UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(x) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
Commission file number 0-26150
MILE MARKER INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)
Florida 11-2128469
------- ----------
(State or other jurisdiction of incorporation) (IRS Employer Identification No)
2121 Blount Road, Pompano Beach, Florida 33069
(Address of principal executive offices)
Issuer's Telephone Number: (954) 782-0604
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes _____ No __X__
APPLICABLE ONLY TO CORPORATE ISSUERS
On September 30, 2006, the Small Business Issuer had outstanding
9,936,117 shares of common stock, $.001 par value.
Transitional Small Business Disclosure Format (Check one): Yes _____ No __X__
MILE MARKER INTERNATIONAL, INC.
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, September 30, 2006,
and December 31, 2005 ............................................. 4
Condensed Consolidated Statements of Income, Three Months
ended September 30, 2006, and September 30, 2005 ................... 5
Condensed Consolidated Statements of Income, Nine Months
ended September 30, 2006, and September 30, 2005 ................... 6
Condensed Consolidated Statements of Cash Flows, Nine
Months ended September 30, 2006, and September 30, 2005 ............ 7
Notes to Condensed Consolidated Financial Statements .............. 8-10
Item 2. Management's Discussion and Analysis or Plan of Operation .................... 10-14
Item 3. Controls and Procedures ...................................................... 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings ........................................................... 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................. 15
Item 3. Defaults Upon Senior Securities ............................................. 16
Item 4. Submission of Matters to a Vote of Security Holders ........................ 16
Item 5. Other Information ......................................................... 16
Item 6. Exhibits .................................................................. 16
SIGNATURES ............................................................................. 17
CERTIFICATIONS ........................................................................ 18 - 23
2
MILE MARKER INTERNATIONAL, INC.
RISKS AND UNCERTAINTIES
Current and potential shareholders should consider carefully the risk factors
described below. Any of these factors, or others, many of which are beyond the
Company's control, could negatively affect the Company's revenues, profitability
or cash flows in the future. These factors include:
o Demand for the Company's products from its major customers and from U.S.
Government entities in particular.
o Magnitude of price and product competition for the Company's products.
o Effects of weather and natural disasters on demand for the Company's
products.
o Effects of foreign political, economic or military developments on the
Company's international customer or supplier relationships.
o Ability to control costs and expenses.
o Ability to retain qualified personnel.
o Ability to develop and introduce new products and enhanced versions of the
Company's products.
o Ability to operate a foreign subsidiary in China.
o Availability of financing on terms that the Company's operations may
require.
FORWARD-LOOKING STATEMENTS
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995:When used in this Quarterly Report on Form 10-QSB or in future filings by
the Company (as hereinafter defined) with the Securities and Exchange
Commission, in the Company's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
" will continue," "is anticipated," "estimate," "project," or similar
expressions are intended to identify "forward-looking statements." The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak as of the date made, and to advise
readers that various factors, including national economic conditions, political
and military developments, substantial changes in levels of market interest
rates, credit and other risks of manufacturing, distributing or marketing
activities, competitive and regulatory factors, and those factors set out under
"Risks and Uncertainties" above, could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from those anticipated by any forward-looking statements.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS OF MILE MARKER INTERNATIONAL, INC.
MILE MARKER INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
UNAUDITED
ASSETS 2006 2005
----------------------------------------
CURRENT ASSETS
Cash $ 172,460 $ 172,306
Accounts Receivable, net of allowance for doubtful
accounts of $20,690 and $5,175, respectively 2,081,733 3,448,848
Inventories 7,268,333 6,204,563
Deferred Tax Asset 71,687 58,553
Prepaid Expenses 229,624 162,507
----------------------------------------
Total Current Assets 9,823,837 10,046,777
PROPERTY, PLANT AND EQUIPMENT, NET 2,142,309 2,153,436
INTANGIBLE ASSETS, NET 125,323 85,251
OTHER ASSETS 78,665 92,873
----------------------------------------
Total Assets $12,170,134 $12,378,337
========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable - Line of Credit $ 5,438,685 $ 4,399,238
Accounts Payable 639,778 1,068,321
Income Taxes Payable 391,925 887,417
Other Liabilities 54,973 -
Accrued Liabilities 225,321 222,639
----------------------------------------
Total Current Liabilities 6,750,682 6,577,615
DEFERRED TAX LIABILITY 79,817 108,847
----------------------------------------
Total Liabilities 6,830,499 6,686,462
----------------------------------------
SHAREHOLDERS' EQUITY
Common Stock, $.001 par value; 20,000,000 shares
authorized, 10,181,117 and 10,215,272 shares issued at
September 30, 2006 and December 31, 2005, respectively. 10,181 10,215
Additional Paid-in Capital 1,048,404 1,118,388
Less Treasury Shares (245,000 and 249,155 Shares at Cost) (509,830) (490,270)
Retained Earnings 4,793,039 5,053,542
Foreign Exchange Translation Adjustments (2,159) -
----------------------------------------
Total Shareholders' Equity 5,339,635 5,691,875
----------------------------------------
Total Liabilities & Shareholders' Equity $12,170,134 $12,378,337
========================================
The accompanying notes are an integral part of these financial statements.
