Attached files
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EX-32 - EX-32 - MISCOR GROUP, LTD. | l42698exv32.htm |
EX-31.2 - EX-31.2 - MISCOR GROUP, LTD. | l42698exv31w2.htm |
EX-31.1 - EX-31.1 - MISCOR GROUP, LTD. | l42698exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended April 3, 2011
or
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number: 000-52380
MISCOR GROUP, LTD.
(Exact name of registrant as specified in its charter)
Indiana | 20-0995245 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
800 Nave Road, SE
Massillon, OH 44646
(Address of principal executive offices/zip code)
Massillon, OH 44646
(Address of principal executive offices/zip code)
Registrants telephone number, including area code: (330) 830-3500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is
a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. As of May 9, 2011, there were 11,785,826 shares outstanding of the
issuers Common Stock, without par value.
MISCOR GROUP, LTD.
INDEX TO FORM 10-Q
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PART I FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
MISCOR GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
April 3, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | | $ | | ||||
Accounts receivable, net of allowance for doubtful accounts
of $176 and $226, respectively |
$ | 4,803 | $ | 6,006 | ||||
Inventories |
4,490 | 4,359 | ||||||
Assets held-for-sale |
4,363 | 3,493 | ||||||
Other current assets |
660 | 603 | ||||||
Total current assets |
14,316 | 14,461 | ||||||
PROPERTY AND EQUIPMENT, net |
5,251 | 5,521 | ||||||
OTHER ASSETS |
||||||||
Goodwill |
| | ||||||
Customer relationships, net |
6,440 | 6,537 | ||||||
Other intangible assets, net |
588 | 598 | ||||||
Deposits and other assets |
59 | 59 | ||||||
Total other assets |
7,087 | 7,194 | ||||||
Total assets |
$ | 26,654 | $ | 27,176 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Revolving credit line |
$ | 3,689 | $ | 3,263 | ||||
Current portion of long-term debt |
208 | 385 | ||||||
Current portion of long-term debt, officers and affiliates |
4,120 | 4,105 | ||||||
Accounts payable |
2,693 | 3,742 | ||||||
Liabilities of held-for-sale operations |
1,347 | 1,076 | ||||||
Accrued expenses and other current liabilities |
1,651 | 1,855 | ||||||
Total current liabilities |
13,708 | 14,426 | ||||||
LONG-TERM LIABILITIES |
||||||||
Long-term debt |
938 | 947 | ||||||
Long-term debt, officers and affiliates |
1,959 | 1,974 | ||||||
Total long-term liabilities |
2,897 | 2,921 | ||||||
Total liabilities |
16,605 | 17,347 | ||||||
Commitments and contingencies |
||||||||
STOCKHOLDERS EQUITY |
||||||||
Preferred stock, no par value; 800,000 shares authorized; no shares issued and
outstanding |
| | ||||||
Common stock, no par value; 30,000,000 shares authorized; 11,785,826 shares issued
and outstanding |
59,344 | 59,344 | ||||||
Additional paid in capital |
||||||||
Accumulated deficit |
(49,295 | ) | (49,515 | ) | ||||
Total stockholders equity |
10,049 | 9,829 | ||||||
Total liabilities and stockholders equity |
$ | 26,654 | $ | 27,176 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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MISCOR GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data)
Three months ended | ||||||||
April 3, 2011 | April 4, 2010 | |||||||
(Unaudited) | (Unaudited) | |||||||
REVENUES |
||||||||
Product sales |
$ | 1,028 | $ | 1,301 | ||||
Service revenue |
7,228 | 6,730 | ||||||
Total Revenues |
8,256 | 8,031 | ||||||
COST OF REVENUES |
||||||||
Cost of product sales |
705 | 1,002 | ||||||
Cost of service revenue |
5,859 | 5,824 | ||||||
Total Cost of Revenues |
6,564 | 6,826 | ||||||
GROSS PROFIT |
1,692 | 1,205 | ||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
1,600 | 2,351 | ||||||
INCOME (LOSS) FROM OPERATIONS |
92 | (1,146 | ) | |||||
OTHER (INCOME) EXPENSE |
||||||||
Interest expense |
252 | 205 | ||||||
Other (income) expense |
| (23 | ) | |||||
252 | 182 | |||||||
LOSS FROM CONTINUING OPERATIONS |
(160 | ) | (1,328 | ) | ||||
Income Tax Expense |
| | ||||||
LOSS FROM CONTINUING OPERATIONS |
(160 | ) | (1,328 | ) | ||||
INCOME FROM DISCONTINUED OPERATIONS |
380 | 283 | ||||||
(See Note C, Discontinued and Held-for-Sale Operations) |
||||||||
NET INCOME (LOSS) |
$ | 220 | $ | (1,045 | ) | |||
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE |
||||||||
From Continuing Operations |
$ | (0.01 | ) | $ | (0.11 | ) | ||
From Discontinued Operations |
0.03 | 0.02 | ||||||
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE |
$ | 0.02 | $ | (0.09 | ) | |||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING |
11,785,826 | 11,794,112 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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MISCOR GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share and per share data)
For Three Months Ended | ||||||||
April 3, 2011 | April 4, 2010 | |||||||
(Unaudited) | (Unaudited) | |||||||
OPERATING ACTIVITIES |
||||||||
Net income (loss) |
$ | 220 | $ | (1,045 | ) | |||
Adjustments to reconcile net income (loss) to net cash utilized by operating activities: |
||||||||
Depreciation and amortization |
409 | 523 | ||||||
Goodwill impairment |
| | ||||||
Long lived assets impairment |
| | ||||||
Write off of note related to sale of business |
| | ||||||
Bad debt provision |
(27 | ) | | |||||
Inventory cost adjustments |
(91 | ) | 33 | |||||
Loss on sale of equipment |
| | ||||||
Loss on disposal of discontinued operations |
| (394 | ) | |||||
Stock-based compensation, net of forfietures |
| (32 | ) | |||||
Amortization of debt issuance costs and debt discount |
| 26 | ||||||
Unrealized gain on conversion option |
| (18 | ) | |||||
Changes in: |
||||||||
Accounts receivable |
495 | (306 | ) | |||||
Inventories |
(141 | ) | (413 | ) | ||||
Other current assets |
(88 | ) | (110 | ) | ||||
Deposits and other non-current assets |
| (25 | ) | |||||
Accounts payable |
(794 | ) | 1,498 | |||||
Accrued expenses and other current liabilities |
(179 | ) | (456 | ) | ||||
Net cash utilized by operating activities |
(196 | ) | (719 | ) | ||||
INVESTING ACTIVITIES |
||||||||
Acquisition of business assets |
| | ||||||
Proceeds from disposal of discontinued operations |
| 746 | ||||||
Acquisition of property and equipment |
(37 | ) | | |||||
Proceeds from disposal of property and equipment |
| 7 | ||||||
Net cash provided (utilized) by investing activities |
(37 | ) | 753 | |||||
FINANCING ACTIVITIES |
||||||||
Payments on capital lease obligations |
| (14 | ) | |||||
Short-term debt borrowings, net |
425 | 213 | ||||||
Borrowings of long-term debt |
10 | 6 | ||||||
Repayments of long-term debt |
(202 | ) | (237 | ) | ||||
Proceeds from the issuance of shares |
| | ||||||
Cash repurchase of restricted stock |
| (2 | ) | |||||
Debt issuance costs paid |
| | ||||||
Net cash provided (utilized) by financing activities |
233 | (34 | ) | |||||
DECREASE IN CASH |
| | ||||||
Cash, beginning of period |
| | ||||||
Cash, end of period |
$ | | $ | | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 254 | $ | 165 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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MISCOR GROUP, LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
(Amounts in thousands, except share and per share data)
NOTE A BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial statements of MISCOR Group, Ltd. (the
Company) as of and for the three months ended April 3, 2011 and April 4, 2010, have been
prepared in accordance with generally accepted accounting principles for interim information and
the rules and regulations of the Securities and Exchange Commission for interim financial
information. Accordingly, they do not contain all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. However, in the
opinion of the Companys management, all adjustments, consisting of normal, recurring
adjustments, considered necessary for a fair statement have been included. The results for the
three months ended April 3, 2011 are not necessarily indicative of the results to be expected
for the year ending December 31, 2011. Refer to our Annual Report on Form 10-K for the fiscal
year ended December 31, 2010 for the most recent disclosure of the Companys accounting
policies.
