FORM 10--Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14659
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TECHDYNE, INC.
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(Exact name of registrant as specified in its charter)
Florida 59-1709103
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2230 West 77th Street, Hialeah, Florida 33016
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(Address of principal executive offices) (Zip Code)
(305) 556-9210
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [x] or No [ ]
Common Stock Outstanding
Common Stock, $.01 par value -- 4,635,167 shares as of October 31, 1997.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
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INDEX
PART I -- FINANCIAL INFORMATION
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The Consolidated Condensed Statements of Income (Unaudited) for the
three and nine months ended September 30, 1997 and September 30, 1996
include the accounts of the Registrant and its subsidiaries.
Item 1. Financial Statements
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(1) Consolidated Condensed Statements of Income for the three months
and nine months ended September 30, 1997 and September 30, 1996.
(2) Consolidated Condensed Balance Sheets as of September 30, 1997
and December 31, 1996.
(3) Consolidated Condensed Statements of Cash Flows for the nine
months ended September 30, 1997 and September 30, 1996.
(4) Notes to Consolidated Condensed Financial Statements as of Sep-
tember 30, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
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PART II -- OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
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<PAGE>
PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements
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TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Sales $8,978,315 $5,262,912 $21,962,802 $18,177,739
Litigation settlement 139,645
Interest and other
income 43,722 55,263 120,346 137,714
---------- ---------- ----------- -----------
9,022,037 5,318,175 22,083,148 18,455,098
Cost and expenses:
Cost of goods sold 7,897,931 4,494,156 18,904,430 15,497,007
Selling, general
and administrative
expenses 823,938 585,007 2,180,240 1,742,070
Interest expense 139,517 67,588 281,772 209,468
---------- ---------- ----------- -----------
8,861,386 5,146,751 21,366,442 17,448,545
---------- ---------- ----------- -----------
Income before income
taxes 160,651 171,424 716,706 1,006,553
Income tax (benefit)
provision (13,998) (9,421) (63,027) 306,289
---------- ---------- ----------- -----------
Net income $ 174,649 $ 180,845 $ 779,733 $ 700,264
========== ========== =========== ===========
Earnings per share:
Primary $.04 $.04 $.17 $.15
==== ==== ==== ====
Fully diluted $.03 $.03 $.14 $.13
==== ==== ==== ====
See notes to consolidated condensed financial statements.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30 December 31,
1997 1996(A)
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(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 2,251,416 $ 3,924,873
Restricted cash 30,632 29,174
Accounts receivable, less allowances
of $93,000 at September 30, 1997
and $83,000 at December 31, 1996 5,183,333 3,106,923
Inventories, less allowances for
obsolescence of $589,000 at
September 30, 1997 and $134,000
at December 31, 1996 7,822,843 3,049,334
Prepaid expenses and other
current assets 1,208,297 436,358
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Total current assets 16,496,521 10,546,662
Property and Equipment:
Land and improvements 194,400 205,200
Buildings and building
improvements 819,090 864,595
Machinery and equipment 6,071,985 3,273,875
Tools and dies 838,100 817,593
Leasehold improvements 233,434 94,119
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8,157,009 5,255,382
Less accumulated depreciation 3,098,912 2,749,339
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5,058,097 2,506,043
Deferred expenses and other assets 207,917 124,313
Costs in excess of net tangible
assets acquired, less accumulated
amortization of $56,000 at
September 30, 1997 and $44,000
at December 31, 1996 1,296,845 47,178
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$23,059,380 $13,224,196
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term bank borrowings $ 2,873,889
Accounts payable 4,720,246 $ 2,457,563
Accrued expenses 1,798,789 935,227
Current portion of long-term
debt and capital lease
obligations 539,719 259,731
Income taxes payable 372,795 297,575
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Total current liabilities 10,305,438 3,950,096
Deferred gain on sale of real estate 161,047 161,047
Deferred income taxes 189,519 102,603
Long-term debt and capital lease
obligations, less current portion 2,609,407 1,384,569
Advances from parent 2,822,371 2,457,570
Commitments and Contingencies
Stockholder's Equity
Common stock, $.01 par value,
authorized 10,000,000 shares:
issued and outstanding 4,635,167
shares at September 30, 1997;
4,294,019 shares at December 31, 1996 46,351 42,940
Capital in excess of par value 8,773,941 7,551,774
Deficit (1,751,434) (2,531,167)
Foreign currency translation
adjustments (97,260) 104,764
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Total stockholders' equity 6,971,598 5,168,311
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$23,059,380 $13,224,196
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(A) Reference is made to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 filed with the Securities and Exchange
Commission in March 1997.