4
MILE MARKER INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
Three Months Ended September 30,
UNAUDITED
2006 2005
----------------------------------------
Sales $ 2,816,923 $ 4,464,747
Cost of Sales 1,744,996 2,504,960
----------------------------------------
Gross Profit 1,071,927 1,959,787
----------------------------------------
Selling Expenses 370,781 287,515
----------------------------------------
General and Administrative Expenses
Salaries and Wages 679,149 567,789
Insurance Costs 155,782 131,265
Professional Fees 78,193 46,791
Depreciation and Amortization 81,837 68,361
Rent Expense 49,142 43,147
Vehicle Expenses 19,711 21,374
Research & Development 26,065 13,325
Other Expenses 96,419 86,456
----------------------------------------
Total General and Administrative Expenses 1,186,298 978,508
----------------------------------------
Total Expenses 1,557,079 1,266,023
----------------------------------------
(Loss)/Income from Operations (485,152) 693,764
----------------------------------------
Interest Expense 100,075 84,016
----------------------------------------
(Loss)/Income before (Benefit)/Provision for Income Taxes (585,227) 609,748
(Benefit)/Provision for Income Taxes (92,337) 232,017
----------------------------------------
Net (Loss)/Income ($492,890) $ 377,731
========================================
Per Share Data:
Weighted Average Shares Outstanding - Basic 9,943,139 10,024,223
Weighted Average Shares Outstanding - Diluted 9,943,139 10,060,833
(Loss)/Earnings per Common Share - Basic ($0.05) $0.04
(Loss)/Earnings per Common Share - Diluted ($0.05) $0.04
The accompanying notes are an integral part of these financial statements.
5
MILE MARKER INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
Nine Months Ended September 30,
UNAUDITED
2006 2005
----------------------------------------
Sales $15,056,197 $17,966,675
Cost of Sales 8,991,159 9,889,963
----------------------------------------
Gross Profit 6,065,038 8,076,712
----------------------------------------
Selling Expenses 1,288,201 1,012,143
----------------------------------------
General and Administrative Expenses
Salaries and Wages 2,090,049 2,178,042
Insurance Costs 442,066 377,067
Professional Fees 260,562 226,565
Depreciation and Amortization 238,421 203,266
Rent Expense 148,637 105,317
Vehicle Expenses 63,339 51,567
Research & Development 58,861 34,193
Other Expenses 361,199 326,508
----------------------------------------
Total General and Administrative Expenses 3,663,134 3,502,525
----------------------------------------
Total Expenses 4,951,335 4,514,668
----------------------------------------
Income from Operations 1,113,703 3,562,044
----------------------------------------
Interest Expense 268,510 208,361
----------------------------------------
Income before Provision for Income Taxes 845,193 3,353,683
Provision for Income Taxes 482,815 1,247,252
----------------------------------------
Net Income $ 362,378 $ 2,106,431
========================================
Per Share Data:
Weighted Average Shares Outstanding - Basic 9,953,558 10,020,666
Weighted Average Shares Outstanding - Diluted 9,968,751 10,084,428
Earnings per Common Share - Basic $0.04 $0.21
Earnings per Common Share - Diluted $0.04 $0.21
The accompanying notes are an integral part of these financial statements.