As a result of the sale of the Companys Construction and Engineering Services operations and
the sale and planned sale of the Companys Rail Services operations, the financial results
associated with these operations were classified as discontinued operations on the Companys
Condensed Consolidated Statement of Operations and held-for-sale on the Condensed Consolidated
Balance Sheets (See Note C, Discontinued and Held-for-sale Operations).
The Company has not yet finalized the new credit facility it needs to be able to retire the
Wells Fargo line of credit by its June 30, 2011termination date and to operate throughout 2011.
Additionally, $4,000 of other debt is currently scheduled to mature in 2011. These conditions,
coupled with its recurring losses from operations, raise substantial doubt as to the Companys
ability to continue as a going concern. As the Company expects to finalize a refinancing of the
Wells Fargo credit facility by June 30, 2011 and to repay or extend its other debt obligations
by their currently scheduled maturity dates, no adjustments to the reported financial statements
have been made that may result from this uncertainty.
NOTE B RECENT ACCOUNTING PRONOUNCEMENTS
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements,
(amendments to ASC Topic 605, Revenue Recognition) (ASU 2009-13). ASU 2009-13 requires
entities to allocate revenue in an arrangement using estimated selling prices of the delivered
goods and services based on a selling price hierarchy. The amendments eliminate the residual
method of revenue allocation and require revenue to be allocated using the relative selling
price method. ASU 2009-13 should be applied on a prospective basis for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010, with
early adoption permitted. The adoption of ASU 2009-13 did not have a material impact on the
Companys consolidated financial statements.
NOTE C DISCONTINUED AND HELD-FOR-SALE OPERATIONS
Construction and Engineering Services Business
In December 2009, the Company announced its plan to sell its CES business, consisting of its
Martell Electric and Ideal subsidiaries, in order to raise operating capital and focus on its
core industrial services operations. On February 3, 2010, the Company completed the sale of 100
percent of the equity of Martell Electric and Ideal to the Companys Chairman and former
President and Chief Executive Officer, John A. Martell, and his wife, Bonnie M. Martell, for
$3,500, consisting of $750 in cash and a $2,750 reduction in the amount owed under a previously
issued $3,000 note held by Mr. Martell (the Martell Note). Under the sale agreement, the
purchase price was subject to a working capital adjustment which the Company could satisfy
either with cash or by increasing the outstanding principal amount of the Martell Note.
The sale agreement set forth a target working capital range of $2,900-$3,200 at closing.
Immediately post-closing, the actual combined working capital for Martell Electric/Ideal was
approximately $1,226. During the first half of 2010, the Company recorded working capital
adjustments of $(1,654), choosing to satisfy the
4
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working capital adjustment by increasing the outstanding principal amount of the Martell Note.
These
adjustments brought the final sale price to $1,846, comprised of $527 for Ideal and $1,319 for
Martell Electric, with the final sale proceeds consisting of a cash payment of $750 and a net
reduction of $1,096 in amounts owed under the Martell Note. During the three months ended April
4, 2010, the Company recognized a pretax gain on sale of $136 from the sale of its CES business,
which was included in the Companys Condensed Consolidated Statement of Operations within Income
from Discontinued Operations.
Mr. Martell disputes the settlement of the working capital adjustment and has requested that the
disinterested directors of the Company negotiate to satisfy the working capital adjustment other
than through an increase in the outstanding principal balance of the Martell Note. A letter
from Mr. Martell to the Company, dated September 3, 2010, purports to accelerate payment of the
amount due under the Martell Note. The subordination agreement prohibits payment without Wells
Fargos prior written consent, which has not been obtained. (See Note H, Related Party
Transactions and Note K, Commitments and Contingencies).
The following table provides revenue and pretax income (loss) from the CES disposal group
discontinued operations:
Three Months Ended | ||||
April 4, 2010 | ||||
Revenue from discontinued operations |
$ | 1,721 | ||
Pretax loss from discontinued operations |
(141 | ) | ||
Pretax gain on disposal of discontinued operations |
136 |
The assets and liabilities of the CES disposal group classified as held-for-sale operations at
February 3, 2010 (date of sale) are summarized as follows:
February 3, 2010 | ||||
ASSETS |
||||
Accounts receivable, net of allowance for doubtful accounts
of $210 and $209, respectively |
$ | 5,116 | ||
Inventories |
171 | |||
Other current assets |
2,208 | |||
Total current assets |
7,495 | |||
PROPERTY AND EQUIPMENT, net |
500 | |||
Total assets |
$ | 7,995 | ||
LIABLITIES |
||||
Accounts payable |
$ | 5,252 | ||
Accrued expense and other liabilities |
1,033 | |||
Total liabilities |
6,285 | |||
Net assets |
$ | 1,710 | ||
American Motive Power
In December 2009, the Company announced its plan to sell its domestic AMP subsidiary in order to
focus on its core industrial services operations. On March 8, 2010, the Company completed the
sale of 100 percent of the outstanding capital stock of AMP to LMC, an unrelated party, in
exchange for the assumption of AMP liabilities.
The following table provides revenue and pretax loss from the AMP discontinued operations:
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Three Months Ended | ||||
April 4, 2010 | ||||
Revenue from discontinued operations |
$ | 709 | ||
Pretax loss from discontinued operations |
(241 | ) | ||
Pretax gain on disposal of discontinued operations |
178 |
The assets and liabilities of AMP classified as held-for-sale operations at March 8, 2010 (date
of sale) are summarized as follows:
March 8, 2010 | ||||
ASSETS |
||||
Accounts receivable, net of allowance for doubtful accounts
of $56 and $55, respectively |
$ | 564 | ||
Inventories |
1,153 | |||
Other current assets |
479 | |||
Total current assets |
2,196 | |||
Other assets |
| |||
Total assets |
$ | 2,196 | ||
LIABLITIES |
||||
Accounts payable |
$ | 683 | ||
Accrued expense and other liabilities |
1,691 | |||
Total liabilities |
2,374 | |||
Net assets |
$ | (178 | ) | |
HK Engine Components
In December 2009, the Company announced its plan to sell its HKEC subsidiary in order to focus
on its core industrial services operations. As a result, the Company has reported HKEC as
held-for-sale as of April 3, 2011 and December 31, 2010. The carrying value of the long-lived
assets of HKEC was adjusted to their fair market values at December 31, 2009 based on the
expected selling price of HKEC. The Company re-evaluated the value of these long-lived assets
as of December 31, 2010 and deemed no adjustment to these values was necessary. The Company
continues to try to sell HKEC and expects the sale of HKEC to be completed during 2011.