See notes to consolidated condensed financial statements.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
---------------------------
1997 1996
---- ----
Operating activities:
Net income $ 779,733 $ 700,264
Adjustments to reconcile
net income to net cash (used in)
provided by operating activities:
Depreciation 389,047 272,554
Amortization 20,245 11,374
Provision for inventory obsolescence 91,423 32,367
Deferred income taxes 2,934
Increase (decrease) relating to
operating activities from:
Accounts receivable (915,082) 156,140
Inventories (2,253,669) 441,682
Prepaid expenses and other
current assets (357,835) 237,409
Accounts payable 994,659 (770,486)
Accrued expenses (27,271) (558,090)
Income taxes payable (237,513) (171,127)
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Net cash (used in) provided by
operating activities (1,513,329) 352,087
Investing activities:
Additions to property and equipment,
net of minor disposals (1,066,475) (414,338)
Acquisition of subsidiary (2,166,011)
Proceeds from restricted cash 59,061 56,294
Restricted cash (60,519) (57,667)
Deferred expenses and other assets (85,181) 48,382
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Net cash used in investing activities (3,319,125) (367,329)
Financing activities:
Line of credit funding for
subsidiary acquisition $ 2,500,000
Other line of credit borrowings 373,889
Proceeds from long-term borrowings 181,476
Payments on long-term debt (141,873) (109,978)
Exercise of stock options and warrants 194,328 45,500
Increase in advances from parent 364,801 186,995
Deferred financing costs (2,979) (14,451)
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Net cash provided by financing activities 3,288,166 289,542
Effect of exchange rate fluctuations
on cash (129,169) 30,992
(Decrease) increase in cash and
cash equivalents (1,673,457) 305,292
Cash and cash equivalents at
beginning of year 3,924,873 3,131,540
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Cash and cash equivalents at
end of period $ 2,251,416 $ 3,436,832
=========== ===========
See notes to consolidated condensed financial statements.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
NOTE 1 -- Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of
Techdyne, Inc. ("Techdyne") and its subsidiaries, Lytton Incorporated
("Lytton"), Techdyne (Scotland) Limited ("Techdyne (Scotland)"), and
Techdyne (Livingston) Limited which is a subsidiary of Techdyne (Scotland),
collectively referred to as the "Company." All material intercompany
accounts and transactions have been eliminated in consolidation. The
Company is a 58.9% owned subsidiary of Medicore, Inc. (the "Parent").
See Notes 5 and 9.
Business
The Company is a manufacturer of electronic and electro-mechanical
products primarily manufactured to customer specifications and designed
for original equipment manufacturers and distributors in the data pro-
cessing, telecommunications, instrumentation and food preparation equip-
ment industries.
Major Customers
A majority of the Company's sales are to certain major customers.
Approximately 53% of the sales of Lytton, the Company's recently acquired
subsidiary (see Note 9) for each of its last three fiscal years prior to
being acquired by the Company were to PMI Food Equipment Group ("PMI").
Sales to PMI by Lytton for the two months ended September 30, 1997, since
the Company acquired Lytton on July 31, 1997, accounted for approximately
44% of its sales during this period. Customers generating in excess of
10% of the Company's sales for the nine months ended September 30, 1997
included Compaq (10%), IBM (23%) and EMC (13%). The loss of or substan-
tially reduced sales to any of these customers would have an adverse
effect on the Company's operations if such sales were not replaced. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations."
Inventories
Inventories are comprised as follows:
September 30, December 31,
1997 1996
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Finished goods $ 748,979 $ 486,863
Work in process 1,514,244 478,481
Raw materials and supplies 5,559,620 2,083,990
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$ 7,822,843 $ 3,049,334
Earnings per Share
Primary earnings per share for the three months and nine months ended
September 30, 1997 has been computed based on the weighted average number
of shares outstanding plus contingent shares issuable on the Lytton acqui-
sition due to guaranties by the Company on the valuation of the 300,000
shares of the Company's stock issued in conjunction with the acquisition.
Fully diluted earnings per share for the three months and nine months
ended September 30, 1997 have been computed based on the weighted average
shares outstanding plus shares assumed to be issued on the conversion of
the convertible note to the Company's Parent, with earnings adjusted for
interest expense related to the convertible promissory note which is
assumed to be converted, plus the contingent shares on the Lytton acqui-
sition. Stock options and warrants were not included in the 1997 compu-
tations since their effect was either antidilutive or not dilutive.
Primary earnings per share for the three months and nine months ended
September 30, 1996 were computed based on the weighted average number
of shares outstanding plus common equivalent shares from dilutive stock
options and warrants using the modified treasury stock method. Fully
diluted earnings per share for the three months and nine months ended
September 30, 1996 were computed based on the weighted average shares
outstanding plus common equivalent shares from dilutive stock options
and warrants using the modified treasury stock method plus shares
assumed to be issued on conversion of the convertible note to the
Company's Parent, with earnings adjusted for interest expense related
to the convertible promissory note.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
NOTE 1 -- Summary of Significant Accounting Policies--Continued
New Pronouncements
In February 1997, the Financial Accounting Standards Board issued
FAS 128, "Earnings Per Share," which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate
all prior periods. The new requirements for calculating primary earnings
per share will exclude the dilutive effect of stock options and warrants.