6
MILE MARKER INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30,
UNAUDITED
2006 2005
----------------------------------------
OPERATING ACTIVITIES:
Net income $ 362,378 $ 2,106,431
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 244,078 227,785
Deferred income taxes (42,164) 3,408
Inventory obsolescense reserves 18,285 12,458
Bad debt provisions 30,592 20,594
(Increase) decrease in:
Accounts receivable 1,336,523 648,415
Inventories (1,082,055) (1,967,111)
Prepaid expenses (67,116) (72,437)
Other assets 14,450 (52,895)
(Decrease) increase in:
Accounts payable (428,543) 164,157
Income taxes payable (495,492) (941,224)
Other liabilities 54,973 -
Accrued liabilities 2,683 10,672
----------------------------------------
Net cash (used in)/ provided by operating activities (51,408) 160,253
INVESTING ACTIVITIES:
Additions to intangible assets (77,007) (51,120)
Acquisitions of property and equipment - net (196,259) (77,034)
----------------------------------------
Net cash (used in) investing activities (273,266) (128,154)
FINANCING ACTIVITIES
Proceeds from (repayment of) short term borrowing - net 1,039,447 1,634,289
Purchase of treasury stock (89,578) (1,750)
Proceeds from common shares sold pursuant to options - 31,500
Payment of dividends (622,882) (1,878,926)
----------------------------------------
Net cash provided by/(used in) financing activities 326,987 (214,887)
Effect of exchange rate fluctuations on cash (2,159) -
Increase/(decrease) in Cash 154 (182,788)
Cash at Beginning of Period 172,306 334,208
----------------------------------------
Cash at End of Period $ 172,460 $ 151,420
========================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 263,663 $ 196,779
Cash paid during the period for income taxes $ 1,020,471 $ 2,185,068
The accompanying notes are an integral part of these financial statements.
7
MILE MARKER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the
accounts of Mile Marker International, Inc. and its wholly-owned subsidiaries,
Mile Marker, Inc., Mile Marker West, Inc. and Mile Marker Automotive Electronics
(ShenZhen), Ltd. (collectively "the Company"). On January 7, 2006, the Company
incorporated Mile Marker Automotive Electronics (ShenZhen), Ltd. in ShenZhen,
China, as a wholly-owned subsidiary of Mile Marker, Inc., which is now included
in these condensed consolidated financial statements. All necessary adjustments
to the condensed consolidated financial statements have been made, and
significant inter-company accounts and transactions have been eliminated in
consolidation.
The accompanying unaudited condensed consolidated financial statements,
which are for interim periods, do not include all disclosures provided in the
annual consolidated financial statements. These unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the footnotes thereto contained in the Annual Report on
Form 10-KSB for the year ended December 31, 2005, of Mile Marker International,
Inc., as filed with the U.S. Securities and Exchange Commission. The summary
December 31, 2005, balance sheet was derived from audited consolidated financial
statements, but does not include all disclosures required by generally accepted
accounting principles at December 31, 2005.
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments (which are
of a normal recurring nature) necessary for a fair presentation of the financial
statements. The results for interim periods are not necessarily indicative of
results to be expected for the complete fiscal year.
Per share data was computed by dividing net income or net loss by the
weighted average number of shares outstanding during the period. The diluted
share base for the periods ended September 30, 2006 and September 30, 2005,
includes incremental shares for stock options outstanding. Potential common
stock, when included in the computation of loss per share for the quarter ended
September 30, 2006, was anti-dilutive.
NOTE 2: SHAREHOLDERS' EQUITY
245,000 shares of the Company's common stock were held in the Company's
treasury as of September 30, 2006. The Company purchased 16,000 treasury shares
during the third quarter for $41,373, purchased 4,000 treasury shares during the
second quarter of 2006 for $11,005, and purchased 10,000 treasury shares during
the first quarter of 2006 for $37,200. The Company retired and cancelled 34,155
treasury shares during the second quarter of 2006.
8
NOTE 3: RECLASSIFICATION
Certain amounts in prior periods have been reclassified for comparative
purposes.
NOTE 4: REVENUE POLICIES AND PROCEDURES
Except for some sales to the U.S. military, revenues are recognized
when the Company's products are physically shipped to its customers. Some of the
Company's sales contracts with the U.S. military provide for quality control
inspection and acceptance by a U.S. Government employee at the Company's plant
prior to shipment, at which time the U.S. Government takes possession of the
products. Shipping of such U.S. military sales generally occurs within a few
days of acceptance. As of September 30, 2006, all of the Company's recorded
sales had been shipped, with the only contingencies being product warranties.
