares, exclusive of any affiliate ownership, which
is the float for our common stock, is approximately 1,632,725 shares, and as the
closing price of our shares on March 15, 2004 was $2.65, we currently satisfy
that maintenance requirement.
Our common stock has traded as low as $.52 in the fourth quarter of
2002, and has limited trading volume. There is the risk of being delisted from
the Nasdaq SmallCap 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. Continued satisfaction of certain of the Nasdaq
SmallCap listing 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 SmallCap Market.
16
ITEM 2. PROPERTIES
The following chart summarizes the principal properties leased by the
company:
SPACE PROPERTY TERM
- ----- -------- ----
16,000 sq. ft. 2230 W 77th St. 10 yrs. to August 31, 2010
(exec. offices, mfg.) Hialeah, FL
12,000 sq. ft. 2230 W 77th St. 10 yrs. to August 31, 2010
(mfg., warehouse) Hialeah, FL
5,500 sq. ft. 171 Commonwealth Ave. 3 yrs. to March 31, 2005
(mfg., offices) Attleboro, MA
18,225 sq. ft. 800 Paloma Dr. 1 yr. to May 31, 2004
(mfg., office, warehouse) Round Rock (Austin), TX(1)
77,800 sq. ft. 1784 Stanley Ave. 5 yrs. to July 31, 2007
(mfg., office, warehouse) Dayton, Ohio(2)
16,000 sq. ft. 2685 N. Coria 5 yrs. to October 31, 2004
(office, warehouse) Brownsville, TX
37,919 sq. ft. Parque Industrial CYLSA 5 yrs. to July 15, 2006
(mfg., office, warehouse) Matamoros, Mexico
(1) 3,000 square feet of this location is sub-leased to Champion Temporaries,
Inc.
(2) We have a right of first refusal and an option to purchase these
premises.
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 50% 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" and
"Risk Factors" under Item 1, "Business."
17
ITEM 3. LEGAL PROCEEDINGS
We are a party in a pending proceeding entitled Lemelson Medical
Education & Research Foundation, Limited Partnership v. Esco Electronics
Corporation, et al., initiated in August 2000, pending in the United States
District Court for the District of Arizona. Lemelson brought a suit against 91
named defendants, including our company, for infringement of a variety of
patents owned by Lemelson, primarily relating to Lemelson's machine vision and
bar code scanning patents. Each of the defendants is involved, as is our
company, in the manufacture of electronic or semiconductor products. Lemelson
simultaneously filed similar lawsuits in the same court against approximately
another 350 defendants in different categories of electronic manufacturing.
This matter has been referred to patent counsel, who filed jointly with
the majority of the other named defendants, a motion to stay any further
proceedings pending the resolution of a motion for summary judgment addressing
the issue of the equitable defense of "prosecution laches" in an unrelated
action entitled Lemelson v. Symbol Technologies, Inc. The equitable defense of
prosecution laches is based on the assertion that Lemelson filed initial patent
applications with USPTO in the 1950s and continued the patent prosecution
through the 1990s continually amending his applications to include products and
methods that have become prevalent in the market. In February 2002, the Federal
Court of Appeals in the Symbol Technologies case found that prosecution laches
is a viable defense to patent infringement claims. This determination is
favorable and could minimize or totally negate Lemelson's claim.
Additionally, on March 29, 2001, the court issued an order to stay this
litigation pending the entry of a final non-appealable judgment in earlier-filed
actions involving the same patents. In January 2004, the court in these
earlier-filed actions ruled that the patents at issue were invalid,
unenforceable and not infringed by bar code scanners and machine vision reading
systems very similar to the bar code scanners and machine vision reading systems
used by us. Lemelson may appeal this decision.
We assemble custom products to the specifications of our customers, and
we rely on our customers' patents, designs, know-how and other intellectual
property. At this stage in the litigation, we are evaluating the Lemelson
litigation and our potential exposure, but are unable to project the merits of
Lemelson's claims, whether the litigation might result in material damages, or
whether, if necessary, we could obtain a license from Lemelson. Should we be
required to obtain such a license from Lemelson, there can be no assurance that
a license could be obtained on acceptable terms. Any litigation of this type may
result in substantial costs and diversion of our resources.
We are also a defendant in an adversary proceeding pending in the
Bankruptcy Court for the Northern District of California; Case No. 03-4470.