The impact of FAS 128 will be to increase primary earnings per share for
periods in which dilutive stock options and warrants presently have a
dilutive effect. Earnings per share under the diluted computation which
will be required under FAS 128 will include the dilutive effect of stock
options and warrants using the treasury stock method and average market
price, as well as other dilutive securities. The Company has not yet
determined what the impact of FAS 128 will be on the calculation of fully
diluted earnings per share.
Reclassifications
Certain reclassifications have been made to the 1996 financial state-
ments to conform to the 1997 presentation.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets are comprised as follows:
September 30, December 31,
1997 1996
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Deferred tax asset $ 420,400
United Kingdom VAT tax
receivable 265,130 $ 182,508
Other 522,767 253,850
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$ 1,208,297 $ 436,358
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Accrued Expenses
Accrued expenses are comprised as follows:
September 30, December 31,
1997 1996
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Accrued compensation $ 544,458 $ 232,416
United Kingdom VAT tax
payable 274,639 299,431
Other 994,692 403,380
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$ 1,813,789 $ 935,227
NOTE 2--Interim Adjustments
The financial summaries for the three months and nine months ended
September 30, 1997 and September 30, 1996 are unaudited and include, in
the opinion of management of the Company, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the earnings for
such periods. Operating results for the three months and nine months
ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 1997.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1997
(Unaudited)
NOTE 2--Interim Adjustments--Continued
While the Company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these Consoli-
dated Condensed Financial Statements be read in conjunction with the
financial statements and notes included in the Company's latest annual
report for the year ended December 31, 1996.
NOTE 3 -- Long-term Debt
On February 8, 1996, the Company refinanced its term loan by entering
into three loan agreements with a Florida bank. One credit facility was a
$2,000,000 line of credit due on demand secured by the Company's accounts
receivable, inventory, furniture, fixtures and intangible assets and bore
interest at the bank's prime rate plus 1.25%. In conjunction with the
Company's acquisition of Lytton July 31, 1997, this line of credit was
modified and increased to $2,500,000 with the interest rate reduced to
prime plus .75% and various other modifications. The interest rate has
remained at 9.25% since the line was drawn on July 31, 1997. The line was
fully drawn down in connection with this acquisition with $2,500,000
remaining outstanding as of September 30, 1997. It is the Company's
intent to replace this line of credit in the near future with a term
loan with the same bank payable over several years. No assurance can
be given that this replacement financing will be secured. See Note 9.
The bank has also extended two commercial term loans to the Company,
one for $712,500 for five years expiring on February 7, 2001 at an annual
rate of interest equal to 8.28% with a monthly payment of principal and
interest of $6,925 based on a 15-year amortization schedule with the
unpaid principal and accrued interest due on the expiration date. This term
loan had an outstanding balance of $672,000 and $691,000 at September 30,
1997 and December 31, 1996, respectively, and is secured by a mortgage on
properties in Hialeah, Florida owned by the Company's Parent, two of which
properties are leased to the Company and one parcel being vacant land used
as a parking lot.
The second commercial term loan is for the principal amount of
$200,000 for a period of five years bearing interest at a per annum rate
of 1.25% over the bank's prime rate and requiring monthly principal
payments with accrued interest of $3,333 through expiration on February 7,
2001. This term loan which had a balance of $137,000 and $167,000 at
September 30, 1997 and December 31, 1996, respectively, is secured by all
of the Company's tangible personal property, goods and equipment, and all
cash or noncash proceeds of such collateral.
The Parent has unconditionally guaranteed the payment and performance
by the Company of the revolving loan and the two commercial term loans.
The Company has a promissory note payable to a local bank of $145,000
at September 30, 1997 and December 31, 1996, with interest payable monthly
at prime with the note maturing April 2000. This note is secured by 2
certificates of deposit of a related company and one certificate of deposit
of the Company.
Lytton has a $1,500,000 revolving bank line of credit requiring monthly
interest payments at prime plus .5% which matures August 1, 1998. The
average amount outstanding on this loan since the Company acquired Lytton
on July 31, 1997 was $55,758 with the maximum outstanding of $373,889
remaining outstanding as of September 30, 1997. The weighted average
interest rate on this loan during this period was 9.13%. Lytton has a
$1,000,000 installment loan with the same bank maturing June 2002 at an
annual rate of 9% for two years, with monthly payments of $16,667 plus
interest. After two years, Lytton will have an option of a variable or
fixed interest rate. The balance outstanding on this loan was $983,333
as of September 30, 1997. Lytton also negotiated a $500,000 equipment
loan agreement with the same bank payable over four years through July 1,
2001 with the same interest rate as the installment loan. There was no
outstanding balance on this loan as of September 30, 1997. All of these
bank loans are secured by the business assets of Lytton.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1997
(Unaudited)
NOTE 3 -- Long-term Debt--Continued
The prime rate was 8.5% as of September 30, 1997 and 8.25% as of
December 31, 1996.
In October 1994, Techdyne (Scotland) finalized the purchase of the
facility which houses its operations at a cost of approximately $730,000.