The Company's sales contracts with its customers do not contain any
contingency clauses that would cause the Company to retain any risk of loss,
except for normal product warranties. The Company's product warranties are
limited to certain terms based on type of product: hydraulic motors are
warranted for five years, hydraulic and electric winches are generally warranted
for two years, electrical components of electric winches are warranted for one
year and Spectro Classic hubs are warranted for one year. Provisions for return
warranties are made monthly based on an analysis of the cost of actual warranty
returns during the period and charged to selling expenses. Warranty returns from
all customers totaled $35,741 in the third quarter of 2006, and provisions
totaling $35,000 were added to the warranty reserve during the third quarter of
2006. As of September 30, 2006, the Company's warranty reserve balance was
$84,830.
NOTE 5: CREDIT RISK
The Company sets individual credit limits for its customers based on
detailed credit investigations, with larger limits requiring a more thorough
investigation and approved credit insurance when such credit insurance is
available. The Company's management establishes provisions for bad debts
quarterly based on a monthly individual customer-by-customer analysis of all
aged receivables. All receivables over $500 aged over 90 days are evaluated for
the probability of loss, quantified and reserved on a specific identification
basis. During the third quarter of 2006, $13,462 of additional reserves were
provided for potentially uncollectible receivables based on a
customer-by-customer analysis, and $9,834 were written off as bad debts. As of
September 30, 2006, the Company's Reserve for Uncollectible Accounts was
$20,690.
NOTE 6: CUSTOMER CONCENTRATION RISKS
During the quarter ended September 30, 2006, only two of the Company's
customers accounted for more than 10% of the Company's total quarterly sales.
9
During the third quarter of 2006, the Company's largest customer
accounted for $478,828, or approximately 17%, of the Company's total sales and
$298,744, or approximately 14.3%, of its accounts receivable as of September 30,
2006.
During the third quarter of 2006, the Company's second largest customer
accounted for $338,803, or approximately 12%, of the Company's total sales and
$529,256, or approximately 25.4%, of its accounts receivable as of September 30,
2006.
NOTE 7: INVENTORY RESERVES
The Company establishes reserves quarterly for obsolete and slow-moving
inventory based on an item-by-item analysis of inventory levels compared to the
movement history of each inventory item. Slow-moving inventory items are
reserved in direct proportion to their movement activity over the past two
years, i.e., the slowest moving inventory items are reserved the most. Obsolete
inventory items are fully reserved. During the third quarter of 2006, additional
reserves for obsolete and slow-moving inventory of $3,598 were provided, and no
obsolete or slow-moving inventory was disposed of and written off. As of
September 30, 2006, this reserve amounted to $105,325.
NOTE 8: LENDER LOAN COVENANTS
During the quarter ended September 30, 2006, the Company was required
by its lender to maintain a minimum Tangible Net Worth of $4,899,706 and a
minimum Fixed Charge Coverage Ratio in excess of 1.00. As of September 30, 2006,
the Company was in compliance with the Tangible Net Worth requirement and the
Fixed Charge Coverage Ratio. Minimum Tangible Net Worth was $4,984,689, and the
Fixed Charge Coverage Ratio was 1.12. While the Company has historically
received waivers for any technical defaults of these ratios, it is likely that
not meeting these covenants and failing to receive a future waiver of a
technical default from the lender could result in more restrictive loan terms by
the lender.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction
with the Financial Statements appearing elsewhere in this quarterly report on
Form 10-QSB.