Electro Mechanical Solutions, Inc., one of the debtors in bankruptcy case number
01-44263, has sued us to recover alleged preferential transfers in the sum of
$270,661. We have filed an answer in the adversary proceeding and are
presently attempting to settle the matter. At this early stage of the
litigation, we are unable to predict whether or in what amount the litigation
will result in any liability to us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of our fiscal year to
a vote of security holders through the solicitation of proxies or otherwise.
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The table below reflects the high and low closing sales prices for our
common stock, which trades under the symbol "SIMC", formerly under the symbol
"TCDN", as reported by the Nasdaq SmallCap Market. The prices shown represent
quotations between dealers, without adjustment for retail markups, markdowns or
commissions and may not represent actual transactions.
2002
----
High Low
---- ---
1st Quarter $1.15 $ .95
2nd Quarter $1.40 $1.00
3rd Quarter $1.77 $ .76
4th Quarter $1.50 $ .52
2003
----
High Low
---- ---
1st Quarter $1.32 $1.05
2nd Quarter $2.35 $1.25
3rd Quarter $3.10 $2.00
4th Quarter $3.14 $2.12
At March 15, 2004, the closing sales price of our common stock was
$2.65.
At March 15, 2004, we had 63 shareholders of record and, based upon
data obtained from our transfer agent, we have over 500 beneficial owners of our
common stock.
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."
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:
19
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Years Ended December 31,
------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Revenues $ 36,187 $ 33,720 $ 37,042 $52,767 $48,383
Net income (loss) 1,106 1,390 (2,806) 565 303
Earnings (loss) per share:
Basic $ .17 $ .21 $ (.43) $ .09 $ .05
Diluted $ .17 $ .21 $ (.43) $ .09 $ .05
CONSOLIDATED BALANCE SHEET DATA
(IN THOUSANDS)
December 31,
------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Working capital $ 11,806 $ 10,018 $ 8,859 $12,443 $10,986
Total assets 25,672 22,168 21,209 27,876 26,796
Long-term debt (1) 6,500 5,315 6,371 8,582 7,962
Total liabilities 13,911 11,797 12,230 16,295 15,631
Stockholders' equity 11,761 10,371 8,979 11,581 11,165
- --------------------
(1) Includes advances from Medicore in 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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 have experienced
throughout 2002 and 2003, could have a material adverse effect on our business,
financial condition and results of operations. Our 2003 operating results
continued to be adversely impacted by the severe instabilities experienced
during the last three years in the telecommunication
20
industry, although we began to see conditions improve in the fourth quarter of
2003. 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.
During periods of recession in the electronics industry, as we have
experienced in 2001, 2002 and 2003, our competitive advantages in the areas of
quick-turnaround manufacturing and responsive customer service may be of reduced
importance to electronic OEMs, who may become more price sensitive.
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.
RESULTS OF OPERATIONS
The following is a discussion of the key factors that have affected our
business over the last three years. This discussion should be read in
conjunction with our consolidated financial statements and the related footnotes
included herein.
21
2003 COMPARED TO 2002
Consolidated revenues increased approximately $2,496,000 (7.4%) for the
year ended December 31, 2003, compared to the preceding year. The acquisition of
AG Technologies, Inc. in July 2003, generated $5,178,000 of increased sales.
Improvements in the computer peripherals and telecommunication industries
provided an increase in sales of $1,827,000 in 2003 over 2002. Soft demand in
the food preparation industry decreased sales by $3,994,000 for the year ended
December 31, 2003 compared to the year ended December 31, 2002. Interest and
other income increased approximately $86,000 primarily due to the gain on the
disposition of a building in Scotland in the year ended December 31, 2003,
compared to the preceding year.
Approximately 46% of our consolidated sales for 2003 were made to five
customers. Illinois Tool Works ("ITW") (22%) is the only customer that accounts
for more than 10% of our total sales. The loss of or substantial reduction of
sales to any major customer would have an adverse effect on our operations if
such sales were not replaced. See Item 1, "Business-Customers."
Cost of goods sold as a percentage of sales amounted to 87% for the
year ended December 31, 2003, and 86% for the preceding year. The 1% increase in
cost of goods sold as a percentage of sales was attributable to the different
mix of business at our Matamoros, Mexico facility. At the remaining four
manufacturing locations, cost of goods sold as a percentage of sales remained
the same at 86% for the years ended December 31, 2003 and 2002.