The principal balance outstanding under this mortgage had a U.S. dollar
equivalency of approximately $566,000 and $622,000 at September 30, 1997
and December 31, 1996, respectively.
Techdyne (Scotland) has a line of credit with a Scottish bank with a
U.S. dollar equivalency of approximately $324,000 and $342,000 at September
30, 1997 and December 31, 1996, respectively. No amounts were outstanding
under this line of credit as of September 30, 1997 or December 31, 1996.
Interest payments on long-term debt amounted to approximately $93,000
and $160,000 for the three months and nine months ended September 30, 1997
and $35,000 and $103,000 for the same periods of the preceding year.
NOTE 4 -- Income Taxes
Subsequent to the completion of the Company's public offering on
October 2, 1995, the Company files separate federal and state income tax
returns with its income tax liability reflected on a separate return basis.
Its net operating loss carryforwards can only be used to offset its
taxable income and cannot be utilized in the consolidated federal and
state income tax returns of the Parent as was done previously. The
Company's new subsidiary Lytton, will be included in the Company's con-
solidated federal tax return effective August 1, 1997 with the Company's
net operating loss carryforwards able to be utilized to offset any income
taxable for federal return purposes generated by this subsidiary. See
Note 9.
Deferred income taxes reflect the net tax effect of temporary differ-
ences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The Company had domestic income tax expense of approximately $22,000
and $37,000 for the three months and nine months ended September 30, 1997
and $2,000 for the three months and nine months ended September 30, 1996.
Techdyne (Scotland) had an income tax expense (benefit) of approxi-
mately $(36,000) and $(100,000) for the three months and nine months ended
September 30, 1997 and $(12,000) and $304,000 for the same periods of the
preceding year.
Income tax payments were $265,000 for the three months and nine months
ended September 30, 1997 and $487,000 for the same periods of the preceding
year.
NOTE 5 -- Transactions with Parent
The Parent provides certain administrative services to the Company
including office space and general accounting assistance. These expenses
and all other central operating costs have been charged on the basis of
direct usage when identifiable or on the basis of time spent. Effective
October 1, 1996, the services provided to the Company by the Parent were
formalized under a two year service agreement for $408,000 per year. The
amount of expenses covered under the service agreement totaled $102,000
and $306,000 for the three months and nine months ended September 30, 1997
and for the same periods of the preceding year.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1997
(Unaudited)
NOTE 5 -- Transactions with Parent--Continued
The balance of the Company's demand convertible promissory note payable
to the Parent including accrued interest, which amounted to $3,128,000 at
September 30, 1997 and $2,998,000 at December 31, 1996, may be converted
into common stock of the Company at the option of the Parent at a con-
version price of $1.75 per share. The Parent converted $350,000 of this
note into 200,000 shares of the Company's common stock in September 1996.
Advances from the Parent on the balance sheet have been presented net of
an advance receivable from the Parent of approximately $306,000 at Sep-
tember 30, 1997 and $540,000 at December 31, 1996 with interest at 5.7%.
Interest on the net advances amounted to approximately $40,000 and $114,000
for the three months and nine months ended September 30, 1997 and $32,000
and $106,000 for the same periods of the preceding year. The Parent has
agreed not to require repayment of the intercompany advances prior to
October 1, 1998 and, therefore the advances have been classified as
long-term at September 30, 1997.
The Company manufactures certain products for the Parent. Sales of
the products were $55,000 and $156,000 for the three months and nine
months ended September 30, 1997 and $59,000 and $210,000 for the same
periods of the preceding year.
NOTE 6 - Commitments and Contingencies
In the first quarter of 1996, a temporary worker provided by a tempo-
rary personnel agency was injured while working at the Company. The worker
was insured through the temporary personnel agency. While the full extent
of the temporary worker's injuries and the ultimate costs associated with
those injuries are not presently known, the Company anticipates that its
insurance is adequate to cover any potential claims which might arise.
Lytton sponsors a 401(k) Profit Sharing Plan covering substantially
all of its employees. The discretional profit sharing and matching expense
since the Company acquired Lytton on July 31, 1997 has been approximately
$7,000.
NOTE 7 -- Stock Options
In May 1994, the Company adopted a stock option plan for up to 250,000
options. Pursuant to this plan, in May 1994, the Board of Directors
granted 227,500 options, of which there are 171,600 outstanding as of
September 30, 1997, to certain of its officers, directors, employees and
consultants. These options are exercisable for a period of five years at
$1 per share. Options for 300 shares were exercised in the first quarter
of 1997 with no further exercises through September 30, 1997.
On February 27, 1996 the Company granted stock options, not part of
the 1994 Plan, to directors of the Company and its subsidiaries for
142,500 shares exercisable at $1.75 per share for five years. In April
1996, the Company granted a stock option for 10,000 shares, not part of
the 1994 Plan, to its general counsel at the same price and terms as the
directors' options.