The following table provides revenue and pretax income from the HKEC discontinued operations:
Three Months Ended | ||||||||
April 3, 2011 | April 4, 2010 | |||||||
Revenue from discontinued operations |
$ | 2,781 | $ | 2,195 | ||||
Pretax income from discontinued operations |
501 | 271 |
The assets and liabilities of HKEC classified as held-for-sale operations at April 3, 2011 and
December 31, 2010 are summarized as follows:
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April 4, 2011 | December 31, 2010 | |||||||
ASSETS |
||||||||
Accounts receivable, net of allowance for doubtful accounts
of $39 and $81, respectively |
$ | 1,337 | $ | 602 | ||||
Inventories |
1,672 | 1,571 | ||||||
Other current assets |
94 | 66 | ||||||
Total current assets |
3,103 | 2,239 | ||||||
PROPERTY AND EQUIPMENT, net |
1,260 | 1,254 | ||||||
Total assets |
$ | 4,363 | $ | 3,493 | ||||
LIABLITIES |
||||||||
Accounts payable |
$ | 1,073 | $ | 819 | ||||
Accrued expense and other liabilities |
274 | 257 | ||||||
Total liabilities |
1,347 | 1,076 | ||||||
Net assets |
$ | 3,016 | $ | 2,417 | ||||
NOTE D INVENTORY
Inventory consists of the following:
April 3, 2011 | December 31, 2010 | |||||||
Raw materials |
$ | 2,215 | $ | 2,196 | ||||
Work-in-progress |
1,746 | 1,633 | ||||||
Finished goods |
529 | 530 | ||||||
$ | 4,490 | $ | 4,359 | |||||
At April 3, 2011 and December 31, 2010, inventory, net of allowance for slow moving, totaling $1,672 and $1,571 respectively, was classified as held-for-sale (See Note C, Discontinued and Held-for-Sale Operations). |
NOTE E OTHER INTANGIBLE ASSETS
Intangible assets consist of the following: |
April 3, 2011 | December 31, 2010 | |||||||||||||||||||||||||||
Estimated Useful | Gross Carrying | Accululated | Gross Carrying | Accululated | ||||||||||||||||||||||||
Lives (in Years) | Amount | Amortization | Net | Amount | Amortization | Net | ||||||||||||||||||||||
Patents and
Trademarks |
10 | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||||||
Technical Library |
20 | 700 | (116 | ) | 584 | 700 | (108 | ) | 592 | |||||||||||||||||||
Customer
Relationships |
15-20 | 7,722 | (1,282 | ) | 6,440 | 7,722 | (1,185 | ) | 6,537 | |||||||||||||||||||
Non-Compete
Agreements |
3 | 17 | (13 | ) | 4 | 17 | (11 | ) | 6 | |||||||||||||||||||
Total |
$ | 8,439 | $ | (1,411 | ) | $ | 7,028 | $ | 8,439 | $ | (1,304 | ) | $ | 7,135 | ||||||||||||||
The estimated future amortization expense related to intangible assets for the periods
subsequent to April 3, 2011 on a calendar year basis is as follows:
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Year Ending December 31 | ||||
2011 |
$ | 321 | ||
2012 |
421 | |||
2013 |
421 | |||
2014 |
421 | |||
2015 |
421 | |||
Thereafter |
5,023 | |||
Total |
$ | 7,028 | ||
NOTE F SENIOR CREDIT FACILITY
As of April 3, 2011, the Company had a $5,800 secured revolving credit agreement (credit
agreement) with Wells Fargo Bank National Association (Wells Fargo) with interest due monthly
at LIBOR plus 8.25% (effectively 8.55% at April 3, 2011), due June 30, 2011. At April 3, 2011
and December 31, 2010, approximately $3,689 and $3,263, respectively, was outstanding on the
credit facility. The borrowings under the credit facility are limited by specified percentages
of the Companys eligible receivables as defined in the credit agreement. At April 3, 2011,
approximately $173 of additional borrowings were available under the revolving credit agreement.
The credit facility is secured by all assets of the Company.
The provisions of the revolving note include a lock-box agreement and also allow Wells Fargo, in
its reasonable credit judgment, to assess additional reserves against, or reduce the advance
rate against accounts receivable used in the borrowing base calculation. Based on further
analysis of the terms of the revolving note, there are certain provisions that could potentially
be interpreted as a subjective acceleration clause. More specifically, Wells Fargo, in its
reasonable credit judgment, can assess additional reserves to the borrowing base calculation or
reduce the advance rate against accounts receivable to account for changes in the nature of the
Companys business that alters the underlying value of the collateral. The reserve requirements
may result in an over-advance borrowing position that could require an accelerated repayment of
the over-advance portion. The Company does not anticipate any changes in its business practices
that would result in any material adjustments to the borrowing base calculation. However,
management cannot be certain that
additional reserves will not be assessed by Wells Fargo to the borrowing base calculation. As a
result, the Company classifies borrowings under the revolving note as a short-term obligation.
Additionally, under a real estate loan with Wells Fargo, the Company has outstanding $145 at
April 3, 2011 and $322 at December 31, 2010. Under the loan agreement, the Company is to make
monthly installments of $52 per month plus interest. The Company paid interest expense of
approximately $4 and $9 for the three months ended April 3, 2011 and April 4, 2010,
respectively.
Interest expense under the Wells Fargo Credit facility, excluding amortization of debt issue
costs and accretion of debt discount, was $73 and $89 for the three months ended April 3, 2011
and April 4, 2010, respectively.
Default and Waiver Agreements
On January 14, 2010 the Company and Wells Fargo executed a Sixth Amendment to the Credit
Agreement (the Sixth Amendment). The Sixth Amendment amended the Credit Agreement in the
following respects:
| Consented to the planned sale of the CES business; | ||
| Revised the definition of Borrowing Base, resulting in lower available borrowings; | ||
| Required additional weekly principal payments of $10,000 on the real estate term note; and | ||
| Extended until January 27, 2010, and reduced to $1,000 the previously agreed upon requirement for the Company to raise $2,000 additional capital through subordinated debt, asset sales, or additional cash equity. |
On February 14, 2010, we received a letter agreement from Wells Fargo which amended the
Credit Agreement as follows:
| Revised the terms of Wells Fargos consent to the sale of our CES business; and | ||
| Extended until February 19, 2010 the requirement for the Company to raise $1,000 additional capital through subordinated debt, asset sales, or additional cash equity. |
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On April 15, 2010, the Company and Wells Fargo executed a Seventh Amendment to the Credit
Agreement (the Seventh Amendment). The Seventh Amendment amended the Credit Agreement in the
following respects:
| Waived the Companys noncompliance with the minimum book net worth and maximum capital expenditures from working capital covenants for the year ended December 31, 2009; | ||
| Adjusted the minimum book net worth covenant to $21,500 as of December 31, 2009 | ||
| Adjusted the allowable capital expenditures for the year ended December 31, 2010 to a maximum of $500; | ||
| Incorporated a monthly minimum EBITDA covenant commencing in April, 2010; and | ||
| Eliminated the previously agreed upon requirement for the Company to raise $1,000 additional capital through subordinated debt, asset sales, or additional cash equity. |
In connection with the Seventh Amendment, the Company agreed to pay Wells Fargo an accommodation
fee equal to $75, $25 of which was payable on the date of the execution of the Seventh
Amendment, with $25 due within 30 days and $25 due within 60 days.