Selling, general and administrative expenses increased by approximately
$236,000 (9%) for the year ended December 31, 2003, compared to the preceding
year, and amounted to approximately 9% of sales for 2003 and 2002, respectively.
The increase in 2003 was due primarily to the cost added with the acquisition of
Simclar (Mexico) in July 2003.
We recorded a one time charge of approximately $171,000 in 2003 related
to the write-off of the accumulated foreign currency transaction account due to
the substantial liquidation of our wholly-owned subsidiary, Techdyne (Europe),
in the fourth quarter of 2003.
Interest expense decreased approximately $71,000 for the year ended
December 31, 2003, compared to the preceding year, reflecting the decreased
borrowings due to our profitable operations, along with declining interest rates
during the year. The LIBOR three month interest rate was 1.13% and 1.35% at
December 31, 2003 and 2002, respectively.
2002 COMPARED TO 2001
Consolidated revenues decreased approximately $3,287,000 (9%) for the
year ended December 31, 2002, compared to the preceding year. There was a
decrease in domestic sales of $1,081,000 (3%), and a decrease in European sales
of $2,053,000 (90%) compared to the preceding year. The European sales decline
in 2002 compared to 2001 was due to the cessation of operations in Europe on
February 28, 2002, (see Note 13 to our consolidated financial statements). The
domestic sales decline was primarily because of a continuation of the 2001
decrease in our shipments to our customers in the telecommunications industry
during the first half of 2002. Domestic sales increased by approximately
$3,911,000 (27%) during the second half of 2002, compared to the second half of
2001. Interest and other income decreased by approximately $187,000 compared to
the preceding year. This decrease reflects the recognition of a $161,000
deferred gain on sale of a buildings to Medicore in 2001 and reduction of
approximately $22,000 in interest income from stock option notes receivable (see
Note 4 to our consolidated financial statements).
Approximately 58% of our consolidated sales for 2002 were made to five
customers. Illinois Tool Works ("ITW") (36%) is the only customer that accounts
for more than 10% of our total sales. The
22
loss of or substantial reduction of sales to any major customer would have an
adverse effect on our operations if such sales were not replaced. See Item 1,
"Business-Customers."
Cost of goods sold as a percentage of sales amounted to 86% for the
year ended December 31, 2002, and 94% for the preceding year. We experienced
favorable operating cost reductions of approximately $2,601,000 as a result of
closing the Techdyne (Europe) manufacturing facility in May 2001 as compared to
our previous year's operating costs. The reorganization of three manufacturing
facilities during the second half of 2001 provided reduced operating costs of
approximately $1,126,000 for the year ended December 31, 2002. Lower component
costs during the second half of 2002 added additional savings to the improvement
of our gross margins for 2002 as compared to 2001.
Selling, general and administrative expenses, although decreasing by
approximately $1,043,000 (7%) for the year ended December 31, 2002, compared to
the preceding year, amounted to approximately 9% of sales for 2002 and 11% of
sales for 2001. The decrease in 2002 was due primarily to the reduction in the
costs of support personnel and marketing personnel implemented during the third
and fourth quarters of 2001, and to the closing of the Techdyne (Europe)
manufacturing facilities in May 2001. We recorded a one time charge of $304,000
in 2001 related to the forgiveness of stock option notes and related accrued
interest (see Item 1, Recent Developments) as well as bonuses for certain
officers and directors, all as a result of the sale of the company to Simclar
Group in June 2001.
Interest expense decreased approximately $302,000 for the year ended
December 31, 2002, compared to the preceding year reflecting the decreased
borrowings due to our profitable operations and to the reductions in
inventories, along with declining interest rates during the year. The three
month LIBOR was 1.35% and 1.88% at December 31, 2002 and 2001, respectively.
23
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balances at December 31, 2003 were
approximately $230,000, compared to approximately $1,537,000 at December 31,
2002. Net cash provided by operating activities was approximately $1,010,000 in
2003 compared to approximately $2,761,000 in 2002. The decrease in cash provided
from operating activities in 2003 as compared to 2002 was due primarily to a
decrease in net income and an increase in inventories. The reduction in net
income resulted from higher income tax provision and the write-off of the
accumulated foreign currency translation account in the period ended December
31, 2003, compared to the preceding year. The increase in inventories was due to
the increase in sales at the Hialeah and North Attleboro facilities.
