-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N6KTD9CeZ+OkuZ2JfVuRV4ZtKMwaiFX03olukKguoAvrUgWgRwObOjhwkMqTuYE/ GyPgVn/C38LDClJeaDgSpg== 0001144204-05-009629.txt : 20050331 0001144204-05-009629.hdr.sgml : 20050331 20050331143701 ACCESSION NUMBER: 0001144204-05-009629 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050331 DATE AS OF CHANGE: 20050331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIMCLAR INC CENTRAL INDEX KEY: 0000764039 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 591709103 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13924 FILM NUMBER: 05719078 BUSINESS ADDRESS: STREET 1: 2230 WEST 77TH ST CITY: HIALEAH STATE: FL ZIP: 33016 BUSINESS PHONE: 3055569210 MAIL ADDRESS: STREET 1: 2330 WEST 77TH ST CITY: HIALEAH STATE: FL ZIP: 33016 FORMER COMPANY: FORMER CONFORMED NAME: TECHDYNE INC DATE OF NAME CHANGE: 19920703 10-K 1 v015268_10k.txt 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, 2004 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 $6,383,435 on June 30, 2004. As of March 15, 2005, 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 2005 Annual Meeting of Shareholders 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. Fees and Services of Independent Registered Public Accounting Firm..... 32 Part IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 34 Signatures ....................................................................... 37 Independent Registered Public Accounting Firm's Report on Supplemental Schedule... S-1 Schedule II - Valuation and Qualifying Accounts................................... S-2
Part I Forward-Looking Statements This document contains certain forward-looking statements that are based upon current expectations and involve certain risks and uncertainties within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words or expressions such as "anticipate," "believe," "plan," "expect," "future," "intend," "estimate," "project," or variations of these words as well as similar words or expressions are intended to identify forward-looking statements. Readers should not place undue reliance on the forward-looking statements contained in this document, which apply only as of the date of this report. We undertake no obligation to update the information contained herein. Our actual performance and results could differ materially from those anticipated in these forward-looking statements for many reasons, including, but not limited to economic changes and changes in the electronics manufacturing services industry generally. Key Risk Factors that might cause or contribute to such differences include, but are not limited to, those discussed under the section entitled "Risk Factors" included herein at Page 10. Item 1. Business Introduction Simclar, Inc. ("we," "our," "us," "Simclar" or "the company") is a contract manufacturer of electronic and electro-mechanical products, providing advanced electronics manufacturing services (EMS) to original equipment manufacturers (OEMs). Our products are manufactured to customer specifications and designed for OEMs in the data processing, telecommunications, instrumentation and food preparation equipment industries. Our principal custom-designed products include complex printed circuit boards (PCBs), conventional and molded cables, wire harnesses and electro-mechanical assemblies. In addition, we provide OEMs with value-added, turnkey contract manufacturing services and total systems assembly and integration. We also deliver manufacturing and test engineering services and materials management, with flexible and service-oriented manufacturing and assembly services for our customers' high-tech and rapidly changing products. We were incorporated in Florida in 1976, acquired by Medicore, Inc., our former parent, in 1982, and became a public company in 1985. Effective June 27, 2001, control of our company was acquired by Simclar International Limited, which then transferred its 71.3% ownership of our company to its parent, Simclar Group Limited ("Simclar Group") both of which are private United Kingdom companies. Other companies of the Simclar Group are engaged in the same electronic and electro-mechanical subcontract manufacturing industry as is our company. Effective September 2, 2003, we changed our name from Techdyne, Inc. to Simclar, Inc. 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). We maintain an Internet website at http://www.simclar.com, along with other members of the Simclar Group. We make available free of charge on our website links to our annual reports on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (http://www.simclar.com/investor.htm). Information on our website is not incorporated by reference into this report. Additionally, individuals can access our electronically filed reports, proxy statements and other information through the Internet site maintained by the Securities and Exchange Commission at http://www.sec.gov. The public may also read and copy any materials we file with the Securities and Exchange Commission at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549 2 Electronics Manufacturing Services Industry Until 2001, our industry exhibited significant year to year growth, due both to the growth in the overall electronics industry, and the steadily increasing number of OEMs deciding to outsource all or a significant portion of the production of their products. As a result of the general global recession beginning in 2001, and its magnified effect in the computer and telecommunications equipment segments, this 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 continued through 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 contributed to the resumption of the pattern of growth in 2004. These factors include increased capital requirements for OEMs to acquire modern, highly automated manufacturing equipment, and 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 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 2001 and 2002 in response to the continued economic downturn put us in a better position to compete when the economy and our industry recovered. 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 3 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 2005, 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 customers. In alliance with Simclar Group, we anticipate experiencing growth and the ability to increase our global presence and competitive position. Products and Services We manufacture 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. 4 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 52% and 68% of our sales revenues in 2004 and 2003, 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. This Matamoros facility provides PCB manufacturing capacity similar to our Ohio facility, but enables us to compete more effectively on medium and higher volume PCB orders. Additional contract manufacturing capabilities were added with the opening of a second Matamoros facility in January 2005. Simclar (Mexico) is an international value added provider of comprehensive electronic manufacturing services to OEM's serving the automotive, industrial controls, medical and power equipment industries. Simclar (Mexico)'s Mexican facilities enable us to be competitive in the higher volume arena for assembly in North America. Cable and Harness Assemblies A cable is an assembly of electrical conductors insulated from each other, twisted around a central core and jacketed. Cables may be molded or non-molded. Simclar offers a wide range of custom manufactured cable and harness assemblies for molded and mechanical applications. These assemblies include multiconductor, ribbon, co-axial cable, and discrete wire harness assemblies. We use advanced manufacturing processes, in-line inspection and computerized automated test equipment. We maintain a large assortment of standard tooling for D-Subminiature, DIN connectors and phono connectors. D-Subminiatures are connectors which are over-molded with the imprint of the customer's name and part number. DIN connectors are circular connectors consisting of two to four pairs of wires used for computer keyboards. Flat ribbon cable or ribbon cable assemblies are cables with wires (conductors) on the same plane with connectors at each end. Flat ribbon cables are used in computer assemblies and instrumentation. Discrete cable assemblies are wires with contacts and connectors. Harnesses are prefabricated wiring with insulation and terminals ready to be attached to connectors. Our cable sales comprised approximately 30% and 27% of total sales revenue for 2004 and 2003, respectively. Contract Manufacturing Contract manufacturing involves the manufacture of complete finished assemblies with all sheet metal, power supplies, fans, PCBs as well as complete sub-assemblies for integration into an OEM's finished products, such as speaker and lock-key assemblies and diode assemblies that consist of wire, connectors and diodes that are over-molded, packaged and bar coded for distribution. These products can be totally designed and manufactured by the company through our computer-aided design system, engineering and supply procurement. We develop manufacturing processes and tooling, and test sequences for new products of our customers. We provide design and engineering services in the early stages of product development, thereby assuring mechanical and electrical considerations are integrated with a total system. Alternatively, the customer may provide specifications and we will assist in the design and engineering or manufacture to the customer's specifications. In January, 2005, we opened a second manufacturing facility in Matamoros, Mexico, providing additional capability to process soft-tooled sheet metal fabrication and finishing. Further expansion phases will include hard-tooled sheet metal fabrication, along with plastic injection molding, and overmolding for more complex cable and harness manufacturing. 5 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 19% and 5% of sales for 2004 and 2003 respectively. We believe that 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. 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 6 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 minimize 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. In mid-2004 we initiated a program whereby we will consolidate the majority of our electronics material "spend" with that of the entire Simclar Group, and quote and initiate contracts to the most competitive suppliers, with the result that we will benefit again by our affiliation with the larger Simclar Group. To date this program is ongoing, and the results are not yet quantifiable. 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 All of our manufacturing locations are certified under the ISO 9001/2000 quality assurance designation. These quality assurance designations are only provided to those manufacturers which exhibit stringent quality and process control assurances after extensive evaluation and auditing by these independent quality assurance organizations. Quality control is essential to the company's operations since customers demand strict compliance with design and product specifications, and high quality production is a primary competitive standard vital to our services. Product components, assemblies and sub-assemblies manufactured by the company are thoroughly inspected visually and electronically to ensure all components are made to strict specifications and are functional and safe. Strict process controls relating to the entire manufacturing process are part of our standard operating procedure. Over the years, our product and manufacturing quality have received excellent ratings. Total quality, timely delivery and customer satisfaction is our philosophy. High levels of quality in every area of our operations are essential. Quality standards are established for each operation, performance tracked against those standards, and identifying workflow and implementing necessary changes to deliver higher quality levels. We maintain regular contact with our customers to ensure adequate information exchange and other activities necessary to ensure customer satisfaction and to support our high level of quality and on-time delivery. Any adverse change in our quality and process controls could adversely affect our relationships with customers and ultimately our revenues and profitability. 7 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 is distributed over the following industry segments: Year Ended December 31, ------------------------------------- 2004 2003 2002 ---------- ---------- ---------- Food preparation equipment 18% 23 % 37 % Data processing 26% 24 % 23 % Telecommunications 12% 14 % 9 % Military and government 5% 9 % 8 % Instrumentation 15% 11 % 4 % Power equipment 15% 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 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 2004, 43% 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 2004 2003 2002 -------- -------- -------- ITW Food Equipment Group 17% 22% 36% 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 8 managers covering the Northeast, Southeast, West and Southwest regions of the United States, as well as parts of Mexico. There are 13 in-house sales/marketing personnel in the United States. In addition to sales through sales representatives and in-house sales personnel, sales are also generated through our website at http://www.simclar.com and through catalogues, brochures and trade shows. The independent manufacturer sales representatives, primarily marketing electronic and similar high-technology products, are retained under exclusive 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 effected 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, 2004 and 2003, our backlog of orders amounted to approximately $13,652,000 and $11,252,000, respectively. 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 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. 9 We believe that we are favorably positioned with regard to primary competitive factors - price, quality of production, manufacturing capability, prompt customer service, timely delivery, engineering expertise, and technical support. We also believe that our affiliation with Simclar Group enhances our competitive position internationally. However, recent consolidation trends in the electronic manufacturing services industry are resulting in changes in the competitive landscape. Increased competition could result in lower priced components and lower profit margins, or loss of customers, which could have a material adverse effect on our business, financial condition and results of operations. Compared to manufacturers who have greater direct buying power with component suppliers or who have lower cost structures, we may be operating at a cost disadvantage. Due to the number and variety of competitors, reliable data reflective to our competitive position in the electronic components and assembly industry is difficult to develop and is not known. Research and Development We spend limited amounts on research and development efforts. Our products are generally manufactured to customer specifications. Governmental Regulation Our operations are subject to certain federal, state and local regulatory requirements relating to environmental waste management and health and safety matters. We believe that we comply with applicable regulations pertaining to health, safety and the use, storage and disposal of materials that are considered hazardous waste under applicable law. To date, our costs for compliance and governmental permits and authorizations have not been material. However, additional or modified requirements that may require substantial additional expenditures may be imposed in the future. Employees We presently have 291 employees located in our U.S. facilities and 258 employees located at our Mexican facilities; 108 of our employees are employed as part time or temporary help. Approximately 457 of our employees are engaged in manufacturing, quality assurance, related operations and support activities, 42 are in material handling and procurement, 17 are in sales and marketing, 16 are in engineering, and 17 are in administrative, accounting and support activities. We have no unions in our U. S. facilities, but have two unions in our Matamoros facilities. We believe that our relationships with our employees, both union and non-union, are good. 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 43% of our sales for the year ended December 31, 2004, has been to five customers, the loss of any of which would adversely affect us. A substantial portion of our sales (17%) 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 10 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 have been pledged as collateral for two bank loans. In October 2004, we entered into two amended credit facilities with Bank of Scotland in Edinburgh, Scotland consisting of a $5,000,000 working capital facility and a term loan facility in the amount of $5,650,000. Interest on the working capital facility accrues at an annual rate equal to LIBOR plus 1.5%, plus an amount, rounded to the nearest eighth of a percent, to cover any increases in certain regulatory costs incurred by the bank. The company may elect to pay interest on advances every one, three or six months, with LIBOR adjusted to correspond to the interest payment period selected by the company. The company elected the three-month interest period at 3.8% until January 24, 2005, and after this date the rate is 4.17% until April 24, 2005. This facility had an outstanding balance of $2,980,000 at December 31, 2004, and expires September 30, 2005. The term loan of $5,650,000 is divided into two tranches. The principal of Tranche A ($4,250,000) is repayable in quarterly installments of $250,000 in October, January, April and July of each year from 2004 through 2008, with the final payment due in October 2008. The principal of Tranche B ($1,400,000) is payable in twenty-eight equal quarterly installments of $50,000, with the first installment payable on January 20, 2005. The term loan bears interest, and interest is payable, on the same terms as under the working capital facility. The term loan had an outstanding balance of $5,400,000 at December 31, 2004. Our credit facilities impose operational and financial restrictions on us Our credit facilities with the Bank of Scotland, which include an Amended Term Loan Facility Letter, an Amended Working Capital Facility Letter, an Amended and Restated General Security Agreement, an Amended and Restated Pledge Agreement, a Mortgage 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 11 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 extraordinary items 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. 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, 2004, the company was not in compliance with one of these covenants as a result of having capital expenditures for the year 2004 in excess of the $1,000,000 limit specified in the covenant. However, we obtained from the Bank a waiver of the non-compliance, and we believe that we will remain in compliance with our covenants for the remainder of 2005, but there can be no assurance that defaults in this 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 12 assistance to customers. Among this mix of competitive standards, we believe we are competitive with respect to delivery time, quality, price and customer service. Price sensitivity becomes a paramount competitive issue in recessionary periods, and we may be at a competitive disadvantage with manufacturers with a lower cost structure, particularly off-shore manufacturers with lower labor and related production costs. To compete effectively, we must also provide technologically advanced manufacturing services, and respond flexibly and rapidly to customers' design and schedule changes. Our inability to do so could have adverse effects on us. Customers in our industry are price-sensitive and, particularly in the recent economic downturn, there is substantial pressure from customers to reduce our prices. Our ability to remain competitive depends on our ability to meet these customer and competitive price pressures while protecting our profit margins. We have been engaged in and will have to continue cost reductions in overhead, manufacturing processes, and equipment retooling, while maintaining product flow, inventory control, and just-in-time shipping to our customers. If we are unable to accomplish these factors, we will not be competitive, and our business and operating results will be adversely impacted. Our revenues are contingent on the health of the industries we serve We rely on the continued growth and financial stability of our customers who operate in the following industry segments: 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. Manufacture of electronic and electro-mechanical products, particularly designed for OEMs and manufactured to custom specifications, is cyclical, and demand for our products may decline Our business depends substantially on both the volume of electronic and electro-mechanical production by OEMs in the data processing, telecommunications, instrumentation and food preparation industries, and new specifications and designs for these OEMs. These industries have been cyclical over the years, and have experienced oversupply as well as significantly reduced demand, as we have experienced in recent years. An economic downturn can result in lower capacity utilization of our manufacturing operations and a shift in product mix toward lower margin assemblies. Changes in economic conditions and demand can result in customer rescheduling of orders and shipments, which affect our results of operations. Moreover, our need to invest in engineering, marketing, and customer services and support capabilities will limit our ability to reduce expenses, as we would attempt to do, in response to such downturns. We do not have long-term contracts with customers, and cancellations, reductions or delays in orders affect our profitability We do not typically obtain firm long-term contracts from our customers. Instead, we work closely with our customers to develop forecasts for upcoming orders, which are not binding, in order to properly schedule inventory and manufacturing. Our customers may alter or cancel their orders or demand delays in production for a number of reasons beyond our control, which may include: o market demand for products; o change in inventory control and procedures; 13 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, in times of a recessionary environment and reduced demand for our customers' products and in turn, our products and services. In addition, since much of our costs and operating expenses are relatively fixed, a reduction in customer demand would adversely affect our gross margins and operating income. Although we are always seeking new business and customers, we cannot be assured that we will be able to replace deferred, reduced or cancelled orders. Shortages of components 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 experienced some shortages in 2004, which may increase as the world economy continues to recover 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 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. 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; 14 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 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 owns 73.4% of our outstanding common stock. Our common stock does not provide for cumulative voting, and therefore, the remaining shareholders, other than Simclar Group, will be unable to elect any directors or have any significant impact in controlling the business or affairs of our company. The concentration of ownership with Simclar Group may also have the effect of delaying, deterring or preventing a change in control of our company, and would make transactions relating to our operations more difficult or impossible without the support of Simclar Group. Also, since we are a "controlled company" for purposes of the Nasdaq Stock Market's corporate governance requirements, we are not required to comply with the provisions requiring that a majority of listed company directors be independent, the compensation of our executives to be determined by independent directors or nominees for election to our board of directors to be selected by independent directors. The price of our shares is volatile The market price of our common stock has substantially fluctuated in the past. The market price of our common stock has been as high as $6.65 in the fourth quarter of 2004 to as low as $.52 in the fourth quarter of 2002. Our common stock has limited trading volume, and it closed at $3.79 on March 15, 2005. 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 15 in the contract manufacturing and technology sectors. Announcements concerning our company and competitors, our operating results, and any significant amount of shares eligible for future sale may also have an impact on the market price of our common stock. As a result of these factors, the volatility of our common stock prices may continue in the future. We have not declared dividends, and our credit facilities prohibit us from paying dividends without written consent from our lender Under Florida corporate law, holders of our common stock are entitled to receive dividends from legally available funds, when and if declared by our board of directors. We have not paid any cash dividends, and our board of directors does not intend to declare dividends in the foreseeable future. Our future earnings, if any, will be used to finance our capital requirements, repay bank borrowings and fund our operations. Our credit facilities prohibit us from paying any dividends without the written consent of the lender or making any other payments on our capital stock without the written consent of the lender. There can be no assurance that the lender will provide such consent. Possible delisting of our stock Our common stock trades on the Nasdaq 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 OTC Bulletin Board, a less transparent trading market which may not provide the same visibility for the company or liquidity for its securities, as does the Nasdaq 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. 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, 2005 was $3.79, 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. During 2004 we were notified by Nasdaq of a failure to meet its qualitative listing requirements due to the failure of our audit committee to comply with the independence criteria, although the company was able to correct this deficiency before further action by Nasdaq. Continued satisfaction of certain of the Nasdaq SmallCap 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, 2008 (mfg., offices) Attleboro, MA 18,225 sq. ft. 800 Paloma Dr. 1 yr. to May 31, 2005 (mfg., office, warehouse) Round Rock (Austin), TX(1) 16,000 sq. ft. 2685 N. Coria Month to month (office, warehouse) Brownsville, TX 37,919 sq. ft. Parque Industrial CYLSA 5 yrs. to July 15, 2006 (mfg., office, warehouse) Matamoros, Mexico 55,524 sq. ft. Parque Industrial CYLSA 13 yrs. to October 31, 2017 (mfg., office, warehouse) Matamoros, Mexico
(1) 3,000 square feet of this location is sub-leased to Champion Temporaries, Inc. In October, 2004, we exercised an option to purchase for $1,400,000 a 77,800 square foot manufacturing, office and warehouse facility located at 1784 Stanley Avenue in Dayton, Ohio, which we had previously leased. The facility is encumbered by a mortgage to the Bank of Scotland to secure the acquisition indebtedness of $1,400,000. 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." 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 April 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 17 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. In September 2004, Lemelson filed an appeal in the Symbol Technologies case. As of March 15, 2005, the appeal is awaiting a hearing date. 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. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of 2004. 18 Part II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities Market for Common Stock The table below reflects the high and low closing sales prices for our common stock, which trades under the symbol "SIMC", 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. 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 2004 ---- High Low ---- --- 1st Quarter $3.10 $2.20 2nd Quarter $4.79 $2.30 3rd Quarter $6.60 $3.10 4th Quarter $6.65 $3.27 At March 15, 2005, the closing sales price of our common stock was $3.79. At March 15, 2005, we had 57 holders of record of our common stock. Dividends We have not paid, nor do we have any present plans to pay cash dividends on our common stock in the immediate future. In addition, our credit facilities with the Bank of Scotland prohibit us from declaring or paying dividends on our common stock without the Bank of Scotland's written consent. See Item 7, "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Liquidity and Capital Resources." Issuer Repurchases No purchases of any of our outstanding shares were made by or on behalf of the company or any affiliated purchaser during the fourth quarter of 2004. 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, --------------------------------------------------------------- 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- Revenues $ 53,582 $ 36,187 $ 33,692 $ 37,042 $ 52,767 Net income (loss) 2,342 1,106 1,390 (2,806) 565 Earnings (loss) per share: Basic $ .36 $ .17 $ .21 $ (.43) $ .09 Diluted $ .36 $ .17 $ .21 $ (.43) $ .09
Consolidated Balance Sheet Data (in thousands)
December 31, -------------------------------------------------------------- 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- Working capital $ 12,137 $ 11,804 $ 10,018 $ 8,859 $ 12,443 Total assets 32,580 25,674 22,168 21,209 27,876 Long-term debt 6,700 6,500 5,315 6,371 8,582 Total liabilities 18,462 13,913 11,797 12,230 16,295 Stockholders' equity 14,119 11,761 10,371 8,979 11,581