On June 6, 1997, the Board of Directors adopted a Stock Option Plan
with 500,000 shares of its common stock reserved under the plan with the
plan approved by shareholders at the annual meeting of shareholders on
June 11, 1997. On June 23, 1997, the Board granted options under the plan
for an aggregate of 375,000 shares of common stock exercisable for five
years through June 22, 2002 at $3.25 per share the closing price of the
common stock on that date as reported by Nasdaq.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1997
(Unaudited)
NOTE 8 -- Common Stock
The Company completed a public offering of common stock and warrants
on October 2, 1995. Pursuant to the offering 1,000,000 shares of common
stock were issued, and there are 1,000,000 redeemable common stock
purchase warrants to purchase warrants to purchase one common share each
with an exercise price of $5.00 exercisable from September 13, 1995
through September 13, 1998. Through the third quarter ended September 30,
1997, approximately 41,000 warrants were exercised resulting in proceeds
of approximately $194,000, net of underwriter commissions on the warrant
exercises.
NOTE 9 -- Acquisition
On July 31, 1997, the Company acquired Lytton Incorporated, which is
engaged in the manufacture and assembly of printed circuit boards and other
electronic products for commercial customers. The Company's modified bank
line of credit (see Note 3) provided $2,500,000 cash required at closing.
In addition, the purchase price included 300,000 shares of the Company's
common stock which have been registered for the seller. The Company has
guaranteed that the seller will realize a minimum of $2,000,000 from the
sale of these shares of common stock which had a fair value of approxi-
mately $1,031,000 based on the closing price of the Company's common stock
on the date of the acquisition with the guaranteed sales proceeds amounting
to $2,400,000 if certain earnings objective are met by Lytton in a speci-
fied one year period, with Lytton having achieved such objectives on a pro
rata basis for the six month period already expired with a final determina-
tion to be made at the conclusion of the one year period. The Company has
the option of paying the seller any difference between the guaranteed sales
proceeds and the actual amount realized by the seller from the sale of the
Company's common stock in cash and/or additional common stock of the
Company. Based on the closing price of the Company's common stock on
September 30, 1997, the shares issued in the Lytton acquisition had a
fair value of approximately $1,163,000. With the earnings objectives
being met on a pro rata basis by Lytton, this stock valuation contingency
could result in additional consideration of approximately $1,237,000 being
due either in cash or in approximately 320,000 shares of the Company's
common stock. In addition, the Stock Purchase Agreement provides for
incentive consideration based on specific sales levels of Lytton for
each of three years as specified in the Agreement with any such considera-
tion payable in cash. Any additional consideration payable either from
the stock valuation guarantee or as incentive consideration would result
in additional goodwill which would be amortized over the remainder of the
initial 25 year life.
The acquisition was accounted for under the purchase method of ac-
counting, and accordingly the results of operation of Lytton have been
included on the accompanying consolidated condensed statement of income
since August 1, 1997. The total purchase price preliminarily recorded
amounted to $3,621,000 including estimated acquisition costs of $90,000
resulting in goodwill of approximately $1,261,000 which will be amortized
over 25 years.
The net purchase price was allocated as follows:
Working capital, other than cash $ 1,398,588
Property, plant and equipment 1,959,751
Other assets 3,000
Goodwill 1,261,353
Other liabilities (1,335,432)
------------
$ 3,287,260
============
Net cash portion of purchase price,
including costs $ 2,256,010
Common stock issued 1,031,250
------------
$ 3,287,260
============
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1997
(Unaudited)
NOTE 9 - Acquisition--Continued
The following pro forma consolidated condensed financial information
reflects the Lytton acquisition as if it had occurred on January 1, 1996,
for statement of income purposes. The pro forma financial information
does not purport to represent what the Company's actual results of opera-
tions would have been had the sale occurred as of January 1, 1996 and may
not be indicative of operating results for any future periods.
SUMMARY PRO FORMA INFORMATION
Nine Month Ended
September 30,
---------------------
1997 1996
---- ----
Total revenues $32,784,000 $29,899,000
Net income $ 1,176,000 $ 820,000
Earnings per share:
Primary $.24 $.15
==== ====
Fully diluted $.20 $.13
==== ====
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
- ---------------------
The statements contained in this Quarterly Report on Form 10-Q that
are not historical are forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"), including statements regarding the Company's expecta-
tions, intentions, beliefs, or strategies regarding the future. Forward
looking statements include the Company's statements regarding liquidity,
anticipated cash needs and availability, and anticipated expense levels
in "Management's Discussion and Analysis of Financial Condition and Results
of Operations" including the pursuit of new business to replace lost sales
from several major customers in 1996 and the development of new products
and facilities. All forward looking statements included in this document
are based on information available to the Company on the date hereof, and
the Company assumes no obligation to update any such forward looking
statement. It is important to note that the Company's actual results
could differ materially from those in such forward looking statements.
Among the factors that could cause actual results to differ materially
are the factors detailed in the risks discussed in the "Risk Factors"
section included in the Company's Registration Statements on Forms S-3 as
filed with the Securities and Exchange Commission ("Commission") (effec-
tive December 11, 1996 and November 4, 1997).