On December 17, 2010, the Company and Wells Fargo entered into the Eighth Amendment to Credit
and Security Agreement (the Eight Amendment). In the Eighth Amendment, Wells Fargo agreed to
extend our senior credit facility through June 30, 2011, pursuant to the following revised
terms:
| amortization of the term loan remained at $21 per month through January 31, 2011, when it increased to $52 per month; | ||
| the term loan is to be paid in full upon the earlier of the sale of the Companys HKEC business or upon maturity; | ||
| the real estate loan was to be paid in full by December 31, 2011, using revolver availability; | ||
| accounts receivable between 91 120 days cease to be eligible collateral on the earlier of a sale of the Companys HKEC business or May 31, 2011, having been subjected to a cap gradually decreasing from $275 in monthly increments of $50 through May 31, 2011; | ||
| the percentage of ineligibility test for accounts owed by an account debtor was to reduce from 35% of the total due from an account debtor to 25%, no later than January 31, 2011; | ||
| a stop loss covenant of ($400) measured monthly on a year-to-date basis commenced January 1, 2011; and | ||
| Capital expenditures during 2011 are limited to $200. |
Wells Fargo was paid a $25 accommodation fee in connection with the Eighth Amendment.
The current agreement with Wells Fargo expires on June 30, 2011. The Company is currently
undergoing due diligence with another lender and anticipates having a new lender in place prior
to June 30, 2011 to replace Wells Fargo (See additional discussion at Note N Management
Plans).
The Company has promissory notes outstanding to BDeWees, Inc. XGenIII, Ltd., and John A.
Martell, in the principal amounts of $2,000, $2,000 and $2,079, respectively (together the
Subordinated Indebtedness) (See Note I, Related Party Transactions). Subordination agreements
have been executed which subordinate the obligations of the Company under the Subordinated
Indebtedness to the Wells Fargo credit facility.
NOTE G DEBT
Long-term debt
Long-term debt consists of the following:
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April 3, | December 31, | |||||||
2011 | 2010 | |||||||
Note payable to
Chairman, payable in
monthly installments of
$5 beginning April 1,
2010, with outstanding
balance payable at
maturity date of
February 28, 2012, plus
interest at the greater
of 5% or the prime rate
(3.25% at April 3, 2011
and December 31, 2010)
plus 2%, secured by a
subordinated interest in
substantially all assets
owned by the Company |
$ | 2,079 | $ | 2 ,079 | ||||
Note payable to former
members of 3-D Service,
Ltd. (BDeWees, Inc.) due
November 30, 2011, plus
interest at 12% at April
3, 2011 and at December
31, 2010, secured by a
subordinated interest in
machinery and equipment
of 3-D Services, Ltd. |
2,000 | 2,000 | ||||||
Note payable to former
members of 3-D Service,
Ltd. (XGen III, Ltd.)
due November 30, 2011,
plus interest at 12% at
April 3, 2011 and at
December 31, 2010,
secured by a
subordinated interest in
machinery and equipment
and inventory of 3-D
Services, Ltd. |
2,000 | 2,000 | ||||||
Note payable to bank in
monthly installments of
$52 through June 30,
2011 beginning February
1, 2011, plus interest
currently at Daily Three
Month LIBOR (0.30% and
0.31% at April 3, 2011
and December 31, 2010,
respectively) plus
8.25%, secured by
inventory and
substantially all
machinery and equipment
(see Note G, Senior
Credit Facility) |
145 | 322 | ||||||
Note payable to bank in
monthly installments of
$3 through November 16,
2014, plus interest at
8% secured by a security
interest in certain
equipment |
116 | 123 | ||||||
Capital lease obligations |
1,003 | 1,009 | ||||||
7,343 | 7,533 | |||||||
Less: current portion |
4,328 | 4,490 | ||||||
$ | 3,015 | $ | 3,043 | |||||
At April 3, 2011 and December 31, 2010, debt totaling $118 and $122 was classified as
held-for-sale, reported as Rail Services for segment reporting purposes (See Note C,
Discontinued and Held-for-Sale Operations).
Aggregate maturities of long-term debt for the periods subsequent to April 3, 2011 on a
calendar year basis are as follows:
Years Ending December 31, | Amount | |||
2011 |
$ | 4,328 | ||
2012 |
2,074 | |||
2013 |
914 | |||
2014 |
27 | |||
$ | 7,343 | |||
Following is a summary of interest expense for the three months ended April 3, 2011 and April 4,
2010:
Three Months Ended | ||||||||
April 3, 2011 | April 4, 2010 | |||||||
Interest expense on principal |
$ | 254 | $ | 182 | ||||
Amortization of debt issue costs |
| 3 | ||||||
Amortization of debt discount
revolving notes payable |
| 23 | ||||||
$ | 254 | $ | 208 | |||||
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For the three months ended April 3, 2011 and April 4, 2010, interest expense of $2 and $3,
respectively, was attributable to the Companys discontinued operations and recorded within
Income from Discontinued Operations on the Condensed Consolidated Income Statements.
NOTE H RELATED PARTY TRANSACTIONS
Trade accounts receivable and accounts payable
As of April 3, 2011, the Company has trade accounts receivable of $323 and $56 due from Martell
Electric, LLC and Ideal Consolidated, Inc., respectively.
As of April 3, 2011, the Company has trade accounts payable of $73 due to Martell Electric, LLC.
Long-term debt, officers
In December 2009, the Company announced its plan to sell its Construction and Engineering
Services business (CES business), consisting of its Martell Electric, LLC (Martell Electric)
and Ideal Consolidated, Inc. (Ideal) subsidiaries, in order to raise operating capital and
focus on its core industrial services operations. As a result, the Company has reported Martell
Electric and Ideal as held-for-sale, and adjusted the carrying value of Martell Electrics and
Ideals long-lived assets based on the sale agreement. On February 3, 2010, the Company
completed the sale of 100 percent of the equity of Martell Electric and Ideal to the Companys
Chairman and former President and CEO, John A. Martell, and his wife, Bonnie M. Martell, for
$3,500, consisting of $750 in cash and a $2,750 reduction in the amounts owed under a previously
issued $3,000 note, held by Mr. Martell (the Martell Note). Under the sale agreement, the
purchase price was subject to a working capital adjustment which the Company could satisfy
either with cash or by increasing the outstanding principal amount of the Martell Note.
Interest expense on the note was $27 and $17 for the three months ended April 3, 2011 and April
4, 2010, respectively.
The sale agreement set forth a target working capital range of $2,900-$3,200 at closing.
Immediately post-closing, the actual combined working capital for Martell Electric/Ideal was
approximately $1,226. During the first half of 2010, the Company recorded working capital
adjustments of $(1,654), choosing to satisfy the working capital adjustment by increasing the
outstanding principal amount of the Martell Note. These adjustments brought the final sale
price to $1,846, comprised of $527 for Ideal and $1,319 for Martell Electric, with the final
sale proceeds consisting of a cash payment of $750 and a net reduction of $1,096 in amounts owed
under the Martell Note. During the three months ended April 4, 2010, the Company recognized a
pretax gain on sale of $136 from the sale of its CES business, which was included in the
Companys Condensed Consolidated Statements of Operations within Income from Discontinued
Operations.