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction and Overview In 2004, we experienced a strong year-on-year sales increase and improved earnings significantly from 2003. During this period, we continued to focus on the following key priorities: (1) expanding our customer base through our alliance with Simclar Group, (2) seeking to develop strong, long-term alliances with major growth OEMs, and (3) developing the opportunities arising from our acquisition of Simclar (Mexico) in July 2003. During 2004, we continued to see new business awards from existing and new customers. As discussed in more detail throughout this Item 7: o our revenues increased by 48.1% during 2004 compared to 2003, following 7.4% sales growth in 2003 compared to 2002; o gross margin in 2004 increased by approximately $2,482,000 compared to 2003, primarily due to sales growth; o we continued to leverage selling, general and administrative expenses and reduced these to 7.0% of sales in 2004 from 8.7% in 2003; o net income of approximately $2,342,000 in 2004 substantially exceeded net income of approximately $1,106,000 in 2003; 20 o cash flows used in investing activities were approximately $3,139,000 in 2004, mainly for earn-out consideration in connection with the acquisition of Simclar (Mexico), the purchase of the land and building occupied by our Dayton, Ohio plant and purchases of machinery and equipment for our new manufacturing facility in Mexico; and o increased bank borrowing facilities of $3,400,000 were negotiated in 2004 with Bank of Scotland to fund our investing activities and the increased working capital requirements resulting from the increase in sales in the year. Our operations have continued to depend upon a relatively small number of customers for a significant percentage of our net revenue. Significant reductions in sales to any of our large customers would have a material adverse effect on our results of operations. The level and timing of orders placed by a customer vary due to the customer's attempts to balance its inventory, design modifications, changes in a customer's manufacturing strategy, acquisitions of or consolidations among customers, and variation in demand for a customer's products due to, among other things, product life cycles, competitive conditions and general economic conditions. Termination of manufacturing relationships or changes, reductions or delays in orders could have an adverse effect on our results of operations and financial condition, as has occurred in the past. Our results also depend to a substantial extent on the success of our OEM customers in marketing their products. We continue to seek to diversify our customer base to reduce our reliance on our few major customers. See "Business Strategy" and "Customers" under Item 1, "Business." The industry segments we serve, and the electronics industry as a whole, are subject to rapid technological change and product obsolescence. Discontinuance or modification of products containing components manufactured by our company could adversely affect our results of operations. The electronics industry is also subject to economic cycles and has in the past experienced, and is likely in the future to experience, recessionary periods. A prolonged worldwide recession in the electronics industry, as we experienced from 2001 through 2003, could have a material adverse effect on our business, financial condition and results of operations. During periods of recession in the electronics industry, our competitive advantages in the areas of quick-turnaround manufacturing and responsive customer service may be of reduced importance to electronic OEMs, who may become more price sensitive. We typically do not obtain long-term volume purchase contracts from our customers, but rather we work with our customers to anticipate future volumes of orders. Based upon such anticipated future orders, we will make commitments regarding the level of business we want and can accomplish given the current timing of production schedules and the levels of and utilization of facilities and personnel. Occasionally, we purchase raw materials without a customer order or commitment. Customers may cancel, delay or reduce orders, usually without penalty, for a variety of reasons, whether relating to the customer or the industry in general, which orders are already made or anticipated. Any significant cancellations, reductions or order delays could adversely affect our results of operations. We use Electronic Data Interchange (EDI) with both our customers and our suppliers in our efforts to continuously develop accurate forecasts of customer volume requirements, as well as sharing our future requirements with our suppliers. We depend on the timely availability of many components. Component shortages could result in manufacturing and shipping delays or increased component prices, which could have a material adverse effect on our results of operations. It is important for us to efficiently manage inventory, proper timing of expenditures and allocations of physical and personnel resources in anticipation of future sales, the evaluation of economic conditions in the electronics industry and the mix of products, whether PCBs, wire harnesses, cables, or turnkey products, for manufacture. See "Electronic Manufacturing Industry" and "Supplies and Materials Management" under Item 1, "Business" and "Results of Operations" below. 21 We must continuously develop improved manufacturing procedures to accommodate our customers' needs for increasingly complex products. To continue to grow and be a successful competitor, we must be able to maintain and enhance our technological capabilities, develop and market manufacturing services which meet changing customer needs and successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis. Although we believe that our operations utilize the assembly and testing technologies and equipment currently required by our customers, there can be no assurance that our process development efforts will be successful or that the emergence of new technologies, industry standards or customer requirements will not render our technology, equipment or processes obsolete or noncompetitive. In addition, to the extent that we determine that new assembly and testing technologies and equipment are required to remain competitive, the acquisition and implementation of such technologies and equipment are likely to require significant capital investment. Our results of operations are also affected by other factors, including price competition, the level and timing of customer orders, fluctuations in material costs (due to availability), the overhead efficiencies achieved by management in managing the costs of our operations, our experience in manufacturing a particular product, the timing of expenditures in anticipation of increased orders, selling, and general and administrative expenses. Accordingly, gross margins and operating income margins have generally improved during periods of high volume and high capacity utilization. We generally have idle capacity and reduced operating margins during periods of lower-volume production. Key Financial Performance Measures We manage and assess the performance of our business primarily through the following measures: Orders booked and backlog - the ratio of orders booked to sales is reviewed on a monthly basis for each of the company's five manufacturing plants. Sales - monthly sales for each plant are compared against budget and the same month in the previous year. Gross margin - the gross margin achieved by each plant each month is compared against budget and the same month in the previous year. Selling, general and administrative expenses - the ratio of these expenses as a percentage of sales for each plant each month is compared against budget. Working capital - movements in the balance sheet amounts of inventory, accounts receivable and accounts payable for each plant are reviewed on a monthly basis. Bank borrowings - movements in the company's working capital facility with the bank are reviewed on a weekly basis. In the event that any of the above measures indicate unusual movements or trends, further review is undertaken by management to ensure that satisfactory explanations are obtained, and, where necessary, appropriate corrective action is taken. Results of Operations The following is a discussion of the key factors that have affected our business over the last three years. This discussion should be read in conjunction with our consolidated financial statements and the related footnotes included herein. 22 2004 Compared to 2003 Consolidated revenues increased approximately $17,395,000 (48.1%) for the year ended December 31, 2004, compared to the preceding year. The acquisition of Simclar (Mexico) in July 2003 generated $9,941,000 of the increase in sales in 2004. Continual improvements in our sales to the computer peripherals, instrumentation, power equipment, telecommunications and food preparation equipment industries provided the additional $7,454.000 of increased sales in 2004, compared to the preceding year. Only our sales to the military-government sector declined in 2004, when compared to 2003. Our best sales improvements in 2004 were in our sales to computer peripherals industry of $5,099,000 and to the instrumentation industry of $4,260,000. Interest and other income decreased approximately $68,000 in the year ended December 31, 2004, compared to the preceding year. The decrease was due to gain on the disposition of a building in Scotland in the year ending December 31, 2003. Approximately 43% of our consolidated sales for 2004 were made to five customers. Illinois Tool Works ("ITW") (17%) 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 86% for the year ended December 31, 2004 and 87% for the preceding year. The company experienced higher material costs as a percentage of sales, at 62% percent of sales for the products manufactured in 2004, compared to 58% in the preceding year. The higher material cost was due to price increases from suppliers of electronic components and higher cost bills of materials for certain products manufactured in the second half of the year. The labor content of our manufactured products remained steady at 8% of sales for 2004 and for 2003. The overhead component of cost of goods sold as a percentage of sales was 17% in 2004, compared to 21% in the preceding year. This was due mainly to the higher volume production in our four U.S. manufacturing locations in 2004. Selling, general and administrative expenses increased by approximately $618,000 (20%) for the year ended December 31, 2004, compared to the preceding year, and amounted to approximately 7% and 9% of sales for 2004 and 2003, respectively. The acquisition of Simclar (Mexico) in July 2003 contributed approximately $409,000 of the increase in 2004 compared to 2003. Increased employee costs were the primary drivers of the remaining expense increase in 2004 compared to 2003. Interest expense decreased approximately $5,000 for the year ended December 31, 2004, compared to the preceding year, reflecting the decreased borrowings until October 2004 when we restructure our credit facilities to acquire the land and building of our Dayton, Ohio facility, which we formerly had leased. The three month LIBOR was 2.30% and 1.13% at December 31, 2004 and 2003, respectively. 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 Simclar (Mexico) 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. 23 Approximately 46% of our consolidated sales for 2003 were made to five customers. Illinois Tool Works ("ITW") (22%) was the only customer that accounted for more than 10% of our total sales in 2003. 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 slightly higher cost structure of 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 three month LIBOR was 1.13% and 1.35% at December 31, 2003 and 2002, respectively. Liquidity and Capital Resources Our cash and cash equivalents balances at December 31, 2004 were approximately $280,000, compared to approximately $230,000 at December 31, 2003. Net cash provided by operating activities was approximately $1,543,000 in 2004 compared to approximately $1,010,000 in 2003. The increase in cash provided from operating activities in 2004 as compared to 2003 was due primarily to an increase in net income in 2004 compared to 2003 with a slight offset due to increased working capital to support our 48% increase in sales in 2004 over 2003. At December 31, 2004, our average outstanding sales' days was 54 days as compared to 49 days at December 31, 2003. The increase in our average outstanding sales' days is primarily the result of the nature of the customer base that we are servicing from our Mexican facilities. The overall trend we experienced over the last two years is that the majority of our customers are stretching out payment terms. Average inventory turnover was 4.1 and 3.4 times for the years ended December 31, 2004 and 2003, respectively. The increase in inventory turnover is primarily due to our increased sales in 2004 across all of the industries that we service, with the exception of the military-government sector. Cash flows used in investing activities were approximately $3,139,000 in 2004 as compared to approximately $1,457,000 in 2003. Cash used in investing activities was primarily for additional consideration paid as an earn-out in connection with the acquisition of Simclar (Mexico), the purchase of the land and building occupied by our manufacturing operation in Dayton, Ohio, and purchases of machinery and equipment for our new manufacturing facility in Mexico. We have a capital expenditure budget of $700,000 for 2005. Cash flow provided from financing activities was approximately $1,630,000 in 2004 as compared to cash flow used in 2003 of approximately $1,083,000. The cash flow provided was from the restructuring of our two credit facilities with the Bank of Scotland as discussed below. 24 On October 2, 2001, the company entered into two credit facilities with Bank of Scotland in Edinburgh, Scotland for an aggregate borrowing of $10,000,000. The financing included a $3,000,000 line of credit, with an interest rate at LIBOR plus 1.5% for a one, three or six month period, at the company's election. The 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 specified quarterly payments of $250,000 due in January, April, July and October of each year. On October 14, 2004, the company restructured its existing term loan and working capital facilities with the Bank. The term loan was made pursuant to an Amended and Restated Facility Letter providing for a term loan of $5,650,000, of which Tranche A represents outstanding borrowings of $4,250,000, and Tranche B represents the $1,400,000 loan to acquire the property located at 1784 Stanley Avenue, Dayton, Ohio. The principal of Tranche A is repayable in quarterly installments of $250,000 in January, April, July and October of each year from 2004 through 2008, with the final payment due in October 2008. The principal of Tranche B is payable in twenty-eight equal quarterly installments of $50,000, with the first installment payable on January 20, 2005. Interest on each advance accrues at an annual rate equal to LIBOR plus 1.5%, plus an amount, rounded to the nearest eighth of a percent, to cover any increases in certain regulatory costs incurred by the Bank. The company may elect to pay interest on advances every one, three or six months, with LIBOR adjusted to correspond to the interest payment period selected by the company. The company elected the three-month interest period at 3.8% until January 24, 2005. After this date the rate is 4.17% until April 24, 2005. The term loan had an outstanding balance of $5,400,000 at December 31, 2004. The company's existing working capital facility with the Bank was also amended on October 14, 2004 to increase the amount of the facility from $3,000,000 to $5,000,000. Advances bear interest, and interest is payable, on the same terms as under the Amended Term Loan Facility. This line of credit had an outstanding balance of $2,980,000 at December 31, 2004, and expires on September 30, 2005. The Company intends to renew this credit facility prior to its expiration date. All of the assets of the company collateralize the credit facilities. The credit facilities contain affirmative and negative covenants. Certain of the affirmative covenants require maintenance of a consolidated adjusted net worth greater than $11,000,000; a ratio of consolidated current assets to consolidated net borrowing not less than 1.75 to 1; a ratio of consolidated trade receivables to consolidated net borrowings not less than .75 to 1; and a ratio of consolidated net income before interest and income taxes to total consolidated interest costs not less than 2 to 1. Some of the negative covenants, among others, include (1) granting or permitting a security agreement against the consolidated assets of the companies other than permitted security agreements, (2) declaring or paying any dividends or making any other payments on the company's capital stock, (3) consolidating or merging with any other entity or acquiring or purchasing any equity interest in any other entity, or assuming any obligations of any other entity, except for notes and receivables acquired in the ordinary course of business, (4) incurring, assuming, guarantying, or remaining liable with respect to any indebtedness, except for certain existing indebtedness disclosed in these financial statements, or (5) undertaking any capital expenditure in excess of $1,000,000 in any one fiscal year. The agreements also preclude, without the bank's prior written consent, changes in ownership in the companies, any mergers or acquisitions, any material change in any of our business objectives, purposes, operations and tax residence or any other circumstances or events which will have a material adverse effect as defined by the agreements. The bank consented to the Simclar (Mexico) acquisition in 2003. Our ability to comply with these provisions may be affected by changes in our business condition or results of our operations, or other events beyond our control. The breach of any of these covenants would result in a default under our debt agreements. At December 31, 2004, the company was not in compliance with one of these covenants as a result of having capital expenditures for the 25 year 2004 in excess of the $1,000,000 limit specified in the covenant. However, we obtained from the Bank a waiver of the non-compliance, and we believe that we will remain in compliance with our covenants for the remainder of 2005, but there can be no assurance that defaults in any of the covenants will not occur in the future, nor can there be any assurance that our lender will waive future covenant violations. 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, 2004:
Total Less than 1-3 4-5 Over 5 In thousands Amounts 1 Year Years Years Years -------------------------------------------------------------- Long-term debt with interest $ 5,966 $ 1,406 $ 2,663 $ 1,478 $ 419 Operating leases (non-cancelable) 5,493 746 1,147 1,020 2,580 Bank line of credit with interest 3,073 3,073 -- -- -- Vendor open line of credit 2,853 353 2,500 -------------------------------------------------------------- Total commitments $ 17,385 $ 5,578 $ 6,310 $ 2,498 $ 2,999 ==============================================================
Effect of Recently Issued Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), Share-Based Payment, which would require all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statements of operations based on their fair values, effective for public companies for interim periods beginning after June 15, 2005. SFAS No.123(R) permits public companies to adopt its requirements using either the modified prospective or retrospective method. The company will adopt this statement in the third quarter of fiscal year 2005 and currently does not anticipate that the adoption of this standard will have a material effect on our consolidated results of operations, financial position, and cash flows. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4 Inventory Pricing". SFAS No. 151 requires idle facility costs, abnormal freight, handling costs, and amounts of wasted materials (spoilage) be treated as current-period costs. Under this concept, if the costs associated with the actual level of spoilage or production defects are greater than the costs associated with the range of normal spoilage or defects, the difference would be charged to current-period expense, not included in inventory costs. SFAS No. 151 also requires the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the 26 production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We will adopt this statement for fiscal year 2006 and currently do not anticipate that the adoption of this standard will have a material effect on our consolidated results of operations, financial position, and cash flows. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions." The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in APB Opinion No. 29 provided an exception to this basic measurement principle for exchanges of similar productive assets. That exception required that some nonmonetary exchanges be recorded on a carryover basis. SFAS No. 153 eliminates this exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. An exchange would lack commercial substance if our future cash flows are not expected to change significantly as a result of that exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted. We will adopt this new standard for fiscal year 2006 and do not anticipate that the adoption of this standard will have a material effect on our consolidated results of operations, financial position, and cash flows. 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 turnover; 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 27 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. The company performed the annual test for goodwill impairment related to the Lytton and Simclar (Mexico) acquisitions. 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. In performing the tests for impairment, we made assumptions about future sales and profitability. In estimating expected future cash flows related to the Lytton and Simclar (Mexico) assets, we used internal forecasts that were based upon actual results, assuming an average revenue growth of 5% and 8% per year, respectively, and minimal increases in gross margin. At the time of the impairment test, the carrying value of the net assets acquired in the Lytton and Simclar (Mexico) transactions was $10.4 and $2.9 million, respectively. 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 $0.7 million for Lytton and by $1.5 million for Simclar (Mexico), including goodwill. The most critical estimates, in order of significance, used in the impairment test include (1) estimated revenue growth, (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 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 and Accounts Receivable-- The company's sales are primarily derived from product manufacturing including, but not limited to, finished molded and non-molded cables, wiring harnesses, printed circuit board assemblies, electro-mechanical and electronic assemblies. Revenue is recognized upon shipment of the product to the customer, 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. Such valuations require us to make significant estimates and assumptions, especially related to intangible assets. 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 Simclar (Mexico) acquisition completed during 2003. The purchased intangible assets were recorded by us 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 28 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. 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, 2004. Interest rate risks on debt are managed by negotiation of appropriate rates on new financing obligations based on current market rates. There is an interest rate risk associated with our variable rate debt agreements which totaled approximately $8,380,000 at December 31, 2004. 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 $84,000 on our operations. Our exposure to market risks from foreign currency exchange rates is minimal. Item 8. Financial Statements and Supplementary Data Our financial statements, and the related notes, together with the reports of Battelle & Battelle, LLP dated March 28, 2005, 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 30 (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Subsequent to the date of this evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect these controls, and no corrective actions taken with regard to significant deficiencies or perceived weaknesses in such controls. Item 9B. Other Information Not applicable. 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 2005 annual meeting of shareholders to be held on June 10, 2005, 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 is posted on our website at www.simclar.com. Item 11. Executive Compensation The information required by this item is included under the caption, "Executive Compensation" in our Information Statement relating to our 2005 annual meeting of shareholders to be held on June 10, 2005, 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 2005 annual meeting of shareholders to be held on June 10, 2005, 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 2005 annual meeting of shareholders to be held on June 10, 2005, 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 and the reviews of the financial statements included in our Quarterly Reports on Form 10-Q were $84,025 for 2004 and $83,500 for 2003 (including direct engagement expenses). Audit-Related Fees. The aggregate fees billed by Battelle & Battelle LLP for audit-related services rendered for us were $6,100 for 2004 and $-0- for 2003. The audit-related fees included fees for accounting consultation on the company's internal control system and an audit of the company's employees benefit plan. Tax Fees. The aggregate fees billed by Battelle & Battelle LLP for tax-related services rendered for us were $17,000 for each of 2004 and 2003. The tax-related services were all in the nature of tax compliance and tax planning. 31 All Other Fees. The aggregate fees billed for services rendered to us by Battelle & Battelle LLP, other than the audit services, audit-related services, and tax services, were $-0- for 2004 and $-0- for 20023. 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. Part IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as part of this Report. (1) The following financial statements are filed as part of this Annual Report on Form 10-K: Independent Auditors' Report. Consolidated Balance Sheets as of December 31, 2004 and 2003. Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002. Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2004, 2003 and 2002. Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002. 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 - ------ ------------------- 3(i) Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q filed November 14, 2003). 32 3(ii) By-Laws (incorporated by reference to the Company's Form SB-2, Part II, Item 27, 3(b)), as amended June 27, 2001 (incorporated by reference to the Company's Form S-3 Registration dated January 23, 2002, Registration No. 333-81270, Part II, Item 16, 99(i)). 4(i) Form of Common Stock Certificate (incorporated by reference to the Company's Annual Report on Form 10-K filed March 30, 2004( "2003 Form 10-K"), Exhibit 4(i)). 10(i) Lease Agreement between the Company and Medicore, Inc. dated August 29, 2000 (incorporated by reference to Medicore Inc.'s Current Report on Form 8-K dated September 1, 2000). 10(ii) Employment Agreement between the Company and Barry Pardon dated September 27, 2000 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, Part IV, Item 14(a), 10(iii)). 10(iii) Letter Agreement between Barry Pardon and the Company regarding amendment to Employment Agreement (incorporated by reference to the Company's 2003 Form 10-K, Exhibit 10(iii)). 10(iv) Lease Agreement between the Company and Route 495 Commerce Park Limited Partnership dated March 25, 1997 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the first quarter of 1997, Item 6(a), Part II(10)). 10(v) Lease Agreement between the Company and PruCrow Industrial Properties, L.P., dated April 30, 1997 (incorporated by reference to the Company's Current Report on Form 8-K dated June 4, 1997 ("June 1997 Form 8-K"), Item 7(c)(10)(i)). 10(vi) Lease between the Company and Stanley Avenue Properties, Ltd., dated July 31, 1997 (incorporated by reference to the Company's 2003 Form 10-K, Exhibit 10(ix)). 10(vii) Lease Agreement between Simclar de Mexico, SA de CV and Consorcio Inmobiliario Del Noreste, S.A. de C.V., dated July 16, 2001 (incorporated by reference to the Company's 2003 Form 10-K, Exhibit 10(x)). 10(viii) Commercial Lease between Simclar (Mexico) and Fleet Management Co., dated October 1, 1999 (incorporated by reference to the Company's 2003 Form 10-K, Exhibit 10(xi)). 10(ix) Sublease between the Company and United Consulting Group dated August 23, 1999 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1999; Part IV, Item 14(a)(10)(xiv). 10(x) Amended Consent to Sublease between the Company, United Consulting Group, Inc., and United Computing Group, Inc. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, Part IV, Item 14(a), 10(xxv)). 10(xi) Facility Letter, dated October 2, 2001, for the Company's financing with the Bank of Scotland (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the third quarter of 2001, Item 6(a)10(a)). 10(xii) Working Capital Facility Letter, dated October 2, 2001, for the Company's Financing with the Bank of Scotland (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the third quarter of 2001, Item 6(a)10(b)). 10(xiii) Letter Agreement with the Bank of Scotland dated January 17, 2003 (incorporated by reference to the Company's 2003 Form 10-K, Exhibit 10(xvii)) 33 10(xiv) Letter Agreement with the Bank of Scotland dated November 10, 2003 (incorporated by reference to the Company's 2003 Form 10-K, Exhibit 10(xviii)) 10(xv) Amendment Letter to Term Loan Facility Letter between the Company and Bank of Scotland, dated October 14, 2004 (incorporated by reference to incorporated by reference to the Company's Current Report on Form 8-K dated October 20, 2004, Exhibit 99.1). 10(xvi) Amendment Letter to Working Capital Facility Letter between the Company and Bank of Scotland dated October 14, 2004(incorporated by reference to incorporated by reference to the Company's Current Report on Form 8-K dated October 20, 2004, Exhibit 99.2). 10(xvii) Service Agreement between the Company and Simclar Group Limited, effective July 16, 2003 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed November 14, 2003). 10(xviii) * Lease Agreement between Simclar de Mexico, SA de CV and Consorcio Inmobiliario Del Noreste, S.A. de C.V., dated as of November 1, 2004 21 * Subsidiaries of the registrant. 24 * Powers of Attorney. 31.1 * Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 * Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 * Certification of Chief Executive Officer of Periodic Financial Reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. 32.2 * Certification of Chief Financial Officer of Periodic Financial Reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. - ----------------- * Filed with this Report. (b) Exhibits. The exhibits to this report follow the Signature Page. (c) Financial Statement Schedules. The financial statement schedule follows the exhibits to this report. 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIMCLAR, INC. Date: March 30, 2005 By: /s/ Barry J. Pardon --------------------------------------- Barry J. Pardon, President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date - ---- ----- ---- /s/ Samuel J. Russell* Chairman of the Board of Directors - ---------------------------------------- and Chief Executive Officer March 30, 2005 Samuel J. Russell /s/ Barry J. Pardon President and Director March 30, 2005 - ---------------------------------------- (principal executive officer) Barry J. Pardon /s/ John Ian Durie* Vice-President (Finance) and March 30, 2005 - ---------------------------------------- Director John Ian Durie /s/ David L. Watts* Chief Financial Officer and March 30, 2005 - ---------------------------------------- Secretary David L. Watts (principal financial and principal accounting officer) Director - ---------------------------------------- A. Graeme Manson Director - ---------------------------------------- Douglas Smith Director - ---------------------------------------- Kenneth M. MacKay, M. D. /s/ Christina M. J. Russell* Director March 30, 2005 - ---------------------------------------- Christina M. J. Russell *By:/s/ Barry J. Pardon ------------------------------------ Barry J. Pardon, Attorney-in-Fact
35 FORM 10-K--ITEM 8 LIST OF FINANCIAL STATEMENTS The following consolidated financial statements of Simclar, Inc. and subsidiaries are included in Item 8: Page Consolidated Balance Sheets - December 31, 2004 and 2003. F-4 Consolidated Statements of Operations - Years ended December 31, 2004, 2003 and 2002. F-6 Consolidated Statements of Stockholders' Equity - Years ended December 31, 2004, 2003 and 2002. F-7 Consolidated Statements of Cash Flows - Years ended December 31, 2004, 2003 and 2002. F-8 Notes to Consolidated Financial Statements F-9 The following financial statement schedule of Simclar, Inc. and subsidiaries is included Schedule II - Valuation and qualifying accounts. S-2 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 36 SIMCLAR, INC. AND SUBSIDIARIES FORM 10-K--ITEM 8 LIST OF FINANCIAL STATEMENTS The following consolidated financial statements of Simclar, Inc. and subsidiaries are included in Item 8: Page Consolidated Balance Sheets - December 31, 2004 and 2003. F-4 Consolidated Statements of Operations - Years ended December 31, 2004, 2003 and 2002. F-6 Consolidated Statements of Stockholders' Equity - Years ended December 31, 2004, 2003, and 2002. F-7 Consolidated Statements of Cash Flows - Years ended December 31, 2004, 2003, and 2002. F-8 Notes to Consolidated Financial Statements F-9 The following financial statement schedule of Simclar, Inc. and subsidiaries is included Schedule II - Valuation and qualifying accounts. S-2 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. F-1 SIMCLAR, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Simclar, Inc. and Subsidiaries Hialeah, FL We have audited the accompanying consolidated balance sheet of Simclar, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity, and cash flows, for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Simclar, Inc. and subsidiaries as of December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Battelle & Battelle LLP Dayton, Ohio March 28, 2005 F-2 SIMCLAR, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Simclar, Inc. and Subsidiaries In our opinion, the consolidated financial statements listed in the index appearing under Item 8 on Page F-1 present fairly, in all material respects, the results of operations and cash flows of Simclar, Inc. and its subsidiaries (formerly known as Techdyne, Inc.) for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 8 on Page F-1 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1, effective January 1, 2002, the company adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ PRICEWATERHOUSE LLP March 27, 2003 Dayton, Ohio F-3 SIMCLAR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 2004 2003 --------------------------- ASSETS Current assets: Cash and cash equivalents $ 280,015 $ 230,183 Accounts receivable, less allowances of $182,000 and $279,000 at December 31, 2004 and 2003, respectively 8,066,978 5,726,814 Amounts receivable from major stockholder, net 2,918,037 2,048,921 Inventories, less allowances for obsolescence of $1,481,000 and $1,421,000 at December 31, 2004 and 2003, respectively 11,314,911 9,753,301 Prepaid expenses and other current assets 317,183 309,360 Deferred income taxes 795,400 857,600 --------------------------- Total current assets 23,692,524 18,926,179 --------------------------- Property, plant and equipment: Land and improvements 547,511 -- Buildings and building improvements 1,235,904 -- Machinery, computer and office equipment 8,171,056 7,268,046 Tools and dies 290,873 283,828 Leasehold improvements 377,082 677,113 --------------------------- 10,622,426 8,228,987 Less accumulated depreciation 6,613,775 5,733,519 --------------------------- 4,008,651 2,495,468 Deferred expenses and other assets, net 20,622 -- Goodwill 4,840,545 4,234,113 Intangibles, net 18,000 18,000 --------------------------- $ 32,580,342 $ 25,673,760 ===========================