RESULTS OF OPERATIONS
The following table summarizes the Company's results of operations,
stated as a percentage of sales, for the nine months and the three months ended
September 30, 2006 and September 30, 2005:
10
Nine Months Three Months
2006 2005 2006 2005
------------------------ -------------------------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 59.7% 55.0% 61.9% 56.1%
------------------------ -------------------------
Gross Profit 40.3% 45.0% 38.1% 43.9%
Selling Expenses 8.6% 5.6% 13.2% 6.4%
General & Administrative Expenses 24.3% 19.6% 42.1% 21.9%
------------------------ -------------------------
Income/(Loss) from Operations 7.4% 19.8% -17.2% 15.6%
Other Expense 1.8% 1.2% 3.6% 1.9%
------------------------ -------------------------
Income/(Loss) Before Income Taxes 5.6% 18.6% -20.8% 13.7%
Income Taxes 3.2% 6.9% -3.3% 5.2%
------------------------ -------------------------
------------------------ -------------------------
Net Income/(Loss) 2.4% 11.7% -17.5% 8.5%
======================== =========================
Sales of $15,056,197 for the nine months ended September 30, 2006, were
$2,910,478, or approximately 16%, less than sales of $17,966,675 during the
first nine months of 2005. This sales decrease was due chiefly to $3,004,710
less Original Equipment Manufacturer (OEM) sales in the first nine months of
2006 than in the comparable period of 2005. Military sales were $1,442,780 in
the first nine months of 2006, compared to $2,589,776 during the same period in
2005, a decrease of $1,146,996, or approximately 44%. However, this military
sales decrease was offset by an increase of $1,241,229 in other commercial
sales. During the third quarter of 2006, military sales amounted to $181,946,
compared to $223,727 during the same period in 2005. The major reasons for the
decreases in military sales were the U.S. military budgetary considerations and
priorities that have resulted in the deferral of military equipment maintenance
during the U.S. Government's 2006 Fiscal Year.
Commercial sales (including OEM sales ) were $13,613,417 in the first
nine months of 2006, compared to $15,376,899 during the same period in 2005, a
decrease of $1,763,482, or approximately 11%. $1,606,043 of this decrease
occurred in the third quarter as commercial sales fell from $4,241,020 in the
third quarter of 2005 to $2,634,977 in the third quarter of 2006, a decrease of
approximately 38%. The main reasons for these decreases in commercial sales were
reduced orders from the Company's major OEM customer due to a manufacturing
shutdown and product line conversion.
The Company's gross margins on sales decreased from 45% in the first nine
months of 2005 to 40.3% in the first nine months of 2006. During the third
quarter of 2006, gross margins decreased to 38.1% from 43.9% compared to the
third quarter of 2005. These decreases were due to a continuing shift in the
Company's product sales mix to more high-volume purchasers of discounted
commercial winch products and the impact of increased material costs flowing
through the Company's first-in first-out (FIFO) inventory. Cost savings from the
Company's China factory expected to be realized have not yet contributed
significantly to the Company's overall cost of goods during the third quarter of
2006.
11
Selling costs increased by $276,058, or approximately 27%, from
$1,012,143 in the first nine months of 2005 to $1,288,201 in the first nine
months of 2006, primarily due to greater travel and trade show costs for new
product introductions as well as higher sales commissions, sales promotions and
warranty costs. During the third quarter of 2006, selling costs increased by
$83,266, or approximately 29%, from $287,515 in the third quarter of 2005 to
$370,781, primarily due to higher sales promotions, travel costs and warranty
costs.
General and administrative expenses for the nine months ended September
30, 2006, increased by $160,609, or about 5%, from $3,502,525 in the first nine
months of 2005 to $3,663,134 in the first nine months of 2006. The increase in
general and administrative expenses in the first nine months of 2006 is
primarily due to higher insurance, rent and depreciation costs. Offsetting these
increases was a decrease in officer salaries due to the elimination of the
annual performance bonuses for the Company's officers in 2006.
For the three months ended September 30, 2006, general and
administrative expenses increased by $207,790, or about 21%, from $978,508 in
the third quarter of 2005 to $1,186,298 in the third quarter of 2006. This
increase from the third quarter of 2005 resulted primarily from an increase of
$111,360 in salaries and wages, $31,402 in higher professional fees and $30,727
higher health insurance costs.
The Company's results of operations for the first nine months of 2006
reflected operating income of $1,113,703 compared to income from operations of
$3,562,044 during the same period in 2005, a decrease of $2,448,341, or
approximately 69%. Other expenses, consisting of interest, were $60,149 more in
the first nine months of 2006 than the comparable period in 2005 primarily due
to higher interest rates on higher working capital borrowings. During the nine
months ended September 30, 2006, the Company recorded income before taxes of
$845,193 compared to income before taxes of $3,353,683 during the same period in
2005. The Company's net income of $362,378 after taxes in the first nine months
of 2006 was $1,744,053, or approximately 83%, lower than net income of
$2,106,431 for the first nine months of 2005. Net income in the first nine
months of 2006 represented earnings per share of $0.04, both primary and fully
diluted, compared to $0.21 earnings per share during the same period in 2005.