Mr. Martell disputes the settlement of the working capital adjustment, and has requested that
the disinterested directors of the Company negotiate to satisfy the working capital adjustment
other than through an increase in the outstanding principal balance of the Martell Note. A
letter from Mr. Martell to the Company, dated September 3, 2010, purports to accelerate payment
of the amount due under the Martell Note. The subordination agreement prohibits payment without
Wells Fargos prior written consent, which has not been obtained.
The Company is indebted to the former members of 3-D, Bernie DeWees, whom served as President of
MIS through November 20, 2009, for two notes payable (Seller Notes) each with a balance of
$2,000 at April 3, 2011 and December 31, 2010 (See Note H, Senior Credit Facility and Note I,
Long Term Debt). These notes were renegotiated and their maturity dates were extended by one
year, on November 30, 2010. Interest is payable monthly at 12%. The loans mature on November
30, 2011. Interest expense on these notes was $120 for the three months ended April 3, 2011 and
$60 for the three months ended April 4, 2010.
Leases
The Company leases its South Bend, Indiana, Hammond, Indiana, and Boardman, Ohio facilities from
its Chairman of the Board and stockholder. Total rent expense under these agreements was
approximately $73 for the three month periods ended April 3, 2011 and April 4, 2010,
respectively. The lease for the Hammond, Indiana facility will expire on August 3, 2011. The
Company leases a facility in South Bend for its former corporate offices from its Chairman of
the Board and stockholder. This lease is set to expire in May 2012. As a result of closure and
relocation of the corporate office to Massillon in June 2010, the Company no longer
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uses this
office space. The Company is still obligated to pay rent on the South Bend facility. As of
April 3, 2011 and December 31, 2010, approximately $138 and $172, respectively, was included in
accrued expenses and other current liabilities on the Companys Condensed Consolidated Balance
Sheets for the abandoned lease.
The Company leases its Hagerstown, Maryland facility from a partnership of which an officer of
the Companys subsidiary, HK Engine Components, LLC, is a partner. Rent expense under this
agreement was $39 for the three months ended April 3, 2011 and $40 for the three months ended
April 4, 2010.
The Company leases a facility in Massillon, Ohio from a partnership, one partner of which is a
former officer of MIS, under an agreement expiring in November 2017. Rent expense under the
lease was approximately $135 for the three months ended April 3, 2011 and April 4, 2010.
NOTE I INCOME (LOSS) PER SHARE
The Company accounts for income (loss) per common share under the provisions of ASC 260,
Earnings Per Share, which requires a dual presentation of basic and diluted income (loss) per
common share. Basic income (loss) per common share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common shares
outstanding for the year. Diluted income (loss) per common share is computed assuming the
conversion of common stock equivalents, when dilutive.
For the three months ended April 3, 2011, the Companys common stock equivalents, consisting of
warrants to purchase 308,197 shares of common stock and options to purchase 72,000 shares of
common stock issued to employees under the 2005 Stock Option Plan, were not included in
computing diluted loss per share because the effect of including the warrants and options would
have been anti-dilutive.
For the three months ended April 4, 2010, the Companys common stock equivalents, consisting of
warrants
to purchase 308,526 shares of common stock and options to purchase 23,600 shares of common stock
issued to employees under the 2005 Stock Option Plan were not included in computing diluted loss
per share because the effect of including the warrants and options would have been
anti-dilutive.
NOTE J CONCENTRATIONS OF CREDIT RISK
The Company grants credit, generally without collateral, to its customers, which are primarily
in the steel, metal working, scrap and rail industries. Consequently, the Company is subject to
potential credit risk related to changes in economic conditions within those industries.
However, management believes that its billing and collection policies are adequate to minimize
the potential credit risk. At April 3, 2011 and December 31, 2010, approximately 24% and 25%,
respectively, of gross accounts receivable were due from entities in the steel, metal working
and scrap industries, and approximately 30% and 14%, respectively, of gross receivables were due
from entities in the rail industry. One customer of the Industrial Services segment accounted
for approximately 16% of gross accounts receivable at April 3, 2011. One customer, doing
business with the Companys Industrial Services and Rail Services segments, accounted for
approximately 24% and 14% of total consolidated revenue for the three months ended April 3, 2011
and April 4, 2010, respectively. For the three months end April 4, 2010, one other customer, of
the Industrial Services segment, accounted for approximately 13% of revenue from continuing
operations. The loss of any of these customers would have a material adverse effect on the
Company.
NOTE K COMMITMENTS AND CONTINGENCIES
Collective bargaining agreements
At April 3, 2011 and December 31, 2010, approximately 11% of the Companys employees were
covered by collective bargaining agreements.
Warranty reserves
The Company warrants workmanship after the sale of its products and services, generally for a
period of one year. An accrual for warranty costs is recorded based upon the historical level
of warranty claims and managements estimates of future costs.
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Product warranty activity for the three months ended April 3, 2011 and April 4, 2010 is as
follows:
Three Months Ended | Three Months Ended | |||||||
April 3, 2011 | April 4, 2010 | |||||||
Balance at beginning of period |
$ | (217 | ) | $ | (244 | ) | ||
Warranty claims paid |
| 9 | ||||||
Warranty expense |
40 | (19 | ) | |||||
Balance at end of period |
$ | (177 | ) | $ | (254 | ) | ||
Employment Agreement
On June 18, 2010, the Company entered into an employment agreement with its newly appointed
President and CEO, Michael P. Moore. The agreement was for an initial one-year term, subject to
earlier termination as provided in the agreement. At each year-end, the agreement will
automatically renew for successive one-year periods unless either party, at least three months
before the end of the initial term or any renewal term, requests termination or renegotiation of
the agreement. The employment agreement provides for certain benefits to the executive if
employment is terminated by the Company for cause, by the executive with good reason, or due to
death or disability. The benefits include continuation of the executives base salary for six
months, any earned but unpaid profit-sharing or incentive bonus, stock option and company-paid
health insurance for six months.
Construction and Engineering Services Working Capital Adjustment
Subsequent to agreement of the working capital adjustment related to the sale of our
Construction and Engineering Services businesses, the purchasers initiated discussions with the
Companys disinterested director about restructuring payment of the working capital adjustment.
Specifically, the purchasers are requesting that all or part of the working capital adjustment
be paid in cash, which would require the consent of the Companys senior lender, Wells Fargo
Bank. MISCOR had elected, as provided for under the purchase agreement, to apply the full
amount of the working capital adjustment to the note. The purchaser Wells Fargo and the
Companys disinterested directors have not yet reached an agreement on restructuring payment of
the working capital adjustment.
NOTE L FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument:
Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses
The carrying amounts of these items are a reasonable estimate of their fair values because of
the current maturities of these instruments.
Debt
As of April 3, 2011 and December 31, 2010, rates currently available to us for long term
borrowings with similar terms and remaining maturities are used to estimate the fair value of
existing borrowings at the present value of expected cash flows. As of April 3, 2011 and
December 31, 2010, the fair value of debt differed from the carrying amount due to favorable
interest terms on the notes with the Companys CEO and former members of 3-D. At April 3, 2011
and December 31, 2010 the aggregate fair value of debt, with an aggregate carrying value of
$10,029 and $9,786, respectively, is estimated at $10,356 and $9,884, respectively, and is based
on the estimated future cash flows discounted at terms at which the Company estimates it could
borrow such funds from unrelated parties.