See notes to consolidated financial statements. F-4 SIMCLAR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 2004 2003 --------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit $ 2,980,000 $ 1,750,000 Accounts payable 5,414,262 2,960,279 Accrued expenses 1,124,732 914,916 Accrued income taxes 836,709 496,645 Current portion of long-term debt 1,200,000 1,000,000 --------------------------- Total current liabilities 11,555,703 7,121,840 Long-term debt 4,200,000 4,000,000 Deferred trade accounts payable 2,500,000 2,500,000 Deferred income taxes 206,000 290,900 --------------------------- Total liabilities 18,461,703 13,912,740 --------------------------- Commitments and contingencies -- -- Stockholders' equity: Common stock, $.01 par value, authorized 10,000,000 shares; issued and outstanding 6,465,345 shares at December 31, 2004 and 2003 64,653 64,653 Capital in excess of par value 11,446,087 11,446,087 Retained earnings 2,593,238 251,458 Accumulated other comprehensive income (loss) 14,661 (1,178) --------------------------- Total stockholders' equity 14,118,639 11,761,020 --------------------------- $ 32,580,342 $ 25,673,760 ===========================
See notes to consolidated financial statements F-5 SIMCLAR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, -------------------------------------------- 2004 2003 2002 ------------ ------------ ------------ Sales $ 53,582,487 $ 36,187,105 $ 33,691,582 Cost of goods sold 46,229,712 31,316,498 29,020,458 -------------------------------------------- Gross Margin 7,352,775 4,870,607 4,671,124 Selling, general and administrative expenses 3,750,984 3,133,170 2,897,101 -------------------------------------------- Income from operations 3,601,791 1,737,437 1,774,023 Interest expense 213,284 217,833 288,869 Interest and other income (47,114) (114,791) (28,342) Foreign currency loss on Scotland shutdown -- 170,867 -- -------------------------------------------- Income before income taxes 3,435,621 1,463,528 1,513,496 Income tax provision 1,093,841 357,207 123,387 -------------------------------------------- Net income $ 2,341,780 $ 1,106,321 $ 1,390,109 ============================================ Earnings per share: Basic & diluted $ 0.36 $ 0.17 $ 0.21 ============================================
See notes to consolidated financial statements. F-6 SIMCLAR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital in Common Excess of Comprehensive Stock Par Value Income ------------------------------------------------- Balance at January 1, 2002 $ 65,570 $ 11,592,995 Comprehensive income: Net income 1,390,109 Other comprehensive income: Foreign currency translation adjustments 2,526 ------------ Comprehensive income $ 1,392,635 ============ ----------------------------- Balance at December 31, 2002 $ 65,570 $ 11,592,995 Comprehensive income: Net income 1,106,321 Other comprehensive income: Foreign currency translation adjustments 223,171 ------------ Comprehensive income $ 1,329,492 ============ Cancellation of held stock option shares due to lack of payment (1,217) (206,608) Exercise of stock options 300 59,700 ----------------------------- Balance at December 31, 2003 $ 64,653 $ 11,446,087 Comprehensive income: Net income 2,341,780 Other comprehensive income: Foreign currency translation adjustments 15,839 ------------ Comprehensive income $ 2,357,619 ============ ----------------------------- Balance at December 31, 2004 $ 64,653 $ 11,446,087 ============================= Retained Accumulated Notes Earnings Other Receivable (Accumulated) Comprehensive Stock (Deficit) Income (Loss) Options Total ------------------------------------------------------------ Balance at January 1, 2002 $ (2,244,972) $ (226,875) $ (207,825) $ 8,978,893 Comprehensive income: Net income 1,390,109 Other comprehensive income: Foreign currency translation adjustments 2,526 Comprehensive income 1,392,635 ------------------------------------------------------------ Balance at December 31, 2002 $ (854,863) $ (224,349) $ (207,825) $ 10,371,528 Comprehensive income: Net income 1,106,321 Other comprehensive income: Foreign currency translation adjustments 223,171 Comprehensive income 1,329,492 Cancellation of held stock option shares due to lack of payment 207,825 Exercise of stock options 60,000 ------------------------------------------------------------ Balance at December 31, 2003 $ 251,458 $ (1,178) $ -- $ 11,761,020 Comprehensive income: Net income 2,341,780 Other comprehensive income: Foreign currency translation adjustments 15,839 Comprehensive income 2,357,619 ------------------------------------------------------------ Balance at December 31, 2004 $ 2,593,238 $ 14,661 $ -- $ 14,118,639 ============================================================
See notes to consolidated financial statements. F-7 SIMCLAR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, --------------------------------------------- 2004 2003 2002 --------------------------------------------- Operating activities: Net income $ 2,341,780 $ 1,106,321 $ 1,390,109 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,019,609 935,883 941,024 Gain from disposal of property and equipment -- (47,650) -- Deferred expenses and other assets (20,622) 9,435 13,217 Provision for uncollectible accounts 35,000 -- 24,284 Provision for inventory obsolescence 382,391 245,976 340,088 Deferred income taxes (22,700) (10,300) (398,600) Changes relating to operating activities from: Accounts receivable (2,375,164) (460,553) (554,611) Accounts receivable from majority stockholder, net (869,116) (104,252) (225,124) Inventories (1,944,001) (202,241) 470,210 Prepaid expenses and other current assets (7,823) (180,651) 86,494 Accounts payable 2,453,983 (210,661) 108,598 Accrued expenses 209,816 (69,475) 45,324 Accrued income taxes 340,064 (2,182) 519,619 --------------------------------------------- Net cash provided by operating activities 1,543,217 1,009,650 2,760,632 --------------------------------------------- Investing activities: Acquisition of AG Technologies, Inc and subsidiary (606,432) (1,951,547) -- Proceeds from sale of property, plant and equipment -- 704,433 -- Additions to property, plant and equipment, net of minor disposals (2,532,792) (209,807) (303,881) Note receivable from major stockholder -- -- (1,500,000) --------------------------------------------- Net cash used in investing activities (3,139,224) (1,456,921) (1,803,881) --------------------------------------------- Financing activities: Line of credit payments -- -- (881,184) Line of credit borrowings 1,230,000 250,000 1,500,000 Exercise of stock options -- 60,000 -- Proceeds from long-term bank borrowings 1,400,000 -- 21,525 Payments on long-term bank borrowings (1,000,000) (1,392,682) (1,083,765) --------------------------------------------- Net cash provided by (used in) financing activities 1,630,000 (1,082,682) (443,424) Effect of exchange rate fluctuations on cash 15,839 223,171 2,526 --------------------------------------------- Net change in cash and cash equivalents 49,832 (1,306,782) 515,853 Cash and cash equivalents at beginning of period 230,183 1,536,965 1,021,112 --------------------------------------------- Cash and cash equivalents at end of period $ 280,015 $ 230,183 $ 1,536,965 =============================================
See notes to consolidated financial statements. F-8 SIMCLAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The consolidated financial statements include the accounts of Simclar, Inc. ("Simclar ") and its subsidiaries, including Simclar (Mexico), Inc. ("Simclar (Mexico)") and Techdyne (Europe) Limited ("Techdyne (Europe)"), collectively referred to as the "company." During September 2003, the company changed its name to Simclar, Inc. from Techdyne, Inc. On August 13, 2003 the company merged its wholly owned subsidiary, Lytton Inc. into Simclar. All material intercompany accounts and transactions have been eliminated in consolidation. The company is a 73.4% owned subsidiary of Simclar Group Limited ("Simclar Group"). Business The company operates in one business segment, the manufacture of electronic and electro-mechanical products primarily manufactured to customer specifications in the data processing, telecommunication, instrumentation and food preparation equipment industries. Cash and Cash Equivalents The company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. The carrying amounts reported in the balance sheets for cash and cash equivalents approximate their fair values. The credit risk associated with cash and cash equivalents is considered low due to the high quality of the financial institutions in which the assets are invested. Inventories Inventories, which consist primarily of raw materials used in the production of electronic components, are valued at the lower of cost (first-in, first-out and/or weighted average cost method) or market value. The cost of finished goods and work in process consists of direct materials, direct labor and a portion of fixed and variable-manufacturing overhead. The company reviews its inventories on an annual basis to identity parts that have not been used in the manufacturing process during the previous two year period or are not believed to be required for use in the manufacturing process during the next six months. The carrying value of these identified parts is adjusted to the estimated realizable fair market value with a current period charge to an allowance for obsolescence as reflected in the financial statements. Property, Plant and Equipment Property, plant and equipment is stated on the basis of cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets, which are generally 25 years for buildings and improvements; 3 to 10 years for machinery, computer and office equipment; 3 to 10 years for tools and dies; and 5 to 15 years for leasehold improvements based on the shorter of the lease term or estimated useful life of the property. Replacements and betterments that extend the lives of assets are capitalized. Maintenance and repairs are expensed as incurred. Upon the sale or retirement of assets, the related cost and accumulated depreciation are removed and any gain or loss is recognized. Depreciation expense was approximately $1,020,000, $936,000, and $941,000 in the years ended December 31, 2004, 2003 and 2002, respectively. Long-Lived Asset Impairment In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", long-lived assets to be held and used are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. When required, F-9 SIMCLAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued impairment losses on assets to be held and used are recognized based on the fair value of the asset. The fair value of these assets is determined based upon estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. In analyzing the fair value and recoverability using future cash flows, the company makes projections based on a number of assumptions and estimates of growth rates, future economic conditions, assignment of discount rates and estimates of terminal values. An impairment loss is recognized if the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows. The measurement of impairment loss is the difference between the carrying amount and fair value of the asset. Long-lived assets to be disposed of and/or held for sale are reported at the lower of carrying amount or fair value less cost to sell. The company determines the fair value of these assets in the same manner as described for assets held and used. Deferred Expenses Deferred expenses, except for deferred loan costs, are amortized on the straight-line method, over their estimated benefit period ranging to 60 months. Deferred loan costs are amortized over the lives of the respective loans. The amortization expense for the years ended December 31, 2004, 2003 and 2002 was approximately $10,000, $11,000 and $12,000, respectively. Goodwill The company adopted SFAS No.142, "Goodwill and Other Intangible Assets", effective January 1, 2002. Under SFAS No. 142, goodwill and certain other intangible assets are no longer amortized but are tested annually for impairment. In connection with the adoption of SFAS No. 142, the company completed the transitional goodwill impairment test, which requires the company to compare the fair value of its reporting unit to the carrying value of the net assets of the reporting unit as of December 31, 2004. Based on this analysis, the company has concluded that no impairment existed since the time of adoption, and, accordingly, the company has not recognized any transitional impairment loss.
December 31, ------------------------------------ 2004 2003 2002 ------------------------------------ Goodwill recognized on the acquisition of Lytton Inc. $2,954,995 $2,954,995 $2,954,995 Goodwill recognized on the acquisition of AG Technologies, Inc. 1,885,550 1,279,118 -- ------------------------------------ $4,840,545 $4,234,113 $2,954,995 ====================================
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. F-10 SIMCLAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued Stock-Based Compensation The company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options. FASB Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), as amended by SFAS No, 148, permits a company to elect to follow the accounting provisions of APB 25 rather than the alternative fair value accounting provided under SFAS 123 but requires pro forma net income and earnings per share disclosures as well as various other disclosures not required under APB 25 for companies following APB 25. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the options issued during 2000: risk-free interest rate of 5.88%; no dividend yield; volatility factor of the expected market price of the company's common stock of .85; and an expected life of the options of 3 years. The Black-Scholes options valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective input assumptions including the expected stock price volatility. Because the company's employee stock options have characteristics significantly different than those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employees' stock options. For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the options' vesting period. Since the company's stock was trading in a range of value below the strike price of the outstanding options until 2003, the amount of expense to amortize was zero. The company's pro forma information for options issued is as follows:
Year Ended December 31, ------------------------------------------------ 2004 2003 2002 ------------------------------------------------ Pro forma and reported net income $ 2,341,780 $ 1,106,321 $ 1,390,109 ================================================ Pro forma and reported earnings per share: Basic $ 0.36 $ 0.17 $ 0.21 ================================================ Diluted $ 0.36 $ 0.17 $ 0.21 ================================================
Earnings per Share Diluted earnings per share gives effect to potential common shares that were dilutive and outstanding during the period, such as stock options and warrants using the treasury stock method and average market price, the company has various stock options; however, only those options which were dilutive during the periods being reported on have been included in the earnings per share computations. F-11 SIMCLAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued Following is a reconciliation of amounts used in the basic and diluted computations:
Year Ended December 31, ------------------------------------------ 2004 2003 2002 ------------------------------------------ Net income - numerator basic computation $ 2,341,780 $ 1,106,321 $ 1,390,109 ========================================== Weighted average shares - denominator basic computation 6,465,345 6,460,086 6,556,990 Effect of dilutive securities: Stock options -- -- 60,000 ------------------------------------------ Weighted average shares, as adjusted - denominator 6,465,345 6,460,086 6,616,990 ========================================== Earnings per share: Basic $ 0.36 $ 0.17 $ 0.21 ========================================== Diluted $ 0.36 $ 0.17 $ 0.21 ==========================================
Estimated Fair Value of Financial Instruments The carrying value of cash, accounts receivable and debt in the accompanying financial statements approximate their fair value because of the short-term maturity of these instruments, or in the case of debt, because such instruments bear variable interest rates which approximate market. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The accounting estimates and assumptions that place the most significant demands on management's judgment include, but are not limited to, doubtful accounts receivable, income taxes, impairment of long-lived assets, business combinations, and inventory obsolescence. These estimates and assumptions are based on information presently available and actual results could differ from those estimates. Revenue Recognition and Accounts Receivable The company's sales are primarily derived from product manufacturing including, but not limited to, finished molded and non-molded cables, wiring harnesses, printed circuit board assemblies, electro-mechanical and electronic assemblies. Revenue is recognized upon shipment of the product to the customer, 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. F-12 SIMCLAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued Trade receivables are uncollateralized customer obligations due under normal trade terms requiring payment generally within 30 days from the invoice date. The company's estimate of the allowance for doubtful accounts for trade receivables is primarily determined based upon the length of time that the receivables are past due. In addition, management estimates are used to determine probable losses based upon an analysis of prior collection experience, specific account risks, and economic conditions. The company has a series of actions that occur based upon the aging of past due trade receivables, including letters and direct customer contact. Accounts are deemed uncollectible based on their past payment account experiences and their current financial condition. Shipping Costs Shipping costs related to the transportation of products sold to customers are charged to cost of goods sold. Warranty Costs The company warrants that products used in its manufacturing process are free from defects in material and workmanship for a period of one year from time of shipment to the customer. If the manufactured product fails in this one year period due to a defect, the company will rework the product until it functions per the customer's specifications. The costs associated with the rework of any return of defective products are treated as a period expense when the products are reshipped to the customer. The company estimates the cost or reworking defective products to be less than 1% of its annual sales volume and thus has not recorded any liability for rework costs on its financial statements. Foreign Operations The financial statements of the foreign subsidiaries have been translated into U.S. dollars in accordance with SFAS No. 52. All balance sheet accounts have been translated using the current exchange rates at the balance sheet date. Income statement accounts have been translated using the average exchange rate for the period. The translation adjustments resulting from the change in exchange rates from period to period have been reported separately as a component of accumulated other comprehensive income included in stockholders' equity. Foreign currency transaction gains and losses, which are not material, are included in the results of operations. These gains and losses result from exchange rate changes between the time transactions are recorded and settled, and for unsettled transactions, exchange rate changes between the time the transactions are recorded and the balance sheet date. Comprehensive Income The company follows SFAS No. 130, "Reporting Comprehensive Income" which contains rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income and foreign currency translation adjustments and is presented in the Consolidated Statement of Stockholders' Equity. F-13 SIMCLAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued New Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), Share-Based Payment, which would require all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statements of operations based on their fair values, effective for public companies for interim periods beginning after June 15, 2005. SFAS No.123(R) permits public companies to adopt its requirements using either the modified prospective or retrospective method. The company will adopt this statement in the third quarter of fiscal year 2005 and currently does not anticipate that the adoption of this standard will have a material effect on its consolidated results of operations, financial position, and cash flows. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4 Inventory Pricing". SFAS No. 151 requires idle facility costs, abnormal freight, handling costs, and amounts of wasted materials (spoilage) be treated as current-period costs. Under this concept, if the costs associated with the actual level of spoilage or production defects are greater than the costs associated with the range of normal spoilage or defects, the difference would be charged to current-period expense, not included in inventory costs. SFAS No. 151 also requires the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The company will adopt this statement for fiscal year 2006 and currently does not anticipate that the adoption of this standard will have a material effect on its consolidated results of operations, financial position, and cash flows. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions." The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in APB Opinion No. 29 provided an exception to this basic measurement principle for exchanges of similar productive assets. That exception required that some nonmonetary exchanges be recorded on a carryover basis. SFAS No. 153 eliminates this exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. An exchange would lack commercial substance if the company's future cash flows are not expected to change significantly as a result of that exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted. The company will adopt this new standard for fiscal year 2006 and does not anticipate that the adoption of this standard will have a material effect on its consolidated results of operations, financial position, and cash flows. NOTE 2--INVENTORIES Inventories are comprised of the following: December 31, --------------------------- 2004 2003 --------------------------- Raw materials and supplies $ 8,863,347 $ 7,315,075 Work in process 1,584,258 1,776,538 Finished goods 867,306 661,688 --------------------------- $ 11,314,911 $ 9,753,301 =========================== F-14 SIMCLAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3--ACCRUED EXPENSES Accrued expenses are comprised of the following: December 31, --------------------------- 2004 2003 --------------------------- Accrued compensation $ 523,430 $ 319,813 Accrued property taxes 223,230 222,319 Accrued commissions 203,895 148,170 Other 174,177 224,614 --------------------------- $ 1,124,732 $ 914,916 =========================== NOTE 4--LONG-TERM DEBT On October 24, 2001, the company entered into two credit facilities with Bank of Scotland in Edinburgh, Scotland for an aggregate borrowing of $10,000,000. The financing included a $3,000,000 line of credit, with an interest rate at LIBOR plus 1.5% for a one, three or six month period, at the company's election, and expires on September 30, 2005. The company intends to renew this credit facility with the Bank prior to its expiration date.. The 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. On October 14, 2004, the company restructured its existing term loan and working capital facilities with the Bank. The term loan was made pursuant to an Amended and Restated Facility Letter providing for a term loan of $5,650,000, of which Tranche A represents outstanding borrowings of $4,250,000, and Tranche B represents the $1,400,000 loan to acquire the property located at 1784 Stanley Avenue, Dayton, Ohio. The principal of Tranche A is repayable in quarterly installments of $250,000 in January, April, July and October of each year from 2004 through 2008, with the final payment due in October 2008. The principal of Tranche B is payable in twenty-eight equal quarterly installments of $50,000, with the first installment payable on January 20, 2005. Interest on each advance accrues at an annual rate equal to LIBOR plus 1.5%, plus an amount, rounded to the nearest eighth of a percent, to cover any increases in certain regulatory costs incurred by the Bank. The company may elect to pay interest on advances every one, three or six months, with LIBOR adjusted to correspond to the interest payment period selected by the company. The company elected the three-month interest period at 3.8% until January 24, 2005. After this date the rate is 4.17% until April 24, 2005. The term loan had an outstanding balance of $5,400,000 at December 31, 2004. The company's existing working capital facility with the Bank was also amended on October 14, 2004 to increase the amount of the facility from $3,000,000 to $5,000,000. Advances bear interest, and interest is payable, on the same terms as under the Amended Term Loan Facility. This line of credit had an outstanding balance of $2,980,000 at December 31, 2004. All of the assets of the company collateralize the credit facilities. The credit facilities contain affirmative and negative covenants. Certain of the affirmative covenants require maintenance of a consolidated adjusted net worth greater than $11,000,000; a ratio of consolidated current assets to consolidated net borrowing not less than 1.75 to 1; a ratio of consolidated trade receivables to consolidated net borrowings not less than .75 to 1; and a ratio of consolidated net income before interest and income taxes to total consolidated interest costs not less than 2 to 1. Some of the negative covenants, among others, include (1) granting or permitting a security agreement F-15 SIMCLAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4--LONG-TERM DEBT--Continued against the consolidated assets of the company other than permitted security agreements, (2) declaring or paying any dividends or making any other payments on the company's capital stock, (3) consolidating or merging with any other entity or acquiring or purchasing any equity interest in any other entity, or assuming any obligations of any other entity, except for notes and receivables acquired in the ordinary course of business, (4) incurring, assuming, guarantying, or remaining liable with respect to any indebtedness, except for certain existing indebtedness disclosed in these financial statements, or (5) undertaking any capital expenditure in excess of $1,000,000 in any one fiscal year. The agreements also preclude, without the Bank's prior written consent, changes in ownership in the company, any mergers or acquisitions, any material change in any of the company's 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. The Bank gave its written consent for the company to acquire all the outstanding shares of AG Technologies, Inc. on July 15, 2003. At December 31, 2004, the company was not in compliance with respect to the terms of the credit facilities as a result of having capital expenditures for the year 2004 in excess of the $1,000,000 limit as specified by the covenants. However, the company obtained a waiver from the Bank in respect of the non-compliance. 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). The proceeds from the credit facility were used to repay the 15-year mortgage loan of $371,000 as of September 30, 2001. This term loan in the amount of (pound)214,844 ($319,999) was paid off on September 1, 2003. Long-term debt is as follows: December 31, --------------------------- 2004 2003 --------------------------- Term loan $ 5,400,000 $ 5,000,000 Less current portion 1,200,000 1,000,000 --------------------------- $ 4,200,000 $ 4,000,000 =========================== Scheduled maturities of long-term debt outstanding at December 31, 2004 are approximately: 2005---$1,200,000; 2006---$1,200,000; 2007---$1,200,000; 2008---$1,200,000; 2009---$200,000; thereafter $400,000. Interest payments on all of the above debt amounted to approximately $189,000, $231,000 and $294,000 in 2004, 2003 and 2002, respectively. On July 15, 2003, Simclar (Mexico) and Simclar entered into an agreement with Winsson Enterprises Co., Ltd ("Winsson"). This agreement calls for Winsson to provide to Simclar (Mexico) a 3-year $2,750,000 open line of credit for purchased services and materials. The 3-year open line of credit required a reduction of $250,000 as of July 14, 2004. The 3-year open line of credit may be renewed at the end this agreement, if both parties agree. The total amount due to Winsson is approximately $2,853,000 at December 31, 2004. Included in accounts payable is approximately $353,000 of this amount with the remaining balance shown in deferred trade accounts payable. F-16 SIMCLAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5--INCOME TAXES Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the company's deferred tax assets and liabilities are as follows: December 31, --------------------------- 2004 2003 --------------------------- Deferred tax assets: Inventory obsolescence $ 578,100 $ 554,400 Cost capitalized in ending inventory 84,900 141,400 Accrued expenses 61,300 52,800 Other 71,100 109,000 --------------------------- Total deferred tax assets 795,400 857,600 --------------------------- Deferred tax liabilities: Depreciation and amortization $ 206,000 $ 290,900 --------------------------- Total deferred tax liabilities 206,000 290,900 --------------------------- Net deferred tax asset $ 589,400 $ 566,700 =========================== For financial reporting purposes, income before income taxes includes the following components: Year Ended December 31, ------------------------------------------- 2004 2003 2002 ------------------------------------------- United States income $ 3,269,909 $ 1,603,477 $ 1,538,928 Foreign income (loss) 165,712 (139,949) (25,432) ------------------------------------------- $ 3,435,621 $ 1,463,528 $ 1,513,496 =========================================== Significant components of the provision (benefit) for income taxes are as follows: Year Ended December 31, ------------------------------------------- 2004 2003 2002 ------------------------------------------- Current: Federal $ 1,011,150 $ 332,701 $ 398,600 State 59,991 14,176 123,387 ------------------------------------------- 1,071,141 346,877 521,987 ------------------------------------------- Deferred Federal 19,791 9,006 (347,500) State 2,909 1,324 (51,100) ------------------------------------------- 22,700 10,330 (398,600) ------------------------------------------- $ 1,093,841 $ 357,207 $ 123,387 =========================================== Techdyne (Europe) and Simclar de Mexico, S.A. de C.V. file separate income tax returns in the United Kingdom and Mexico, respectively. F-17 SIMCLAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5--INCOME TAXES--Continued The reconciliation of income tax attributable to income before income taxes computed at the U.S. federal statutory rates to income tax expense (benefit) is:
Year Ended December 31, -------------------------------------------- 2004 2003 2002 -------------------------------------------- Statutory tax rate (34%) applied to income before income taxes $ 1,168,111 $ 497,600 $ 514,589 Increases (reduction) in taxes resulting from: State income taxes expense net of federal income tax effect 42,870 10,230 81,444 Tax rate differential relating to tax benefit of foreign operating income 2,287 70,290 8,647 Non deductible items 15,343 7,756 7,132 Change in deferred tax valuation allowance -- -- (587,000) Refund of prior U.S. income taxes (38,000) (85,000) -- Settlement of U.S. income taxes (132,000) (200,000) -- Other 35,230 56,331 98,575 -------------------------------------------- $ 1,093,841 $ 357,207 $ 123,387 ============================================
Undistributed earnings of the company's foreign subsidiaries amounted to approximately $287,000 at December 31, 2004 and 2003, respectively. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation; however, foreign tax credits may be available to reduce some portion of the U.S. liability. Withholding taxes of approximately $14,000 would be payable upon remittance of all previously unremitted earnings at December 31, 2004 and 2003, respectively. Income tax payments were approximately $754,000, $333,000 and $28,000 in 2004, 2003 and 2002, respectively. NOTE 6--TRANSACTIONS WITH SIMCLAR GROUP The company's parent, Simclar Group, provides certain financial and administrative services to the company under a service agreement. The amount of expenses covered under the service agreement totaled $360,000, $347,000 and $336,000 in 2004, 2003 and 2002, respectively. In 2004, the company purchased steel components with a combined value of approximately $431,000 from other members of the Simclar Group. In May 2001, Techdyne (Europe) entered into a management agreement with Simclar Group pursuant to which Simclar Group manufactured products for Techdyne (Europe) and assisted in management coordination. These expenses were approximately $241,000 in 2002. This agreement was terminated on February 28, 2002. The company has a net receivable due from its parent, Simclar Group, of approximately $2,918,000 and $2,049,000 at December 31, 2004 and 2003, respectively. These amounts included a $1,500,000 demand note F-18 SIMCLAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6--TRANSACTIONS WITH SIMCLAR GROUP--Continued payable by Simclar Group, bearing an annual interest rate of LIBOR plus 2.0% and accumulated interest on this demand note of approximately $123,000 and $71,000 at December 31, 2004 and 2003, respectively. During the year 2004, the company advanced funds to two companies owned by Simclar Group or its sole owners for operating capital. As of December 31, 2004 the company had a net received due from these two companies of approximately $1,295,000. NOTE 7--RELATED PARTY TRANSACTIONS On October 20, 2004, the company purchased for $1,400,000 the 77,800 square foot office, manufacturing and warehouse facility located at 1784 Stanley Avenue, Dayton, Ohio that it had been leasing for a term ending July 31, 2007. The purchase resulted from the company's exercise of an option to purchase contained in the lease. The premises were purchased from the lessor, Stanley Avenue Properties, Ltd., an Ohio limited liability company controlled by Lytton F. Crossley, a former director of the company. The purchase price was determined by negotiation, based upon independent appraisals obtained by the company and the seller. NOTE 8--COMMITMENTS AND CONTINGENCIES Commitments The company leases several facilities which expire at various dates through 2017 with renewal options for a period of five years at the then fair market rental value. The company's aggregate lease commitments at December 31, 2004, are approximately: 2005---$746,000, 2006---$621,000, 2007---$526,000, 2008---$510,000, and 2009---510,000. Total rent expense was approximately $753,000, $635,000 and $556,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Retirement Plan The company sponsors a 401(k) Profit Sharing Plan covering substantially all of its employees, excluding Techdyne (Europe) and Simclar (Mexico). The company contributes a 50% match based on the first 4% of each employee's annual earnings contributed to the plan. The discretionary profit sharing and matching expense amounted to approximately $73,000, $59,000 and $57,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Contingencies The company is involved in various legal actions arising in the ordinary course of business. In the opinion of management, the ultimate liability, if any, resulting from these matters will not have a material effect on the company's financial position. NOTE 9--STOCK OPTIONS On February 27, 1995 the company granted non-qualified stock options, to directors of Simclar and its subsidiary for 142,500 shares exercisable at $1.75 per share for five years. In April 1995, the company granted a non-qualified stock option for 10,000 shares which vested immediately, to its general counsel at the same price and terms as the directors' options. On February 25, 2000, 145,000 of these options were exercised. The company received cash payment of the par value and the balance in three-year promissory notes totaling $207,825 presented in the stockholders' equity section of the balance sheet, with interest at 6.19%. The notes, which were F-19 SIMCLAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9--STOCK OPTIONS--Continued due in February 2003, were not repaid and, as a result, the related interest receivable was written off in 2002. The related shares were cancelled in 2003. In June 1997, the company adopted a stock option plan for up to 500,000 options, and pursuant to this plan the board granted 375,000 options exercisable for five years through June 22, 2002 at $3.25 per share, with 320,000 of these options outstanding at December 31, 2001. On June 30, 1999, the company granted 52,000 options exercisable for three years through September 29, 2002 at $4.00 per share with 10,000 options outstanding at December 31, 2001. On August 25, 1999, the company granted 16,000 options exercisable for three years through August 24, 2002 at $4.00 per share with 13,000 options outstanding at December 31, 2001. On December 15, 1999, the company granted 19,000 options exercisable for three years through December 14, 2002 at $4.00 per share with 8,000 options outstanding at December 31, 2001. On May 24, 2000, the company granted 3,000 options exercisable for three years through May 23, 2003 at $4.00 per share, the options terminated when the employee terminated his employment with the company. On October 16, 2000, the company granted 90,000 three year stock options exercisable at $2.00 per share through October 15, 2002, with one-third of the options vesting immediately, one-third vesting on October 16, 2001 and one-third vesting on October 16, 2002, but based on the change in control of the company, all options vested on June 27, 2001, and 30,000 options were redeemed for $4,200, 60,000 of these options remained outstanding at December 31, 2002. A summary of the company's stock option activity, for the years ended December 31, follows:
2004 2003 2002 -------------------------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Options Exercise Price Options Exercise Price Options Exercise Price -------------------------------------------------------------------------------------------- Outstanding-beginning of year 60,000 $ 2.00 411,000 $ 3.12 Granted 0 0 0 Exercised 30,000 0 Expired 30,000 (351,000) ------------ ------------ ------------ Outstanding-end of year 0 0 60,000 ============ ============ ============ Outstanding and exercisable at end of year October 2000 options 0 $ -- 0 $ -- 60,000 $ 2.00 ------------ ------------ ------------ 0 0 60,000 ============ ============ ============ Weighted-average fair value of options granted during the year $ -- $ -- $ -- ============ ============ ============
In June 2001, in connection with the sale to Simclar Group, the company forgave stock option notes and related accrued interest totaling $207,825 from certain current and former officers and directors of the company. The balances of these notes, which were due in February 2003, were not repaid and, as a result, the related interest receivable was written off as of December 31, 2002. The related shares were cancelled in 2003. F-20 SIMCLAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10--QUARTERLY FINANCIAL INFORMATION (Unaudited) The following summarizes certain quarterly operating data:
2004 2003 ------------------------------------------------- ------------------------------------------------- March 31 June 30 Sept 30 Dec 31 March 31 June 30 Sept 30 Dec 31 ------------------------------------------------- ------------------------------------------------- (In thousands except per share data) Net Sales $ 11,997 $ 15,002 $ 13,233 $ 13,350 $ 7,376 $ 7,719 $ 9,601 $ 11,491 Gross Profit 1,726 2,450 1,721 1,456 1,059 1,130 1,123 1,559 Net Income 481 879 486 496 196 241 211 458 Earnings per share: Basic & diluted $ 0.07 $ 0.14 $ 0.08 $ 0.07 $ 0.03 $ 0.04 $ 0.03 $ 0.07
Since the computation of earnings per share is made independently for each quarter using the treasury stock method, the total of four quarters' earnings does not necessarily equal earnings per share for the year. NOTE 11--GEOGRAPHIC AREA DATA AND MAJOR CUSTOMER Summarized financial information for the company's one reportable segment is shown in the following table: Year Ended December 31, ------------------------------------------ Geographic Area Sales 2004 2003 2002 ------------ ------------ ------------ United States $ 53,551,613 $ 36,187,105 $ 33,458,570 Mexico 30,874 -- -- Europe(1) -- -- 233,012 ------------ ------------ ------------ $ 53,582,487 $ 36,187,105 $ 33,691,582 ============ ============ ============ (1) Techdyne (Europe) sales were primarily to customers in the United Kingdom. Year Ended December 31, ------------------------------------------- Geographic Area 2004 2003 2002 Operating Income (loss) ------------------------------------------- United States $ 3,436,079 $ 1,738,623 $ 1,781,856 Mexico 165,712 28,658 -- Europe -- (29,844) (7,833) ------------------------------------------- $ 3,601,791 $ 1,737,437 $ 1,774,023 =========================================== F-21 SIMCLAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11--GEOGRAPHIC AREA DATA AND MAJOR CUSTOMER--Continued Geographic Area Property, December 31, Plant and Equipment (Net) ------------------------------------------ 2004 2003 2002 ------------------------------------------ United States $ 3,992,247 $ 2,479,191 $ 2,361,984 Mexico 16,404 16,277 -- Europe -- -- 653,521 ------------------------------------------ $ 4,008,651 $ 2,495,468 $ 3,015,505 ========================================== Sales to major customer are as follows: Year Ended December 31, ------------------------------------------ 2004 2003 2002 ------------------------------------------ Major Customer ITW $ 9,023,000 $ 8,084,000 $ 12,078,000 ========================================== The loss of or substantially reduced sales to this customer would have an adverse effect on the company's operations if such sales were not replaced. A significant customer would be any customer who annual sales volume from the company is 10% or more. NOTE 12--CESSATION OF SCOTLAND MANUFACTURING OPERATIONS As a result of continuing operating losses, in April 2001 the company decided to discontinue the manufacturing operations of its European subsidiary, Techdyne (Europe). As of February 28, 2002, all remaining net assets and the remaining employee, except the building and land, were transferred to Simclar Group at net book value on that date. These net assets consisted principally of cash, receivables, payables and equipment. The management agreement with Simclar Group was also cancelled. Included in property, plant and equipment at December 31, 2002 were assets held for sale, net of accumulated depreciation, in Scotland totaling approximately $654,000. On April 2, 2003, a fire started by vandals destroyed the Techdyne (Europe) building located in Livingston, Scotland. The claims with the insurance companies were settled during the third quarter in the amount of (pound)364,900 ($588,185), less demolition expenses. The company realized a net gain on this disposition of (pound)34,500 ($55,621). On October 17, 2003, the company received the net proceeds from the sale of land located in Livingston, Scotland in the amount of (pound)114,868 ($192,163). The company realized a net loss on this disposition of (pound)5,132 ($8,585). In 2003, the company recognized approximately $171,000 charge for the write-off of accumulated foreign currency translation loss resulting from the substantial liquidation of Techdyne (Europe). F-22 SIMCLAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13--ACQUISITION OF AG TECHNOLOGIES, INC. On July 15, 2003, the company acquired for cash, all of the outstanding stock of AG Technologies, Inc., a privately owned company based in Schaumburg, Illinois. The company name was changed to Simclar (Mexico), Inc. on August 29, 2003. Additional consideration of up to $1,300,000 is payable based on Simclar (Mexico)'s net sales in each of the three years ending July 14, 2004, 2005 and 2006. Simclar (Mexico) is an international value added provider of comprehensive electronic manufacturing services to OEM's serving the automotive, industrial controls, medical and power equipment industries. Simclar (Mexico)'s Mexican facility enables the company to be competitive in the higher volume arena for assembly in North America. The acquisition was accounted for by the purchase method of accounting under SFAS No. 141, "Business Combinations". The purchase price for the acquisition, including loan repayment and net of cash received, totaled $1,951,547 and was allocated to assets acquired and liabilities assumed based on estimated fair values at the date of acquisition. The company recorded $1,279,118 of goodwill and $18,000 of intangibles based on the opening balance sheet. Additional consideration payable based on Simclar (Mexico)'s sales through July 14, 2006 could increase the amount of this goodwill to $2,579,118. The additional earn-out for the period July 15, 2003 to July 14, 2004 of $606,432 was paid on September 15, 2004. This additional earn-out payment increased the company's goodwill to $1,885,550. The purchase allocation, as adjusted for the earn-out payment, is as follows: Current assets $3,414,149 Equipment 867,322 Goodwill 1,885,550 Intangibles 18,000 Other assets 743 ---------- Total assets acquired $6,185,764 ---------- Current liabilities $1,556,485 Long-term debt 9,000 Long-term liabilities 2,062,300 ---------- Total liabilities $3,627,785 ---------- Net assets acquired $2,557,979 ========== Results of operations have been included in the company's consolidated financial statements prospectively from the date of acquisition. The following table summarizes selected unaudited pro forma financial information for the years ended December 31, 2003 and 2002, respectively, as if Simclar (Mexico) had been acquired at the beginning of 2003 and 2002. The unaudited pro forma financial information includes adjustments for income taxes, prepaid expenses, accrued expenses, depreciation and amortization. The pro forma financial information does not necessarily reflect the results that would have occurred if the acquisition had been in effect for the periods presented. In addition, it is not intended to be a projection of future results and does not reflect any synergies that might be achieved from combining the operations. F-23 SIMCLAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13--ACQUISITION OF AG TECHNOLOGIES, INC.--Continued December 31, ------------------------------- 2003 2002 ------------------------------- Net Sales $ 41,210,031 $ 44,625,040 Net Income 1,000,302 1,168,813 =============================== Earnings per share: Basic $ 0.15 $ 0.18 =============================== Diluted $ 0.15 $ 0.18 =============================== F-24 SIMCLAR, INC. AND SUBSIDIARIES INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S REPORT ON SUPPLEMENTAL SCHEDULE Board of Directors and Shareholders Simclar, Inc. and Subsidiaries Hialeah, FL Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The consolidated supplemental schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. Battelle & Battelle LLP Dayton, Ohio March 28, 2005 S-1 SIMCLAR, INC. AND SUBSIDIARIES A. Schedule II - Valuation and Qualifying Accounts Simclar, Inc. and Subsidiaries December 31, 2004
- ----------------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E COL. F - ----------------------------------------------------------------------------------------------------------------------------------- Additions Balance at Accquisition (Deductions) Other Changes Balance Beginning (3) Charged (Credited) to Add (Deduct) at End of Classsification of Period Costs and Expenses Describe Period - ----------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2004: Reserves and allowances deducted From asset accounts: Allowance for uncollectible accounts $ 279,000 $ 35,000 $ (132,000) (1) $ 182,000 Reserve for inventory obsolescence 1,421,000 382,000 (322,000) (2) 1,481,000 --------------------------------------------------------------------------------------- $ 1,700,000 $ -- $ 417,000 $ (454,000) $ 1,663,000 ======================================================================================= YEAR ENDED DECEMBER 31, 2003: Reserves and allowances deducted From asset accounts: Allowance for uncollectible accounts $ 244,000 $ 35,000 $ -- -- (1) $ 279,000 Reserve for inventory obsolescence 1,115,000 332,000 107,000 (133,000) (2) 1,421,000 --------------------------------------------------------------------------------------- $ 1,359,000 $ 367,000 $ 107,000 $ (133,000) $ 1,700,000 ======================================================================================= YEAR ENDED DECEMBER 31, 2002: Reserves and allowances deducted From asset accounts: Allowance for uncollectible accounts $ 220,000 $ -- $ 24,000 -- (1) $ 244,000 Reserve for inventory obsolescence 959,000 -- 380,000 (224,000) (2) 1,115,000 Valuation allowance for defered tax asset -- -- (587,000) 587,000 0 --------------------------------------------------------------------------------------- $ 1,179,000 $ -- $ (183,000) $ 363,000 $ 1,359,000 =======================================================================================
(1) Uncollectible accounts written off, net of recoveries (2) Net write-offs against inventory reserves (3) Acquisition of AG Technologies, Inc. S-2 EX-10.XVIII 2 v015268_ex10-xviii.txt LEASE AGREEMENT Between CONSORCIO INMOBILIARIO DEL NORESTE, S.A. DE C.V. as Landlord And SIMCLAR DE MEXICO, S.A. DE C.V. as Tenant As of _11-1-04_______, 2004 Property Location: Ave. Cantinflas entre Lauro Villar y Colorado H. Matamoros State of Tamaulipas United Mexican States LEASE AGREEMENT THIS LEASE AGREEMENT (the "Lease") is made and entered into as of the 1ST__ day of _NOVEMBER____, 2004, by and between CONSORCIO INMOBILIARIO DEL NORESTE, S.A. DE C.V., represented herein by its legal representative, Mr. Federico Javier Carretero Zardeneta (hereinafter referred to as "Landlord"), and SIMCLAR DE MEXICO, S.A. DE C.V., represented herein by its President and legal representative, Mr. Douglas Lee Kvalvog Carlino (hereinafter referred to as "Tenant"), with the intent to be legally bound. RECITALS A. Landlord hereby states, through its legal representative, that: (i) It is a corporation duly incorporated and existing pursuant to the laws of the United Mexican States, as per Public Deed Number 743, dated March 30, 1982, from the records of Notary Public Number Vito Cerda Cabrera, in and for the City of H. Matamoros, State of Tamaulipas, United Mexican States, and recorded in the Public Registry of Property in the City of H. Matamoros, State of Tamaulipas, United Mexican States, under entry Number 2824, File 965, Book 67, Commerce Section, dated April 1, 1982, and that his authority was granted under the same instrument. (ii) It is the owner of a tract of land with a surface area of 103,738.80 square feet, located at Ave. Cantinflas, entre Lauro Villar y calle Colorado, in the City of H. Matamoros, State of Tamaulipas, United Mexican States, and a building to be constructed thereon of 55,524.00 square feet, the plans and specification of such building and related improvements (the "Building"), which parcel of land is described in the blueprint attached to this Lease as Exhibit "A", which is considered as incorporated by reference herein and becomes a part hereof, and which will hereinafter be referred to individually as the "Land"; the Land and the Building are hereinafter referred to collectively as the "Premises". (iii) It desires to lease the Premises to the Tenant under the terms and conditions hereinafter set forth. B. Tenant hereby states, through its legal representative, that: (i) It is a corporation duly incorporated and existing pursuant to the laws of the United Mexican States, as per Public Deed Number 1550, Volume 120, dated December 19, 2004, granted by Mr. Jorge Luis Velarde Danache, from the records of Notary Public Number 150, in and for the City of H. Matamoros, State of Tamaulipas, United Mexican States, and recorded in the Public Registry of Property in the City of H. Matamoros, State of Tamaulipas, United Mexican States, under Entry Number 725, Volume 3-015, Book I, Commerce Section, dated January 22 of 2004, and that his authority was granted under the same instrument. (ii) It wishes to lease the Premises under the terms and conditions of this Agreement. C. Both parties state, through their respective legal representative, that: (i) In the execution hereof there had been no error, violence, bad faith nor duress between them. (ii) Their respective representatives have sufficient authority to execute this Lease, same authority that has not been revoked, diminished or limited in any way whatsoever. (iii) They mutually acknowledge the authority with which their legal representative appear to the execution hereof. SECTION 1 PREMISES; GUARANTY 1.1 Description. (a) Landlord, for and in consideration of the rents herein reserved and of the covenants and agreements herein contained on the part of the Tenant to be performed, hereby leases to Tenant, and Tenant hereby takes and hires from Landlord, the Premises together with a leasehold interest in all rights, privileges, easements and appurtenances thereunto belonging for the "Term" (as defined in Section 2.1) of this Lease. (b) The Premises contains a total of 55,524.00 Sq. Ft., rentable of area (all on grade). By taking occupancy of the Premises, Tenant shall be deemed to have accepted the same as suitable for the purposes herein intended, subject to Landlord's maintenance obligations under the provisions of this Lease including Section 10.1 hereof. 1.2 Title Matters. The Premises are subject to the easements, restrictions, reservations and other permitted encumbrances (the "Permitted Encumbrances") set forth on the attached Exhibit B incorporated herein by reference. Landlord agrees that it will not create any easements, rights of way, covenants, or restrictions (the "Restrictive Agreements") affecting the Premises except: (a) the Permitted Encumbrances; (b) park rules and regulations established in Landlord's reasonable documents and (c) Restrictive Agreements required by any proposed or existing mortgagee of the Premises (each a "Mortgagee") in connection with Landlord's financing of the Premises provided that such Restrictive Agreements do not materially affect Tenant's exclusive use of the Building, as contemplated by this Lease, and are commercially reasonable. 1.3 Environmental Condition. (a) Landlord represents that (i) the Building will be delivered to Tenant in accordance with Section 2 hereof free and clear of any material "Hazardous Substances" (as defined in Section 7.1 hereof) except as permitted by Section 7.4(a) hereof and (ii) during the Term, the Landlord will not take any actions that would violate the environmental laws of any applicable jurisdiction in the United Mexican States. (b) Tenant acknowledges that (i) it shall comply, at its sole expense, with all applicable laws, including environmental laws relative to the Premises and Tenant's use, occupancy and operations at the Premises; and (ii) during the Term, the Tenant will not take any actions that would violate the environmental laws of any applicable jurisdiction in the United Mexican States. (c) Landlord shall indemnify, defend with counsel reasonably acceptable to Tennant, and hold Tenant fully harmless from and against any and all liability, loss, suits, claims, actions, causes of action, proceedings, demands, costs, penalties, damages, fines and expenses, including, without limitation, attorneys' fees, consultants' fees, laboratory fees and clean-up costs and the costs and expenses of investigating and defending any claim or proceedings, resulting from the presence of any Hazardous Substances (as defined in Section 7.1 hereof) at the Premises arising prior to the Commencement Date from the action or inaction of Landlord, its employees, contractors, and agents (but excluding any such liability arising from negligence of Tenant) or arising out of: (i) the generation, storage, treatment, handling, transportation, disposal or release of any Hazardous Substance at the Premises, or (ii) any violation(s) of any applicable law regarding Hazardous Substances at the Premises. (d) Tenant shall indemnify, defend with counsel reasonably acceptable to Landlord, and hold Landlord fully harmless from and against any and all liability, loss, suits, claims, actions, causes of action, proceedings, demands, costs, penalties, damages, fines and expenses, including, without limitation, attorneys' fees, consultants' fees, laboratory fees and clean-up costs and the costs and expenses of investigating and defending any claim or proceedings, resulting from the presence of any Hazardous Substances (as defined in Section 7.1 hereof) at the Premises arising after the Commencement Date from the action or inaction of Tenant, its employees, contractors, and agents (but excluding any such liability arising from negligence of Landlord) or arising out of: (i) the generation, storage, treatment, handling, transportation, disposal or release of any Hazardous Substance at the Premises, or (ii) any violation(s) of any applicable law regarding Hazardous Substances at the Premises. 1.4 Uses and Zoning. Landlord represents and warrants that the proposed use of the Premises, as stated in Section 6 hereof, is permitted by applicable governmental laws and regulations and that there are no recorded covenants, restrictive agreements or easements that will adversely impact the use of the Premises. For such purposes Landlord has, or will, obtain a zoning certificate (certificado de uso de suelo) issued by the corresponding Authority that the Premises are zoned for industrial purposes, and deliver a copy of the same to the Tenant. 1.5 Guaranty. As a condition for Landlord agreeing to enter into this Lease with Tenant, Landlord has required that a corporation guarantee the full payment and performance of Tenant's obligations under this Lease. The agreement of guaranty shall be in the form attached hereto as Exhibit "C" (the "Guaranty") and shall be duly executed by Guarantor (the "Guarantor") and delivered to Landlord simultaneously with the execution and delivery of this Lease by Tenant. SECTION 2 TERM 2.1 Term: Commencement Date. (a) The term (the "Term") of this Lease shall commence on the "Commencement Date" (as defined below) as more particularly set forth in subsection (b) below and shall end on __10-31-_______2017 (the "Expiration Date"), unless sooner terminated pursuant to the terms and conditions of this Lease. If Tenant exercises its option to extend the Term pursuant to Section 26 hereof, the Expiration Date and the Term shall be extended in accordance with such Section 26. (b) The "Commencement Date" of this Lease shall mean __11-1-04____________. (c) Tenant shall have free access to the Premises from _10-7-04________, 2004, in order to carry out inspections of the Premises. 2.2 Certain Definitions. As used in this Lease, the following terms shall have the meanings set forth below: (a) "Force Majeure Delay", shall mean any delays beyond a party's reasonable control, including emergency governmental restrictions, regulations, or control, strikes, shortages of labor or materials, order of civil, military or naval authority, governmental preemption, Acts of God; fire, earthquake, floods, explosions, extreme weather conditions, enemy action, terrorism, civil commotion, riot or insurrection or other unavoidable physical casualty, or any other causes which are beyond the delaying party's control. (b) "Confirmatory Amendment", shall mean when the Commencement Date, the Rent Commencement Date and Expiration Date hereof have been determined in accordance with the provisions set forth in this Lease, the parties hereto shall execute a document in recordable form not later than fifteen (15) days following Landlord's written request therefore, setting forth said dates and said document shall be deemed a supplement to and part of this Lease. 2.3 Building Compliance. Landlord warrants that, as of the Commencement Date, the Building shall be in compliance with all applicable Mexican laws and regulations governing the construction of the Building (excluding such laws and regulations as may apply solely to Tenant's business or operations at the Premises; except as provided in Section 1.4 above). SECTION 3 RENT 3.1 Rent. (a.1)In consideration of this Lease, the Tenant shall pay during the first eight years of the "Initial Term," commencing on the Commencement Date of this Landlord, as rent for the use and possession of the Premises, the net monthly amount of US $0.48 (FORTY EIGHT CENTS), legal currency of the United States of America, per each square foot of the Building (the "Initial Base Rent"), in monthly payments, of US$26,651.52 (Twenty six thousand six hundred and fifty one dollars 52/100) U.S. CY, legal currency of the United States of America, each, giving as result and annual rent total of $319,818.24 (Three hundred and nineteen thousand eight hundred and eighteen dollars 24/100 U.S. CY), Accordingly, Tenant shall make rent payments to Landlord totaling U.S. legal currency of the United States of America, plus the applicable value added tax. Rent for the first month is to be deferred to the end of the 8-year lease period. The initial deposit for the building will be one month's rent, payable upon the start of construction, and the lease being signed by both parties. (a) Monthly installments of Annual Base Rent shall be payable by Tenant to Landlord beginning on the Commencement Date, as determined or extended in accordance with Section 2 hereof, and by the fifth day of each succeeding calendar month thereafter during the Term without demand, together with any scheduled monthly payments of Additional Payment Obligations. All Annual Base Rent and Additional Payment Obligations shall be due and payable to Landlord without abatement, suspension, reduction, discount, setoff, counterclaim or defense in lawful currency of the United States of America. (b) All installments of Annual Base Rent, the Additional Payment Obligations and all other money to be paid by Tenant to Landlord hereunder shall be paid in lawful currency of the United States of America by electronic bank wire transfer of immediately available funds to such bank or place, or in such other manner as Landlord may from time to time designate in writing to Tenant. Landlord agrees to deliver a corresponding official invoice to Tenant for any amounts so paid following Landlord's receipt of any payment of Annual Base Rent or Additional Payment Obligations in compliance with the United Mexican States. (c) The term of this Lease Agreement shall be of thirteen years starting on _11-1____, 2004, and terminating on _10-31___, 2017, (Initial Term) same being obligatory to both parties, except in the event of the cause established in of this Agreement. The Landlord hereby agrees and accepts that the rental payments shall be decreased by five (5%) percent based on the monthly sum paid as rent commencing on the ninth year of the Initial Term. Accordingly, the adjusted monthly rental payment will be $25,318.94 (Twenty five thousand three hundred and eighteen dollars 94/100 ) U.S. CY, and a total annual rent $303,827.32 (Three hundred and three thousand eight hundred and twenty seven dollars 32/100 ) U.S. CY, legal currency of the United States of America, plus the applicable value added tax. The adjusted rental payments will be fixed for the duration on the Initial Term. The Landlord grants an option to the Tenant to extend the Initial Term of the Lease for an additional term of five years (First Extension Term). In order to exercise the option to extend this agreement as mentioned before, the Tenant must give written notice to the Landlord at least 90 days prior to the termination of the Initial Term, otherwise the Landlord will have no obligation to hold and reserved the property for the Tenant and the Landlord may take any actions to promote or advertise the property for a future Tenant. 