The Company's manufacturing and assembly operations are subject to
substantial competition from divisions of large electronic and high-tech-
nology firms and numerous smaller, specialized companies. Strong competi-
tion derives from price advantages of competitors with less expensive
off-shore operations, particularly the Far East manufacturers. This
imposes pressure on the Company's bidding orders and profit margins.
The Company's future growth as an international contract manufacturer
of precision electronic and electro-mechanical products for OEMs in the
data processing, telecommunication, instrumentation and food preparation
equipment industries, will be influenced by several factors including
technological developments, the ability of the Company to efficiently meet
the design and production requirements of its customers, and the market
acceptance of its customers' products. Further factors impacting the
success of the Company's operations are increases in expenses associated
with continued sales growth, the ability of the Company to control costs,
management's ability to evaluate new orders to target satisfactory profit
margins, the capacity of the Company to develop and manage the introduc-
tion of new products, and competition, as well as pursue acquisitions in
new geographic and product markets. Quality control is also essential to
the Company's operations, since customers demand strict compliance with
design and product specifications. Any adverse change in the Company's
excellent quality and process controls could adversely affect its rela-
tionship with customers and ultimately its revenues and profitability.
Results of Operations
Consolidated revenues increased approximately $3,704,000 (70%) and
$3,628,000 (20%) for the three months and nine months ended September 30,
1997 compared to the same periods of the preceding year which included an
increase in sales revenues of $3,715,000 (71%) and $3,785,000 (21%) for
the three months and nine months ended September 30, 1997 compared to the
same periods of the preceding year. Domestic sales revenues increased
$3,705,000 (100%) and $7,400,000 (76%) and European-based sales revenues
increased $10,000 (1%) and decreased $3,615,000 (43%) compared to the same
periods of the preceding year. Interest and other income decreased approx-
imately $12,000 and $17,000 for the three months and nine months ended
September 30, 1997 compared to the same periods of the preceding year
largely as a result of decreased cash balances invested. Prior year
revenues included approximately $140,000 from a litigation settlement in
the first quarter.
The increase in domestic sales included sales of Lytton of $2,779,000
commencing August 1, 1997.
The decrease in European-based sales was largely attributable to a
decrease of $614,000 (54%) and $5,086,000 (70%) in sales to Compaq Computer
Corp. ("Compaq") by Techdyne (Scotland) for the three months and nine
months ended September 30, 1997 as compared to the same periods of the
preceding year. Revenues of Techdyne (Scotland) continue to be highly
dependent on sales to Compaq which accounted for approximately 34% and 45%
of the sales of Techdyne (Scotland) for the three months and nine months
ended September 30, 1997 and 74% and 86% for the same periods of the pre-
ceding year. The bidding for Compaq orders has become more competitive
which has resulted in substantially reduced Compaq sales and lower profit
margins on remaining Compaq sales. Techdyne (Scotland) is pursuing new
business development and has offset some of the lost Compaq business with
sales to other customers and is also continuing cost reduction efforts to
remain competitive on Compaq business. However, there can be no assurance
as to the success of such efforts.
<PAGE>
Results of Operations--Continued
Approximately 50% and 61% of the Company's consolidated sales for the
three months and nine months ended September 30, 1997 were made to five
customers. Customers generating in excess of 10% of sales for either the
three month or nine month periods included Compaq (6% and 10%), IBM (16%
and 23%), EMC and its related suppliers (7% and 13%) and PMI (14% and 6%),
Lytton's major customer. Approximately $1,236,000 (44%) of Lytton's sales
since its acquisition by the Company on July 31, 1997 were to its major
customer. The loss of, or substantially reduced sales to any of these
customers, as has occurred with Compaq in Europe commencing in the third
quarter of 1996, would have an adverse effect on the Company's operations.
Cost of goods sold as a percentage of sales remained relatively stable,
amounting to 88% and 86% for the three months and nine months ended Sep-
tember 30, 1997 compared to 85% for each of the same periods of the
preceding year. Cost of goods sold for the Company's new subsidiary,
Lytton, included in the Company's results of operations since August 1,
1997 was 88%, which together with Techdyne (Scotland)'s reduced margins
contributed to the overall increase in cost as a percentage of sales.
Selling general and administrative expenses, increased approximately
$254,000 and $453,000 for the three months and nine months ended September
30, 1997 compared to the same periods of the preceding year. This includes
$153,000 for Lytton, substantially increased operations of the Company's
Austin, Texas facility and the Company's new Massachusetts facility.
Selling, general and administrative expenses as a percent of sales amounted
to 9% and 10% for the three months and nine months ended September 30, 1997
compared to 10% for the same periods of the preceding year.
Interest expense increased by $72,000 for the three months and nine
months ended September 30, 1997 compared to the same periods of the pre-
ceding year. Interest expense of Lytton amounted to $25,000 and interest
on the bank line of credit to finance the Lytton acquisition was $42,000,
each occurring in the third quarter of 1997. The prime rate was 8.5% at
September 30, 1997 and 8.25% at December 31, 1996.