At December 31, 2003, our average days sales outstanding was 49 days as
compared to 48 days at December 31, 2002. The increase of our average days sales
outstanding is primarily the result of a 15% increase in our sales to the
telecommunications industry in 2003, compared to 2002. Average inventory
turnover was 3.4 and 3.9 times for the years ended December 31, 2003 and 2002,
respectively. The decrease in inventory turnover is primarily due to slowdown in
sales to our food preparation equipment customers during 2003 as compared to
2002.
Cash flows used in investing activities decreased approximately
$347,000 in 2003 to $1,457,000 as compared to approximately $1,804,000 in 2002.
Cash used in investing activities was primarily for the acquisition of Simclar
(Mexico), less the proceeds from the settlement of the insurance claim from the
fire loss of the building in Scotland and proceeds from the sale of land in
Scotland. We have a capital expenditure budget of $358,000 for 2004.
Cash flow used in financing activities was approximately $1,083,000 in
2003 as compared to cash flow used in 2002 of approximately $443,000. The cash
flow was used to reduce our long-term loan from the Bank of Scotland.
On October 24, 2001, we entered into two credit facilities with Bank of
Scotland in Edinburgh, Scotland for an aggregate borrowing of $10,000,000. This
financing replaced the lines of credit and three commercial loans with The
Provident Bank of Ohio. The financing included a $3,000,000 line of credit with
an interest rate at LIBOR rate plus 1.5% for a one, three or six month period,
at our election, and which expires September 30, 2004. We elected the
three-month interest rate period at 2.69% until January 24, 2004. After this
date the rate is 2.60% until April 24, 2004. This line of credit had an
outstanding balance of $1,750,000 at December 31, 2003. The 2001 Bank of
Scotland financing also included a seven-year term loan of $7,000,000 at the
same interest rate as the line of credit. The term loan specifies quarterly
payments of $250,000 due in January, April, July and October of each year, plus
interest. The term loan had an outstanding balance of $5,000,000 at December 31,
2003.
All of the assets of Simclar, except for the assets of Techdyne
(Europe) and Simclar (Mexico), collateralize the credit facilities. The credit
facilities require affirmative and negative covenants. Certain of the
affirmative covenants require maintenance of a consolidated adjusted net worth
greater than $11,000,000; ratio of consolidated current assets to consolidated
net borrowing not less than 1.75 to 1; a ratio of consolidated trade receivables
to consolidated net borrowings not less than .75 to 1; and a ratio of
consolidated net income before interest and income taxes to total consolidated
interest costs not less than 2 to 1. Some of the negative covenants, among
others include (1) granting or permitting a security agreement against the
consolidated assets of the companies other than permitted security agreements,
(2) declaring or paying any dividends or making any other payments on our
capital stock, (3) consolidating or merging with any other entity or acquiring
or purchasing any equity interest in any other entity, or assuming any
obligations of any other entity, except for notes and receivables acquired in
the ordinary course of business, (4) incurring, assuming, guarantying, or
remaining liable with respect to any indebtedness, except for certain existing
indebtedness disclosed in our financial statements, or (5) undertaking any
capital expenditure in excess of $1,000,000 in any one fiscal year. The
agreements also
24
preclude changes in ownership in the companies, any material change in any of
our business objectives, purposes, operations and tax residence or any other
circumstances or events which will have a material adverse effect as defined by
the agreements.
Our ability to comply with these provisions may be affected by changes
in our business condition or results of our operations, or other events beyond
our control. The breach of any of these covenants would result in a default
under our debt. At December 31, 2003, we were in compliance with all of the
bank's financial covenants. Management believes we will continue to be in
compliance with our covenants in 2004. A default of the covenants would permit
our lender to accelerate the maturity of our credit facilities and to sell the
assets securing them, which would cause us to cease operations and seek
bankruptcy protection.
On October 11, 2001, Techdyne (Europe) entered into a credit facility
with Bank of Scotland for an amount of (pound)275,000 ($399,025). This facility
comprised an eight-year term loan repayable in quarterly payments of
(pound)8,594 ($13,788) due in January, April, July and October of each year,
with an interest rate of Bank of Scotland base rate plus 1.5% (effectively 5.4%
at December 31, 2002). This term loan in the amount of (pound)214,844 ($319,999)
was paid off on September 1, 2003.