NOTE M SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
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Three Months Ended | ||||||||
April 3, 2011 | April 4, 2010 | |||||||
Reduction of note payable in conjunction with
sale of CES business |
$ | | $ | 1,176 | ||||
NOTE N MANAGEMENT PLAN
In 2011, the Companys management plan is to continue cost cutting efforts, by improving gross margins via strategic sourcing and improved efficiencies. Additionally, during the last part of 2010, the Company added salesmen in key strategic areas, in order to grow core revenues and will consider adding additional salesmen if warranted. The Company continues pursuing the divestiture of HKEC, as this business does not fit with the Companys core business competencies. The Company will also consider strategic alternatives, include but not limited to, obtaining an equity infusion, being acquired and/or going private. Lastly, the Company will pursue alternative lending sources for the credit facility. By doing such, management believes the Company can significantly reduce its interest expense, increase its base borrowing and eliminate lending restrictions currently in place. |
Pursuant to a non-binding credit proposal accepted by the Company on March 10, 2011, Crestmark Commercial Capital Lending LLC (Crestmark) proposed an accounts receivable financing using a $5 million revolving credit facility. The facility, which has been approved by Crestmark, would be used to pay off Wells Fargos line of credit with an outstanding balance of $3,689 as of April 3, 2011, and for working capital. This facility is contingent upon obtaining subordination agreements. Crestmark requires a senior security interest in accounts receivable and inventory, and a subordinated interest in substantially all of the Companys other assets. |
NOTE O SUBSEQUENT EVENTS
None |
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We provide electro-mechanical repair and maintenance solutions to industrial customers primarily in the United States. Our services include repair, maintenance and remanufacturing of electric motors for the steel, rail, and renewable energy industries from five locations in the Midwest and California; repair and manufacture of industrial lifting magnets for the steel and scrap industries from two locations in the Midwest; and manufacturing and remanufacturing of power assemblies, engine parts and other components related to large diesel engines from two locations on the East Coast. |
The severity and extended nature of the recent economic decline resulted in a steep decline in demand for products and services in the industries that we support. In 2009 and throughout 2010, we undertook a number of actions to reduce our fixed costs, improve operational efficiencies and increase operating margins. The Company suspended non-essential cash expenditures and severely reduced capital expenditures. These were efforts to align our operating costs with the decline in sales and respond to debt service and supplier demands. By the end of 2010, the Company had achieved substantially all components of the Plan. |
In December 2009, we announced a restructuring plan in response to the economic issues and banking environment. This plan established a focus on our industrial services businesses providing repair and maintenance services for electric motors and electric magnets, with the intent to divest our other operations, including our operations that specialize in the manufacturing and remanufacturing of diesel engine components, our operations specializing in the repair and remanufacture of locomotives, and our construction and engineering services businesses. |
In 2010, part of the Companys restructuring plan also included relocating the Companys corporate offices to Massillon, Ohio in order to more centrally locate our management team within our operational area and reduce selling, general and administrative expenses. This relocation was completed during the second quarter of |
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2010. Also, as part of this plan, the Company had announced that it would divest the construction and engineering businesses as well as two of our subsidiaries in the rail services industry. As of April 3, 2011, the Company still owns HK Engine Components, LLC (HKEC), which services the rail services industry. The financial results for HKEC are recorded as discontinued operations. |
In 2011, the Companys management plan is to continue cost cutting efforts, by improving gross margins via strategic sourcing and improved efficiencies. Additionally, during the last part of 2010, the Company added salesmen in key strategic areas, in order to grow core revenues, and will consider adding additionally salesmen if warranted. The Company continues pursuing the divestiture of HKEC, as this business does not fit the Companys core business competencies. We also consider strategic alternatives, including, but not limited to, obtaining an equity infusion, being acquired and/or going private. Lastly, the Company will pursue alternative lending sources for the credit facility. By doing such, management believes the Company can significantly reduce its interest expense, increase its base borrowing and eliminate lending restrictions currently in place. |
Revenues from continuing operations in the three months ended April 3, 2011 increased approximately 3.6% from the three months ended December 31, 2010, reflecting increased service demand. Gross profit increased with lower direct costs and overhead reduction efforts. Cost reduction initiatives were realized in SG&A with a reduction of approximately 45% compared to the three months ended December 31, 2010. Consequently, the first quarter of 2011 as compared to the fourth quarter of 2010 realized improved operating results. While the Company has experienced improvement in the volume of past due accounts payable, certain suppliers continue to place us on credit hold or cash in advance terms. These restrictions have impacted our sales and operating margins in 2010, and continued to have an impact in the first quarter of 2011. |
The Company has not yet finalized the new credit facility it needs to be able to retire the Wells Fargo line of credit by its June 30, 2011 termination date and to operate throughout 2011. Additionally, $4,000 of other debt is currently scheduled to mature in 2011. These conditions, coupled with its recurring losses from operations, raise substantial doubt as to the Companys ability to continue as a going concern. As the Company expects to finalize a refinancing of the Wells Fargo credit facility by June 30, 2011 and to repay or extend its other debt obligations by their currently scheduled maturity dates, no adjustments to the reported financial statement have been made that may result from this uncertainty. |
Recent Developments | ||
Not applicable | ||
Significant Accounting Policies |
The significant accounting polices used in preparation of the Companys consolidated financial statements are disclosed in Note B of the Notes to the Consolidated Financial Statements within the Form 10-K. No additional significant accounting policies have been adopted during Fiscal 2011. | ||
Recent Accounting Pronouncements |
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to ASC Topic 605, Revenue Recognition) (ASU 2009-13). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption of ASU 2009-13 did not have a material impact on its consolidated financial statements. |
Results of Operations
Three Months Ended April 3, 2011 Compared to Three Months Ended April 4, 2010
Revenues. Revenues from continuing operations increased by $0.2 million or 2.8% to $8.2 million for the three months ended April 3, 2011 from $8.0 million for the three months ended April 4, 2010. For 2010 and 2011, the Construction and Engineering and Rail Services segments have been classified as discontinued operations. For 2011, the Rail Service segment has been classified as discontinued operations. The increase in revenue is |
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related to increased service revenue and a concentrated effort to re-establish the Company in the market place. Additionally, the Company is beginning to experience some economic recovery in the markets we serve. |
Gross Profit. Total gross profit from continuing operations for the three months ended April 3, 2011 was $1.7 million or 20.5% of revenues from continuing operations compared to $1.2 million or 15.0% of revenues from continuing operations for the three months ended April 4, 2010. For 2010 prior to its sale,, the Construction and Engineering and Rail Services segments have been classified as discontinued operations. For 2010 and 2011, the Rail Service segment has been classified as discontinued operations. The Industrial Services gross profit increased due to our ability to continue eliminating costs and improve efficiencies. |