3.2 Lease Year. For purposes of this Lease, the term "Lease Year" shall mean a period of twelve (12) full calendar months. The first Lease Year shall begin on the Commencement Date and shall end on the last day of the twelfth (12th) full calendar month following the Rent Commencement Date. Each subsequent Lease Year shall consist of twelve (12) full calendar months following the immediately preceding Lease Year, except that the final Lease Year of the Term shall end on the Expiration Date. 3.3 Additional Payment Obligations. In addition to payment of the Annual Base Rent as set forth in Section 3 herein, Tenant hereby covenants and agrees to pay when due the VAT, and any and all other sums of money, charges or other amounts required to be paid by Tenant to Landlord or to another person under this Lease (collectively referred to herein as the "Additional Payment Obligations"). Any nonpayment of Additional Payment Obligations when due hereunder shall constitute a default under this Lease to the same extent, and shall entitle the Landlord to the same remedies, as nonpayment of the Annual Base Rent. Except as otherwise herein provided, all Additional Payment Obligations payable hereunder shall be due within ten (10) days of the date of Landlord's invoice therefore. 3.4 Late Charge. If Tenant shall fail to pay any Annual Base Rent or any Additional Payment Obligations within ten (10) days after the date same is due and payable, Tenant shall pay to Landlord an administrative fee equal to annual rate of 2 points over the prime rate of the International Bank of Commerce, after a grace period of 10 days of the amount due to cover Landlord's additional administrative costs and cost of funds resulting from Tenant's failure. Such fee shall be paid to Landlord together with such unpaid amounts and shall constitute Additional Payment Obligations hereunder. Such late payment fee shall not diminish or impair any other remedies available to Landlord. Landlord will provide Tenant with written notice of such delinquency hereunder on not more than two (2) occasions during each calendar year, and Tenant shall not be liable for such fee relative to such delinquency if Tenant cures the delinquency within five (5) days following Landlord's delivery of such written notice. 3.5 The Tenant hereby agrees that should the Landlord at one point obtain a loan with a bank institute, pertaining to the Premises and or the Lease Contract, Tenant will submit the monthly payment directly to the bank institute rather than to Landlord immediately after Landlord advises Tenant all the necessary information and/or documentation as to where payment should be mailed to, accepting the conditions that the bank institution establishes. SECTION 4 HOLDING OVER 4.1 Holding Over. Upon failure of Tenant to surrender possession of the Premises upon the expiration of the Term of this Lease, as renewed and extended hereunder, or the sooner termination thereof, Tenant shall pay to Landlord, as an occupancy charge, an annual amount equal to one hundred fifty percent (150%) of the Annual Base Rent and other sums required to be paid under this Lease with respect to the year immediately preceding the expiration or sooner termination of the Term of this Lease and one hundred percent (100%) of Tenant's Additional Payment Obligations, as applied to any period in which Tenant shall remain in possession after such expiration or sooner termination of this Lease (which amounts shall be charged on a monthly calendar basis); the payment by Tenant and collection by Landlord of any such amounts shall not be deemed to be the consent of Landlord for Tenant's failure to deliver possession; and provided, further, that in such event Tenant shall not be released from liability for any costs, damages or liabilities whether direct, indirect or consequential, suffered by Landlord and occasioned by Tenant's holding over. SECTION 5 REAL ESTATE TAXES 5.1 Real Estate Taxes. The Landlord will pay all the taxes and duties generated by the Premises. The Landlord shall deliver to the Tenant copies of all the tax payments related with the Premises, in order for the latter to verify that such payments were carried out. SECTION 6 USE OF PREMISES 6.1 Permitted Use. Except as expressly permitted by Section 7.4, Tenant covenants that it shall use and occupy the Premises as a facility for "light" manufacturing, warehouse, office and other lawful, non-polluting uses accessory and incidental to the foregoing that are consistent with the uses permitted in other first-class industrial parks in the vicinity of the Premises, provided that such uses do not (a) involve the manufacture, processing, use, storage or release of explosives or "Hazardous Substances", (b) involve the release of any noxious fumes, vapors or odors, (c) cause the emission of any noise beyond the perimeter of the Building, or (d) violate any Permitted Encumbrances or Restrictive Agreements applicable to the Premises. Tenant shall not use or occupy the Premises for any other purpose or business without the prior written consent of Landlord, which consent may be withheld or conditioned in Landlord's reasonable discretion. Tenant shall observe and comply with all laws, rules, regulations and ordinances applicable to the Premises and such other laws, rules, regulations and ordinances that may require repairs or replacements, whether structural or nonstructural, exterior or interior, foreseen or unforeseen; Provided, however, that all "Alterations" (as defined in Section 8.1 hereof) shall be performed in accordance with Section 8. Under no conditions whatsoever shall the Tenant be permitted to use the Premises for any activities or operations that are in violation of any applicable municipal, state or federal laws, regulations or ordinances. 6.2 Rules and Regulations. In addition, Landlord reserves the right to establish rules and regulations for the Premises. Tenant shall observe and comply with such commercially reasonable rules and regulations reasonably established by Landlord and all modifications thereof and additions thereto from time to time put into effect by Landlord. Landlord agrees to enforce such Rules and Regulations against all tenants in a fair and non-discriminatory manner. 6.3 Public Utilities. (a) Landlord will provide sanitary sewer, water, gas supplier; telephone and electric conduit lines from the Building to the street line 3,500 kva. Such utilities will be designed to serve the Building exclusively. Tenant shall have the responsibility to contract directly with the utility companies for all of its utility services and arrange for the initiation, connection and consumption of service (and meter installation) from each of the providers of utility services and for the direct payment to such provider for all charges relating thereto. All costs and charges associated with utility services shall be Tenant's financial responsibility. (b) Tenant shall be responsible for: (i) the payment of any "cuota de cooperacion" and "cuota de aportacion" fees as may be charged for initiation of electric service and for all connection, user and consumption fees associated with the electric service for the Building; and (ii) the payment of all water rights ("derecho de fuente"), connection, user and consumption fees associated with the initiation, connection and consumption of water service at the Building, and for the connection, consumption and user fees for all other utilities serving the Premises. Tenant shall pay all utility expenses before the same become delinquent or subject to the assessment of any late charge or administrative fee by the utility company. (c) The Landlord shall also provide the following services at the Premises: 1. - Sufficient restrooms for men and women in the factory floor and in the office area. 2. - Proper sanitary draining. 3. - Seal the production floor of the new building in accordance with the proposal submitted by the Tenant, and accepted by the Landlord. 4. - Parking lot with a surface area of up to 18,000.00 Sq. Ft., and 24 spaces for visitors. 5. - The Landlord will install 7 units of air conditioning with a total of 130 tons. Costs of the repair and on going maintenance of all units will be obligatory to the Tenant. If due an increase of employees or equipment the Tenant would need more a/c units, the Tenant would pay these units. Furthermore, the Landlord commits to deliver to the Tenant copies and/or originals of the warranties issued by the manufactured of the aforementioned equipment. Tenant will be entitled to enforce directly all rights and benefits of the Landlord under such guarantees or warranties. 6.4 Increased Insurance Risk. Tenant shall not do or permit anything to be done, or keep or permit anything to be kept in the Premises, which would: (a) be in violation of any governmental law, regulation or requirement, (b) invalidate or be in conflict with the provision of any fire or other insurance policies covering the Building or any property located therein, (c) result in a refusal by fire insurance companies of good standing to insure the Building or any such property in amounts required by Landlord's Mortgagee (as hereinafter defined) or reasonably satisfactory to Landlord, (d) subject Landlord to any liability or responsibility for injury to any person or property by reason of any business operation being conducted in the Premises, or (e) cause any increase in the fire insurance rates applicable to the Premises or property located therein at the beginning of the Term or at any time thereafter. In the event that any use of the Premises by Tenant increases such cost of insurance, Landlord shall give Tenant written notice of such increase and Tenant shall pay such increased cost to Landlord within fifteen (15) days following Landlord's delivery to Tenant of its invoice therefor. Acceptance of such payment shall not be construed as a consent by Landlord to Tenant's such use, or limit Landlord's further remedies under this Lease. SECTION 7 HAZARDOUS WASTES 7.1 Prohibition Against Use. (a) Tenant covenants that it shall not, at any time during the Term of this Lease, place, store, install upon, discharge, release or generate on, in or under the Premises, or allow to escape from the Premises, any "Hazardous Substances" (as defined below) or containers or storage or processing facilities thereof. The term "Hazardous Substances", as used in this Lease, shall mean any: (a) hazardous wastes and/or toxic chemicals, materials, substances or wastes occurring in the air, water, soil or ground water at the Premises as defined in the laws and regulations in effect during the Term in the United Mexican States (the "Environmental Laws"); (b) any substance, the presence of which is prohibited or controlled by any other applicable federal or state or local laws, regulations, statutes or ordinances now in force or hereafter enacted relating to waste disposal or environmental protection with respect to hazardous, toxic or other substances generated, produced, leaked, released, spilled or disposed of at or from the Premises; and (c) any asbestos or asbestos containing materials, polychlorinated biphenyls ("PCB") in the form of electrical equipment, fluorescent light fixtures with ballasts, cooling oils or any other form, or any solid, liquid, gaseous or thermal irritant or contaminant, such as smoke, vapor, soot, fumes, alkalis, acids, chemicals, pesticides, herbicides, sewage, industrial sludge or other similar wastes, or industrial, nuclear or medical by-products or underground storage tanks (whether filled or unfilled). (b) Tenant shall promptly notify Landlord when Tenant becomes aware of the presence of Hazardous Substances at levels at the Premises (not previously authorized by Landlord) that exceed the applicable levels allowed by the Environmental Laws of the United Mexican States. If any remedial action is necessary or appropriate pursuant to this Section, Tenant shall determine and undertake all such actions that are necessary to comply with the laws, statutes and regulations of the United Mexican States applicable to Hazardous Substances. Tenant shall remove, clean-up and remedy any Hazardous Substance on the Premises to the extent required by applicable law, provided that the presence of such Hazardous Substance resulted from the action or inaction of Tenant or any Tenant Parties, and Tenant shall be obligated to continue to pay Annual Base Rent and the Additional Payment Obligations hereunder until such removal, clean-up or remedy is completed in accordance with applicable laws, whether or not the Term of this Lease shall terminate or expire. 7.2 Tenant Indemnity. Tenant shall indemnify, defend and hold harmless Landlord and/or any Mortgagee from and against any and all liability, loss, suits, claims, actions causes of action, remediation orders, proceedings, demands, costs, penalties, damages, fines and expenses, including, without limitation, attorneys' fees, consultants' fees, laboratory fees and clean-up costs, and the costs and expenses of investigating and defending any claims or proceedings, resulting from, or attributable to, (a) the presence of any Hazardous Substance at the Premises arising from the action, inaction or negligence of Tenant or any Tenant Parties, or arising out of the generation, storage, treatment, handling, transportation, disposal or release by Tenant or any Tenant Parties of any Hazardous Substance at or near the Premises, or (b) any violation(s) by Tenant or any Tenant Parties of any applicable law regarding Hazardous Substances. Furthermore, upon the termination of the Lease, Tenant shall deliver to Landlord a Site Abandonment Approval ("Abandono de Sitio") issued by the Mexican Environmental Protection Agency ("PROFEPA") stating that the Premises are in satisfactory condition. 7.3 Landlord Representations and Indemnity. (a) To the best of Landlord's knowledge, there are no material Hazardous Substances in, on, or about the Premises. Landlord covenants and agrees that neither Landlord nor its contractors or agents shall release, discharge, place, or install any Hazardous Substances upon the Premises or install or incorporate any Hazardous Substances into the Building. Landlord covenants that it previously has not, and that it shall not place, store, install upon, discharge, release or generate on, in or under the Premises, or allow to escape from the Premises, any Hazardous Substances. Landlord shall not be liable to Tenant or any other party on account of, the placement, storage or release of any Hazardous Substances affecting the Premises or any surrounding area during the Term of this Lease expect as provided in Section 7.3(b). Landlord shall deliver to Tenant a Site Abandonment Approval issued by PROFEPA, stating that the Premises are in satisfactory condition. (b) Landlord shall indemnify, defend and hold harmless Tenant from and against any and all liability, loss, suits, claims, action, causes of action, remediation orders, proceedings, demands, costs, penalties, damages, fines and expenses, including, without limitation, attorneys' fees, consultants' fees, laboratory fees and clean-up costs, and the costs and expenses of investigating and defending any claims or proceedings (but excluding consequential damages) arising from (a) the action, inaction or negligence of Landlord or its contractors or agents, or arising out of the generation, storage, treatment, handling, transportation, disposal or release by Landlord or its contractors or agents of any Hazardous Substance at or near the Premises, or (b) any violation(s) by Landlord of any applicable law regarding Hazardous Substances. 7.4 Permitted Activities. Notwithstanding the provisions of this Section 7, (a) the presence of trace amounts of Hazardous Substances below the level at which such Hazardous Substance is regulated by any applicable law of the United Mexican States shall not constitute a violation of Tenant's representations and covenants contained herein; and (b) Tenant may store commercial products on-site which contain Hazardous Substances and which are used in the ordinary course of Tenant's business provided that (i) Tenant obtains all necessary permits therefor from the applicable governmental authorities; (ii) Tenant stores, handles and disposes of such Hazardous Substances in conformance with all applicable laws and regulations of the United Mexican States; and (iii) Tenant removes all such Hazardous Substances from the Premises in accordance with applicable laws and regulations at the expiration or sooner termination of the Term. SECTION 8 ALTERATIONS AND ADDITIONS 8.1 Performance by Tenant. (a) No alteration, addition or improvement to or installation in the Premises or any penetration of the roof (each an "Alteration") shall be made or permitted to be made by Tenant without the express prior written consent of Landlord, which shall not be unreasonably withheld. Landlord's consent shall not be required with respect to non-structural Alterations made after the Commencement Date with an aggregate contract value of up to $_20000.00_______ (determined on a cumulative basis throughout the Term) that do not involve or affect the roof, the structural elements of the Building, or any mechanical, electrical, plumbing, HVAC or other Building systems (the "Building Systems"); provided, however, Tenant shall provide Landlord with copies of all final plans and specifications for such nonstructural improvements at least fifteen (l5) days prior to the commencement of any such work. (b) Landlord may impose reasonable conditions to its consent, including conditions that Tenant (i) obtain Landlord's approval, not to be unreasonably withheld or delayed, of final plans and specifications; (ii) obtain Landlord's approval, not to be unreasonably withheld or delayed, of all contractors and subcontractors and their respective contracts; (iii) obtain all permits, approvals, and certificates required by any governmental or quasi-governmental bodies and, upon completion, provide said certificates to Landlord; (iv) carry, and cause all contractors and subcontractors to carry, worker's compensation (to the extent the same may become applicable and available), general liability, personal and property damage insurance; (v) agree at its sole cost to remove any such alteration, addition, improvement or installation on or before the expiration or sooner termination of the Term and to restore the Premises to its prior condition (subject to Section 8.3 below); (vi) to the extent customary in the locality, require all contractors, subcontractors, suppliers and material to sign waiver and release of lien agreements in form, scope and substance satisfactory to Landlord; and (vii) at Landlord's written direction, remove any of the Alterations at the expiration of the Term. Any such alterations, additions, improvements or installations shall (A) in no way adversely affect the value of the Premises, (B) be performed in a workmanlike manner; and (C) in no way violate any agreement, contract or other document by which the Premises is bound, including-any restrictive covenants affecting the Premises. (c) Landlord will permit Tenant and Tenant's Contractor to enter the Premises upon prior notice during normal business hours for the purpose of constructing Tenant's initial Alterations as approved by the Landlord subject to the following conditions: (i) Tenant's execution and delivery of this Lease and Guarantor's execution and delivery of the Guaranty, (ii) Tenant's payment in full of the Security Deposit, (iii) Tenant's delivery of all applicable insurance certificates required by this Lease, (iv) Landlord's receipt and approval of the Tenant's Alterations (and the plans and specifications therefore, and (v) no Event of Default shall have occurred. Tenant's contractors or subcontractors must work in harmony with Landlord and its employees, agents contractors and suppliers and must not (A) take any actions that would cause interference with any activities related thereto, or (B) violate any of Landlord's Rules and Regulations or directions related to Tenant's construction activities at the Building. Until such time as the Premises are ready for Occupancy, Tenant's contractors and subcontractors shall have access to the Premises solely in connection with the performance of Tenant's Alterations. Any entry by Tenant or its agents, engineers, contractors, subcontractor, materialmen and any other party given access to the Premises in connection therewith ("Tenant's Agents and Consultants") shall be at the sole risk of such party and without liability to Landlord, its agents, employees, officers, directors, principals, partners, shareholders and affiliates. Tenant agrees to keep the Premises clean and free at all times of any obstructions, supplies, equipment and materials brought into the building by Tenant or Tenant's Agents or Consultants; comply with Landlord's Rules and Regulations applicable to Tenant's Alteration activities and the activities of Tenant's Agents and Consultants; and comply with Landlord's directions and requirements concerning the use and the time of use of the means of ingress to, and egress from, the Building with respect to Tenant's Alteration activities at the Building. All of Tenant's construction activities shall be coordinated with Landlord and subject to Landlord's requirements to prevent interference with the Building's operations. 8.2 Liens. (a) Tenant shall keep the Premises free and clear of all liens and encumbrances except the Permitted Encumbrances and any liens or encumbrances arising from the acts of the Landlord. If any lien shall be filed against the Premises or the Building purporting to be for labor or material furnished or to be furnished at the request of the Tenant, then Tenant shall at its expense cause such lien to be discharged of record by payment, bond or otherwise, within thirty (30) days after the filing thereof. If Tenant' shall fail to cause such lien to be discharged of record within such thirty (30) day period, in addition to any other remedy available to it for such a default, Landlord may cause such lien to be discharged by payment, bond or otherwise, without investigation as to the validity thereof or as to any offsets or defenses thereto, and Tenant shall, upon demand, reimburse Landlord for all amounts paid and costs incurred including attorney's fees, in having such lien discharged of record. (b) In the event Tenant in good faith desires to contest the validity or amount of any lien referred to in this Section 8.2, Tenant shall have the right to contest the validity or amount of any such lien or other lien referred to in this Section 8.2 at its own expense, by appropriate legal proceedings, promptly initiated and conducted in good faith and with due diligence; that (i) no default or Event of Default exists under this Lease, (ii) Tenant has given prior written notice to Landlord of Tenant's intent to take such action, (iii) neither the Premises nor any part thereof or interest therein will, in the reasonable opinion of Landlord, be in danger of being sold, forfeited, terminated, cancelled or lost, (iv) such action shall not subject Tenant or Landlord to criminal or civil liability. 8.3 Removal of Alterations. All alterations, additions, improvements and installations, which may be made to, the Premises shall become the property of Landlord upon installation and shall remain upon and be surrendered with the Premises, unless Landlord identifies any proposed improvement as an item that must be removed at the end of the term at the time approval is solicited by Tenant in accordance with Section 8.1(a). Notwithstanding the foregoing, Tenant's personal property and trade fixtures, other than that which is affixed to the Premises so that it cannot be removed without material damage to the premises, shall remain the property of Tenant and may be removed by Tenant at any time during the Term. Tenant's goods, effects, personal property, business and trade fixtures, machinery and equipment not removed by Tenant at the expiration of this Lease (or within thirty (30) days after any other termination) shall be considered abandoned and Landlord may dispose of the same as it deems expedient, but Tenant shall promptly reimburse Landlord for any expenses incurred by Landlord in connection therewith including, without limitation, the cost of removal thereof and repairing any damage occasioned by such removal. Tenant shall coordinate its plans to remove such items with Landlord in advance of any removal activities and obtain Landlord's prior written approval of the quality and manner of the repair and restoration work. Tenant shall not undertake any such activities that affect the roof (or any of its structural components) without Landlord's prior written consent. Tenant agrees to repair as soon as practicable, at its sole cost and expense, any and all damage to the Premises caused by, or in connection with, the removal of any articles of personal property, business or trade fixtures, alterations, improvements and installations, normal wear and tear excepted. SECTION 9 TENANT'S MAINTENANCE AND REPAIR OF THE PREMISES 9.1 Tenant's Obligations. Tenant shall be responsible for payment of all expenses and charges relating to the operation, repair and maintenance of the Premises including the Value Added Taxes relative thereto, but excluding any taxes payable by Landlord. Tenant shall be responsible for and shall provide, at its own cost and expense, the maintenance, repair and services for the Premises as stated in the immediately preceding sentence including, without limitation, the following utilities and facilities in and about the Premises (including capital repairs and replacements in connection therewith) subject to Landlord's obligations: (a) Any and all oil, gas, electricity, water, telephone, sanitary sewer, storm or drainage sewer and all other utilities utilized in or about the Premises (including all utility lines, conduits, and related equipment); (b) All heating, ventilating and air-conditioning systems and conduits (including the component equipment and machinery) and the operation of adequate air conditioning and heating in such respective amounts as necessary to protect and preserve the Building; (c) All electrical, mechanical and plumbing systems (including component equipment and machinery); (d) All restrooms, and all plumbing and sewer lines in and about the Premises, (e) All electrical wires, cable, fixtures, outlets and boxes in and about the Premises; (f) All load leveler, including the component equipment and machinery; (g) All hardware installed in the Building, including, but not limited to, hardware items such as doorknobs, urinals, sinks, faucets, etc.; and (h) Other maintenance (including the responsibility to pay its share (based upon the rentable square footage of the Premises relative to the rentable square footage of the other buildings) of any and all maintenance costs and expenses assessed by any present or future industrial park association or similar body), except for items that are Landlord's obligations under Section 10.1 of this Lease, as may be required to preserve and protect the Premises and its constituent parts. Any payment of the items mentioned in Section 9 herein, if paid by the Landlord should be considered as an Additional Payment Obligation. 9.2 Maintenance of the Premises. Tenant covenants and agrees to use, maintain and occupy the Premises in a careful, safe and proper manner which will neither injure the reputation of either Landlord or Tenant nor use the Premises in a manner which renders it a nuisance to any other tenants of the Building, or users or tenants of adjacent buildings. No outside storage of any equipment, inventory, products or any materials whatsoever shall be permitted. Tenant, at its own expense, shall at all times maintain the Premises in a first-class manner and to no less a standard than that of comparable general purpose "light" manufacturing buildings in the vicinity of the Premises and in compliance with those standards imposed by any insurance policies required to be maintained hereunder, (including capital repairs and replacements). Tenant shall keep maintenance and repair reports in sufficient detail to indicate the nature and date of major work done. Tenant shall, at its own cost and expense, keep the Premises and all leasehold improvements therein, including all parking areas and sidewalks, in a clean, safe and healthy condition and shall clean the dirt and rubbish from the parking areas and sidewalks on the Premises during the Term of this Lease. In the event that any of the parking areas, sidewalks, or other parts of the Premises shall be in an unsafe, unclean, or unsightly condition, Tenant shall commence the curing of such condition within ten (10) days following receipt of Landlord's notice of such condition and diligently and continuously prosecute such curative action to completion. 9.3 Tenant's Repairs. Other than Landlord's obligations expressly stated in Section 10.1 of this Lease, at all times during the Term of this Lease, Tenant shall make, at its sole cost and expense, any and all necessary repairs and capital improvements to the Premises, both structural (excluding the items identified as Landlord's responsibility in Section 10.1) and non-structural in order to preserve, protect, and maintain the Premises to their condition as of the date thereof, normal wear and tear excepted, or to such superior condition as Tenant may desire, as provided in this Article 9 hereof and all other items which constitute a part of the Building and the Premises. Tenant in accordance with Section 8 shall perform any repairs and capital improvements, which constitute Alterations, hereof. Tenant's obligation for repairs extends to repairs made after the Tenant has vacated the Premises, which were necessary because of Tenant's use or occupancy of the Premises. 9.4 Exterior Maintenance. Tenant shall, at its own cost and expense, maintain all lawns, gardens, trees, shrubbery, exterior landscaping and all parking, loading and other exterior areas at the Premises and keep the same clear and free from accumulations of any debris, rubbish and garbage and keep such outside areas of the Premises in such condition as consistent with professionally landscaped buildings. 9.5 Refuse Removal. Tenant shall, at its own cost and expense, provide for all trash, garbage, and refuse removal from the Premises at all times during the Term of this Lease. Tenant shall at all times comply with all health and safety laws, rules, regulations and ordinances with respect to the storage and removal of trash, garbage and refuse on and from the Premises. 9.6 Tenant's Failure to Repair. If Tenant refuses or neglects to commence any repairs or fails to diligently prosecute the same to completion within twenty (20) days from the date on which Tenant receives written notice from Landlord of the need therefore, or if Tenant fails to make emergency repairs or diligently prosecute the same within such time as is necessary to avoid risk or damage to the Premises, Landlord may make such repairs at the expense of Tenant and such expense plus fifteen percent (15%) for Landlord's cost of administration and overhead shall be paid by Tenant to Landlord within five (5) days following completion and written demand as Additional Rent hereunder. SECTION 10 LANDLORD'S MAINTENANCE AND REPAIR OF THE PREMISES 10.1 Landlord's Obligations. After the Occupancy Date Landlord shall have no obligation to maintain or repair, or provide any service to, the Premises except as stated in this Section 10.1. Landlord, at its sole cost and expense, shall maintain (and make any necessary repairs and replacements) the following structural components of the Building in good condition, repair, reasonable wear and tear excepted throughout the Term: (a) the foundation, (b) the footings, (c) the load-bearing and exterior walls, (d) the steel joists and supporting columns, and (e) the roof and the roof membrane. It shall be a condition precedent to Landlord's responsibility for the roof of the Building that Tenant makes no penetrations of the roof. SECTION 11 NET LEASE; TENANT'S OBLIGATIONS FOR COSTS 11.1 Net Lease. This Lease is a net lease, it being understood that Landlord shall receive the Annual Base Rent set forth herein free and clear of any and all impositions, taxes, utilities, liens, charges or expenses of any nature whatsoever in connection with the ownership, maintenance, repair and operation of the Premises, except as specifically provided in this Lease. As provided in this Lease, Tenant shall pay certain Additional Payment Obligations including, without limitation, the VAT, and the insurance premiums for the coverage required by Section 17. Any present or future law to the contrary notwithstanding, this Lease shall not terminate except as expressly provided herein, nor shall Tenant be entitled to any abatement, suspension, deferment, reduction, setoff, counterclaim, or defense with respect to any Annual Base Rent, Additional Payment Obligations or other sum payable hereunder other than as expressly provided herein. 