During the third quarter of 2006, the Company's results of operations
reflected an operating loss of $485,152, compared to income from operations of
$693,764 during the same period in 2005. Other expenses, consisting principally
of interest, were $16,059 more in the third quarter of 2006 than the comparable
period in 2005, primarily due to higher interest rates on higher working capital
borrowings. During the three months ended September 30, 2006, the Company
recorded a loss before taxes of $585,227 compared to income before taxes of
$609,748 during the same period in 2005. The Company incurred a net loss of
$492,890 after taxes in the third quarter of 2006, compared to net income after
taxes of $377,731 during the third quarter of 2005. The net loss for the three
months ended September 30, 2006, represented a loss of $0.05 per common share,
both primary and fully diluted, compared to earnings of $0.04 per share during
the same period in 2005.
12
The primary reason for the net loss in the third quarter of 2006
compared to the comparable period in 2005 was the negative effect of
significantly lower sales and gross margins in 2006 on the Company's operating
leverage. The main contributing factors for the sales decrease were the
significant decrease in OEM orders and the lack of significant direct military
sales. OEM sales declined from $2,523,790 in the third quarter of 2005 to
$478,828 in the same period in 2006, a decrease of $2,044,962, or approximately
81%, due to a manufacturing shutdown in July and product line conversion. All
other commercial sales increased by $438,919, or approximately 26%, from
$1,717,230 in the third quarter of 2005 to $2,156,149 in the third quarter of
2006 despite the negative effect of seasonal factors.
As we have previously noted, the Company's financial results are
heavily influenced by significant periodic sales to the U.S. military of
replacement winches for the refurbishing of existing Humvees. During 2006, the
Company's investments in inventory, staff and facilities have been based on a
much higher level of anticipated military sales due to the substantial backlog
of unfilled potential military orders. While there were only $181,946 in
military sales in the third quarter of 2006, the Company's total sales in the
future will continue to be affected considerably by the receipt of new military
orders for replacement winches under its four outstanding military winch
contracts totaling over $47 million of potential orders through February of
2010. The military is not required to order any more winches under its contracts
with the Company. Even if, as the Company anticipates, the military does place
additional orders for such winches, the timing and size of such potentially
large orders is intermittent and unpredictable, nor are the order quantities
guaranteed or assured. However, the Company must be prepared to meet such orders
on a timely basis when they are received pursuant to the contracts. The 2007
Department of Defense Appropriations Act was signed into law by the President on
September 29, 2006. Media reports have indicated that the US Army's equipment
budget for Fiscal Year 2007 is expected to be substantially more than was
budgeted in previous years, that $5 billion of previous years' allocations for
equipment expenses have been deferred and that many Humvee vehicles were waiting
for funding for repair and refurbishing during the fiscal year beginning October
1, 2006. Any major military orders received for replacement winches would be
expected to provide opportunities for substantial increases in sales and
profits, while the lack of such additional military orders would have a material
adverse effect on the Company's future sales, profits and cash flow.
The Company's basic sales strategy continues to be increasing both
hydraulic and electric winch sales to various commercial markets with the
addition of new winch models and electronic products, while continuing to sell
more of its hydraulic winches to OEM customers. Military winch sales could
supplement such commercial sales very dramatically.
13
LIQUIDITY AND CAPITAL RESOURCES
Net working capital decreased by $396,007 to $3,073,155 on September
30, 2006, from $3,469,162 on December 31, 2005, and the Company's current ratio
decreased to 1.46 at September 30, 2006, compared to 1.53 at December 31, 2005.
The Company's current assets decreased by $222,940 to $9,823,837 at September
30, 2006, compared to $10,046,777 at December 31, 2005. Most of this decrease in
current assets was due to a decrease of $1,367,115 in accounts receivable from
December 31, 2005, levels, offset by $1,144,175 of increases in other current
assets, primarily inventories, which increased by $1,063,770.
The Company's current liabilities increased by a net $173,067, from
$6,577,615 on December 31, 2005, to $6,750,682 on September 30, 2006. Decreases
of $495,492 in income taxes payable and $428,543 in accounts payable were offset
by increased borrowings of $1,039,447. Borrowings under the Company's working
capital line of credit increased from $4,399,238 on December 31, 2005, to
$5,438,685 on September 30, 2006. The higher borrowings essentially funded the
increase in inventories noted above.