Selling, General and Administrative Expenses. Selling, general and administrative expenses from continuing operations were $1.6 million for the three months ended April 3, 2011 compared to $2.4 million for the three months ended April 4, 2010, reflecting cost reduction efforts, mainly staff reductions, enacted as part of our management plan during the early part of 2010. |
Interest Expense and Other Income. Interest expense for continuing operations increased slightly from the three months ended April 4, 2010 to the three months ended April 3, 2011 mainly due to an increase in borrowing against our revolving line of credit and interest expense associated with a portion of our subordinated debt. |
Provision for Income Taxes. We have experienced net operating losses in each year since we commenced operations. We are uncertain as to whether we will be able to utilize these tax losses before they expire. Accordingly, we provided a valuation allowance for the income tax benefits associated with these net future tax assets that primarily relate to cumulative net operating losses, until such time as profitability is reasonably assured and it becomes more likely than not that we will be able to utilize such tax benefits. |
Loss from Continuing Operations. Loss from continuing operations decreased by $1.1 million or 88% to $(0.2) million for the three months ended April 3, 2011 from $(1.3) million for the three months ended April 4, 2010. The decrease in loss from continuing operations is primarily attributed to a $0.5 million improvement in gross profit margin and $0.7 million decrease in selling, general and administrative expenses, as discussed in the gross profit and selling, general and administrative expenses sections above. Offsetting these items was a $0.1 million increase in interest expense. |
Income from Discontinued Operations. Income from discontinued operations of $0.4 million for the three months ended April 3, 2011 increased compared to income of $0.3 million for the three months ended April 4, 2010. For the three months ended April 3, 2010, the income from discontinued operations includes $0.4 million in pretax gain on disposal of discontinued operations. Excluding this pretax gain on disposal of discontinued operations, this segment generated a loss of ($0.1) million. Additionally, the results for the three months ended April 4, 2010 include pretax loss from discontinued operations of ($0.4) million related to the Construction and Engineering Services and AMP businesses, which were both divested during the first quarter 2010. Accordingly, the income from discontinued operations as of April 3, 2011 relates directly to our HK Engine Components, LLC subsidiary. For this subsidiary, we recorded income from discontinued operations of $0.4 million for the three months ended April 3, 2011 compared to $0.3 million for the three months ended April 4, 2010. The increase is due to increased sales in rail services. |
Net Income (Loss). Net income for the three months ended April 3, 2011 was $0.2 million compared to a net loss of $1.0 million for the three months ended April 3, 2010. The $1.3 million increase was mainly due to improved operating results, including improved margins, improved operational efficiencies and reduced selling, general and administrative expenses within our Industrial Services segment, as well as increased income from discontinued operations related to our HK Engine Components, LLC subsidiary. |
Liquidity and Capital Resources | ||
At April 3, 2011, we had approximately $0.6 million of working capital, an improvement of $0.6 million as compared to December 31, 2010. The increase is primarily due to a decrease in accounts payable owed at April 3, 2011. |
Net cash utilized by operating activities was ($0.2) million for the three months ended April 3, 2011 compared to ($0.7) million for the three months ended April 4, 2010. This increase is primarily due to the Company generating income and reducing its levels of accounts receivable. |
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For the three months ended April 3, 2011, net cash flows provided (utilized) by investing activities declined by $0.7 million to ($0.03) million compared to $0.8 million for the three months ended April 4, 2010. This decrease is a direct result of proceeds from the disposal of discontinued operation for the three months ended April 4, 2010. |
Net cash provided (utilized) by financing activities increased by $0.2 million to $0.2 million as of April 3, 2011 as compared to ($0.03) million as of April 4, 2010. This increase is directly attributed to increased borrowings against our revolving line of credit. |
The Company will focus efforts to refinance the existing senior credit facility to provide increased availability and long-term debt and subordinated notes due in 2011 and early 2012 to provide working capital. Prior operating results and the banking environment offer challenges in modifying or establishing a new senior credit facility. Consequently, capital may not be available on acceptable terms, or at all. |
Certain of our trade accounts payable are extended beyond the terms acceptable to the vendor. As a result, certain vendors have placed us on credit hold or require cash in advance which has resulted in delays in the receipt of necessary materials and parts. Disruptions of this nature have resulted in the loss of sales orders, and future delays may have an adverse affect on our business. |
We continue our efforts to enhance our future cash flows. These improvements include efforts to collect accounts receivable at a faster rate, decrease inventory levels, improve operating margins, review alternative financing sources, and negotiate extended terms with our vendors. |
Based on the current facility with Wells Fargo, accounts receivable between 91 120 days cease to be eligible collateral on the earlier of a sale of the Companys HKEC business or May 31, 2011, having been subjected to a cap gradually decreasing from $275 in monthly increments of $50 through May 31, 2011. |
While the current agreement with Wells Fargo expires on June 30, 2011, we expect to either renew the current revolving line of credit or find alternative funding solution for the revolving line of credit. Pursuant to a non-binding credit proposal accepted by the Company on March 10, 2011, Crestmark Commercial Capital Lending LLC (Crestmark) proposed an accounts receivable financing using a $5 million revolving credit facility. The facility, which has been approved by Crestmark, remains subject to loan subordination with our subordinated debt holders, would be used to pay off Wells Fargos line of credit and for working capital. Crestmark requires a senior security interest in accounts receivable and inventory, and a subordinated interest in substantially all of our other assets. |
The Company has not yet finalized the new credit facility it needs to be able to retire the Wells Fargo line of credit by its June 30, 2011 termination date and to operate throughout 2011. Additionally, $4,000 of other debt is currently scheduled to mature in 2011. These conditions, coupled with its recurring losses from operations, raise substantial doubt as to the Companys ability to continue as a going concern. As the Company expects to finalize a refinancing of the Wells Fargo credit facility by June 30, 2011 and to repay or extend its other debt obligations by their currently scheduled maturity dates, no adjustments to the reported financial statement have been made that might result from this uncertainty. |
We have promissory notes outstanding to BDeWees, Inc. and XGen III, Ltd. (together, the Seller Notes) and John A. Martell, in the original principal amounts of $2.0 million, $2.0 million and $2.1 million, respectively (collectively, the Subordinated Indebtedness). (See Note I, Related Party Transactions). Subordination agreements have been executed that subordinate our obligations under the Subordinated Indebtedness to the Wells Fargo credit facility. |
Effective as of December 1, 2010, the Seller Notes were extended through November 30, 2011. Under the loan modification agreements, the time for the payment of principal upon maturity has been extended for one year in consideration of a higher interest rate, monthly installment payments of principal and interest, additional collateral and certain other changes. Prior to a default, the amended and restated Seller Notes bear interest at prime plus 1%, subject to a minimum of 12% until Wells Fargos term debt is fully repaid, and thereafter subject to a minimum of 7% per annum. Monthly interest payments may be made, and beginning when we repaid the term loan to Wells Fargo in late December, 2010, repayments of $10 principal per month |
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to each holder of a Seller Note commenced. Upon any sale or combination of sales of assets exceeding $1.0 million gross, or upon a Change in Control as defined in the loan modification agreements, after repayment of transaction costs not to exceed 8%, and that portion of the revolver attributable to the assets sold, each Seller Noteholder will receive a principal payment of 12.5% of the net proceeds from such sale or sales. For an HKEC sale, each Seller Noteholder will receive a $0.07 million principal payment. The loan modification agreements also restrict both Magnetech and MISCOR from incurring additional indebtedness without the consent of the lenders, excepting $0.1 million per year for indebtedness for certain capital expenditures. The Seller Noteholders have a shared third lien on 3-D Services accounts receivable and inventory in addition to their existing shared second lien on 3-D Services fixed assets. |