Liquidity and Capital Resources
Working capital totaled $6,191,000 at September 30, 1997 decreasing
$405,000 (6%) during the first nine months of 1997. This decrease in-
cluded a reduction in current debt as a result of the Company extending
a $145,000 bank note payable due April 1997 for an additional three years,
changes in other components of working capital resulting from overall
increased sales levels, and included working capital of Lytton which
totaled $1,523,000 at September 30, 1997, with the net overall increase
resulting from other changes being more than offset by the borrowings of
$2,500,000 under the Company's line of credit to fund the Lytton acqui-
sition.
Included in the changes in components of working capital was a de-
crease of $1,673,000 in cash and cash equivalents, which included net cash
used in operating activities of $1,513,000, net cash used in investing
activities of $3,319,000 (including $1,066,000 from additions to property
and equipment and net cash expanded in the Lytton acquisition of $2,166,000)
and net cash provided by financing activities of $3,288,000 (including net
proceeds from common stock purchase warrants and options exercised of
approximately $194,000, borrowings of $2,500,000 under the Company's line
of credit to fund the Lytton acquisition, Lytton line of credit borrowings
of $374,000, payments on long-term debt of $142,000 and a net increase in
advances from the Parent of $365,000).
In February 1996, the Company refinanced its bank loan agreement with
a Florida bank. The new financing included a $2,000,000 line of credit,
due on demand, secured by the Company's accounts receivable, inventory,
furniture, fixtures and intangible assets. A $712,500 term loan, which
had a remaining principal balance of $672,000 and $691,000 at September 30,
1997 and December 31, 1996, respectively, is secured by two buildings and
land owned by the Parent. The second term loan for $200,000, which had a
remaining principal balance of $137,000 and $167,000 at September 30, 1997
and December 31, 1996, respectively, is secured by the Company's tangible
personal property, goods and equipment. The Parent has guaranteed these
loans and has subordinated $2,500,000 due from the Company, provided the
Company may make payments to the Parent on this subordinated debt from
funds from the Company's 1995 security offering and from earnings. The
Company further agreed that in the event that it should sell its interest
in Techdyne (Scotland), which is not anticipated, 50% of the selling price
would be used to repay the $712,500 term loan facility. The Company was
in default of certain financial reporting requirements regarding these
loans as of December 31, 1996 for which the bank has granted waivers as
of December
<PAGE>
Liquidity and Capital Resources--Continued
31, 1996 and extending through December 31, 1997. In connection with
the Company's acquisition of Lytton in July 1997, the line of credit was
increased to $2,500,000 with various other modifications, including removal
of conditions regarding use of proceeds upon any sale of Techdyne (Scotland).
In connection with this acquisition, the increased line of $2,500,000 was
fully drawn down in July 1997. See Notes 3 and 9 to "Notes to Consolidated
Condensed Financial Statements."
The Company has outstanding borrowings of $145,000 from a local bank
with interest payable monthly with a renewal of the present note maturing
April, 2000. Techdyne (Scotland) has a line of credit with a Scottish
bank, with a U.S. dollar equivalency of approximately $324,000 and
$342,000 at September 30, 1997 and December 31, 1996, respectively, which
is secured by the assets of Techdyne (Scotland) and guaranteed by the
Company. This line of credit operates as an overdraft facility. No
amounts were outstanding under this line of credit as of September 30,
1997 or December 31, 1996. See Note 3 to "Notes to Consolidated Condensed
Financial Statements."
In July, 1994 Techdyne (Scotland) purchased the facility housing its
operations for approximately $730,000, obtaining a 15-year mortgage which
had a U.S. dollar equivalency of approximately $566,000 and $622,000 at
September 30, 1997 and December 31, 1996, respectively based on exchange
rates in effect at each of these dates. See Note 3 to "Notes to Consoli-
dated Condensed Financial Statements."
The Company has established a new manufacturing facility in Milford,
Massachusetts with the facility having an initial five year lease term
with the Company's occupancy commencing in late April 1997. This facility
is intended to assist in meeting increased customer demand in the North-
eastern United States, as well as to increase service levels to customers
in the Northeast and to penetrate new markets. The Company has increased
its manufacturing capacity at its Houston and Austin, Texas facilities to
meet increased customer demand in the Southwestern United States. Most of
the expenditures related to its new facilities, including leasehold
improvements, equipment and furniture and fixtures, and the costs of
expansion of existing facilities were provided from the proceeds from
the Company's 1995 security offering.