We have no off-balance sheet financing arrangements with related or
unrelated parties and no unconsolidated subsidiaries. In the normal course of
business, we enter into various contractual and other commercial commitments
that impact or can impact the liquidity of our operations. The following table
outlines our commitments at December 31, 2003:
Total Less than 1-3 4-5 Over 5
In thousands Amounts 1 Year Years Years Years
----------------------------------------------------
Long-term debt $ 5,000 $ 1,000 $ 2,000 $ 2,000 $ --
Operating Leases
(non-cancelable) 2,609 692 1,134 509 274
Bank line of credit 1,750 1,750 -- -- --
----------------------------------------------------
Total commitments $ 9,359 $ 3,442 $ 3,134 $ 2,509 $ 274
====================================================
Unused bank line of credit $ 1,250 $ 1,250 $ -- $ -- $ --
----------------------------------------------------
Total commitments $ 1,250 $ 1,250 $ -- $ -- $ --
====================================================
25
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the company adopted the provisions of SFAS
No. 145 which updates and clarifies existing accounting pronouncements related
to reporting gains and losses from the extinguishment of debt and certain lease
modifications that have economic effects similar to sale-leaseback transactions.
The adoption of SFAS No. 145 did not have any material impact on the company's
financial position or results of operations.
Effective January 1, 2003, the company adopted the provisions of SFAS,
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities".
SFAS No. 146 nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF Issue 94-3, a liability for an exit cost as defined in EITF
Issue 94-3 was recognized at the date of an entity's commitment to an exit plan.
The adoption of SFAS No. 146 did not have any material impact on the company's
financial position or results of operations.
Effective January 1, 2003, the company adopted the provisions of
Financial Accounting Standards Board, ("FASB") Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 requires that a
guarantor must recognize, at the inception of a guarantee, a liability for the
fair value of the obligation that it has undertaken in issuing a guarantee. FIN
No. 45 also addresses the disclosure requirements that a guarantor must include
in its financial statements for guarantees issued. The adoption of FIN No. 45
did not have any material impact on the company's financial position or results
of operations.
In December 2002, the FASB issued SFAS, No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the prior disclosure guidance and requires prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. The provisions of SFAS No. 148 are generally effective for
fiscal years ending after December 15, 2002. At this time, the company does not
plan to adopt the accounting provisions of SFAS No. 123 and will continue to
account for stock options in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees".
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities" (an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements"), which became effective for the company in
October 2003. FIN No. 46 provides consolidation guidance for certain variable
interest entities ("VIE") in which equity investors of the VIE do not have the
characteristics of a controlling interest or do not have sufficient equity at
risk for the VIE to finance its activities independently. FIN No. 46 requires
each enterprise involved with a special purpose entity to determine whether it
provides financial support to the special purpose entity through a variable
interest. Variable interests may arise from financial instruments, service
contracts, minority ownership interests or other arrangements. If an entity
holds a majority of the variable interests, or a significant variable interest
that is considerably more than any other party's variable interest, that entity
would be the primary beneficiary and would be required to include the assets,
liabilities and results of operations of the special purpose entity in its
consolidated financial statements. The company does not expect the adoption of
FIN 46 to have a material impact on its financial position or results of
operations.
26
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:
ALLOWANCE FOR DOUBTFUL ACCOUNTS--We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of customers to make
required payments. Based on historical information, we believe that our
allowance is adequate. However, changes in general economic, business and market
conditions could affect the ability of customers to make their required
payments; therefore, the allowance for doubtful accounts is reviewed monthly and
changes to the allowance are updated as new information is received.
ALLOWANCE FOR INVENTORY OBSOLESCENCE--We maintain an allowance for
inventory obsolescence for losses resulting from inventory items becoming
unusable in the manufacturing operations due to loss of a specific customer or a
customer's product changes or discontinuations. Based on historical and
projected sales information and concentration of customers, we believe that the
allowance is adequate. However, changes in general economic, business and market
conditions could cause customers to cancel, reduce or reschedule orders. These
changes could affect the company inventory turn over; therefore, the allowance
for inventory obsolescence is reviewed monthly and changes to the allowance are
updated as new information is received.
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 to differences between the
financial accounting and tax basis of assets and liabilities.
IMPAIRMENT OF LONG-LIVED ASSETS--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, we make 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. We determine the fair value of these assets in the same manner as
described for assets held and used. See "Long-Lived Asset Impairment" in Note 1
to our consolidated financial statements included in this Report.