Management is in the process of commencing negotiations with the Sellers to renegotiate the terms of the Sellers Notes. The Sellers appear to be willing to work with the Company, as long as they do not increase their risk as note holders. |
As of April 3, 2011, we did not have any material commitments for capital expenditures. |
Discussion of Forward-Looking Statements |
Certain matters described in the foregoing Managements Discussion and Analysis of Financial Condition and Results of Operations, as well as other statements contained in this Quarterly Report on Form 10-Q are forward-looking statements, which include any statement that is not an historical fact, such as statements regarding our future operations, future financial position, business strategy, plans and objectives. Without limiting the generality of the foregoing, words such as may, intend, expect, believe, anticipate, could, estimate or plan or the negative variations of those words or comparable terminology are intended to identify forward-looking statements. A safe harbor for forward-looking statements is provided by the Private Securities Litigation Reform Act of 1995 (Reform Act of 1995). The Reform Act of 1995 was adopted to encourage such forward-looking statements without the threat of litigation, provided those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement. |
Management based the forward-looking statements largely on its current expectations and perspectives about future events and financial trends that management believes may affect our financial condition, results of operations, business strategies, short-term and long-term business objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, that may cause actual results to differ materially from those indicated in the forward-looking statements, due to, among other things, factors identified in this report, and those identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable. |
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Effectiveness of Disclosure Controls and Procedures | ||
Our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) are designed to ensure that information we are required to disclose in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. Our disclosure controls and procedures also are designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosures. |
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures in effect as of April 3, 2011. Based on this evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that, as of April 3, 2011, our disclosure controls and procedures were effective to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries required to be included in our |
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Exchange Act reports, including this Quarterly Report on Form 10-Q, is recorded, processed, summarized, and reported as required, and is made known to management, including the Chief Executive Officer and Chief Accounting Officer, on a timely basis. | ||
Changes in Internal Control Over Financial Reporting |
There were no changes in our internal control over financial reporting that occurred during the quarter ended April 3, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS
The following documents are included or incorporated by reference in this Quarterly Report on
Form 10-Q:
Exhibit No. | Description | |||
10.1 | Secured Promissory Note dated February 3, 2010, among John A. Martell and the registrant
(incorporated by reference to
Exhibit 10.3 to the registrants Current Report on Form 8-K filed on February 9, 2010) |
|||
10.2 | Sixth Amendment to Credit and Security Agreement dated January 14, 2010, among Wells Fargo Bank, the
registrant and
certain subsidiaries of the registrant (incorporated by reference to Exhibit 10.1 of the registrants
Current Report or Form 8-K
filed January 21, 2010) |
|||
10.3 | Letter Agreement dated September 8, 2009, among Wells Fargo Bank, the registrant and certain
subsidiaries of the registrant,
acknowledged and agreed to by the registrant and such subsidiaries on September 16, 2009
(incorporated by reference to
Exhibit 10.1 to the registrants Current Report on Form 8-K filed on September 21, 2009) |
|||
10.4 | Consent and release by Wells Fargo Bank, National Association, dated March 15, 2010 (incorporated by
reference to Exhibit
10.10 to the registrants Current Report on form 8-K filed on March 15, 2010) |
|||
10.5 | Letter Agreement dated February 9, 2010, among Wells Fargo Bank, the registrant and certain
subsidiaries of the registrant
(incorporated by reference to Exhibit 10.1 to the registrants Current Report on Form 8-K filed on
February 9, 2010) |
|||
10.6 | Seventh Amendment to Credit and Security Agreement and Limited Waiver of Defaults dated April 15,
2010,
among Wells Fargo Bank, the registrant and certain subsidiaries of the registrant (incorporated by
reference to Exhibit 10.56
to the registrants Annual Report on Form 10-K filed on April 15, 2010) |
|||
10.7 | Purchase Agreement dated February 3, 2010, among John A. Martell and Bonnie Martell and the
registrant (incorporated by
reference to Exhibit 2.1 to the registrants Current Report on Form 8-K filed on February 9, 2010) |
|||
10.8 | Lenders Receipt and Acknowledgement dated February 3, 2010, among John A. Martell and the registrant
(incorporated by
reference to Exhibit 10.2 to the registrants Current Report on Form 8-K filed on February 9, 2010) |
|||
10.9 | Security Agreement dated February 3, 2010, among Magnetech Industrial Services, Inc. and the
registrant (incorporated by reference to Exhibit 10.4 to the registrants Current Report on Form 8-K
filed on February 9, 2010) |
|||
10.10 | Indemnification Agreement dated February 3, 2010, among John A. Martell and Bonnie Martell and the
registrant(incorporated by reference to Exhibit 10.5 to the registrants Current Report on Form 8-K
filed on February 9, 2010) |
|||
10.11 | Amendment No. 1 to Employment Agreement dated February 3, 2010, among John A. Martell and the
registrant (incorporated
by reference to Exhibit 10.6 to the registrants Current Report on Form 8-K filed on February 9, 2010) |
|||
10.12 | AMP Stock Purchase Agreement dated March 8, 2010, between LMC Transport, LLC, and the registrant
(incorporated by
reference to Exhibit 2.1 to the registrants Current Report on form 8-K filed on March 15, 2010) |
|||
10.13 | Release of Tenant Guaranty made by Dansville Properties, LLC, in favor of the registrant and certain
of its affiliates
(incorporated by reference to Exhibit 10.1 to the registrants Current Report on form 8-K filed on
March 15, 2010) |
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Exhibit No. | Description | |||
10.14 | Release of Landlord Guaranty made by American Motive Power, Inc. in favor of Lawrence Mehlenbacher
(incorporated by
reference to Exhibit 10.2 to the registrants Current Report on form 8-K filed on March 15, 2010) |
|||
10.15 | Eighth Amendment to Credit and Security Agreement, dated December 13, 2010, by and among MISCOR
Group, Ltd., Magnetech Industrial Services, Inc., and HK Engine Components, LLC as Borrowers and
Wells Fargo Bank, National Association as Lender (incorporated by reference to Exhibit 10.1 to the
registrants Current Report on Form 8-K filed on December 22, 2010) |
|||
10.16 | Form of Loan Extension and Modification Agreement dated as of December 1, 2010 by and between
Magnetech Industrial Services, Inc., MISCOR Group, Ltd. and BDeWees, Inc. (incorporated by reference
to Exhibit 10.2 to the registrants Current Report on Form 8-K filed on December 22, 2010) |
|||
10.17 | Form of Amended and Restated Promissory Note dated November 30, 2010 by Magnetech Industrial
Services, Inc. and MISCOR Group, Ltd. in favor of BDeWees, Inc. (incorporated by reference to Exhibit
10.3 to the registrants Current Report on Form 8-K filed on December 22, 2010) |
|||
10.18 | Form of Amendment to Commercial Security Agreement dated as of December 1, 2010 by and between
Magnetech Industrial Services, Inc. and BDeWees, Inc. (incorporated by reference to Exhibit 10.4 to
the registrants Current Report on Form 8-K filed on December 22, 2010) |
|||
31.1 | Certification by Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act |
|||
31.2 | Certification by Chief Accounting Officer required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act |
|||
32 | Section 1350 Certifications |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MISCOR GROUP, LTD. |
||||
May 13, 2011 | By: | /s/ Marc Valentin, CPA | ||
Marc Valentin, CPA | ||||
Chief Accounting Officer (Signing on behalf of the registrant as Principal Financial and Accounting Officer) |
||||
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