11.2 Non-Terminability. To the extent permitted by applicable law, Tenant shall remain obligated under this Lease in accordance with its terms and shall not take any action to terminate, rescind or avoid this Lease, or any of its payment obligations, notwithstanding any action for bankruptcy, insolvency, reorganization, liquidation, dissolution or other proceeding affecting Landlord, or any action with respect to this Lease which may be taken by any trustee, receiver or liquidator of Landlord or by any court in respect of Landlord, except as such right may be expressly granted to Tenant in this Lease. 11.3 Rent Acceleration. Except as otherwise expressly provided in this Lease (and subject to the provisions of applicable law and Tenant's cure rights under Section 20.1(f)), if Tenant seeks to modify, amend, cancel in whole or in part, or have declared null, whether in whole or in part this Lease Agreement, and whether or not successful, Landlord shall have the right to accelerate all rentals and other payments payable under this Lease Agreement as herein defined (collectively the "Rent Payable"), in addition to any other remedy available to Landlord. "Rents Payable" for purposes herein is defined as the total amount of Annual Base Rent and Additional Payment Obligations to be paid for the entire Term of this Lease Agreement, provided in Section 3 hereof, discounted to present value as provided in Section 21.1(a). SECTION 12 RESTRICTIONS ON TRANSFER. ASSIGNMENT AND SUBLETTING 12.1 Assignment or Sublease. Except as provided in Section 12.3 hereof, Tenant, expressly covenants that Tenant shall not, assign, transfer, mortgage or encumber this Lease or any interest therein, directly or indirectly, or sublet the Premises or any part thereof or grant any license, concession or other right of occupancy, or permit any part thereof to be used or occupied by anyone other than Tenant without the prior written consent of Landlord (any such action, a "Transfer"), which consent shall not be unreasonably delayed or withheld, provided the following conditions are complied with: (a) Tenant shall provide written notice of any proposed Transfer to Landlord at least thirty (30) days in advance of the date on which Tenant desires to make such Transfer, which notice shall specify: (1) the name, address and business of the proposed assignee, sublessee or other transferee (the "Transferee"), (2) the amount and location of the space in the Premises affected, (3) the proposed effective date and duration of the Transfer, (4) a certified financial statement indicating the financial worthiness of the proposed Transferee, (5) a copy of the proposed assignment, sublease or other document (the "Transfer Document") which shall include the proposed rent to be paid by any assignee or sublessee, and (6) any other information about the proposed Transferee as Landlord may reasonably request. (b) Any Transfer shall not transfer or avoid Tenant's duties and obligations under the Lease or Guarantor's obligations under the Guaranty and the Tenant named herein shall continue to be liable for all of its obligations hereunder and the Guarantor shall continue to be liable for all of its obligations under the Guaranty, in each case as though no Transfer had been made. (c) At the time of any Transfer, this Lease must be in full force and effect, and no Event of Default shall have occurred and be continuing. (d) The Transferee shall agree in writing to be bound by the terms of this Lease pursuant to an assumption agreement in form and substance satisfactory to Landlord. A copy of the assignment, sublease or other Transfer Document fully executed and acknowledged by Tenant and Transferee shall be mailed to Landlord ten (10) days prior to the effective date of such Transfer. (e) The financial net worth and creditworthiness of the Transferee shall be acceptable to Landlord (as substantiated by its audited financial statements or other comparable financial information reasonably satisfactory to Landlord). (f) The Guarantor shall deliver to Landlord an instrument in form and substance satisfactory to Landlord and any Mortgagee whereby Guarantor consents to such Transfer and ratifies and confirms the continuing validity of its Guaranty (a "Ratification Agreement") at least ten (10) days prior to the effective date of such Transfer. (g) Any Transfer shall comply with the requirements of all financing documents applicable to the Premises. Any Mortgagee or other party whose approval is required shall have approved the Transfer Document. (h) In the case of an assignment or sublease, each Transfer Document permitted under this Section 12 shall contain provisions to the effect that (1) such assignment or sublease is only for actual use and occupancy by the Transferee; (2) such assignment or sublease or other Transfer is subject to all of the terms, covenants and conditions of this Lease and to all of the rights of Landlord hereunder; and (3) in the event this Lease shall terminate before the expiration of such assignment or sublease or other Transfer, the Transferee thereunder will, at Landlord's option, attorney to Landlord and waive any rights to surrender possession thereunder, as a result of the termination of this Lease. (i) No Transferee of this Lease shall engage in any business or activities which produce, use, store or process any Hazardous Substances as defined in Section 7 of this Lease or shall otherwise be in violation of the use restrictions contained in Section 6 of this Lease. (j) Tenant agrees to pay on behalf of Landlord any and all costs of Landlord, including reasonable attorneys' fees, occasioned by such Transfer, or Landlord's or any Mortgagee's approval thereof. 12.2 Landlord Approval. Landlord shall have a period of fifteen (15) days following receipt of notice given by Tenant pursuant to Section 12.1 above within which to notify Tenant in writing that Landlord elects either (a) to permit Tenant to make such Transfer; or (b) to withhold Landlord's consent in its reasonable discretion and to continue this Lease in full force and effect. No consent given by Landlord to any Transfer shall be construed to be a consent to any further Transfer of the Premises by Tenant or any other party, or a release of Tenant's liability under this Lease, and Landlord's right to withhold its consent with respect thereto is hereby expressly reserved. 12.3 Permitted Transactions. Tenant may assign this Lease or sublet the Premises or any portion thereof without Landlord's consent (except as to the form of assignment or sublease) to (a) any corporation or limited liability company which controls, is controlled by or is under common control with Tenant, or (b) to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all of the assets of Tenant's business as a going concern, (a "Merger Transaction") provided that: (a) At least twenty (20) days prior to such assignment or sublease, Tenant delivers to Landlord the financial statements and other financial background information of the assignee or sublessee described in Section 12.1 above and the proposed form of assignment or sublease; (b) If an assignment, the assignee assumes, in full, the obligations of Tenant under this Lease (or if a sublease, the sublessee of a portion of the Premises or Term assumes, in full, the obligations of Tenant with respect to such portion and the Transferee has a financial net worth that equals or exceeds that of the Tenant on the date hereof); (c) Tenant remains fully liable under this Lease (except as may otherwise be permitted by a Merger Transaction); (d) The financial net worth and creditworthiness of the Transferee shall be acceptable to Landlord (as substantiated by its audited financial statements); (e) The financial net worth of Guarantor shall be equal to or exceed the net worth of Guarantor on the date of execution of this Lease and the Guaranty shall remain in full force and effect; (f) Guarantor provides Landlord with a Ratification Agreement together with evidence reasonably acceptable to Landlord that the conditions of subsection (d) have been satisfied; (g) The use of the Premises permitted under Section 6.1 of this Lease remains unchanged; (h) No Event of Default shall have occurred and be continuing at the time of such Transfer or after giving effect to the Merger Transaction; and (i) Such transaction is not entered into as a, subterfuge to avoid the restrictions and provisions of this Section 12.3. In addition to the foregoing, the following conditions must also be fulfilled in connection with a Merger Transaction: (a) the surviving entity is a statutory business entity organized under the laws of the United Mexican States, or the United States of America (or any state thereof) which is in full compliance with all applicable Mexican "doing business," foreign ownership of real estate, foreign registration and related laws and regulations, (b) the surviving entity or the entity to which all or substantially all of the assets are sold shall have tangible net worth immediately following the Merger Transaction of no less than the net worth of the Tenant as calculated on the Commencement Date, (c) the surviving entity (if not the Tenant) or, in the case of a sale of all or substantially all of the Tenant's assets, the entity which has purchased such assets shall have delivered to the Landlord and any Mortgagee an instrument in recordable form and in form and substance reasonably satisfactory to the Landlord and any Mortgagee whereby the surviving entity assumes the obligations of the Tenant under this Lease. SECTION 13 INSPECTION 13.1 Inspection. Landlord and its employees, servants and agents shall have the right to enter the Premises during normal business hours upon at least one (1) business day's prior notice (except in emergencies) for the purpose of showing the same to prospective purchasers, Mortgagees, or tenants of the Premises, or for making such alterations, repairs, improvements or additions to the Premises in accordance with the provisions of this Lease, or examining or inspecting the Building in order to ascertain whether Tenant is complying with all of its obligations hereunder. Landlord agrees that each such entry shall be conducted in a reasonable manner that will be the least intrusive to Tenant's business operations relative to the purpose of the entry. Notwithstanding anything to the contrary in the preceding sentence, except in emergencies, Landlord and its employees, servants and agents shall not enter any area of the Premises that may result in the disclosure of commercial or industrial trade secrets of Tenant and Tenant shall have the right to have a representative accompany Landlord throughout the Premises. Landlord's entry pursuant hereto shall not constitute an eviction of Tenant in whole or in part, and the Rent shall in no way abate while any alterations, repairs, improvements or additions are being made, whether by reason of loss or interruption of Tenant's business or otherwise. If representatives of Tenant shall not be present to open and permit entry into the Building at any time during an emergency, Landlord may enter the Building by means of a master key or forcibly without liability to Tenant. SECTION 14 SURRENDER OF PREMISES 14.1 Condition of Premises. At the end of the Term, or any renewal or extension thereof, Tenant shall surrender the Premises to Landlord, together with all alterations, additions, renovations and improvements thereto specified in Section 8.3, in compliance with all applicable laws, rules, regulations and ordinances and any restrictive covenants, and in broom-clean condition and in good order and repair except for ordinary wear and tear, failing which Landlord may restore the Premises to such condition and Tenant shall pay the cost of said repair and restoration. Tenant shall surrender the Premises to Landlord at the end of the term hereof, without notice of any kind, and Tenant waives all right to any such notice as may be provided under any laws now or hereafter in effect. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of the Term of this Lease. SECTION 15 WAIVER OF CLAIMS: INDEMNIFICATION AND LIABILITY 15.1 Waiver of Claims. Landlord and Landlord's agents, servants and employees shall not be liable for, and Tenant hereby releases Landlord, its agents, servants and employees from, all liability in connection with any and all loss of life, personal injury, damage to or loss of property, or loss or interruption of business occurring to Tenant, its agents, servants, employees, invitees, licensees, visitors or any other person, firm, corporation or entity, in or about or arising out of, in or upon the Premises, including, without limitation, (a) any fire, other casualty, accident, occurrence or condition; (b) any defect in or failure of (i) plumbing, sprinkling, electrical, heating or air conditioning systems or equipment, or any other systems and equipment, and (ii) the stairways, railings or walkways; (c) any steam, gas, oil, water, rain, frost, ice, snow, or flooding that may leak into, issue or flow from any part of the Premises or from the drains, pipes or plumbing, sewer or other installation of same, or from any other cause, place or quarter; (d) the breaking or disrepair of any services, installations and equipment; (e) the falling of any fixtures or any wall or ceiling materials; (f) broken or dislodged glass; (g) patent or latent defects; (h) the carrying out of any construction work or repairs; (i) any acts or omissions of other persons; (j) acts or omissions of third party contractors, and (k) theft, act of God, act of a public enemy, injunction, riot, strike, labor dispute, public demonstration, insurrection, war, court order, or any order of any governmental authority having jurisdiction over the Premises, but excluding any liability resulting from the gross negligence or willful misconduct of Landlord. 15.2 Indemnification and Liability. (a) Tenant's Indemnity. Unless arising out of the negligence or intentional misconduct of Landlord, its agents or employees, Tenant shall protect, defend, indemnify, and hold harmless Landlord from and against any and all costs, expenses (including reasonable attorneys' fees), liabilities, losses, damages, suits, actions, fines, penalties, claims or demands of any kind to the extent such items arise out of or are in any way connected with, and Landlord shall not be liable to Tenant on account of (a) any failure by Tenant to perform any of the agreements, terms, covenants, or conditions of this Lease required to be performed by Tenant, (b) any failure by Tenant to comply with the statutes, ordinances, laws, rules, regulations or orders of any governmental authority, (c) any act or omission of Tenant or any Tenant Parties, (d) any accidents, death or personal injury occurring in, on or about the Premises, or (e) Tenant's use or occupancy of the Premises. (b) Landlord's Indemnity. Unless arising out of the negligence or intentional misconduct of Tenant or any Tenant Parties, Landlord will indemnify and save harmless Tenant of and from any and all fines, suits, claims, demands, penalties, losses and actions (including reasonable attorneys' fees) for any injury to persons or damage to or loss of property in or about the Premises which are caused by the gross negligence, willful misconduct or breach of this Lease by Landlord; provided, however, that Landlord's indemnity shall not apply or extend to any such damage or injury which occurs within the Premises or any area covered by any insurance maintained by Tenant (or which would have been covered had Tenant obtained insurance required under the Lease). (c) Effect of Mutual Waiver. The foregoing indemnity obligations are expressly subject to the provisions of Section 17.4. SECTION 16 CASUALTY AND CONDEMNATION. 16.1 In the event of a casualty suffered by the Premises, Tenant shall immediately notify Landlord in writing and Landlord shall commence the procedures for the determination of damages. In the event of any casualty to the Premises, Landlord and/or Tenant shall have the right to terminate this Agreement if (i) such casualty affects (100%). (b) If this Agreement is not terminated pursuant to paragraph 16.1 (a) hereof, then Landlord, to the extent of insurance proceeds received therefore, shall restore the Premises to the condition existing as of the date hereof, and Tenant, at its sole cost and expense, shall restore all leasehold improvements and/or any other improvements constructed by Tenant within the Premises. (c) During any period during which the Premises are untenable as a result of any casualty, the Annual Base Rent shall abate under this Agreement in proportion to floor area of the Premises rendered untenable to the remaining portion of the Premises, continuing until Landlord substantially completes Landlord's restoration obligations hereunder. 16.2 Condemnation. (a) If the whole or any part of the Premises shall be taken under the power of condemnation, eminent domain or any act by a governmental authority (a "Condemnation"), whether rendered wholly or partially untenantable, Landlord shall negotiate, adjust and appeal the claim for any award or compensation on account of any such Condemnation and shall take all appropriate action in connection therewith. (b) In the event that all or substantially all of the Premises shall be subject to Condemnation, this Lease and the term and estate hereby granted shall automatically terminate as of the date of dispossession of Tenant as a result of such Condemnation. (c) In the event that forty percent (40%) or less of the rentable area of the Building shall be taken by Condemnation, and Tenant can use the Building for the same purpose as prior thereto without material impairment to its business operations, this Lease shall continue in full force and effect. The Term shall expire only as to the portion of the Building so taken, effective on the date of dispossession of Tenant. In the event that more than 40 % of the rentable area of the Building shall be taken by Condemnation and the Building can no longer be used for the same purpose or Tenant's ability to conduct its business operations is materially impaired by the Condemnation, Landlord or Tenant shall have the option to terminate this Lease within the three (3) month period following the Condemnation by giving written notice that substantiate the basis for Tenant's of exercise this termination option. (d) In the event that this Lease is not terminated in accordance with subsection (b) or (c) hereof, Landlord shall, upon receipt of the award in Condemnation, make all necessary repairs or alterations to the Building so as to constitute the remaining Building a complete architectural unit to the extent feasible as promptly as possible (but not in excess of 180 days after receipt of such Condemnation award monies unless due to delays caused by Tenant or Force Majeure Delay), but Landlord shall not be required to spend for such work an amount in excess of the amount received by Landlord as damages for the part of the Premises so taken. "Amount received by Landlord" shall mean that part of the award in condemnation which is free and clear to Landlord of any collection by mortgagees and after payment of all costs involved in collection, including but not limited to attorney's fees. Tenant, at is own cost and expense shall, restore all trade fixtures, equipment, furniture, furnishings and other installations of personal property of Tenant which are not taken to as near its former condition as the circumstances will permit. In the event of a partial taking, all provisions of this Lease shall remain in full force and effect. (e) Any payment or recovery received from the governmental authority related to the Condemnation shall belong to Landlord; provided, however, that Tenant also retains its rights, if any, to make claims against any governmental authority for Tenant's relocation expenses, provided that Landlord's award is not diminished thereby, and any recovery received by Landlord for such relocation expenses shall belong to Tenant. (f) In the event of a Condemnation or other taking that does not result in a termination of this Lease as to the entire Premises, then the Annual Base Rent shall be adjusted in proportion to that portion of the Building taken by such Condemnation. (g) Except as otherwise expressly provided in this Section, in any event where Tenant loses the use of the Premises and the Lease is terminated, Tenant and not Landlord shall bear the business cost to move Tenant's operations to other facilities. 16.3 Escrow for Disbursement of Casualty and Condemnation Proceeds. (a) In the event of a Casualty, Tenant and Landlord agree to deposit the "Net Insurance Proceeds" (defined below) immediately upon receipt thereof in escrow with the financial institution which is the first Mortgagee or the financial institution designated by such first Mortgagee to act as its agent (such Mortgagee when so acting, or its agent when so designated, the "Depositary"), or, in the absence of any Mortgagee, the Depositary shall be mutually agreed upon by Landlord and Tenant. The Depositary shall hold the Net Insurance Proceeds in trust in an interest bearing money market account and shall disburse such Net Insurance Proceeds to Tenant in accordance with the terms and conditions of subsection (c) below to: (i) Tenant to fulfill its obligations under Section 16.1(b); or (ii) Landlord to fulfill its obligations under Section 16.1 (b) hereof. "Net Insurance Proceeds" (as used herein) means the insurance proceeds received by Tenant and/or Landlord less the amount of any reimbursement to Tenant and/or Landlord for administrative fee for collecting the same, and all costs and expenses incurred in connection with the collection of such proceeds. Tenant and/or Landlord shall also deposit with the Depositary within five (5) calendar days of written demand therefor by the other party such additional monies (the "Party Contributions") as are necessary so that the Net Insurance Proceeds at any time held by Depositary and such Party Contributions will be sufficient, in the reasonable judgment of the other party, to pay all of the costs and expenses of the reconstruction and repair of the Building and of the improvements made by Tenant, as the case may be. Once so deposited by Tenant and/or Landlord with the Depositary, such Party Contributions shall become a part of the Net Insurance Proceeds and shall be held and administered in the same manner. (b) In the event of a Condemnation and Landlord elects to reconstruct and repair the Premises, Landlord and Tenant agree to deposit the "Net Condemnation Proceeds" (as defined below) in escrow with the Depositary; provided, however, Tenant shall not be obligated to deposit any award made to Tenant for its personal property. The Depositary shall hold the Net Condemnation Proceeds in trust in an interest bearing account (subject to the investment directions of Landlord and Tenant with respect to the sums deposited by each respectively) and shall disburse such Net Condemnation Proceeds to Landlord and Tenant respectively in accordance with the terms and conditions of subsection (c) below. "Net Condemnation Proceeds" (as used herein) means the Condemnation awards received by Landlord and Tenant less the amount of any reimbursement to Landlord and Tenant for reasonable administrative fees for collecting the same, and all costs and expenses incurred in connection with the collection of such awards. (c) The disbursement of the Net Insurance Proceeds and Net Condemnation Proceeds deposited with the Depositary pursuant to subsection (a) or (b) of this Section 16.3 and the reconstruction and repair of the Premises shall be accomplished pursuant to the following requirements: (i) Landlord and/or Tenant, as the case may be, shall submit to the first Mortgagee plans and specifications, a budget for the costs for such restoration, proposed contracts and subcontracts, a construction schedule, and lien waivers, which items shall be reasonably satisfactory to Landlord and the first Mortgagee; (ii) The restoration shall be conducted under the supervision of an architect, engineer or general contractor selected by Tenant and Landlord who shall be reasonably satisfactory to Landlord and the first Mortgagee, and in accordance with such approved plans and specifications; (iii) Disbursement shall be made on a progress basis (but not more frequently than monthly) subject to: (A) first Mortgagee obtaining a certificate executed by Tenant and Tenant's general contractor (or Landlord and Landlord's general contractor, as the case may be) indicating that the requested disbursement is to pay for costs of restoration (materials installed and work and labor performed) not previously paid, and that the amount of the disbursement does not exceed the aggregate of costs incurred or paid on account of restoration; and (B) first Mortgagee obtaining evidence that no notices of mechanics' or other liens or encumbrances on the Premises arising out of the restoration exist, and to the extent applicable, appropriate lien waivers; (iv) Upon completion of the restoration to the satisfaction of first Mortgagee, the balance of the Net Insurance Proceeds, if any, being held by the Depositary shall be paid to Tenant, if the restoration resulted from a casualty and to Landlord if the restoration resulted from a condemnation; and (v) Such other commercially reasonable terms and conditions as may be customarily required by first Mortgagee in its commercial construction loan administration for similar properties and construction budgets of a similar value and type of work. SECTION 17 INSURANCE 17.1 Tenant's Insurance. Tenant shall, at its own cost and expense, obtain or cause to be obtained, insurance policies naming the Landlord as additional named insured as to the coverage required under clauses (a), (b) and (g), as an additional named insured as to the coverage required under clause (c) and as loss payee as to the coverage required under clause (f), insuring against the following risks, in the following amounts: (a) "All Risk" of "Full Coverage" property insurance, including standard fire and extended coverage insurance at all times in an amount equal to 100% of the full replacement cost and full insurable value of the Premises; (b) Machinery coverage on all building systems at all times in an amount equal to 100% of the full replacement cost and full insurable value of the Premises insuring against all losses and damages arising from such occurrences not covered by All Risk Coverage; (c) Comprehensive general liability insurance with a minimum limit of US Dollars $50,000.00 per person and US Dollars $ 100,000.00 per occurrence, and property damage coverage with a minimum limit of US Dollars $100,000.00. (d) Any insurance coverage required of Tenant by any applicable laws of the United Mexican States; (e) Business interruption insurance covering expenses of operating the Premises, for a period of not less than twelve (12) months following any damage to or destruction of the Premises; (f) Rental income loss insurance in an amount of at least the Tenant's Annual Base Rent and Additional Payment Obligations due hereunder for a period of not less than twelve (12) months following any damage or destruction to the Premises; and (g) Builder's Risk insurance during the performance by Tenant of any Alterations by Tenant, which will be contracted for by Tenant prior to beginning any alterations. Upon written request by Landlord, Tenant agrees to increase, within a commercially reasonable period of time, the amounts of the insurance coverage, described above so as to conform the amounts of insurance with the insurance requirements consistent with the prevailing insurance amounts for similar buildings in the immediate vicinity (10 mile radius) of the Premises. 17.2 Additional Insurance Requirements. All of the insurance policies (including endorsements) required hereunder: (a) shall expressly provide that the coverage shall not be materially changed, reduced or canceled absent thirty (30) calendar days' prior written notice to the Landlord; (b) shall be limited to insure Landlord's insurable interest alone (and not that of Tenant) or if said policies are to include the insurable interest of Tenant, shall contain an endorsement to the effect that Landlord's insurable interest shall not be reduced or invalidated by any act or neglect of Tenant or of any subtenant of the Premises, nor by the use of the Premises by such party for purposes more hazardous than are permitted by the policy; (c) shall not contain any clause which would result in the insured thereunder being required to carry insurance with respect to the Premises or the property covered thereby, in an amount equal to a minimum specific percentage of the full replacement cost of such property in order to prevent the insured named therein from becoming a co- insurer of any loss under such policy; and (d) shall be payable in the United States in U.S. dollars. The Tenant shall provide the Landlord, within ten (10) business days following Landlord's written request, with certified copies of said insurance policies from the insurers at such times as may be necessary (but in no event less than once each year) to show that insurance is being maintained as required by this Section 17. In the event Tenant shall fail to deliver to Landlord such certified copies of policies evidencing that the same are in full force and effect, Landlord may undertake to obtain such insurance and the full cost thereof shall be payable hereunder by Tenant as an Additional Payment Obligation. 17.3 Landlord's Insurance. Landlord shall obtain and keep in force during the Term, Commercial general liability insurance in such amounts, as Landlord deems advisable from time to time insuring Landlord against liability arising out of its maintenance and repair obligations under Section 10 hereof. 17.4 Waiver of Subrogation. (a) Each party waives claims arising in any manner in its favor (as an injured party) and against the other party for loss or damage to the injured party's property located within or constituting a part or all of the Premises. This waiver applies only to the extent the loss or damage is covered by: (a) the injured party's insurance; or (b) the insurance that the injured party is required to carry under Section 17, whichever is greater. The waiver also applies to each party's directors, officers, employees, shareholders, members and agents. The waiver does not apply to claims caused by a party's willful misconduct. (b) Landlord and Tenant agree that all insurance policies covering loss or damage to property and business interruption or rent loss required hereunder, shall be endorsed to provide that any release from liability of, or waiver of claim for, recovery from the other party entered into in writing by the insured thereunder prior to any loss or damage shall not affect the validity of said policy or the right of the insured to recover thereunder. Such insurance policies shall further provide that the insurer waives all rights of subrogation, which such insurer might have against the other party. Without limiting any release or waiver of liability or recovery contained in any other section of this Lease, but rather in confirmation and furtherance thereof, each of the parties hereto waives all claims for recovery from the other party for any loss or damage to any of its property or damages as a result of business interruption, rent loss or liability of the types covered in Section 17.1 and 17.2 above insured under valid and collectible insurance policies, but only to the extent of any recovery collectible by the insured under such insurance policies. SECTION 18 SUBORDINATION AND ATTORNMENT 18.1 Subordination. Tenant agrees, at the request of Landlord, to subordinate this Lease (including any renewals, extensions and modifications) to any mortgage placed upon the Premises (or any portion thereof), provided that the Mortgagee agrees to recognize the Tenant's rights under this Lease and not to disturb the possession, use and other rights of Tenant under this Lease subject to the condition that Tenant continues to perform its obligations hereunder and is not in default of such obligations. In the event of acquisition of title to the Premises by said Mortgagee or any person through foreclosure proceedings or otherwise, the Mortgagee or other person acquiring title to the Premises agrees to accept Tenant under the Lease and to perform the Landlord obligations hereunder, while owner of the Premises provided that no default has occurred and is continuing; and Tenant agrees to attorney to and recognize such Mortgagee or any other person acquiring title to the Premises. 