Goodwill and indefinite-lived intangibles are required to be evaluated
for impairment on an annual basis, or more frequently if impairment indicators
arise, using a fair-value-based test that compares the fair value of the asset
to its carrying value. Fair values are typically calculated using discounted
expected future cash flows, using a risk-adjusted discount rate.
We performed the annual test for goodwill impairment related to the
Lytton Inc. acquisition. These tests were performed at the reporting unit level.
In the test, we determined that the discounted sum of the expected future cash
flows from the assets exceeded the carrying value of those assets; therefore, no
impairment of goodwill was recognized.
27
In performing the tests for impairment, we made assumptions about
future sales and profitability. In estimating expected future cash flows related
to the Lytton Inc. assets, we used internal forecasts that were based upon
actual results, assuming an average revenue growth of 5 % per year and minimal
increases in gross margin.
At the time of the impairment test, the carrying value of net assets
for Lytton Inc. was $9,316,000. If our estimate of expected future cash flows
had been 10% lower, the expected future cash flows would still have exceeded the
carrying value of the assets by $5,862,000, including goodwill.
The most critical estimates, in order of significance, used in the
impairment test include (1) estimated revenue growths, (2) the terminal value
assumed, and (3) the discount rate applied.
We cannot predict the occurrence of future impairment triggering events
nor the impact such events might have on Lytton's reported asset values. Such
events may include strategic decisions made in response to economic conditions
relative to operations and the impact of technology, economic conditions, and
industry trends on our customer base.
REVENUE RECOGNITION-- Our sales are primarily derived from product
manufacturing including, but not limited to, finished molded and non-molded
cables, wiring harnesses, printed circuit board assemblies, electro-mechanical
and electronic assemblies. Revenue is recognized upon shipment of the product to
the customer, under contractual terms, which are generally FOB shipping point.
Upon shipment, title transfers and the customer assumes the risks and rewards of
ownership of the product. The selling price of the product is fixed and the
ability to collect for the sale to the customer is reasonably assured when the
product is shipped.
Revenue from contract manufacturing, rework and refurbishing is
recognized upon shipment of the product to the customer, under contractual
terms, which are generally FOB shipping point.
BUSINESS COMBINATIONS--We are required to allocate the purchase price
of acquired business to the tangible and intangible assets acquired and
liabilities assumed, based on their estimated fair values. We used outside
sources of information to complete a valuation to assist in determining the fair
value of assets acquired and liabilities assumed for the acquisition of AG
Technologies, Inc. completed during 2003. Such valuations require us to make
significant estimates and assumptions, especially related to intangible assets.
The purchased intangible assets were recorded by us for the 2003 acquisition at
the fair value assigned.
Critical estimates were used in valuing certain intangible assets and
plant and equipment include but are not limited to: future expected cash flows
from acquired customers continuing sales; and the expected useful life of plant
and equipment. Our estimates are based upon assumptions we believe are
reasonable, but which are inherently uncertain and unpredictable; as a result,
actual results may differ from estimates.
28
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 Simclar, Inc. The forward-looking statements speak only as of the
date on which they are made, and we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date of
this Report.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from changes in interest rates and
foreign currency exchange rates.
Sensitivity of results of operations to interest rate risks on our
investments is managed by conservatively investing liquid funds in short-term
government securities and interest-bearing accounts at financial institutions in
which we had approximately $39,000 invested at December 31, 2003.
Interest rate risks on debt are managed by negotiation of appropriate
rates on new financing obligations based on current market rates. There is an
interest rate risk associated with our variable rate debt agreements which
totaled approximately $6,750,000 at December 31, 2003.
We have exposure to both rising and falling interest rates. A 1/2%
decrease in rates on our year-end investments would have an insignificant impact
on our results of operations. A 1% increase in rates on our year-end variable
rate debt would result in a negative impact of approximately $68,000 on our
operations.
Our exposure to market risks from foreign currency exchange rates is
minimal due to the closing of Techdyne (Europe) in May 2001 and our transfer of
all Techdyne (Europe) operating assets to Simclar Group in February 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements, and the related notes, together with the
reports of Battelle & Battelle, LLP dated March 23, 2004, and
PricewaterhouseCoopers, LLP dated March 27, 2003, are set forth at pages F-4
through F-8 attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PricewaterhouseCoopers, LLP resigned as our independent accountants
effective July 16, 2003. We engaged new independent accountants, Battelle &
Battelle, LLP, for our annual audit for our 2003 fiscal year. This matter was
previously reported by us on the Current Report on Form 8-K dated July 17, 2003,
filed with the Securities and Exchange Commission on July 17, 2003.