On July 31, 1997, the Company acquired Lytton Incorporated, which is
engaged in the manufacture and assembly of printed circuit boards and other
electronic products for commercial customers. This acquisition required
$2,500,000 cash at closing, funded by the modified bank line of credit,
as well as 300,000 shares of the Company's common stock which had a fair
value of approximately $1,031,000 based on the closing price of the
Company's common stock on the date of acquisition for which the Company
has guaranteed $2,000,000 minimum proceeds ($2,400,000 if certain earnings
objectives are met over a twelve month period, which objectives have been
met to date on a pro rata basis for the period already expired) to the
seller. The Stock Purchase Agreement also providing for incentive con-
sideration based on specific sales levels of Lytton for each of three
successive specified years. Based on the closing price of the Company's
common stock on September 30, 1997, the shares issued in the Lytton
acquisition had a fair value of $1,163,000 at September 30, 1997. The
Lytton acquisition has expanded the Company's customer base, broadened
its product line, enhanced its manufacturing capabilities and provided
a new geographic area to better serve the continued existing customer
base with opportunities to attract new customers. See Notes 3 and 9 to
"Notes to Consolidated Condensed Financial Statements."
The Company anticipates that current levels of working capital and
working capital from operations, including those of Lytton, will be
adequate to successfully meet liquidity demands for at least the next
twelve months, including the financing obligations incurred in the
acquisition of Lytton.
Inflation
Inflationary factors have not had a significant effect on the Company's
operations. The Company attempts to pass on increased costs and expenses
by increasing selling prices when and where possible and by developing
different and improved products for its customers that can be sold at
targeted profit margins.
<PAGE>
PART II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits
Part I Exhibits
(11) Statements re: computation of per share earnings
(27) Financial Data Schedule (for SEC use only)
Part II Exhibits
None
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, Item 2, "Acqui-
sition or Disposition of Assets" dated August 12, 1997 relating to
the acquisition by the Company of Lytton Incorporated ("Lytton") on
July 31, 1997.
The Company filed a Current Report on Form 8-K/A#1, Item 7,
"Financial Statements and Exhibits" dated October 3, 1997, including
audited and interim financial statements of Lytton and pro forma
financial information relating to the Lytton acquisition.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
TECHDYNE, INC.
By /s/ Daniel R. Ouzts
---------------------------------
DANIEL R. OUZTS, Vice President/
Finance, Controller and Principal
Financial Officer
Dated: November 13, 1997
<PAGE>
EXHIBIT INDEX
Exhibit
No.
- -------
Part I Exhibits
(11) Statement re: computation of per share earnings
(27) Financial Data Schedule (for SEC use only)
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
EXHIBIT 11 -- COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1997 1996 1997 1996
---- ---- ---- ----
Primary
Weighted average
shares outstanding 4,534,080 4,262,608 4,389,859 4,121,951
Contingently issuable
shares 318,557 318,557
Net effect of dilutive
stock options-based
on the modified
treasury stock method 719,573 672,901
--------- --------- --------- ---------
4,852,637 4,982,181 4,708,416 4,794,852
========= ========= ========= =========
Net income $ 174,649 $ 180,845 $ 779,733 $ 700,264
========= ========= ========= =========
Net income per share $.04 $.04 $.17 $.15
==== ==== ==== ====
Fully Diluted
Weighted average
shares outstanding 4,534,080 4,262,608 4,389,859 4,121,951
Assumed conversion
of convertible
promissory note 1,774,682 1,676,587 1,749,771 1,812,139
Contingently issuable
shares 318,557 318,557
Net effect of dilutive
stock options-based
on the modified
treasury stock method 747,437 745,981
--------- --------- --------- ---------
6,627,319 6,686,632 6,458,187 6,680,071
========= ========= ========= =========
Net income $ 174,649 $ 180,845 $ 779,733 $ 700,264
Adjustment for interest
on convertible note 44,256 41,810 130,905 135,571
--------- --------- --------- ----------
$ 218,905 $ 222,655 $ 910,638 $ 835,835
========= ========= ========= ==========
Net income per share $.03 $.03 $.14 $.13
==== ==== ==== ====
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,251,416
<SECURITIES> 0
<RECEIVABLES> 5,183,333<F1>
<ALLOWANCES> 0
<INVENTORY> 7,822,843<F2
<CURRENT-ASSETS> 16,496,521
<PP&E> 8,157,009
<DEPRECIATION> 3,098,912
<TOTAL-ASSETS> 23,059,380
<CURRENT-LIABILITIES> 10,305,438
<BONDS> 2,609,407
0
0
<COMMON> 46,351
<OTHER-SE> 8,773,941
<TOTAL-LIABILITY-AND-EQUITY> 23,059,380
<SALES> 21,962,802
<TOTAL-REVENUES> 22,083,148
<CGS> 18,904,430
<TOTAL-COSTS> 18,904,430
<OTHER-EXPENSES> 2,180,240
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 281,772
<INCOME-PRETAX> 716,706
<INCOME-TAX> (63,027)
<INCOME-CONTINUING> 779,733
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 779,733
<EPS-PRIMARY> .17
<EPS-DILUTED> .14
<FN>
<F1> ACCOUNTS RECEIVABLE ARE NET OF ALLOWANCE OF $93,000 AT SEPTEMBER 30,
1997.
<F2> INVENTORIES ARE NET OF RESERVE OF $589,000 AT SEPTEMBER 30, 1997.
<FN>
</TABLE>