18.2 Rights of Mortgagee and Assignee of Rents. Notwithstanding the foregoing, no Mortgagee, transferee or purchaser acquiring the interest of any Mortgagee (and no assignee of Rents or other amounts payable by Tenant hereunder) shall be: (a) liable for the performance of any of Landlord's obligations relating to the Premises, (b) liable for Landlord's obligations arising prior to the date that such Mortgagee, assignee of Rents or other party takes possession of the Premises; (c) liable for Annual Base Rent or any Additional Payment Obligations paid more than thirty (30) days in advance; (d) subject to offsets, claims or defenses which Tenant might have against any prior landlord; or (e) bound by any amendments, waiver, or modification of or affecting this Lease made without its written consent. If Tenant is given written notice of the identity and address of any Mortgagee or assignee of Rents, then Tenant shall give to such Mortgagee written notice of any default by Landlord under the terms of this Lease by registered or certified mail, and such Mortgagee shall be given the opportunity to cure Landlord's default within the thirty (30) days following such written notice; provided, however, that said thirty (30) day period shall be extended if such party has commenced to cure the default within such thirty (30) day period and such party is proceeding with due diligence (including the exercise of its remedies against Landlord if necessary to obtain possession of the Premises) to effect such cure. 18.3 Direct Payment of Tenant Obligations. In the event Landlord notifies Tenant in writing to pay the Annual Base Rent directly to such Mortgagee, Tenant agrees to make all payments of such amounts directly to Mortgagee upon written notice by the Landlord and in the manner directed by the Landlord in its notice. SECTION 19 ESTOPPEL CERTIFICATES 19.1 Estoppel Certificates. Landlord and/or Tenant shall, at any time and from time to time, within a period of fifteen (15) calendar days following written request from the other party, execute, acknowledge and deliver a written statement certifying (a) that a true and correct copy of this Lease is attached to such statement, (b) that this Lease is in full force and effect and unmodified (or, if modified, stating the nature of such modification and attaching a copy thereof), (c) the date to which the Annual Base Rent and the Additional Payment Obligations have been paid, (d) that there are not, in the case of the estoppel certificate to be provided by Landlord, to Landlord's knowledge, any uncured defaults on the part of Tenant hereunder, and in the case of the estoppel certificate to be provided by Tenant, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or in either case, specifying such defaults, and (e) as to such other matter as Landlord or Tenant or any prospective purchaser or Mortgagee of the Premises may reasonably request. Any such statement may be relied upon by Landlord or Tenant, as the case may be, and any prospective purchaser or Mortgagee. Landlord's or Tenant's failure to deliver such statement within the said period shall be conclusive as to the matters stated therein. SECTION 20 EVENT OF DEFAULT 20.1 Tenant's Default. The occurrence of any of the following shall, at Landlord's option, constitute a material default and breach of this Lease by Tenant (an "Event of Default"): (a) A failure by Tenant to pay Annual Base Rent or any Additional Payment Obligations reserved herein within five (5) calendar days after written notice thereof from Landlord to Tenant; provided, however, Landlord shall only be obligated to provide such written notice and five (5) days cure period twice in any calendar year. (b) The abandonment of the Premises by Tenant or its vacation thereof for a period in excess of 30 (thirty) days. (c) The filing of any lien against the Premises or any portion thereof or interest therein as a result of the act or omission of the Tenant or its agents, servants or licensees which is not discharged or released or a sufficient bond is not obtained within thirty (30) days after filing subject to Tenant's rights in Section 8.2 to contest a lien; (d) The making by Tenant of any assignment for the benefit of creditors; the adjudication that Tenant is bankrupt or insolvent; the filing by or against Tenant of a petition for the suspension of payments or of a petition to have Tenant adjudged bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless in the case of a petition filed against Tenant, the same is dismissed within thirty (30) days after the filing thereof); the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets or of Tenant's interest in this Lease; or the attachment, execution or levy against, or other judicial seizure of, substantially all of Tenant's interest in this Lease; (e) A failure by Tenant to fully observe and perform the provisions or covenants of Sections 7 or 12 of this Lease; or Tenant takes any actions under Section 11.3, which entitled Landlord to accelerate the Rents Payable. (f) A failure by Tenant to fully observe and perform any other provision or covenant of this Lease to be observed or performed by Tenant, where such failure continues for thirty (30) calendar days after written notice thereof from Landlord to Tenant. If any failure described in this Section 20.1(f) is capable of being cured but cannot be cured within thirty (30) calendar days, then such failure shall not be an Event of Default hereunder so long as Tenant has promptly commenced cure within such thirty (30) calendar day period, proceeds with diligence to complete such cure, and completes such cure within ninety (90) calendar days after written notice thereof from Landlord to Tenant. 20.2 Landlord's Default. If at any time during the Term Landlord shall fail to perform any of its obligations under this Lease, Tenant may, if any such failure shall continue for a period of thirty (30) consecutive calendar days after Tenant gives written notice thereof to Landlord and Landlord notifies Tenant that it contests or disputes such claimed default with such thirty (30) calendar day period, perform such obligations; and any such sum shall be payable by Landlord within ten (10) calendar days of written demand together with interest thereon at the rate established in Section 21.1 (b) hereof; provided, however, if the nature of the claimed default is such that it cannot feasibly be cured within such 30-calendar-day period, and Landlord notifies Tenant of such condition, then Landlord shall not be deemed to be in default if such condition does not materially interfere with Tenant's use of the Premises and Landlord promptly and diligently commenced cure within such thirty (30) calendar day period. SECTION 21 ACCELERATED RENT 21.1 Accelerated Rent. (a) Upon any Event of Default, the Annual Base Rent and Additional Payment Obligations reserved herein for the entire unexpired portion of the Term shall, at Landlord's option, thereupon immediately become due and payable (without regard to the premature termination of the Term by reason of such Event of Default). Tenant shall be obligated for such accelerated Rents regardless of which, if any, of the other remedies provided in this Lease or under law or in equity the Landlord elects to pursue. Landlord shall forthwith, notwithstanding any other provisions of this Lease to the contrary, be entitled to recover from Tenant all outstanding and unpaid Annual Base Rent and Additional Payment Obligations as of the date of such Event of Default, together with an amount, as liquidated damages, equal to the difference between the present worth of the aggregate of the Annual Base Rent and Additional Payment Obligations which would have been payable hereunder for the original unexpired portion of the Term of this Lease (without regard to the premature termination of the Term by reason of such Event of Default) and the then present worth of the then aggregate fair market rent of the Premises for the same period. In the computation of such present value, a discount at a current commercially reasonable market capitalization rate shall be employed. Upon any termination of this Lease by Landlord as a result of an Event of Default by Tenant, Landlord agrees to take commercially reasonable steps to re-lease the Premises to mitigate its damages as provided in Section 22.2 below. (b) Nothing herein contained shall limit or prejudice the right of Landlord in lieu of the foregoing accelerated Annual Base Rent and Additional Payment Obligations remedy to prove and obtain by reason of such termination an amount of damages, and interest thereon at the rate which is the lesser of eighteen percent (18 %) per annum or the maximum legal rate then in effect, whether or not such amount be greater, equal to, or less than the accelerated amount referred to above. (c) It is understood by the parties that the preceding paragraphs will not be applicable in the event of an early termination if the Tenant has another tenant in place for the Premises with the same or greater financial solvency, in which case the Landlord will not charge any penalties to the Tenant for such early termination. SECTION 22 REMEDIES 22.1 Landlord's Rights and Remedies. Upon any Event of Default, Landlord at its option, may terminate this Lease by giving written notice of termination to Tenant, or Landlord, without terminating this Lease, may at any time after an Event of Default, without notice or demand additional to that which may be required by Section 20 hereof, and without limiting Landlord in the exercise of any other right or remedy which Landlord may have by reason of such Event of Default or breach, exercise any one or more of the remedies hereinafter provided in this Section or in this Lease or as otherwise provided at law or in equity, all of such remedies (whether provided herein or by-law) being cumulative and not exclusive. 22.2 Liability for Reletting Costs. In the event of termination of the Lease and recovery of the Premises by Landlord, Landlord shall make good faith and commercially reasonable efforts to relet the Premises. Tenant agrees that all reasonable costs and expenses paid or incurred by Landlord in reletting of the Premises, including, without limitation, all costs associated with advertising, repair, and redecorating the Premises, all leasing commissions, Tenant allowances, partial or total rental abatement periods, attorneys' and accountants' fees (the "Reletting Costs") which shall be due and payable by Tenant to Landlord within twenty (20) days following written demand therefore and shall constitute Additional Payment Obligations. Any proceeds of such reletting received by Landlord after deducting all costs and expenses incurred by Landlord as a result of Tenant's default or in connection with such reletting (collectively, the "Net Reletting Proceeds"), shall be applied against amounts due or owing by Tenant according to the Lease. If Tenant has previously paid to Landlord the accelerated Annual Base Rent and Additional Payment Obligations provided under Section 21, then the Net Reletting Proceeds shall be refunded to Tenant as they are paid to Landlord, up to the full amount of the accelerated Annual Base Rent and Additional Payment Obligations paid by Tenant. At such reasonable times as Tenant may request, Landlord shall make available to Tenant and its representatives books and records relative to such reletting. 22.3 Right to Perform for Tenant. During the continuance of any Event of Default, if Tenant shall fail to perform or comply with any of its agreements contained herein, the Landlord shall have the right, but not the obligation, to perform or comply with such agreement after at least ten (10) days' prior notice to Tenant (and in connection therewith may enter upon the Premises); in any such event the Landlord shall not thereby be deemed to have waived any default caused by such failure, and the amount of the expense of Landlord (including reasonable attorney's fees and expenses) incurred in connection with such payment or the performance of or compliance with such agreement, as the case may be, together with interest thereon as provided in Section 22.4, shall be deemed an Additional Payment Obligation, payable by Tenant to Landlord upon demand. 22.4 Interest. Any amount not paid by Tenant to Landlord when due (subject to any applicable grace periods) shall bear interest from the date due at the lesser of (a) eighteen percent (18%) per annum, or (b) the maximum rate then permitted by applicable law, and shall be paid by Tenant to Landlord on written demand therefore, and shall constitute an Additional Payment Obligation. SECTION 23 WAIVER 23.1 Waiver. The failure or delay on the part of Landlord or Tenant to enforce or exercise at any time any of the provisions, rights or remedies in this Lease shall in no way be construed to be a waiver thereof, nor in any way to affect the validity of this Lease or any part hereof, or the right of Landlord or Tenant, as the case may be, to thereafter enforce each and every such provision, right or remedy. No waiver of any breach of this Lease shall be held to be a waiver of any other or subsequent breach. The receipt by Landlord of Annual Base Rent or an Additional Payment Obligation at a time when the Tenant is in default under this Lease shall not be construed as a waiver of such default. The receipt by Landlord of a lesser amount than the Annual Base Rent or Additional Payment Obligations due shall not be construed to be other than a payment on account of the Annual Base Rent or Additional Payment Obligations then due, nor shall any statement on Tenant's check or any letter accompanying Tenant's check be deemed an accord and satisfaction, and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of the Annual Base Rent or Additional Payment Obligations due or to pursue any other remedies provided in this Lease. No act or thing done by Landlord or Landlord's servants, agents or successors during the Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such a surrender shall be valid, unless in writing and signed by Landlord. SECTION 24 QUIET ENJOYMENT 24.1 Quiet Enjoyment. Landlord warrants that it owns title to the Premises, subject to the Permitted Encumbrances. So long as Tenant is in compliance with the terms of the Lease, Tenant shall have the right to peaceably and quietly have, hold and enjoy use of the Premises for the initial or any extended Term of the Lease, free from interference by Landlord, its employees, representatives, agents, or from any other person claiming under or through Landlord, subject nevertheless to all of the provisions of this Lease. Landlord warrants that it has the right to enter into the Lease. SECTION 25 GOVERNING LAW 25.1 Governing Law. With respect to all matters arising under this Lease, this Lease shall be construed, governed and enforced in accordance with the Civil Code of the State of Tamaulipas, United Mexican States, with exclusive jurisdiction residing in the courts and tribunals located in the City of H. Matamoros, State of Tamaulipas, United Mexican States, to adjudicate all claims arising hereunder. The provisions of this Section 25.1 are not applicable to the Guaranty or any guarantee(s) given by a third party or by third parties to Landlord to assure the performance by the Tenant of any of its Lease. 25.2 Translation. English was the language in which this Lease was negotiated. Promptly following execution of this Lease, the parties shall cause this Lease to be translated from English into Spanish and following completion thereof, both parties agree to execute the translated version of this Lease promptly following receipt of such translated version. The translator shall be a person reasonably acceptable to both parties, and the parties shall share equally the translator's charges. In the event of litigation in a Mexican tribunal, the Spanish version may be used as evidence of the agreement of the parties. If, however, there is a dispute between the parties with respect to the translation, reference may be made to the Spanish version, which shall prevail in the event of any discrepancy. SECTION 26 OPTION TO EXTEND 26.1 Option to Extend. Tenant shall have the right to extend the term of this Lease (the "Extension Option") as follows: One consecutive period of five (5) years ("First Extension Term") at the Annual Base Rent set forth below. All of the other terms, covenants and conditions contained in this Lease, including payment of Additional Payment Obligations, shall apply to the Extension Term. One consecutive period of three (3) years ("Second Extension Term") at the Annual Base Rent set forth below. All of the other terms, covenants and conditions contained in this Lease, including payment of Additional Payment Obligations, shall apply to the Second Extension Term. 26.2 Rent for First Extension Term. The applicable rent for the first extension term will be determined according to the rent paid in the last year of the Initial Term, increased in a rate equal to the percentage change of the Consumer Price Index (CPI) in the previous twelve months, provided, however, that the rent payable during the first extension term may not be lower than the rent payable during last year of the Initial Term. 26.3 Rent for the Second Extension Term. The parties shall negotiate the Annual Base Rent payable in respect of the Second Extension Term. 26.4 Exercise of Option. Tenant must exercise each Extension Option by delivery of written notice (the "Exercise Notice") to Landlord ninety (90) calendar days prior to the expiration of the Term or the First Extension Term, as applicable, expressly stating its election to extend the Term pursuant to this Article 26 and its agreement to be bound by all of the terms and conditions of this Lease. Tenant's right to extend the Term pursuant to this Article 26 shall also be subject to the condition that no Event of Default shall have occurred and be continuing at the time Tenant delivers its Exercise Notice and at the commencement of the Extension Term. SECTION 27 MISCELLANEOUS 27.1 Signs. Tenant shall not place, install or affix, or permit the placement, installation or fixation of any sign of any nature whatsoever which can be seen from outside the Building except in accordance with any restrictive covenants and all applicable, present and future, laws, statutes, codes, ordinances, orders, decrees, regulations and requirements. Any permitted signs installed on or about the Premises shall be removed at the expiration or sooner termination of the Term of this Lease and the Premises promptly repaired or restored to its original conditions where such sign has been removed. Tenant shall pay all expenses, and all license and permit fees relating to the installation and maintenance of authorized signs, and shall pay all expenses of removal and costs of repairs resulting therefrom. 27.2 Unavoidable Delay. If either party shall be delayed or hindered in, or prevented from, the performance of any covenant or obligation hereunder, other than one for the payment of money, as a result of any acts of God, fire or other casualty, enemy act, war, riot, general unavailability of certain materials, strikes, boycotts, or labor disputes or other similar events beyond the reasonable control of either party hereto that cause such party to be delayed or hindered in, or prevented from, the performance of any covenant or obligation hereunder, and provided that the-party delayed, hindered or prevented from performing notifies the other party not later than ten (10) calendar days after the date on which performance of such covenant or obligation is due of any such delay, hindrance or prevention, then the performance of such covenant or obligation shall be extended by the number of days equivalent to the number of days of the impact of such delay, hindrance, or prevention. In no event shall any such delay, hindrance or prevention constitute a termination of this Lease and the provisions of this Section shall not operate to excuse Tenant from the prompt payment of any Annual Base Rent or Additional Rent due and owing under this Lease. 27.3 Corporate Authority. Landlord and Tenant each represent and warrant to the other that each individual executing this Lease on behalf of said corporation is duly authorized to execute and deliver this Lease on behalf of said corporation in accordance with a duly adopted resolution of the board of directors of said corporation and in accordance with the bylaws of said corporation and that this Lease is binding upon said corporation in accordance with its terms. 27.4 Successors. The respective rights and obligations provided in this Lease shall bind and shall inure to the benefit of the parties hereto, their legal representatives, heirs, successors and permitted assigns; provided, however, that no rights shall inure to the benefit of any successor or assign of Tenant unless Landlord's written consent for the transfer to such successor has first been obtained to the extent required by this Lease. 27.5 Severability. If any provision of this Lease shall be held to be invalid, void or unenforceable, the remaining provisions hereof shall in no way be affected or impaired and such remaining provisions shall remain in full force and effect. 27.6 Captions. Marginal captions, titles and exhibits to this Lease are for convenience and reference only and are in no way to be construed as defining, limiting, or modifying the scope or intent of the various provisions of this Lease. 27.7 Persons; Gender. As used in this Lease, the word "person" shall mean and include, where appropriate, an individual, corporation, partnership or other entity; the plural shall be submitted for the singular, and the singular for the plural, where appropriate; and words of any gender shall mean to include any other gender. 27.8 Notices. Any bill, statement, notice or communications required or permitted hereunder shall be in writing addressed to the respective party as set forth below and may be personally served, telecopied or sent by internationally recognized overnight courier service or U.S. Mail and shall be deemed given: (a) if served in person, when served; (b) if telecopied, on the date of transmission if before 5:00 p.m. (Mountain time) on a business day; provided that a "hard" copy of such notice is also sent pursuant to (c) or (d) below; (c) if by international overnight courier, on the first business day after delivery to the courier; or (d) if by U.S. Mail, certified or registered mail, return receipt requested on the 4th day after deposit in the mail postage prepaid. To Landlord: Calle 4 Y Bustamante No.2 H. Matamoros, Tamaulipas, Mexico Attn. C.P. Federico Javier Carretero Zardeneta To Tenant: Calle Colorado s/n entre Av. Lauro Villar y Ave. Cantinflas Parque Industrial CYLSA H. Matamoros, Tamaulipas, Mexico Attn. Mr. Douglas Lee Kvalvog Carlino Either party may change its address for purposes of this Section 27.8 by written notice so given to the other party consistent with the requirements of this Section. 27.9 Lease not an Offer. The submission of this Lease to Tenant should not be construed as an offer, nor shall Tenant have any rights with respect thereto unless and until Landlord shall execute this Lease and deliver the same to Tenant, which rights may be revoked by Landlord at any time prior to receipt by Tenant of this Lease duly executed by Landlord. 27.10 Counterparts. This Lease may be executed in several counterparts and by each party on a separate counterpart, each of which, when so executed and delivered, shall be an original and all of which together shall constitute one instrument. In proving this Lease, it shall not be necessary to produce or account for more than one such counterpart signed by the party, against whom enforcement is sought. 27.11 Time of the Essence. TIME IS OF THE ESSENCE WITH RESPECT TO THE DUE PERFORMANCE OF THE TERMS, COVENANTS AND CONDITIONS HEREIN CONTAINED; PROVIDED, HOWEVER, NO DELAY OR FAILURE TO ENFORCE ANY OF THE PROVISIONS HEREIN CONTAINED AND NO CONDUCT OR STATEMENT SHALL WANE OR AFFECT ANY OF LANDLORD'S RIGHTS UNDER THIS LEASE. 27.12 Landlord's Obligations. Landlord's obligations hereunder shall be binding upon Landlord only for the period of time that Landlord is the owner of the Premises; and, upon termination of that ownership, Tenant shall look solely to Landlord's successor in interest in the Premises for the satisfaction of each and every obligation of Landlord hereunder. 27.13 Landlord's Exculpatory. Anything contained in this Lease to the contrary notwithstanding, Tenant agrees that in any judicial proceeding involving the collection of any judgment (or other judicial process) requiring the payment of money by Landlord or any partner, officer, shareholder or employee of Landlord, Tenant shall look solely to the estate and property of Landlord in the Premises and to no other property or assets of Landlord, nor to any property of any partner, officer, shareholder or employee of Landlord, nor shall any property of either the Landlord (with the exception of the Premises) or any partner, officer, shareholder, or employee of Landlord become subject to levy, execution, attachment or other enforcement procedures for the satisfaction of Tenant's remedies. In addition, Tenant covenants and agrees that no personal liability or responsibility is assumed by, nor shall at any time be asserted or enforceable against, any partner, officer, shareholder, or employee of Landlord on account of any covenant, undertaking or obligation under or with respect to this Lease, all such personal liability and responsibility, if any, being expressly waived and released. The exculpation does not apply to claims caused by a party's willful misconduct. 27.14 Indirect Damages. Notwithstanding any provisions of this Lease to the contrary, none of the provisions of this Lease shall cause either party to be liable to the other party, or anyone claiming through or on behalf of such other party, for any special, indirect or consequential damages, including, without limitation, lost profits or revenues. 27.15 Compliance. Tenant shall, at its sole cost and expense, comply with all laws, orders, ordinances and regulations of all governmental authorities having jurisdiction with respect to occupancy, use or manner of use of the Premises. Landlord shall, at its sole cost and expense, comply with all laws, orders, ordinances and regulations of all governmental authorities having jurisdiction with respect to those portions of the Premises that are maintained by Landlord pursuant to Section 10.1 hereof. Landlord and Tenant shall give each other prompt notice of any violation or recommendation of change of which it shall have received notice from any such authority. Neither Landlord nor Tenant shall do or permit to be done any act or thing, which will invalidate or be in conflict with the Certificate of Occupancy for the Building. 27.16 Modifications. This Lease, including all exhibits attached hereto, contains all of the agreements, conditions, understandings, representations and warranties made between the parties hereto with respect to the subject matter hereof and may not be modified orally or in any manner other than by an agreement in writing signed by both parties hereto or their respective successors in interest. 27.17 Brokerage. Landlord and Tenant warrant and represent to each other that they have had no dealings with any broker, agent or finder in connection with this Lease except _____N/A___________ (the "Brokerage Agents"). Landlord shall pay the commissions of the Brokerage Agents. Both parties agree to protect, indemnify and hold harmless the other from and against any and all expenses with respect to any compensation, commissions and charges claimed by any other broker, agent or finder not identified above with respect to this Lease or the negotiation thereof that is made by reason of any action or agreement by such party. 27.18 Denomination of Currency. All monetary sums expressed herein as "dollars" or by use of the dollar sign ("$") shall mean sums in the lawful currency of the United States of America. All sums due from one party to the other hereunder shall be payable in such United States dollars. IN WITNESS WHEREOF, the parties hereto have duly executed this Lease in the City of H. Matamoros, State of Tamaulipas, United Mexican States on the _1ST____, of __NOVEMBER_________________ 2004. TENANT: /s/ Douglas Kvalvog ------------------------------------------------ SIMCLAR DE MEXICO, S.A. DE C.V. MR. DOUGLAS LEE KVALVOG CARLINO PRESIDENT AND LEGAL REPRESENTATIVE LANDLORD /s/ Federico Javier Carretero Zardeneta ------------------------------------------------ CONSORCIO INMOBILIARIO DEL NORESTE, S.A. DE C.V. C.P. FEDERICO JAVIER CARRETERO ZARDENETA ---------------------------------------- LEGAL REPRESENTATIVE WITNESS: /s/ Oscar Passament Castro ------------------------------------------------ Mr. Oscar Passament Castro /s/ Ms. Minerva Briones ------------------------------------------------ Ms. Minerva Briones Exhibit "C" Form of Guaranty Agreement THIS LEASE GUARANTY AND AGREEMENT (the "Guaranty") is made as of the _ day of __11-1___________, 2004, by and from _SIMCLAR INC.________________________, a _____U.S.___________ corporation, having its principal place of business at (the "Guarantor"), to and for ___2230 W. 77TH ST.HIALEAH,FLORIDA,33016_______________________________________________________, having an office at H. Matamoros, Tamaulipas, and United Mexican States (The " Landlord"). WITNESSETH: WHEREAS, Landlord has entered into a Lease with _SIMCLAR INC.___________________, a Mexican "sociedad anonima de capital variable" corporation (the "Tenant") dated __11-1-04___________________, 2004 (the "Lease") with respect to a manufacturing facility on property located at __AVE.CANTINFLAS ENTRE LAURO VILLAR Y COLORADO_______________________________________in H. Matamoros, Tamaulipas, United Mexican States. (The "Leased Premises"); WHEREAS, Guarantor owns _100_____% of the issued and outstanding shares of the Tenant and fully controls it. WHEREAS, Landlord was willing to enter into the Lease with the Tenant only if Guarantor agreed to guaranty payment of the Guaranteed Obligations (defined below) to Landlord in the manner hereinafter provided, and performance of all of the Tenant's obligations under the Lease; NOW, THEREFORE, in consideration of the foregoing recitals, which are incorporated into the operative provisions of this Guaranty by this reference, and for good and valuable other consideration, the receipt and adequacy of which are hereby conclusively acknowledged, and intending to be legally bound hereby, Guarantor hereby agrees as follows: 1. Guaranty of Payment and Performance. Guarantor hereby absolutely, unconditionally and irrevocably guarantees, as primary obligor and not merely as a surety, to Landlord and its successors and/or assigns: (a) The prompt and complete payment in full when due, of all payments of "Rent", "Additional Payment Obligations" (as such terms are defined in the Lease) and all other liabilities, charges and amounts that become due and payable under the Lease (including any extension or hold-over period) (the "Lease Payments"); (b) The full, prompt, and absolute performance and observance by Tenant of all of the obligations contained in the Lease to be performed or observed by, or imposed upon, Tenant during the Term (including any extension or renewal thereof) or any hold-over period; and (c) The prompt and complete payment upon demand of all costs and expenses of any collection or other realization under, this Guaranty, including all expenses, liabilities and advances made or incurred by Landlord in connection therewith, including reasonable attorneys' fees. The payment and performance obligations guaranteed pursuant to this Section 1 are hereinafter referred to as the "Guaranteed Obligations". 