During the two fiscal years ended December 31, 2002 and 2001 and the
subsequent interim period to the date of July 17, 2003, we had no disagreements
with PricewaterhouseCoopers, LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope of procedure, nor
any "reportable events" as defined in Item 304(a)(1)(v) of Regulation S-K of the
Securities and Exchange Commission. Additionally, the reports of
PricewaterhouseCoopers, LLP on our financial statements for those same periods
contained no adverse opinion or disclaimers of opinion, nor were they qualified
or modified as to uncertainty, audit scope or accounting principles.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")). Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures are
adequately designed to ensure that the information required to be disclosed by
us in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
applicable rules and forms. During the period covered by this Annual Report on
Form 10-K, there was no change in our internal control over financial reporting
(as
30
defined in Rule 13a-15(f) under the Exchange Act) that materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting. Subsequent to the date of this evaluation, there have been no
significant changes in our internal controls or in other factors that could
significantly affect these controls, and no corrective actions taken with regard
to significant deficiencies or perceived weaknesses in such controls.
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included under the caption,
"INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS" in our Information
Statement relating to our 2004 annual meeting of shareholders to be held on June
4, 2004, and 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
will be posted on our website at www.simclar.com by the date of the our annual
meeting of shareholders, June 4, 2004, or shortly thereafter. Until that time,
the code of conduct and ethics may be obtained free of charge by writing to
Simclar, Inc., Attn: Chief Financial Officer, 2230 W. 77th Street, Hialeah,
Florida, 33016.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption,
"EXECUTIVE COMPENSATION" in our Information Statement relating to our 2004
annual meeting of shareholders to be held on June 4, 2004, 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 our Information Statement relating to our 2004
annual meeting of shareholders to be held on June 4, 2004, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption,
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in our Information Statement
relating to our 2004 annual meeting of shareholders to be held on June 4, 2004,
and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES. The aggregate fees billed for professional services
rendered by Battelle & Battelle LLP, for the audit of our annual consolidated
financial statements for 2003 and the reviews of the financial statements
included in our Quarterly Reports on Form 10-Q for 2003 were $83,500 (including
direct engagement expenses). The aggregate fees billed for professional services
rendered by PricewaterhouseCoopers LLP for the audit of our annual consolidated
financial statements for 2002 and the reviews of the financial statements
included in our Quarterly Reports on Form 10-Q for the fiscal year were $72,440
(including direct engagement expenses).
AUDIT-RELATED FEES. The aggregate fees billed by Battelle & Battelle
LLP for audit-related services rendered for us for 2003 were $-0-. The aggregate
fees billed by PricewaterhouseCoopers LLP for audit-related services rendered
for us and our subsidiaries for 2002 were $-0-. Audit-related fees generally
include fees for benefit plan audits, due diligence services, etc.
TAX FEES. The aggregate fees billed by Battelle & Battelle LLP for
tax-related services rendered for us for 2003 were $17,000. The aggregate fees
billed by PricewaterhouseCoopers LLP for tax-related services rendered for us
and our subsidiaries for 2002 were $12,600. The tax-related services were all in
the nature of tax compliance and tax planning.
32
ALL OTHER FEES. The aggregate fees billed for services rendered to us
by Battelle & Battelle LLP and PricewaterhouseCoopers LLP, other than the audit
services, audit-related services, and tax services, were $-0- for 2003 and $-0-
for 2002, respectively.
PRE-APPROVAL POLICY. Our Audit Committee is required to pre-approve all
auditing services and permitted non-audit services (including the fees and terms
thereof) to be performed for us by our independent auditor or other registered
public accounting firm, subject to the de minimis exceptions for non-audit
services described in Section 10A(i)(1)(B) of the Securities Exchange Act of
1934 that are approved by our Audit Committee prior to completion of the audit.
33
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(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:
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2003 and 2002.
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001.
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001.
Notes to the Consolidated Financial Statements.
(2) The following financial statement schedule is included in
this Annual Report on Form 10-K and should be read in conjunction with the
Consolidated Financial Statements contained in this Report:
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above are omitted because of the absence of conditions
under which they are required or because the required information is included in
the financial statements or notes thereto.
(3) Exhibits:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ --------------------