During the first nine months of 2006, the Company's operating activities
used $51,408 of cash flow. Major cash uses during this period were $1,082,055
for higher inventories, $622,882 for dividends to shareholders in the first
quarter, $196,259 for capital expenditures and $89,578 for the purchase of
Company stock. The Company has no material commitments outstanding for major
capital expenditures during 2006, but the Company may purchase more of its
common stock, as it has been doing since 2002. The Company's ability to have
adequate liquidity and capital for its foreseeable operational needs is
dependant upon its ability to increase its borrowing capacity in the fourth
quarter and to process substantial military orders while simultaneously growing
its commercial business. The Company's management is actively addressing all
these factors while managing its existing liquidity and capital.
The Company has historically paid out a substantial portion of its
earnings in the form of dividends to its shareholders. However, the Company did
not pay a dividend during the second or third quarter of 2006. While the Company
intends that it will again pay quarterly cash dividends in the foreseeable
future, its ability to do so is subject to adequate earnings, periodic
determinations that such cash dividends are in the best interest of its
shareholders, and that the Company's capital and lender requirements are being
satisfied. Our dividend policy will be affected by, among other matters, the
views of our management and Board of Directors on the anticipated earnings of
the Company and the Company's overall financial condition.
The Company's cash balances did not change significantly from a December
31, 2005, level of $172,306 to $172,460 on September 30, 2006, due to the timing
of deposits in transit. The Company seeks to minimize its cash balances by
employing an efficient cash management system utilizing a zero balance
disbursement account funded by the Company's credit facility at the time
outstanding checks are presented and paid.
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The Company has a $7,000,000 working capital line of credit from a lender
at an interest rate of 2.40% above the One Month London Interbank Offered Rate
with a maturity date of April 30, 2007. In addition, this lender has also
provided the Company with a 10-year $1,260,000 revolving line of credit secured
by the Company's warehouse and office building that was fully repaid in June of
2004, but it remains available for term borrowings on a declining balance basis.
ITEM 3. CONTROLS AND PROCEDURES
As stated in the certifications in Exhibit 31 of this Report, the
Company's Chief Executive Officer and Chief Financial Officer have evaluated the
Company's disclosure controls and procedures as of September 30, 2006. Based on
that evaluation, these officers have concluded that the Company's disclosure
controls and procedures are effective for the purpose of ensuring that material
information required to be in this quarterly report is made known to them by
others on a timely basis. There have not been changes in the company's internal
control over financial reporting that occurred during the Company's third
quarter that have materially affected, or are reasonably likely to affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is a party to business disputes arising
in the normal course of its business operations. The Company's management
believes that none of these actions, standing alone, or in the aggregate, is
currently material to the Company's operations or financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
a. Unregistered Sales of Equity Securities - None
b. Purchase of Equity Securities by Small Business Issuer
The following table summarizes the status of equity purchases by the Company
during the quarter ended September 30, 2006:
Small Business Issuer Purchases of Equity Securities
Average Total Shares Maximum Shares
Time Total Number Price Purchased Under Remaining Under
Period of Shares Paid per the Publicly the Publicly
Purchased Share Announced Announced
Purchase Program Purchase Program
7/1/06-7/31/06 6,000 $2.73 6,000 123,845
8/1/06-8/31/06 8,000 $2.50 8,000 115,845
9/1/06-9/30/06 2,000 $2.50 2,000 113,845
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6 EXHIBITS
Exhibit 31.1 - Section 302 Certificate of Chief Executive Officer
Exhibit 31.2 - Section 302 Certificate of Chief Financial Officer
Exhibit 32.1 - Section 906 Certificate of Chief Executive Officer
Exhibit 32.2 - Section 906 Certificate of Chief Financial Officer
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, duly authorized.
MILE MARKER INTERNATIONAL, INC.
(Registrant)
11/03/06 /s/ Richard E. Aho
- ----------- -------------------------------------------------------
(Date) Richard E. Aho, President and
Chief Executive Officer
11/03/06 /s/ Alvin A. Hirsch
- ----------- -------------------------------------------------------
(Date) Alvin A. Hirsch, Secretary/Treasurer
and Chief Financial Officer
Principal Accounting Officer
17