2. Representations and Warranties. Guarantor represents and warrants that: (a) No consents or approvals of any kind by others, including any creditors of Guarantor, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by Guarantor, in connection with this Guaranty or the execution, delivery, performance, validity or enforceability of this Guaranty and all obligations required hereunder, and this Guaranty is not in violation of the terms of any agreement or instrument to which Guarantor or Tenant is a party or by which either of them or any of their assets may be bound or affected, and this Guaranty will not violate any provision of any existing law or regulation of material import, which would result in a material adverse effect on Guarantor, which is binding on Guarantor, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on Guarantor; (b) There is no pending or, to the best of Guarantor's knowledge, threatened action or proceeding affecting Guarantor before any court, governmental agency or arbitrator that could reasonably be expected to have a material adverse effect on the ability of Guarantor to perform or observe any of its obligations hereunder or that could reasonably be expected to have a material adverse effect on Guarantor's guaranty of the Guaranteed Obligations hereunder; (c) Guarantor has full power, authority and legal right to execute this Guaranty and to observe and perform all of the terms of this Guaranty on Guarantor's part to be observed and performed and this Guaranty constitutes the valid and binding obligation of Guarantor, enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy laws and other laws affecting the rights of creditors generally, or by virtue of the application of general principles of equity; (d) This Guaranty is made by Guarantor at the request of Tenant and Landlord's agreement to enter into the Lease with Tenant is of substantial and material benefit to Guarantor, (e) Guarantor has established adequate means of obtaining from Tenant on continuing basis financial and other information pertaining to the respective financial condition of Tenant and the ability of Tenant to promptly pay the Guaranteed Obligations, (f) Guarantor has reviewed and approved copies of the Lease and is fully informed of the rights and remedies that Landlord may pursue, with or without notice to Tenant, upon the occurrence and continuance of a default or Event of Default thereunder; and Any financial statements of Guarantor heretofore delivered to Landlord (i) are true and correct in all respects as of the date thereof, (ii) were prepared in accordance with generally accepted accounting principles, consistently applied, and (iii) fairly present the financial position of Guarantor as of the date thereof. 3. Adequate Information. Guarantor shall, at its sole cost and expense, establish and maintain means whereby Guarantor shall be kept adequately informed of any facts, events or circumstances that might in any way affect Guarantor's risks hereunder, and Landlord shall have no obligation to disclose to Guarantor information or material acquired in the course of Landlord's relationship with Tenant. 4. Payment by Guarantor: Application of Payments. Guarantor hereby agrees, in furtherance of the foregoing and not in limitation of any other right that Landlord may have at law or in equity against Guarantor by virtue hereof, that upon the failure of Tenant to pay any of the Guaranteed Obligations when and as the same shall become due, Guarantor will upon demand pay, or cause to be paid, in cash, to Landlord, an amount equal to the sum of the unpaid principal amount of all Guaranteed Obligations then due as aforesaid, all accrued and unpaid interest thereon, and all other Guaranteed Obligations then owed to Landlord as aforesaid. All such payments shall be applied promptly from time to time by Landlord: First, to the payment of the costs and expenses of any collection or other realization under, this Guaranty, including all expenses, liabilities and advances made or incurred by Landlord in connection therewith, including reasonable attorneys' fees, Second, to the payment of all other Guaranteed Obligations; and Third, after payment in full of all Guaranteed Obligations, to the payment to whomsoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct, of any surplus then remaining from such payments. 5. Release of Guaranty. When Tenant pays the full amount of the Lease Payments and performs all of the obligations contained in the Lease, this Guaranty shall terminate and become void and have no further force or effect. 6. Liability of Guarantor Absolute. Guarantor agrees that its obligations hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance that constitutes a legal or equitable discharge of a guarantor or surety other than indefeasible payment in full of the Guaranteed Obligations. In furtherance of the foregoing and without limiting the generality thereof, Guarantor agrees as follows: (a) This Guaranty is a guaranty of payment and performance and not of collectibility. (b) Landlord may enforce this Guaranty upon the terms and conditions herein set forth notwithstanding the existence of any dispute between Landlord and Tenant, any partners, joint venturers, officers, directors, shareholders, trustees or beneficiaries (as applicable) of Tenant or any other Person with respect to the existence of any default or "Event of Default" (as defined in the Lease) under the Lease. (c) Landlord may enforce this Guaranty upon the terms and conditions herein set forth notwithstanding any exercise or failure to exercise any right or remedy available to Landlord against any Person under the Lease, at law, in equity or otherwise. (d) The obligations of Guarantor hereunder are independent of the obligations of Tenant, any partners, joint venturers, officers, directors, shareholders, trustees or beneficiaries (as applicable) of Tenant or any other Person under the Lease, including the obligations of any other guarantor, and a separate action or actions may be brought and prosecuted against Guarantor whether or not any action is brought against Tenant or any of such other Persons and whether or not Tenant is joined in any such action or actions. (e) Payment by Guarantor of a portion, but not all, of the Guaranteed Obligations shall in no way limit, affect, modify or abridge Guarantor's liability for any portion of the Guaranteed Obligations that has not been paid. (f) Landlord, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability of this Guaranty or giving rise to any reduction, limitation, impairment, discharge or termination of Guarantor's liability hereunder, from time to time may: (i) grant an extension or extensions of time for the payment or performance of any Guaranteed Obligations or change the time, place or manner or terms of payment of the Guaranteed Obligations; (ii) grant an indulgence or indulgences in the payment or performance of any Guaranteed Obligations; (iii) modify or amend the Lease or any term thereof or any obligation of Tenant arising thereunder; (iv) consent to any assignment or assignments, subleases and successive assignments or subleases by Tenant; (v) consent to an extension or extensions of the term of the Lease; (vi) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Guaranteed Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment or performance of any other obligations; (vii) request and accept other guaranties of the Guaranteed Obligations and take and hold security for the payment of this Guaranty or the Guaranteed Obligations; (viii) release, surrender, exchange, substitute, compromise, settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guaranteed Obligations, any other guaranties of the Guaranteed Obligations, or any other obligation of any Person (including any other guarantor) with respect to the Guaranteed Obligations; (ix) enforce and apply any security now or hereafter held by or for the benefit of Landlord in respect of this Guaranty or the Guaranteed Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that Landlord may have against any such security, as Landlord in its discretion may determine; and (x) exercise any other rights available to it under the Lease, at law or in equity. (g) This Guaranty and the obligations of Guarantor hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than indefeasible payment in full of the Guaranteed Obligations), including the occurrence of any of the following, whether or not Guarantor shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce, or agreement or election not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising under the Lease, at law, in equity or otherwise) with respect to the Guaranteed Obligations or any agreement relating thereto, or with respect to any other guaranty of, or security for, the payment of the Guaranteed Obligations; (ii) any rescission, waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including provisions relating to Events of Default) of the Lease, or of any other guaranty or security for the Guaranteed Obligations; (iii) the Guaranteed Obligations, or any agreement relating thereto, at any time being found to be illegal, invalid or unenforceable in any respect; (iv) the release or discharge of Tenant in any bankruptcy, insolvency, receivership, reorganization, liquidation or similar proceedings; (v) the impairment, limitation or modification of the liability of the Tenant or the estate of the Tenant in any bankruptcy, insolvency, receivership, reorganization, liquidation or similar proceeding, or of any remedy for the enforcement of Tenant's said liability under the lease, resulting from the operation of any present or future provision of the Bankruptcy Code (Title 11 of the United States Code, as amended) or other statute or from the decision in any court; (vi) the rejection or disaffirmance of the lease in any such proceedings; (vii) the assignment or transfer of the lease by Tenant; (viii) any disability or other defense of Tenant; (ix) any defenses, set-offs or counterclaims that Tenant may allege or assert against Landlord in respect of the Guaranteed Obligations; and (x) any other act or thing or omission, or delay to do any other act or thing, that may or might in any manner or to any extent vary the risk of Guarantor as an obligor in respect of the Guaranteed Obligations. 7. Waivers by Guarantor. Guarantor hereby waives, to the extent not prohibited by applicable law, for the benefit of Landlord: (a) Any right to require Landlord, as a condition of payment by Guarantor, (i) to proceed against Tenant, any other guarantor (including any other Guarantor) of the Guaranteed Obligations or any other Person, (ii) to proceed against of exhaust any security held from Tenant, any other guarantor (including any other Guarantor) of the Guaranteed Obligations or any other Person, or (iii) to pursue any other remedy in the power of Landlord whatsoever; (b) Any defense arising by reason of the incapacity, lack of authority or any disability or other defense of Tenant, including any defense based on or arising out of the lack of validity or the unenforceability of the Guaranteed Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of Tenant from any cause other than indefeasible payment in full of the Guaranteed Obligations; (c) Any principles or provisions of law, statutory or otherwise, that are or might be in conflict with the terms of this Guaranty and any legal or equitable discharge of Guarantor's obligations hereunder; (d) Any rights to set-offs, recoupments and counterclaims; (e) Promptness, diligence and any requirement that Landlord protect, secure, perfect or insure any security interest or lien or any property subject thereto, (f) Notices, demands, presentments, demands for payment, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance of this Guaranty, notices of default under the Lease, notices of any renewal, extension or modification of the Guaranteed Obligations or any agreement related thereto, notices of any extension of credit to Tenant and notices of any of the matters referred to in Section 6 and any right to consent to any of them; and (g) Any defenses or benefits that may be derived from or afforded by law that limit the liability of or exonerate guarantors or sureties, or that may conflict with the terms of this Guaranty. 8. Guarantor's Rights of Subrogation. Contribution. Etc. Until the Guaranteed Obligations shall have been indefeasibly paid in full, Guarantor shall withhold exercise of (a) any claim, right or remedy, direct or indirect, that Guarantor now has or may hereafter have against Tenant or any of its assets in connection with this Guaranty or the performance by Guarantor of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise and including (i) any right of subrogation, reimbursement or indemnification that Guarantor now has or may hereafter have against Tenant, (ii) any right to enforce, or to participate in, any claim, right or remedy that Landlord now has or may hereafter have against Tenant, and (iii) any benefit of, and any right to participate in, any collateral or security now or hereafter held by Landlord, and (b) any right of contribution Guarantor may have against any other guarantor (including any other guarantor) of the Guaranteed Obligations. Guarantor further agrees that, to the extent the waiver of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification Guarantor may have against Tenant or against any collateral or security, and any rights of contribution Guarantor may have against any other guarantor, shall be junior and subordinate to any rights Landlord may have against Tenant, to all right, title and interest Landlord may have in any such collateral or security, and to any right Landlord may have against such other guarantor. Landlord may use, sell or dispose of any item of collateral or security as it sees fit without regard to any subrogation rights Guarantor may have, and upon any such disposition or sale, any rights of subrogation Guarantor may have shall terminate. If any amount shall be paid to Guarantor on account of any such subrogation, reimbursement or indemnification rights at any time when all Guaranteed Obligations shall not have been paid in full, such amount shall be held in trust for Landlord and shall forthwith be paid over to Landlord to be credited and applied against the Guaranteed Obligations, whether matured or unmatured, in accordance with the terms hereof. 9. Subordination of Other Obligations. Any indebtedness of Tenant now or hereafter held by Guarantor is hereby subordinated in right of payment to the Guaranteed Obligations, and any such indebtedness of Tenant to Guarantor collected or received by Guarantor after an Event of Default has occurred and is continuing shall be held in trust for Landlord and shall forthwith be paid over to Landlord to be credited and applied against the Guaranteed Obligations but without affecting, impairing or limiting in any manner the liability of Guarantor under any other provision of this Guaranty. 10. Continuing Guaranty. This Guaranty is a continuing guaranty and shall apply to and cover the Lease including any option periods, extension, amendments, assignments, subleases, transfers or other modifications of the Lease whether or not Guarantor shall have knowledge or have been notified of or agreed or consented to any such option period, renewal, extension, amendment, assignment, sublease, transfer or modification of the Lease. This Guaranty shall remain in effect until all of the. Guaranteed Obligations shall have been indefeasibly paid in full. 11. Notice of Events. Immediately upon Guarantor obtaining knowledge thereof, Guarantor shall give Landlord written notice of any condition or event that has resulted in (a) a material adverse change in the financial condition of Guarantor, Tenant or any partner, joint venturer, trustee or beneficiary (as applicable) of Tenant, or (b) a breach of or noncompliance with any term, condition or covenant contained herein or in the Lease. 12. Further Assurances. At any time or from time to time, upon the request of Landlord, Guarantor shall execute and deliver such further documents and do such other acts and things as Landlord may reasonably request in order to affect fully the purposes of this Guaranty. 13. Notices. Any notice, request, demand, statement, authorization, approval, direction or consent made under this Guaranty shall be in writing and shall be deemed sufficiently given or served for all purposes as of the date (a) when hand delivered (provided that delivery shall be evidenced by a receipt executed by or on behalf of the addressee), (b) three (3) days after being sent by postage pre-paid registered or certified mail, return receipt requested, (c) when dispatched by telecopy (with written confirmation sent by hand delivery or registered or certified mail, return receipt requested), or (d) one (1) day after being sent by Federal Express or other reputable overnight courier service (with delivery evidenced by written receipt) to any party at its address as follows: If to Guarantor: ----------------------------- ----------------------------- ----------------------------- Attention: ------------------ Facsimile Transmission Number: ----------------------------- If to Landlord: ----------------------------- ----------------------------- ----------------------------- ----------------------------- Any Person shall have the right to specify, from time to time, as its address or addresses for purposes of this Guaranty, any other address or addresses upon giving notice thereof to each other Person then entitled to receive notices or other instruments hereunder at least ten (10) days before such change of address is to become effective. 14. Non-Waiver by Landlord. (a) Rights Cumulative. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every such right or remedy shall be cumulative and continuing, shall be in addition to every other right or remedy given hereunder, or under the Lease or now or hereafter existing at law or in equity, and may be exercised from time to time and as often as may be deemed expedient by Landlord. Landlord shall not be limited exclusively to the rights and remedies herein stated but shall be entitled to every additional right and remedy now or hereafter afforded by law. (b) Delay Not a Waiver. No delay or omission by Landlord to exercise any right or remedy hereunder upon any default or Event of Default or failure of Landlord to insist on strict -performance of any term of this Guaranty shall impair such exercise, or be construed to be a waiver of any such default or Event of Default or an acquiescence therein. No act of Landlord shall be construed as an election to proceed under any one provision of this Guaranty to the exclusion of any other provision. (c) Waivers Specific. The failure, refusal or waiver by Landlord of its right to assert any right or remedy hereunder upon any default or Event of Default or other occurrence shall not be construed as waiving such right or remedy upon any other or subsequent default or Event of Default or other occurrence. (d) No Obligation Under Other Agreements. Landlord shall not have any obligation to pursue any rights or remedies it may have under any other agreement, including any other guaranty given in respect of the Lease Payments (or any portion thereof) or any other obligations of Tenant in respect of the Lease, prior to pursuing its rights or remedies hereunder or under the other Lease. (e) Certain Actions Not a Release. Guarantor shall not be relieved of any of its obligations in respect of the Guaranteed Obligations by reason of, and the rights of Landlord hereunder shall not be affected by, (i) any alteration, extension, renewal, change, modification, release, amendment, compromise or cancellation, in whole or in part, of any term, covenant or provision of any of the Lease, or (ii) any agreement or stipulation between Landlord extending the time of payment or otherwise modifying or supplementing the terms of the Lease, without first having obtained the consent of Guarantor. 15. Certain Definitions. Unless the context clearly indicates a contrary intent or unless otherwise specifically provided in this Guaranty, (a) the word "Tenant" shall mean Tenant and any subsequent tenant holding the tenant's leasehold interest under the Lease, (b) the word "Landlord" shall mean all Persons constituting Landlord or any subsequent landlord holding the landlord's interest under the Lease, (c) the word "Person" shall include an individual, corporation, limited liability company, partnership, joint venture, trust (including any beneficiary thereof), unincorporated association, government, governmental authority, or other form of legal or business entity, and (d) the terms "payment in full" "paid in full" or any similar term means the indefeasible payment in full of all of the Guaranteed Obligations. 16. Waiver of Notice. Guarantor shall not be entitled to any notices hereunder of any nature whatsoever from Landlord except with respect to matters for which this Guaranty specifically and expressly provides for the giving of notice by Landlord to Guarantor, and Guarantor hereby expressly waives the right to receive any notice from Landlord with respect to any matter for which this Guaranty does not specifically and expressly provide for the giving of notice by Landlord to Guarantor. 17. Relationship. Nothing contained in this Guaranty or the Lease is intended to create, or shall in any event or under any circumstance be construed to create, a partnership, joint venture, tenancy-in-common, joint tenancy or like or similar relationship between Guarantor and Landlord. 18. Matters to be in Writing. Guarantor acknowledges that this Guaranty, the Lease and all instruments referred to in any of them cannot be extended, altered, modified, amended, terminated or discharged except in a document executed by Landlord and that none of the rights or benefits of Landlord can be waived except in a document executed by Landlord. 19. Descriptive Headings: Construction. The headings in this Guaranty are intended for convenience of reference only and shall not in any way limit, amplify or be used in interpreting the terms of this Guaranty. Any of the terms used herein May, unless the context otherwise requires, be used in the singular or the plural depending on the reference. All words or terns used in this Guaranty, regardless of the number or gender in which they are used, shall include any other number or gender, as the context may require. The words "herein", "hereof'" and "hereunder" shall refer to this Guaranty unless the context otherwise requires. The word "including" shall mean "including, without limitation," except where the context otherwise requires. References to contracts, agreements, leases and other contractual instruments shall be deemed to include all subsequent amendments; supplements and other modifications permitted by the terms of this Guaranty. The term "provisions", when used with respect hereto or to any other document or instrument, shall be construed as if preceded by the phrase "terms, covenants, agreements, requirements, conditions and/or". This Guaranty shall not be construed against any party hereto as the drafters of this Guaranty. All references to "Sections", "subsections", "Exhibits" and "Schedules" are to Sections, subsections, Exhibits and Schedules to this Guaranty unless the context otherwise requires. All Exhibits and Schedules attached hereto are made a part hereof and are incorporated herein by this reference. 20. Costs and Expenses. In addition to all other costs and expenses for which Guarantor may be responsible pursuant to the terms of this Guaranty, Guarantor shall pay or, on demand, reimburse Landlord for the payment of any costs or expenses (including attorneys' fees, forum costs and disbursements) incurred or expended in connection with or incidental to (a) any default by Guarantor in the performance or observance of any provision contained herein, (b) any misrepresentation or any breach of warranty made by Guarantor herein, or (c) the exercise or enforcement by or on behalf of Landlord of (i) any of its rights or remedies or (ii) Guarantor's obligations under this Guaranty, including the enforcement, compromise or settlement of the obligations of Guarantor arising hereunder or the defense or assertion of rights and claims of Landlord hereunder in respect thereof, by litigation or otherwise. 21. Joint and Several. If more than one person or entity executes this Guaranty, each such person or entity shall be jointly and severally liable for observing and performing each of the provisions of this Guaranty. 22. Entire Agreement. This Guaranty constitutes the entire agreement between Guarantor and Landlord with respect to the subject matter hereof and all understandings, oral representations and agreements heretofore or simultaneously had among the parties are merged in, and are contained herein. 23. Successors and Assigns. This Guaranty shall be the obligation of Guarantor and all of its successors and assigns, and all references in this Guaranty to Guarantor shall be deemed to include all of the foregoing Persons. This Guaranty shall inure to the benefit of Landlord and its heirs, successors, substitutes and assigns, and all references in this Guaranty to Landlord shall be deemed to include all of the foregoing Persons. 24. Counterparts. This Guaranty may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. Signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same instrument. 25. No Third Party Beneficiaries. Nothing contained herein is intended or shall be deemed to create or confer any rights upon any third person not a party hereto, whether as a third-party beneficiary or otherwise, except as expressly provided herein. 26. Severability. If any provision of this Guaranty shall be held by any court of competent jurisdiction to be unlawful, void or unenforceable for any reason as to any Person or circumstance, such provision or provisions shall be deemed severable from and shall in no way affect the enforceability and validity of the remaining provisions of this Guaranty. 27. Governing Law. This Guaranty shall be governed by, and construed in accordance with, the laws of the State of Texas, without regard to conflict of laws principles. 28. Submission to Jurisdiction. GUARANTOR, TO THE FULL EXTENT PERMITTED BY LAW, HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL, (A) SUBMITS TO PERSONAL JURISDICTION IN THE STATE OF TEXAS AND THE REPUBLIC OF MEXICO OVER ANY SUIT, ACTION OR PROCEEDING-BY ANY PERSON ARISING FROM OR RELATING TO THIS GUARANTY, (B) AGREES THAT ANY SUCH ACTION, SUIT OR PROCEEDING NLAY BE BROUGHT IN: ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION LOCATED IN THE STATE OF TEXAS OR THE REPUBLIC OF MEXICO, (C) SUBMITS TO THE JURISDICTION OF SUCH COURTS, AND, (D) TO THE FULLEST EXTENT PERMITTED BY LAW, AGREES THAT IT WILL NOT BRING ANY ACTION, SUIT OR PROCEEDING IN ANY OTHER FORUM (BUT NOTHING HEREIN SHALL AFFECT THE RIGHT OF LANDLORD TO BRING ANY ACTION, SUIT OR PROCEEDING IN ANY OTHER FORUM). GUARANTOR FURTHER CONSENTS AND AGREES TO SERVICE OF ANY SUNLNIONS, COMPLAINT OR OTHER LEGAL PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY REGISTERED OR CERTIFIED U.S. MAIL, POSTAGE PREPAID, RETURN RECEIPT REQUESTED, TO THE GUARANTOR AT THE ADDRESS FOR NOTICES DESCRIBED IN SECTION 12 HEREOF, AND CONSENTS AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE IN EVERY RESPECT VALID AND EFFECTIVE SERVICE (BUT NOTHING HEREIN SHALL AFFECT THE VALIDITY OR EFFECTIVENESS OF PROCESS SERVED IN ANY OTHER MANNER PERMITTED BY LAW). 29. Waiver of Jury Trial. GUARANTOR, BY EXECUTION AND DELIVERY OF THIS GUARANTY, AND LANDLORD, BY ACCEPTANCE HEREOF, TO THE FULL EXTENT PERMITTED BY LAW, EACH HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL, EXPRESSLY WAIVES AND RELINQUISHES THE RIGHT TO TRIAL BY JURY LET ANY ACTION OR PROCEEDING ARISING OUT OF OR IN ANY WAY RELATING TO THIS GUARANTY OR ANY OTHER AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH. IN WITNESS WHEREOF, Guarantor has, by its duly authorized representatives, duly executed this Guaranty as of the day and year first above written. WITNESSED BY: GUARANTOR: Simclar, Inc., a Florida corporation /s/ Roxana L. Alvarez By: Barry Pardon - --------------------- ------------------------------------ Name: /s/ Barry Pardon ------------------------------------ Title: President ------------------------------------ STATE OF FLORIDA COUNTY OF MIAMI-DADE On this the 16th day of November, 2004, before me, the undersigned officer, personally appeared Barry Pardon, who acknowledged himself to be the President of Simclar, Inc. Corporation a ________________ and that he, as such President, being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of the company by himself as such officer. In witness where of, I here unto set my hand. /s/ Roxana L. Alvarez ------------------------------ Notary Public EX-21 3 v015268_ex21.txt Exhibit 21 Subsidiaries of Simclar, Inc. --------------------------------------- Percentage Jurisdiction of Owned By Subsidiaries Incorporation Registrant - -------------------------------------------------------------------------------- Simclar (Mexico) Inc. Illinois 100% - -------------------------------------------------------------------------------- Techdyne (Europe) Limited Scotland 100% - -------------------------------------------------------------------------------- Simclar de Mexico, S.A. de Mexico 100% owned by Simclar C.V. (Mexico) Inc. - -------------------------------------------------------------------------------- Techdyne (Livingston) Limited Scotland 100% owned by Techdyne (Europe) Limited - -------------------------------------------------------------------------------- EX-24 4 v015268_ex-24.txt POWER OF ATTORNEY Each of the undersigned officers and/or directors of Simclar, Inc., a Florida corporation (the "Company"), hereby appoints Barry J. Pardon and David L. Watts as his or her true and lawful attorneys-in-fact, or either one of them individually with power to act without the other, as his or her true and lawful attorney-in-fact, in his or her name and on his or her behalf, and in any and all capacities stated below, to sign and to cause to be filed with the Securities and Exchange Commission the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, and any and all amendments thereto, hereby granting unto said attorneys, and to each of them, full power and authority to do and perform in the name and on behalf of the undersigned, in any and all such capacities, every act and thing whatsoever necessary to be done in and about the premises as fully as each of the undersigned could or might do in person, hereby granting to each such attorney full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereof. IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney in counterparts if necessary, effective as of March 30, 2005. Signature Title /s/ Samuel J. Russell Chairman of the Board of Directors - ------------------------------------ and Chief Executive Officer Samuel J. Russell /s/ Barry J. Pardon President and Director - ------------------------------------ (principal executive officer) Barry J. Pardon /s/ John Ian Durie Vice President (Finance) and Director - ------------------------------------ John Ian Durie /s/ David L. Watts Chief Financial Officer and Secretary - ------------------------------------ (principal financial and principal David L. Watts accounting officer) Director - ------------------------------------ A. Graeme Manson Director - ------------------------------------ Kenneth M. MacKay, M. D. /s/ Christina M.J. Russell Director - ------------------------------------ Christina M. J. Russell Director - ------------------------------------ Douglas A. Smith EX-31.1 5 v015268_ex31-1.txt Exhibit 31.1 CERTIFICATION I, Barry J. Pardon, certify that: 1. I have reviewed this annual report on Form 10-K of Simclar, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 31, 2005 /s/ Barry J. Pardon ------------------------------------ Barry J. Pardon President EX-31.2 6 v015268_ex31-2.txt Exhibit 31.2 CERTIFICATION I, David L. Watts, certify that: 1. I have reviewed this annual report on Form 10-K of Simclar, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 31, 2005 /s/ David L. Watts ------------------------------------ David L. Watts Chief Financial Officer and Secretary EX-32.1 7 v015268_ex32-1.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Simclar, Inc, (the "Company") on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Barry J. Pardon, President of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Barry J. Pardon ------------------------------------ Barry J. Pardon, President Simclar, Inc. March 31, 2005 EX-32.2 8 v015268_ex32-2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Simclar, Inc. (the "Company") on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David L. Watts, Chief Financial Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ David L. Watts ------------------------------------------ David L. Watts, Chief Financial Officer and Secretary Simclar, Inc. March 31, 2005 -----END PRIVACY-ENHANCED MESSAGE-----